Economists Lead the Way to Calamity

Goldman gets a hidden bailout…Wall Street uses bailout money for bonuses…Cash for Clunkers…nationalizing GM…quantitative easing…Geithner lies to the Chinese…

Crackpot ideas! Corruption! What next?

But the most breathtaking scene is the one no one seems to notice…

Perhaps it is because we have our head in the clouds…so far above the surface of everyday life that we can look down and see what is happening…

…or perhaps because you have to be a connoisseur of absurdity to appreciate it…

…strange…bizarre…almost surreal…even when you see it, you don’t quite believe it…

First, the voters ruined themselves…now it’s the government’s turn!

The US federal government is digging its own grave…bankrupting itself with its eyes wide shut. And it’s not alone…

Look back a little more than 100 years ago, and you’ll see that something similar happened. Europe went to war. No one knew why. No one knew what he stood to gain. But whether he was a kraut, a frog or a Tommy…he kept at it for four years – until every major government of Europe was broke. Most of them collapsed completely. All of them were broke. Germany and Russia, with the added burdens of war reparations on the one hand, and Bolshevism and civil war on the other, forgot their manners. Both were soon butchering their own people.

In the Great War the generals led the way to calamity. Now it is economists…

Some observers think the economy is recovering already. Others think it is not. If it is not recovering, it is because it didn’t get enough stimulus, they say. If it is recovering, it’s because the stimulus has worked.

“Fewer layoffs expected as recession winds down,” says a headline this morning from one of the wire services.

The Dow fell 25 points yesterday…but it’s still in bear market rally mode. With a little luck, it could go to 10,500.

(Of course, it can do whatever it wants…we’re just guessing, based on the experience of other major crash/depression episodes in history.)

Oil trades at just under $72 this morning. Gold is at $960.

It is “business as usual at Goldman,” says a news report. Which is to say, big bonuses for the bankers. The top eight US banks got more than $170 in bailout money last year. They paid about 20% out in bonuses.

But now the press and the politicians are on their case. It looks like they might have to ease up on the bonuses…at least until the heat is off.

The news is mixed. German factory orders are up…but the Bank of England says the recession is worse than expected; it says it will continue buying bonds.

Americans are raising chickens in their backyards again…even in places like Brooklyn. But the latest headlines tell us that requests for unemployment benefits are running below expectations.

The housing market is supposed to be stabilizing…but new waves of defaults, resets and foreclosures are coming. Half America’s mortgages will be underwater by 2011, says a Reuters report. And Deutschebank warned that construction loans were starting to go bad too.

But the big story? Stimulus.

Here is the International Herald Tribune on Monday:

“More Stimulus is Needed to Spark a Strong Recovery,” is the headline. According to the IHT, stimulus is working. And it will work even better if there were more of it.

Once underway, the WWI generals used the same sort of logic. If they were winning, it was because they put so many resources into the campaign. If things were going against them, they called for more men…more guns…more ammunition.

Of course, once a war has begun, it is hard not to want to win it. One hundred years later, it seems obvious the combatants should have called the whole thing off. They could have spared themselves a lot of misery.

But that’s not the way history works. She may be absurd, but she rarely does things by half measures. Once called to action, soldiers fought to win…even at the cost of their own lives.

And now the world’s central banks, Treasuries, and legislatures are at war. With economic strategists egging them on, they have declared war on all that they find unholy about capitalism – deflation, bear markets, and the down swing of the business cycle. John Maynard Keynes, that much-revered strategist from the Depression Era, tells them this is a fight they can win. And they believe it!

Of course, these are the same people who saw nothing to worry about in 2006…the same people who have no idea what is going on – and have the track record to prove it!

Can you really fix a debt-saturated economy by pouring on more debt? We know the answer, don’t we? When you borrow money you take something away from the future and bring it into the present. That is not a bad thing…if you are doing it to increase your future output. In that case, you’ll be able to pay back the loan with your extra earnings. But if you borrow from the future only to consume, the future waits for you…like Shylock waiting for his pound of flesh…

The future caught up with American consumers in 2007. But the feds learned nothing…and soon it will be a ton of flesh the future will want.

“Life seemed much more simple when I was growing up,” said mother, reflecting back on her youth during WWII.

“People were so much more modest. I had a job at Bergstrom Air Base in Texas…[she was in the WACs]; we would show movies to the soldiers who were going overseas. Some of the movies reminded them not to talk to people about where they were going… ‘Loose lips sink ships’ was the phrase.

“And there were some awful movies such as ‘Kill or Be Killed’…it showed them that they had to be on-guard…and they couldn’t hesitate. Of course, it is an awful thought – that you had to kill someone before he killed you. And then there were the movies about social diseases…I don’t remember what we called them then…but these were training films that warned the boys that they might catch a disease overseas if they weren’t careful. But we weren’t allowed to show those movies…we weren’t even allowed to see them.

“To tell you the truth, it was so long ago I can’t remember very accurately. And it was such a different world; I can barely believe it existed. It seems unbelievable now…I can barely believe I lived through it.”

Keep reading for today’s essay…

The Daily Reckoning