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Economic Laws Are Not Optional

Tyler Durden's picture




 

Submitted by Monty Pelerin of Economic Noise blog,

Economic laws are not optional. They are like the laws of physics - inexorable!

economic policy

 

Economic laws are less precise in terms of their timing and effects, only because they deal with human behavior rather than physical particles. Human beings alter their behavior to cope with changing conditions. Particles do not. Free will and the survival instinct make prediction, especially regarding timing, very different and difficult in the human realm. Nevertheless, the laws are immutable!

Long-time readers of this website know that no recovery is possible given past and current economic policies. Initially, it was argued by some that government intervention was necessary and would effect an economic recovery. By now, even the dullest of Keynesians know their policies failed. Yet they continue.

Why would failed policies continue? The political class argues for their continuance, but not on the basis of sound economics. Their arguments are motivated by political self-interest. The appearance of a recovery is more important for politicians facing another election or a legacy than the damage being done to the economy. Remember when the focus of the Clinton campaign against George H. W. Bush claimed that it was the worst economy in fifty years? That was not true, but it was effective.

Stopping the Federal Reserve juice threatens what remains of our economy. No one wants to be known as the “new Herbert Hoover,” although someone will inevitably be tarred with that association.

Early Warnings

This website began in September 2009 recognizing the futility of applied economic efforts to “cure” the problem. The very first post appeared on September 7, 2009  and was entitled No Exit From Economic Mess. To put matters into perspective, the government claimed the recession had ended in June of 2009. This economic lie was apparent to anyone who had a modicum of economic understanding or common sense. The more of the latter one possessed, the less of the former was required.

Over time I have come to believe that the two types of knowledge may now be incompatible — a sad commentary on how the economic profession has been hijacked by the political class. A good rule of thumb is to ignore any economist who is involved in politics. Unfortunately, with government grants, that includes much of the profession, including those never directly employed by government.

The first paragraph of that very first post stated the following:

Doug Noland of www.Prudentbear.com has it right on his “No Exit” Possible scenario. Our economy has become totally dependent upon government spending, interventions and subsidies. There is no recovery in the private sector, nor is there likely to be one in the next several years. Federal meddling will continue to create distortions that will require additional and continued meddling. From a political standpoint, there will be no good time for an exit. However, at some point, the system will not be sustainable. Markets will eventually end the meddling regardless of whether it is politically or economically feasible or timely. When that happens, our lives and economy will never be the same again.

On that same day, there were six other articles suggesting that no economic recovery was possible until policies and conditions changed. Links to them follow:

1. Stocks Divorced From Real World

 

2. Banking Mess where it was said:

Enron-type accounting is allowed to enable banks to keep exposure on non-consolidated subsidiary books. Banks are allowed to value assets at whatever they deem them to be worth rather than accounting standards that have been in place for centuries. Condoning this fraud may defer the political problem. It cannot solve the economic problem and likely makes it unsolvable at some point. Market forces will eventually overwhelm the charade, and put our entire economic system at risk of implosion.

3. Timely Economic Analysis from Dilbert???? The Dilbert cartoon provided a possible reason why economists find it easier to bring good rather than bad news:

It appears that the writer of Dilbert is a better economist than many Nobel laureates who are proclaiming “Green Shoots.”

 

 

4. The Banking System, The Dollar and The Welfare State stated:

There is no mathematical possibility of escaping the economic bind we face without reducing the welfare state. The current financial crisis only exacerbates a situation which long ago passed the tipping point. The Federal government’s total liabilities exceed $100 trillion (most of that from the unfunded liabilities of the welfare state: social security, medicare, etc.). With the financial crisis, we now have an additional black hole, our banking system. The condition of the banking system has been covered up, but that is becoming harder and harder to do as banks collapse under their own weight as a result of deteriorating conditions.

5. The Crash Course by Chris Martenson  presented his ideas of how the policies were economically foolish and mathematically impossible to continue.

 

6. Moral Hazard Destroys Social Capital and Cooperation discussed the corrosive moral effects of an immoral government:

When the “game” is perceived to be corrupt and exploitive, it is easy to rationalize immoral behavior at the level of the individual. Contracts, promises and obligations start to become meaningless. For many, the phrase “is it legal?” replaces the phrase “is it right.” Loopholes in the law trump ethics. Soon even the law becomes less of a barrier as cheating and stealing become acceptable for some.

