Why 2013 scares me

Triskaidekaphobia! Fear of the number 13. Oh that dreaded number… that dreaded year!

The year of our Lord 2012 came to an end the night before last at midnight. Fireworks were set off down at Baltimore’s Inner Harbor and the ‘meat axe’ came down on the Pentagon, which would have to put as many as 800,000 civilian employees (temporarily) out on the streets. The Wall Street Journal reports:

Illustrating the gravity of the cuts, the Pentagon plans to notify 800,000 civilian employees that they could be forced to take several weeks of unpaid leave in 2013 if a deal isn’t struck, and other agencies are likely to follow suit.

The cuts, which members of both parties have referred to as a ‘meat ax’, are the product of a hastily designed 2011 law that required $110 billion in annual spending reductions over nine years to reduce the deficit. Their severity, representing close to 10% of annually appropriated spending, was intended to force Democrats and Republicans to come together on a broader package of deficit-reduction measures, which would replace the cuts. That effort failed, raising the prospect of the cuts’ taking place.

What will that do to the national defence? Answer: it will probably improve it. Because America’s military has been taken over by zombies. The more resources they consume, the less available for the real economy and a real defence.

Which is why we feel so much trepidation about the year ahead. Zombies are what you get when you reach the point of declining marginal utility and keep going. You get a negative return, people who take up valuable resources and give nothing back. They pretend to protect us or to educate us or to make us healthy or to make things ‘fair’. But every dollar they consume just makes us weaker and more vulnerable.

We were in a reflective mood yesterday morning, cogitating on the year out and the year in… 

We’re now 12 years into this new century. What happened during those dozen years? We are a dozen years older. Are we wiser? What did we learn?

First, we learned that the internet was not a one-way ticket to prosperity. The dotcom boom blew up in January 2000, leading to a crash in the Nasdaq followed by a recession. The Nasdaq has never fully recovered. And the internet, for all its magic and promise, does not seem to have added anything to economic growth.

Growth rates have gone down as people spend more and more time on Facebook and iPhones. The real, private sector economy is barely bigger today than it was when the century began.

Second, we learned that federal stimulus programmes can have alarming consequences. The feds over-reacted to the recession of 2001 with a massive programme of fiscal and monetary stimulus, the largest ever undertaken. The low rates caused a bubble in housing. This in turn caused a financial bubble, based on mortgage finance.

Both bubbles blew up after Country Credit – a leading subprime lender – went belly up in April 2007. The private sector has been in a debt-killing funk ever since.

The feds learned nothing from the experience of ‘02 – ‘07. Instead of backing off, they multiplied their stimulus efforts. The US government has run trillion-dollar deficits for the last four years. And the Fed is on course to more than quadruple America’s money base by the end of next year.

Seeing little consumer price inflation and no bubble in housing or stocks, the feds conclude that their efforts do no harm. But it looks to us as though the gods have set a trap.

One of the big things that happened over the past 12 years was that the zombies got the upper hand. Government always favours unproductive, parasitic groups. But now, with half the voters getting money from the feds, the government is firmly under zombie control.

That is why the feds must take such desperate and dangerous measures to keep the cash flowing. The zombies depend on it.

In a ‘normal’ economy, people suffer a recession or depression from time to time. They hunker down and let prices fall until the economy is on a firm footing once again. That’s what they did every time until the Great Depression. That was when the feds got in the habit of meddling.

And now, they can’t help but meddle. Too many lobbyists, lawyers and layabouts need federal cash. And they vote. The only way the feds can keep up is by revving up the economy with bad debt and phoney dollars.

In 2013, the Fed is scheduled to print $85bn per month. In other words, by October, it will have printed up the equivalent of its entire 2007 monetary base. That’s one for the record books.

But we also learned – from Japan’s example – that a period of debt deleveraging can last much longer than we imagined. While it is going on, the unintended consequences of stimulus spending can remain hidden. Even for 20 years or more.

That alone is an unintended consequence. The feds – in Japan and in America – intend their policies to heat up the economy. But the economy doesn’t run hot. It barely runs at all. Because, the ‘stimulus’ doesn’t go to real wealth-creating businesses. It goes to the zombies. Dead industries. Dead-end businesses. Brain-dead activities. And plain, old-fashioned time-wasting loafers. That’s why, the more ‘stimulus’ you give the economy, the more zombies you get.

And here, too, is a great lesson, and perhaps the most astonishing of the century. Until a few months ago, ‘growth’ was taken for granted. One innovation led to another invention which led to more breakthroughs. We get richer all the time as we learn how to convert raw materials and potential energy into useful products and services (wealth). We saw no reason why growth wouldn’t continue – and even speed up – as more and more of these innovations and insights were shared over the internet.

But, boo hoo, it just didn’t happen. The ‘growth’, such as it is, comes from the government spending zombie money on zombie projects, creating a race of zombies that will be very hard to stop.

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