Thursday, December 12, 2019

Magical Thinking - US Economic Policies

An article at Marketwatch (link below) uses the words "magical thinking" to describe the economic policies that have dominated our economy for the last few decades.  The phrase "magical thinking" is a perfect description of the myopia economic policymakers have engaged in for decades, as we pursued the incompatible goals of tax cuts and increased defense spending, and tolerated, or encouraged, people and government to take on debt.  

Evidence of this "magical thinking" includes.

Since the Great Recession the Federal Reserve has, essentially, printed money to keep interest rates artificially low - and they voted December 11 to hold interest rates between 1.5% and 1.75%, stating our economic outlook "remains favorable".  They make decisions based on short term inflation and unemployment figures, with little concern about the bigger picture.

The bigger picture is our National debt has been climbing consistently for the last 40 years as government spent more than it took in and printing money is aggravating that debt.

The stock market since the Great Recession has been driven by ever rising corporate profits per share.  But profits per share have been pumped up by corporations buying back their own shares.   Each time they buy their own stock they push the price of their stock up by creating fewer shareholders in the same pot, not necessarily gaining even a dollar of additional earnings.  This has been encouraged by unnaturally low interest rates from the Federal Reserve making debt attractive so corporations could fund other activities with debt to free up funds to buy back stock.  As a result corporate debt is at or near all time highs.

Corporations make their money, ultimately, by selling stuff to consumers, or to other corporations selling stuff to consumers.  Consumer debt is also at record levels, over $13 Trillion, meaning a lot of consumer spending has been propped up with added debt.

A huge percentage of the population is retiring, no longer in the job market, so the number of people in the job market is lower than it was in the past, which makes the unemployment rate misleading as an indicator of overall economic health.  

The misleading economic numbers wouldn't matter as much as long as retired folk are able to keep being consumers because social security and private pensions maintain their income. 

Unfortunately State, local and private pensions are also hugely underfunded.  The shortfall has been masked for years by pension fund accountants using unrealistic economic assumptions about future pension fund asset growth based on present debt fueled stock prices.  

But when the debt overload can no longer be ignored some funds will not have the money to pay what the retiree's expected, so retiree's will not have the income they expect so will spend less and default on some consumer debt.

All these abnormal factors are not sustainable so at some point some combination of the following events will have to occur:

1.  Retiree's have less money to spend, causing a drop in consumption that undermines the foundation our economy and stock market.  The drop in consumption will cause defaults in corporate and personal debt, aggravating the economic downturn.  Increased unemployment will add to the drop in consumption. 

2.  Government will raise taxes to bail out pension funds - again dinging consumption,

3.  Government will add to their already massive debt to bail out pension funds, undermining the dollars status and making foreign goods more expensive.

This does not even consider the impact of the trade wars currently slowing the world economy.  It is not easy to see a path toward unwinding all that debt without a serious economic downturn.  Most rich folks will survive.  They take on debt through their corporations so even if the corporations go bankrupt, the personal wealth they have stashed away will be untouched.  It is regular folks who will suffer.

Economic policy makers, mostly rich folks with assets stashed away, have done well using debt and are insulated from its most negative consequences.  They have a hard time viewing debt as a long term problem. They are also clueless to the fact protecting working folks,and thereby consumption, is the key to long term economic health and stability in a mature economy.

If you, like me, think it is important for voters to understand this magical thinking, please don't simply like this post.  Share it.

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