These were posts on the inaugural day of the website. The passage of time has not changed anything, except the understatement of some of the problems from the first day. The post regarding stock market valuations was arguably incorrect as the market recovered nicely from that point. However, it is valid today, more so than ever.  Almost five full years from the date of these posts, there is less reason for optimism. The economic structure of the country has been further weakened.

The declaration that the recession ended was a lie. Polls show that a majority of the population now agrees we never left the recession. Zerohedge referred to a recent article by Eric Sprott to provide an up-to-date assessment of conditions:

As Eric Sprott points out in his latest letter, “if one looks past headline figures, things are not really getting better. As shown in Figure 1, real disposable income per capita in the U.S. has increased only modestly since the Great Recession. However, all of this increase is due to Government Transfers, not from an improvement in the real economy. If we exclude those transfers from the numbers, disposable income per capita is actually lower than it was at the end of 2005 and has been painfully flat since 2011. Also, those numbers assume that the headline Consumer Price Index (CPI) accurately represents people’s purchasing power.”

 

Presenting our chart of the day: disposable income with and without government transfers.

 

 

And it is not just disposable income: as Sprott explains, “the U.S. economy has been on life support, graciously provided by Central Planners. However hard they try, they will soon realize that no amount of money printing can cleanse the rot of the U.S. economy.”

Here is why for a large portion of the population, “things are not anywhere close to being better, in fact they are worse than before the recession.”

Nothing Has Changed

The smoke and mirrors obfuscating true economic conditions for five years has been deliberate. The economy has not recovered. It has been made more distorted and imbalanced by the futile attempts to pretend that all is well. Government has more smoke and mirrors left. Yet, even the political class now seem to sense that they are playing out the clock without altering the ultimate conclusion. When your time frame is limited to the next election, longer-term consequences of current policies are ignored.

The economic piper will be paid. All that has been accomplished by these actions is a deferral of the correction and the creation of a bigger debt upon which the piper will collect. The warnings expressed on the first posts on this website are as relevant now as they were five years ago.

A massive political cover-up of the true condition of the country has been accomplished at the cost of making underlying economic conditions worse. The economy is no longer growing and people are becoming poorer as a result of the political shenanigans used to hide the true conditions.  As expressed in the very first post:

There is no recovery in the private sector, nor is there likely to be one in the next several years. Federal meddling will continue to create distortions that will require additional and continued meddling. From a political standpoint, there will be no good time for an exit. However, at some point, the system will not be sustainable.

Zerohedge’s recent assessment of current economic conditions indicates that matters may be progressing rapidly toward this end:

Despite the best efforts of The Fed, its apologists, and the commission-taking talking-heads to persuade the world that the US economy is picking up and set to reach escape velocity any minute… the fact is, the US economy (judged on data not fantasy) is hurting. Consensus expectations for 2014 US GDP growth have collapsed from over 3.00% to a mere 1.7% now. But what is more critical is the incessant bleating that data is picking up and suggests a 2nd half recovery… it doesn’t.

The inevitability of what is coming is what is important. The timing remains uncertain. It need not occur in the next week or month. Timing may still be measured in years, but the outcome is more certain today than it was five years ago. The laws of economics make it so. Any geopolitical or economic misstep could trigger the event. Without such a misstep, the charade could continue for a while.

A collapse is coming. It is unavoidable and will be worse than it should have been as a result of political duplicity.

 

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Sat, 07/26/2014 - 17:46 | 5008033 Grouchy Marx
Grouchy Marx's picture

Einstein made no laws of physics. Rather, he extended human understanding of what those laws are and how they operate. 

Sat, 07/26/2014 - 04:11 | 5006656 Xandrino
Xandrino's picture

What goes up must come down

Nothing lasts forever

 

And since we're discussing physics....

BURNING KEROSINE DOES NOT MELT SOLID STEEL

Sat, 07/26/2014 - 05:14 | 5006690 orangegeek
orangegeek's picture

economic laws?  really?  laws?

 

is that you Krugman?

