Friday, February 12, 2016

Absurd Economics

Listening to last night's Democratic debate between Hillary Clinton and Bernie Sanders was an amazing experience.  It was, in most respects, a recounting of the Hugo Chavez agenda that, for the last decade and a half, has played out in Venezuela.  There wasn't any discussion at all about how or even why an economy should grow.  There was an implicit assumption that economic growth was over and it was now time to put a pitchfork to those who ended up with the biggest share and appoint Clinton and/or Sanders to preside over the spoils so obtained.

What passed for an economic agenda by either candidate was visceral hatred for successful Americans and unlimited "free stuff" for everyone else.  Sanders has proposed $ 38 trillion in additional annual spending in an economy with $ 19 trillion in GDP and current government spending of over $ 19 trillion.  That's right -- $ 57 trillion in government spending in an economy with $ 19 trillion of total output.  Hillary is right behind him.  According to both candidates, "the rich" are going to make up the gap -- apparently they believe the rich have income equal to triple the nation's annual GDP.

This is so similar to the Hugo Chavez rhetoric, that it's scary.  It took Chavez only a decade and a half to destroy Venezuela, where most of its citizens now scavenge the countryside for food, in a country that was once the economic marvel of South America.  It doesn't really take very long to crush the free market, if you can convince people that government is the answer.  You wonder, if elected, how long it would take Clinton or Sanders to reduce the once proud American nation to a sniveling, swarming citizenry groveling for its next meal.  Chavez has certainly provided the blueprint and Clinton and Sanders seem determined to pursue that route.

Meanwhile, in what's left of America's tattered free markets, the stock market is getting crushed while all eyes are on the Wizard of Oz to see what he/she will do next (think Federal Reserve).  There is no evidence in any country in any era, that the central bank made any real difference for good or evil in the real economy.  While central banks might impact inflation from time to time, their impact on the economy as a whole is similar to that of the Wizard of Oz -- lots of conversation, no substance.

That no businesses want to spend, invest, hire employees seems the greatest of mysteries to financial commentators.  Outlawing lending, investing, trading, etc. matters.  Dodd-Frank and the accompanying regulatory regime have done their job.  They have destroyed the American financial industry.  Without a financial sector, economic growth in the US is a non-starter.  Even the absurd target of 2 percent growth is no longer achievable for an economy that was routinely used to over 4 percent annual growth in its history.

Meanwhile the European and Japanese central banks are charging interest on reserves that banks hold.  Why is this absurd policy in place?  To punish banks who do not make commercial loans!  That's with their left hand.  With their right hand, European regulators are admonishing the banks to add more capital to back their existing loan portfolio -- thereby implying that the banks should not expand commercial loans.  Great policy. Damned if you, damned if you don't.  No wonder Deutsche Bank is hitting the skids.

Western banks, at this point, are simply tentacles of the ever-expanding government apparatus both in Europe and in the US.  No local bank lender in the US has any real authority to make loans today.  They look to Washington regulators as to who they can loan to, who they must loan to, and what the terms and conditions of such loans are to be.  If this isn't the old Chinese/Soviet model, what is?

We are in the early stages of the Obama-Clinton-Sanders revolution.  If you want to cut to the endgame, check in on modern Venezuela to see the final act.  Once individuals are no longer free to make their own decisions, the possibility of sustained economic growth is over.  Bureaucrats have never created economic growth or prosperity, except, for a while, and then only for themselves.

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