The Biggest Casualty of the Financial Crisis

Today we acknowledge a grim anniversary…

Lehman Bros. shuttered its doors 10 years ago this very day… and the Great Financial Crisis was underway.

A decade on, America is still shoveling its way out.

The stock market has gone on a run for all time, it is true.

But the Main Street economy appears to have acquired a permanent limp.

Not one year has GDP grown at 3%… while recoveries from previous recessions routinely exceeded 3%.

Meantime, the national debt pre-crisis was roughly $9.5 trillion.

The government of the United States borrowed $11.6 trillion since 2008.

Today the national debt rises above $21 trillion.

But the American economy expanded only $5.1 trillion these past 10 years.

That is, while GDP has increased 35% since 2008… the national debt has increased 122%.

The Keynesian “multiplier” has taken up division.

As “Sovereign Man” Simon Black notes… every borrowed dollar since 2008 has generated only 44 cents of economic output.

We await the breathless explanation of Paul Krugman, arch-salesman of the Keynesian business model.

We recently revealed the specific economic impact of post-2008 “unconventional monetary policy.”

This includes QEs 1 through 3, NIRP, ZIRP and three-quarters of the English alphabet.

The combined results, as summarized by analyst Daniel Lacalle:

  1. In eight of the 12 cases analyzed, the impact on the economy was negative.

  2. In three cases, it was completely neutral.

  3. It only worked in the case of the so-called QE1 in the U.S. and fundamentally because the starting base was very low and the U.S. became a major oil and gas producer.

For emphasis:

In 11 of 12 instances… “unconventional monetary policy” proved either negative or insignificant.

Again we turn to Torsten Slok, chief international economist at Deutsche Bank:

The conclusion is that U.S. QE1 had an impact but in all other cases the impact of QE and negative interest rates has been insignificant. And in eight out of 12 cases, the economic impact has been negative.

We re-submit the following graphic in indictment of central banks the world over:


Radical changes as those above get no hearing in normal times.

But come the crisis, we are forced to guzzle whatever medicine is on tap — however bitter — side effects be damned.

Was there a man outside the economics departments of ivied institutions who would mount a soapbox and yell for negative interest rates?

Imagine… being charged to house your money in a bank.

A fellow proposing it would have been packed off to a farm not nearly as funny as the word suggests.

But Lehman fell.

A few short years later whole swathes of the civilized world were toiling under negative interest rates.

Many still are.

Absent the great crisis, it would not have been.

Nor would the rest of the financial witchcraft conjured into being these past 10 years.

Come the next crisis…

Negative interest rates, the banning of cash, “helicopter money,” etc., we will likely be treated to the entire menu — and probably more.

“The modern world is insane,” said G.K. Chesterton once upon a time, “not so much because it admits the abnormal, as because it cannot recover the normal.”

We have lost the normal.

Only one question remains:

Will we ever recover it?


Brian Maher
Managing editor, The Daily Reckoning

The Daily Reckoning