Sat, 07/26/2014 - 05:24 | 5006695 Bioscale
Bioscale's picture

Sometimes I wonder why the ZH crowd is so ignorant of the economic knowledge. Guys, you buy gold and silver, you should be perfectly aware why you do it. The inevitability of the economic exchange and the way how money works in the society, call it principles or laws or whatever, but these are and always will be the same in every society with no regard to the ideology. These principles are NOT OPTIONAL. Saying otherwise you are like bunch of people who claim the earth is flat or Newton was a fool because he had no notion about quantum physics. I suspect most the crowd here has never read any book about real economics that made a bit of sense - that's because you have read the bankster's propaganda. This is taught in the schools to demotivate the masses of any interest in it and to support the shallow ideas that econmic principles are optional. Banksters made out of you uneducated ignorant fools.

Go and grab something, anything from von Mises or Rothbard and read it through. And teach your kids about it.

Sat, 07/26/2014 - 11:25 | 5007088 Hubbs
Hubbs's picture

It takes time to undo years of brainwashing incurred at some of the "finest" ( read: most elite/expensive college in the northeast) to reeducate myself.  Now that I am in the deep south in MS along the river, I am  teaching my daughter, age 10, about the financial motivation for the civil war. It was not about freeing the blacks from slavery. In fact, IMO history should be taught in context of finance.

When she saves money for the long term, I encourage her to buy a silver maple leaf rather than cash or a savings account. I think she understands that like car dealer ships sell you cars, or grocery stores sell you food, Banks sell you debt, which in a way a subtle form of slavery- or at least shackles.

I try to teach her that money is a store of value or a solid redeemable credit for the work you have done or things you have produced, where as currency is what happens when the Banks and the government try to chisel in on that store of value.

If I die tomorrow, I think I have left enough of a warning to her. 

 

My younger brother has read Rothbard/Mises, and is ahead of me on that, but for now I am getting the hang of it.

Sat, 07/26/2014 - 05:38 | 5006697 surfsup
surfsup's picture

Ummm, where's the part about Interest itself consuming monetary circulation as a result of its mathematical certainty?  

Go ahead, rebuild the same house of cards on the same foundation and see what happens... 

How about letting the "crash porn" sit idle and study some actual principles:  http://perfecteconomy.com/pg-why-inflation-is-a-lie.html

...

Got a text addition to a sentence from the above article:  "The smoke and mirrors obfuscating true economic conditions for five [[[HUNDRED]]] years has been deliberate."

Its the interest stupid.  

 

http://mathonweb.com/help_ebook/html/functions_3/fungraph08.gif

Sat, 07/26/2014 - 11:34 | 5007129 shovelhead
shovelhead's picture

I don't think you'll find many people here that think a govt. handing over the right to create interest free coin minting to bankers creating interest laden paper money is really a great idea.

I include fractional reserve credit creation the same as printing money at interest.

Money creation at interest is the problem, not interest, in and of itself.

There's nothing wrong at all with me loaning you $100,000 @ X% of money I have earned and saved so you can expand your business. X is merely the cost pulled forward from future expected increased revenues from your business and the cost of my capital risk.

It's thin air money creation at interest which is the greatest fraud played on mankind.

 

Sat, 07/26/2014 - 15:18 | 5007712 luftmensch
luftmensch's picture

of course, if we were to truly dispense w fractional reserve banking of any form...then we would also need to question how any enterprise could be worth more than "book-value".

Any PE ratio over 1 is based on hope and speculation. Similarly, there could be a scenario where the monetary supply could be increased a little based on "legitimate" hope about continued prosperity and/or growth.

The problem is, the ability to print $ is an extremely addictive and corrupting drug...question would be can anyone be trusted to control this in a more altruistic way.

Sat, 07/26/2014 - 07:40 | 5006750 wwxx
wwxx's picture

I don't think there can be an effective discussion about current economic laws, without at least mentioning the US legislature has frequently determined misguided exceptions, thru law, to anything that resembles economic sanity.  An easy example is NAFTA (North American Free Trade Agreement) & related sucking sound, or the $700B swindle of 2008 and related destruction sound.  Members of the US legislature are nothing more than loop-hole artist, for hire.  They legislate profusely as they have, and shall, with very little regard for responsibility. 

 

The US judicial branch is lockstep in a similar irresponsibility, $500M for Exxon Valdez, and related screams of death at the bottom of the ocean floor, or Boudamine vs. Bush (the habeas corpus case)..of which the petitioner was not immediately released, even tho the US Supreme court issued that habeas corpus shall go forth. 

