Friday, May 17, 2013

The Economy: “Has Dr. Bernankenstein Created a New Monster?”

“Has Dr. Bernankenstein Created a New Monster?”
by Bill Bonner

"When a man is up to no good, it doesn't help that he gets lucky. A fellow goes to rob your house. He finds the door unlocked. He enters without breaking. He steals everything. Mission accomplished. Later on, he is arrested for robbing a bank. He gets 10 years in the slammer. He would have been better off if he had found the door locked tight... and gave up!

So the latest news from the Congressional Budget Office is not good, either. Now the politicians can stop worrying about deficits... and continue to rob the future. Good news is bad news. From The New York Times: "Since the recession ended four years ago, the federal budget deficit has topped $1 trillion every year. But now the government's annual deficit is shrinking far faster than anyone in Washington expected, and perhaps even faster than many economists think is advisable for the health of the economy. That is the thrust of a new report released Tuesday by the nonpartisan Congressional Budget Office, estimating that the deficit for this fiscal year, which ends on September 30, will fall to about $642 billion, or 4% of the nation's annual economic output, about $200 billion lower than the agency estimated just three months ago."

Even dumbbell economists believe lower deficits are bad news... but for an entirely different reason. They believe lower deficits will reduce GDP and jobs. They think the only reason the economy is doing so well is that the feds have been willing to spend money they didn't have on things they didn't need.

And that's another reason the budget news is bad news: It makes people think the Great Experiment is a success! Here's US Trust bank with analysis: "We believe the policy response we call the Great Experiment is appropriate and has helped the economy heal and normalize. As gun-shy investors see the policies working they are returning to the risk markets and a secular bull market is beginning. Other countries have responded to this success by trying these bold initiatives with the Bank of Japan now the most prominent example..."

A New "Normal": Whoa! Did we hear that right? The Great Experiment helped the economy normalize? Something funny about that. "Normal” is what you get when you don't experiment. Normal comes from... well... normal. If you want a normal outcome, you have to make sure you're not doing anything too extraordinary, no? So how can you get to normal from a Great Experiment?

We will leave that for the philosophers of tomorrow. Today, we'll merely suggest that maybe this economy isn't so normal. What's normal about an economy in which the major financial institutions can borrow money at negative real interest rates? What's normal about an economy in which people who have run their businesses so recklessly that they had to be bailed out by the government are still running their businesses... and can now borrow at lower rates than good businesses? And what's normal about an economy in which the feds still spend $1.60 for every dollar they get in tax receipts... and make up most of the difference by printing money?

This is not a normal economy at all... but a strange and grotesque one... with wires going into its brains and tubes feeding into its veins. The Great Experiment in monetary policy has produced an experimental economy – just as you'd imagine. The word "normal” refers to what eventually happens to an economy no matter how hard the feds try to stop it. It's where you end up after the Great Experiment fails... and you realize that Dr. Bernankenstein has produced a monster... not a normal economy.”

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