The Pill Too Bitter to Swallow

Oddly enough, they tend to be Republicans or at least they were in years past.   Most of them were prominent insiders in Republican administrations up to but rarely past the Reagan days.   And in slightly different keys they're all singing the same tune, "it's over."

People like Paul Craig Roberts, Kevin Phillips and, of course, David Stockman are looking over the devastation their governments have unleashed and what they're seeing is ruin heading their country's way, unstoppable.

Stockman began his epiphany several years ago.   It led him to write this telling op-ed in The New York Times in August, 2010 in which he catalogued what he called the Four Deformations of America's Apocalypse.

The first of these started when the Nixon administration defaulted on American obligations under the 1944 Bretton Woods agreement to balance our accounts with the world. 

The second unhappy change in the American economy has been the extraordinary growth of our public debt. ...This debt explosion has resulted not from big spending by the Democrats, but instead the Republican Party’s embrace, about three decades ago, of the insidious doctrine that deficits don’t matter if they result from tax cuts.
 
 The third ominous change in the American economy has been the vast, unproductive expansion of our financial sector.  ...the combined assets of conventional banks and the so-called shadow banking system (including investment banks and finance companies) grew from a mere $500 billion in 1970 to $30 trillion by September 2008.

The fourth destructive change has been the hollowing out of the larger American economy. Having lived beyond our means for decades by borrowing heavily from abroad, we have steadily sent jobs and production offshore.

Now Stockman has written a follow-up op-ed for The New York Times, Sundown in America, in which he chronicles how the corruption of American capitalism has brought his country to ruin from which it may never rebound.

...the Main Street economy is failing while Washington is piling a soaring debt burden on our descendants, unable to rein in either the warfare state or the welfare state or raise the taxes needed to pay the nation’s bills. By default, the Fed has resorted to a radical, uncharted spree of money printing. But the flood of liquidity, instead of spurring banks to lend and corporations to spend, has stayed trapped in the canyons of Wall Street, where it is inflating yet another unsustainable bubble.

When it bursts, there will be no new round of bailouts like the ones the banks got in 2008. Instead, America will descend into an era of zero-sum austerity and virulent political conflict, extinguishing even today’s feeble remnants of economic growth.

THIS dyspeptic prospect results from the fact that we are now state-wrecked...

As the federal government and its central-bank sidekick, the Fed, have groped for one goal after another.. ..they have now succumbed to overload, overreach and outside capture by powerful interests. The modern Keynesian state is broke, paralyzed and mired in empty ritual incantations about stimulating “demand,” even as it fosters a mutant crony capitalism that periodically lavishes the top 1 percent with speculative windfalls. 

...Americans stopped saving and consumed everything they earned and all they could borrow. The Asians, burned by their own 1997 financial crisis, were happy to oblige us. They — China and Japan above all — accumulated huge dollar reserves, transforming their central banks into a string of monetary roach motels where sovereign debt goes in but never comes out. We’ve been living on borrowed time — and spending Asians’ borrowed dimes.

...The destruction of fiscal rectitude under Ronald Reagan — one reason I resigned as his budget chief in 1985 — was the greatest of his many dramatic acts. It created a template for the Republicans’ utter abandonment of the balanced-budget policies of Calvin Coolidge and allowed George W. Bush to dive into the deep end, bankrupting the nation through two misbegotten and unfinanced wars, a giant expansion of Medicare and a tax-cutting spree for the wealthy that turned K Street lobbyists into the de facto office of national tax policy. In effect, the G.O.P. embraced Keynesianism — for the wealthy.

THE state-wreck ahead is a far cry from the “Great Moderation” proclaimed in 2004 by Mr. Bernanke... Instead of moderation, what’s at hand is a Great Deformation, arising from a rogue central bank that has abetted the Wall Street casino, crucified savers on a cross of zero interest rates and fueled a global commodity bubble that erodes Main Street living standards through rising food and energy prices — a form of inflation that the Fed fecklessly disregards in calculating inflation.

These policies have brought America to an end-stage metastasis. The way out would be so radical it can’t happen. It would necessitate a sweeping divorce of the state and the market economy. It would require a renunciation of crony capitalism and its first cousin: Keynesian economics in all its forms. The state would need to get out of the business of imperial hubris, economic uplift and social insurance and shift its focus to managing and financing an effective, affordable, means-tested safety net.

All this would require drastic deflation of the realm of politics and the abolition of incumbency itself, because the machinery of the state and the machinery of re-election have become conterminous. Prying them apart would entail sweeping constitutional surgery: amendments to give the president and members of Congress a single six-year term, with no re-election; providing 100 percent public financing for candidates; strictly limiting the duration of campaigns (say, to eight weeks); and prohibiting, for life, lobbying by anyone who has been on a legislative or executive payroll. It would also require overturning Citizens United and mandating that Congress pass a balanced budget, or face an automatic sequester of spending.

It would also require purging the corrosive financialization that has turned the economy into a giant casino since the 1970s. This would mean putting the great Wall Street banks out in the cold to compete as at-risk free enterprises, without access to cheap Fed loans or deposit insurance. Banks would be able to take deposits and make commercial loans, but be banned from trading, underwriting and money management in all its forms.

The United States is broke — fiscally, morally, intellectually — and the Fed has incited a global currency war (Japan just signed up, the Brazilians and Chinese are angry, and the German-dominated euro zone is crumbling) that will soon overwhelm it. When the latest bubble pops, there will be nothing to stop the collapse. If this sounds like advice to get out of the markets and hide out in cash, it is. 

Stockman is certainly right on the deceptive meaning of America's current soaring stock exchanges.  It's happening almost entirely within the Wall Street canyon.   The Fed is handing Wall Street banks nearly free money which, instead of being loaned out to the economy, Wall Street instead is using to buy stock in the overheated exchanges.  It's a bubble, plain and simple.  It's the richest of the rich doing what they do best - using virtually free money to expand their wealth, gambling that the state will do what it has always done before, bail them out if or when it all fails.

This is a 21st century version of how once-great nations meet their collapse.   And you've got a front-row seat.

A big h/t to the Anon commenter who initially gave me the link to Stockman's latest piece.   You know whom you are.

Update - Paul Krugman, NYT's columnist, Princeton economics prof and Nobel laureate economist, doesn't buy Stockman's arguments.

Paul Krugman ...responded on his blog Sunday, saying that he was “disappointed” in Stockman’s “gee-whiz, context- and model-free numbers embedded in a rant — and not even an interesting rant.”

Krugman called Stockman’s piece “cranky old man stuff,” and summarized it this way:

“We’ve been doomed, yes doomed, ever since FDR took us off the gold standard and introduced unemployment insurance. What about those 80 years of non-doom? Just a series of lucky accidents. Now we’re really doomed. I mean it!”

I don't know if I can accept Krugman's comforting assurance this time.   We know the Fed has been pumping money into Wall Street at near zero interest; we know that Wall Street hasn't been getting that money out to Main Street America; we know that Wall Street has been investing on its own account in the stock markets, skyrocketing the DOW to all time record highs even as the U.S. economy languishes and the government remains as dependent on foreign lenders as ever.  Wall Street seems like nothing so much as a mega-Boiler Room stock inflation operation.

We have witnessed the Savings & Loan bubble, the Enron/WorldCom bubble, the Dot.Com bubble and the housing/mortgage bubble.  That's four successive FIRE-economy (finance/insurance/real estate) bubbles that have whipsawed America and savaged its blue and white collar middle class.   The current action that makes the U.S. economy seem not entirely moribund is likewise coming from the FIRE-sector and has the tell-tale signs of being a powerful and dangerous bubble.