 

As for the US executive branch, that partly exists to prosecute the case for economic direction, has at great consequence diverted their standards into the bottom of the ditch, and sought to keep it there.  

 

Without Justice, even the basic economic laws: 'Nothing happens until somebody sells something' & 'There is a sucker born every minute' become muted.

 

wwxx 

Sat, 07/26/2014 - 08:42 | 5006806 Budd aka Sidewinder
Budd aka Sidewinder's picture

I thought 'entropy' was when you were lifting weights and your large intestine pops out of your butthole

Sat, 07/26/2014 - 08:45 | 5006816 J J Pettigrew
J J Pettigrew's picture

Tell Janet

Sat, 07/26/2014 - 08:56 | 5006825 Herdee
Herdee's picture

Pissing In The Wind.It's a good read.

Sat, 07/26/2014 - 08:58 | 5006828 world_debt_slave
world_debt_slave's picture

economists are the witchdoctors of the modern world

Sat, 07/26/2014 - 10:20 | 5006919 AdvancingTime
AdvancingTime's picture

Have we been lulled into complacency by the extraordinary actions taken by central banks and governments over the last six years? This is a key question we must face. Have these actions really worked or merely masked over major flaws and problems?  And just for fun, consider that by not demanding the right kind of growth and by throwing money at problems we have only delayed and added to festering issues that face us in the future.

  Modern Monetary Theory often referred to as MMT to its many believers removes much of the risk ahead and guarantees that we will always be able to muddle forward. MMT also known as neochartalism is a economic theory that details the procedures and consequences of using government-issued tokens and our current units of fiat money.  Newly acquired tools like derivatives and currency swaps are suppose to allow us to print and  manipulate away problems. What I'm seeing develop is an "almost surreal" feeling of indifference towards reality. More on this subject in the article below.

 http://brucewilds.blogspot.com/2014/01/have-we-been-lulled-into-complace...


Sat, 07/26/2014 - 10:38 | 5006955 AdvancingTime
AdvancingTime's picture

Sometimes the old guys who have seen it all have the most perspective and the guts to speak up because they have less to lose. What I like about numbers is that when they are not jockeyed, jerked around, and falsified they tend to tell the truth. Looking down the road the numbers do not work.

Allen H Meltzer is viewed by many economist as America’s foremost expert in monetary policy, Meltzer is the author of the three-volume “A History of the Federal Reserve.” For over 25 years he was the chair of the Shadow Open Market Committee, a group that meets regularly to discuss the policy of the Federal Reserve. “We’re in the biggest mess we’ve been in since the 1930s,” he recently stated. “We’ve never had a more problematic future.” More on his thoughts in the article below.

http://brucewilds.blogspot.com/2013/07/it-will-all-end-badly.html

Sat, 07/26/2014 - 11:38 | 5007142 p00k1e
p00k1e's picture

As soon as it cracks the first layer containing millions of sick, broke Pensioners, Social Security Collectors, etc will be seen wandering the streets.

Have a lot of bullets to humanely put them down. 

Sat, 07/26/2014 - 14:49 | 5007625 AnAnonymous
AnAnonymous's picture

Economic laws? Immutable? The same as physical laws?

Quite funny coming from 'americans'.

Denial, denial, denial. That is the 'american' nature.

'Americans' sold themselves as able to overcome the environment. So physical laws should be dismissed, following the 'american' creed.

The opposite is happening: 'americans' are unable to overcome the environment, therefore physical laws start to press more and press. 'Americans' are cornered.

And are trying to turn this into economics laws are immutable. The very same economic laws that were supposed to open up the path to dismissing physical laws.

'American' all the way.

Sat, 07/26/2014 - 19:09 | 5008231 newworldorder
newworldorder's picture

You may be right on many of your points, but i would like for you to consider this financial FACT. Rightly or wrongly the FED and the Bank of England have infected the rest of the world with unlimited fiat/digital currency printing. Were it not for that printing most sovereign central banks and almost every large Bank, dark pool, private equity firm and shadow banking derivative house would be bankrupt.

I am not advocating this. The reality is that whatever economic laws existed prior to 1971 - no longer exist. The peg is the US$. Every financial institution and government in the world will fight to the the death to keep it functioning. The current system will function until it is overwhelmed. Current Economic Laws are for the little people.

