The Misguided Optimism of Modern Day Economists

The world economy is airing its dirty laundry…and America is the “least dirty shirt” in the pile. That’s how Bill Gross, manager of the world’s largest bond fund, sees the state of world’s largest economy.

Mr. Gross is being polite. We’d say the US looks more like the least dirty pair of undergarments…after a very scary opening scene of a very long horror movie. Moreover, as reckoners who have children will surely attest, it’s much harder to clean dirty cloths than it is to dirty clean ones. That truism is especially so when the kids wearing the clothes enjoy playing in the mud, as kids tend to do. Unfortunately for the voting (and non-voting) citizens of the world, their elected (and unelected) officials like nothing more than a little roll in the dirt before recess.

Mr. Gross’ comments came after a Bloomberg survey concluded that America is now the preferred capital destination for worldwide investors. According to the study, almost 4 in 10 investors surveyed believed the United States would yield the greatest opportunities over the coming year, double the percentage from only 6 months ago. Those same investors rated Brazil as the second most promising market (29%), with China and India rounding out the top four, respectively.

The story makes for some enticing headline fodder…but it’s not all “whiter whites and brighter colors.”

The same survey also found that “Forty-two percent of investors now believe the world economy is deteriorating, double the 21 percent who thought so in January. US investors were the most pessimistic about the global economy, with 58 percent saying it is getting worse versus 31 percent of Europeans and 35 percent of Asians. Europeans were the most pessimistic about their own region, with 40 percent viewing it as deteriorating; 21 percent of US investors viewed their home region negatively, while 9 percent in Asia felt that way.”

But wait a minute! Aren’t the Europeans rioting in the streets? How can they be more optimistic than their American comrades? Aren’t the Greeks torching buildings? Aren’t the Spaniards up in arms? Didn’t the Hungarian government just reveal that the economy there was in a “very grave situation”? Didn’t David Cameron, the new British PM, just announce that the problems in Ol’ Blighty were “worse than we thought”? And that’s to say nothing of the Italians and the Irish, the Slovenians, Romanians and Portuguese. And these folk are almost twice as positive as the Americans? Where’s their spirit of doom and gloom?

Could it be that American investors are simply better informed than those across the pond? Or could it be that people simply don’t know what they’re talking about? Your editor has no clue. Many an overconfident man was knocked out in the first round…and sentiments don’t pay the bills.

We do know, however, that nobody can spend his or her way to prosperity, whether they are an individual investor, a Fortune 500 company or a sovereign state with a Keynesian enthusiast at the helm. Debts must eventually be repaid…or defaulted on. It’s a case of “what goes up…”

But no matter how solid the laws of gravity may be, there will always be men who try to subvert them. Skydivers refer to such men as “casualties.” Politicians refer to them as modern day “economists.”

Ben Bernanke is one such man. When asked yesterday whether the US economy would likely suffer a “double dip recession” Bernanke replied, “My best guess is we’ll have a continued recovery [but] it won’t feel terrific.”

As near as we can tell, Mr. Bernanke has missed the point entirely. He assumes that the economy is recovering. It is not. He sees a renewed enthusiasm among consumers (which is, in itself, dubious at best and waning at worst) as bricks on the road to the Land of Milk and Honey.

“So far [this year] the news is pretty good,” he said. “We’ve seen consumers coming back.”

But consumers are not coming back, at least not in any kind of sustainable manner. Wages are going down. Hours are being cut. Credit is contracting. And even if they were coming back, what on earth are they spending? They have no money! Secondly, the private debts of yore have not been repaid; they have merely been collectivized and dumped on to the public books. They are still the same debts as they always were, only now they are much bigger, threatening to drag entire nations asunder instead of poorly managed private institutions.

This trend of debt-collectivization has driven spendthrift central governments to what Anthony Crescenzi, an investor at Bill Gross’ Pacific Investment Management Co., refers to as the “Keynesian endpoint.”

“Time, devaluations, and debt restructurings might be the only way out for many nations,” Crescenzi wrote in an e-mailed note titled “Keynesian Endpoint.” Debt-fueled spending programs aimed at combating the global financial crisis of 2008 are among policy tools now “being seen as a magic elixir that has morphed into poison.”

As our Reckoner-in-Chief, Bill Bonner, tirelessly reminds readers, we are in the throes of the Great Correction. There is not a shade of recovery in the mix. Firstly, the jobs situation is worsening, as is evident to anyone who bothers taking more than a cursory glance at Friday’s woeful employment report. Secondly, the non-recovery in housing is about to get a whole lot more non-recovering.

Joel Bowman
for The Daily Reckoning