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Krugman: Just Keep Borrowing

And other dopey myths of the 21st Century...

EVERY ERA has its busted myths and failed dreams. Wall Street and Washington wallow in them, writes Bill Bonner in his Diary of a Rogue Economist.

The practical challenge for us is not to be smarter than other investors or wiser than other voters...but merely to step outside the myth long enough to get a good look at it.

In the 1960s, the idea was that you could just buy the leading stocks – the Nifty Fifty; it seemed a foregone conclusion that you'd get rich as America's commercial genius conquered the world.

But in 1966, the Nifty Fifty stocks started to slip. The group, overpriced and overhyped, underperformed for the next 20 years; many of them disappeared.

In the 1980s, it was Japan, Inc. that captured imaginations. Everyone wanted to learn the latest Japanese business jargon and imitate Japan's extraordinary success.

But in 1989, the Nikkei Dow collapsed...falling 80%. Thirty years later, investors are still down 50%.

Then, in the late 1990s came the dot.com boom. Everybody knew that the new internet technology would set the world on fire – with faster growth, higher wages, and no need for debt financing (information would replace the need for capital!).

That dream washed up over the next two decades. Growth rates have fallen, wages have gone nowhere, and there's more debt than ever.

Then came the myth that 'house prices never go down'...which blew up in 2007.

Assets, markets, companies, and empires rise and fall. No single one, or group of them, ever dominates for long.

But now comes the most absurd myth of all – that the feds can 'manage' and 'guide' the economy, not only to make it better, but to make sure nothing bad happens.

In these diaries, of course, we have deconstructed various elements of this dream many times. Taken together, they are a breathtaking bunch of poppycock.

Where does the Fed get any money? How does it know what short-term interest rate the economy needs?

Every alert citizen knows that his politicians and bureaucrats are incompetent, self-serving rascals. And every economist guffaws if you suggest that bureaucrats should fix the price of oil; they know that only willing buyers and sellers can discover the correct prices – in 'the market.'

But when it comes to an even more important price – the price of credit – credo quia absurdum (I believe because it is absurd). They trust the honchos at the Fed to do it instead.

And look at the record! US monetary policy for the last 30 years is nothing more than the classic three mistakes over and over.

Mistake #1 – keep interest rates too low for too long. Mistake #2 – raise rates to try to mitigate the damage from Mistake #1. Mistake #3 – drop rates in a panic when Mistake #2 causes the economy to crash.

And that's just monetary policy. What about fiscal policy? The key concept of enlightened budget management is that fiscal policy should be countercyclical.

You save (surpluses) when the gettin's good...and spend (deficits) when it ain't. Pharaoh did it 3,000 years ago – storing grain during seven fat years...and releasing it during the seven lean years. It's so simple, even a moron could do it.

Which should have been well-suited for the feds. But for half a century – including two of the fattest booms in our history – they flubbed it. They just borrowed more and more money – as if we were always in a crisis.

Not a penny of savings or surplus has been seen since the Carter administration. And now, the country faces the biggest debt crisis in the history of world.

So what do the world's leading economists suggest? How do you get out of a hole that deep?

Here's where the absurdum kicks into hyperdrive – they propose to borrow more!

Olivier Blanchard, formerly with the International Monetary Fund, now with MIT, recently gave a speech to the American Economic Association.

Says he: High levels of debt "may not be so bad."

The drift of his speech was that if an economy is growing at 4% and debt is priced at 2%, debt is no problem; the economy grows faster than the debt, so it will grow its way out.

This view was buttressed by, who else, Paul Krugman.

The New York Times columnist made his position clear years ago:

"[The nation needs] sharply increased public investment in everything from energy to transportation to wastewater treatment."

"How should we pay for this investment? We shouldn't...Right now, there is an overwhelming case for more government borrowing...Spending now would mean a bigger economy later, which would mean more tax revenue."

What's the matter with these people?

Since 1980, the feds have spent $20 trillion more than they have taken in. This year, spending will outpace tax receipts by roughly $1 trillion. And we're still in a recovery. Where is the promised growth? Where's the missing revenue?

Of course, the idea is absurd. There is no plausible theory...and no observable case...where people get richer by borrowing more and more money, year after year. Instead, they go broke.

It's only by saving money and investing it wisely that it is even possible to get ahead. And the feds are unable to do either.

But that doesn't mean we won't see even bigger deficits and more debt.

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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