Sat, 07/26/2014 - 19:32 | 5008283 bunnyswanson
bunnyswanson's picture

You are too annoying for words but I'll hang this at the end of your rhetoric, which you hold closer to you than any woman would near dare be.

 

America was not always like this.  There was a time that this country did the right thing for its citizens.  Comparatively speaking, if one travels, americans are no different than anyone else, the crooks were given the front row seats though and, just like models hired to sit in the front row of a rock concert, the crooks got the best and paid nothign at all, weren't even fucking fans.

 

Plenty of crooks to go around.  Taking the easy road, the low road, is the crook's trip ticket to fame and forture for now...but by the time this is over, it will all be gone and seeing the Americans left standing being shipped off to factories somewhere in the world as "human resources" is all that you'll have to look forward to. 

 

Yes, like children, the Americans took the sucker and now when it comes time to pay the Piper, the tax man, the creditors, the tears will begin to flow and all that fun money could buy will be replaced by debt.

As a person who is NOT AN AMERICAN, I say to you, you should be horse whipped until you haven't a drop of blood left because, asshole, you are so fucking annoying.  And though there is enough blood shed in this sorry excuse of a world, thanks to CORRUPT LEADERSHIP, I'd like to watch from the sidelines as you beg them to stop.

Sat, 07/26/2014 - 14:55 | 5007646 messystateofaffairs
messystateofaffairs's picture

Real economics is based on praxeology which does provide a structural framework to optimize the efficiency with which traders transact their needs and wants in a speculative environment. Charts and statistics can give some indication of what has transpired but cannot reliably predict future events like laboratory science can because praxeology provides an infitinite number of variables of individual human origin that never duplicate. Economics needs to repect that or it will always be "dismal". But economics does have some useful rules, personally I identify with the ones Ludwig von Mises (egad, he's a Jew and I'm an antisemite) lays out in Human Action. The man was a brilliant thinker and a geniuine scholar who has something really valuable to teach the world if only more of it knew how to think.

Sat, 07/26/2014 - 15:39 | 5007757 malek
malek's picture

 Economic laws are immutable

And isn't willing or able to present a single example of such a "law" - epic fail.

Sorry folks, economics is a social "science."
Social "science" has no immutable laws unless it overlaps with areas where physical laws play a role.

Sat, 07/26/2014 - 17:43 | 5008025 Grouchy Marx
Grouchy Marx's picture

Economic laws exist, whether understood or not, just as it is with physical laws.

Sat, 07/26/2014 - 20:26 | 5008385 malek
malek's picture

What is better: your word or a concise example?

Sun, 07/27/2014 - 12:48 | 5009785 Grouchy Marx
Grouchy Marx's picture

Simple example: expanding the money supply creates inflation. 

Another example: extended trade deficits impoverish the nation with the negative balance. 

Another example: wealth is generated by raw material extraction and sales, or material transformation through value added activities. No wealth is created by the service or government sectors.

Another example: capital always flows to locations of minimum cost labor.

Sun, 07/27/2014 - 15:25 | 5010188 malek
malek's picture

Very funny.

"Money", and by extension trade deficits, is a man-designed concept, therefore there cannot exist anything similar to a physical law around it, as such true laws exist even without man.

Where you wrote wealth you actually meant value - another thing purely in the eye of the beholder (" a kingdom for a horse")

Capital -at least in its original meaning- is very closely related to physical assets (machinery etc.)
I dispute that capital (which in your sentence sounds more like wrongly termed "money" to me) always flows to locations of minimum cost labor - ask Porsche for example.
And it's not a law because producers can break it constantly as long as they can still find customers willing to pay the (higher) price.

Sat, 07/26/2014 - 16:44 | 5007900 reinhardt
reinhardt's picture

"economic" "law" is a contradiction of terms

something to think about:

The Indisputable Connection Between Outsourcing Projects And Stock Markets (Part 1)

http://enronnext101.wordpress.com/

r

Sat, 07/26/2014 - 19:41 | 5008295 TabakLover
TabakLover's picture

Here's the law........the Fed is gonna crash this whole thing, as soon as they are sure they cannot be blamed for doing so.  The law of CYA.

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