PIMpCO’s El-Erian gave a very interesting speech the other day that you should all read. The money shot is right here and thankfully reasonably close to the front:
To crystallize our conversation today, allow me to use a very – and I stress very – clumsy sentence to summarize the current state of affairs: In the last three plus years, central banks have had little choice but to do the unsustainable in order to sustain the unsustainable until others do the sustainable to restore sustainability!
Now here’s where your personal view of the world and politics intersects with Fed (and other Central Bank) policy: Do you believe that any of the political bodies in power today will do the sustainable?
I’m going to focus just on the US, because (1) I understand it better than the European and other situations, although when it comes to Europe they’re not that different than we are and (2) the US bears so much responsibility and has so much size in economic terms compared to the rest of the world that without us the rest of the argument is literally a non-event.
European peripheral debt, for example, is a literal non-issue comparatively. If your home is in the middle of an advancing forest fire the car wreck that spills gasoline outside the door and then gets ignited is interesting, but it’s not the proximate cause of your home burning down nor would removing the wreck change the outcome.
Your belief in the avoidance of collapse in the markets and ultimately government services and tax base is founded in one thing — what El-Erian has outlined up above in his one-sentence summary.
You believe that politicians and governments will do the sustainable things.
In the case of the United States this means cutting the deficit and monetary expansion of all forms to zero on a GDP-relative basis. When it comes to government debt it means going even further so as to reduce the government’s debt as a percentage of GDP on a declining basis toward zero.
If you believe in “stability”, “improvement” or anything similar, this is what you believe will happen.
If you don’t believe in that happening then you also don’t believe in stability, improvement or a durable and sound market.
Many have asked why I continue to believe we’re going to see the S&P trade under the early 2009 levels (666), the DOW under 6,000 and the economy and government funding model come apart at the seams.
My answer is simple:
Our government with its present infestation of Democrats and Republicans, and the inability to find a single third party that will stand for the end of the stupid when it comes to the policies they espouse, including the one I’m currently involved in quite-heavily, means that we’re going to go off the cliff Thema and Louise style with the entirely-certain outcome.
That Thelma gets away this time (the markets go up today) doesn’t change the outcome; it just means that this time the odds, however long, resolved in her favor.
In order to believe we will escape the inevitable canyon-diving outcome you must believe that our government will do the right things. That is not “tax the rich” or “drink more when drunk” (e.g. cut taxes even more while increasing spending) or any such thing.
It requires massive structural realignment of:
- The Medical industry. Not Medicare or Medicaid, the medical industry. All of the cost-shifts and other perversities and legal exemptions currently abused by this part of the economy have to go away. There is zero evidence that our government intends to do any of this, but this, standing alone, must be done or we have no chance. From a mathematical point of view it’s that simple.
- Military, foreign policy and energy. They’re inextricably interconnected and we’re going the wrong way with with all three.
- Financial fraud and debt generally. It has to be dramatically reduced in the economy as a whole. This will lead to asset price corrections but if it’s not done you get asset price collapses instead as instead of some leverage being available to buy things you’ll ultimately get none.
None of this is being addressed at all. In fact, every step being taken thus far is making it worse instead of better, across the board.
If you have a thesis that includes the government starting to do the right things, which is necessary to believe in an actual economic recovery, let’s see it.
If not, well….