I OWE, I OWE, SO OFF TO WORK I GO…

8/27/11

An article in this morning’s (Saturday/Sunday, 8/27-8/28/11, page A5) Wall Street Journal entitled “Tug of War on Timing for Belt-Tightening” prompted me to write a post (this one) that I have been contemplating for a long time.

The article outlines the now long running argument between what the Journal refers to as liberals and conservatives, though that breakdown is not as clear cut for this issue as it might be for others, regarding the advisability of what passes for fiscal austerity at this time. The “liberals” (Keynesians, really, and despite the largely undeserved derision that Lord Keynes and his acolytes have received from the right for the last 35 or so years, the two terms are not necessarily interchangeable) argue that, with the economy still shaky, this is not the time to cut spending and raise taxes. The “conservatives” argue that fiscal austerity is needed because what is holding back the economy is uncertainty about what Washington is up to and fear that the pols will spend us into oblivion, necessitating a future tax increase that is subtly entering into the calculations of businesses and individuals. Some in the latter camp are also arguing for “real” tax cuts, i.e., cuts in marginal tax rates as opposed to what they consider tinkering with the tax code, such as payroll tax holidays and the like. Mostly, however, what the Journal refers to as the conservative camp is pushing for Washington to get is spending under control.

While, as you might guess, yours truly is far more sympathetic with the latter argument than the former, neither fiscal austerity nor what passes for fiscal prudence nowadays will have much impact on our miserable economy. Why? In times of heavy indebtedness, such as those we are experiencing today, the traditional tools of fiscal, and even monetary policy, do not work well, if at all. Any money received from stimulative policy is either used to pay down gargantuan debt levels (individuals) or horded because of lack of overall confidence (individuals and businesses). Any confidence engendered by a demonstration of a determination by our public servants to follow a path of fiscal virtue (as if such a thing could ever happen, but I digress) will be more than offset by fear for one’s personal finances when one is confronted by the realities of a mountain of debt built up due to a sense of entitlement to a lifestyle that was clearly unsustainable.

You have heard the arguments outlined in the last paragraph; they are neither insightful nor fresh. But I would take it a step further into the realm of the real economy. Not only will the fruits of fiscal stimulus, or the engenderment (if that’s a word) of new confidence be blunted by a mountain of debt, but any actual increase in output, rather than funny money created by our ever wise “policymakers,” will have to be dedicated to the reduction of debt. We simply lived way over our heads for the last twenty or so years and now have to face the music. We can’t enjoy the fruits of our labor; instead, our creditors will, of necessity, enjoy those fruits. Despite the earnest efforts of Obsequious Ben Bernanke and the Washingtonians to punish savers by keeping interest rates as low as possible, this ultimate transfer of wealth is a fact of life that cannot be avoided, nor should it be.

Not only did we go through the seed corn over the last twenty or so years, we borrowed even more to finance a lifestyle to which we thought we were somehow entitled. Now we have to pay back the debt and, if we are to survive as a society, begin rebuilding the seed corn. Though these efforts probably, the latter almost certainly, will prove ineffectual, even the feint at such efforts we will make will render the traditional tools of economic management largely ineffectual. Recovery, if it ever comes, will be a long, hard slog. More importantly, what will prove to be the ultimate futility of our efforts to get our personal and public fiscal houses in order will demonstrate that we are doomed as an economic going concern and probably as a society.

Market watchers, some very smart and some not so smart, have long argued, with some historical justification, that the time to buy stocks is when things look bleakest. If I really believed that, I would be backing up the truck on stocks and would borrow money to buy more. But I’m not going to do that. This time, I fear, things really are different, though those are very dangerous words.