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Reckoning

Reckoning is an important word.  It implies an ultimate justice or reconciliation.  All observers of life, and perhaps especially the financial markets, understand that justice or reconciliation can be postponed, and often for a very long time indeed.  However, it cannot be put off forever.  Every borrowings must ultimately be repaid, or if not cause negative consequences.

The financial joys of the past five years, such as they were, have been mostly enjoyed by a small minority.  The buoyancy of the U.S stock market has created the illusion of prosperity.  The ultra low yield environment has allowed governments around the world to finance their upside-down balance sheets without too much pain.  Even Spain can borrow long term near 2%, for God’s sake!  No one with any sense of history or financial understanding could imagine that this situation is sustainable.  Only politicians and their wishful-thinking followers, along with the either sycophantic or terribly cynical financial news commentators could defend this situation as being sustainable, or being achieved without some serious costs.


We have in recent days heard of news that has caused some newfound volatility in stocks.  Germany, thought to be the bastion of strength in Europe, reported some troubling news about its exports and its economic health.  Germany’s economic success has been largely built upon its exporting goods to other nations, and one must ask today which nation is so strong as to be in a position to support the industrial/commercial production of another nation?  In difficult times, people all tighten their belts and spend less, governments erect protectionist barriers to help protect or create jobs locally, and central banks aim to devalue its currency so as to make imports more costly and thus less appealing.  None of this bodes well for an economy built on exportation.

I have long wondered how real economic growth occurs.   I’m not referring to the kind of growth that moves deck chairs around, shifting prosperity from one set of industries to another while the whole pie is unchanged.  Nor am I referring to the kind of growth that bankers and politicians can trigger by inflating a money supply and making debt cheaper and/or more abundantly available.  This sort of growth is either a pure illusion or the kind that borrows from the potential prosperity of future generations.   We’ve borne witness to a lot of those forms of growth for quite some time.

This week I asked my class at USC’s Marshall Business School for their best ideas of how to stimulate real economic growth, and the class was mostly stumped.  I read over the weekend how the IMF had convened a gathering of its policy setting committee, which included the world’s economic leaders (Yellen, etc.) with the main stated purpose being how they would answer this very same question.  I must say that I was amused when I read in their press release that they “pledged to make the necessary structural changes that would stimulate greater growth.”  Were these folks holding something back until now?  Did they know what structural changes needed to be made all along, but decided that they’d let the global economy sink some more first?

Who in the world are these people, how naive do they think we are, and how dumb are we to take them seriously?  At least one, Brazil’s finance minister, was honest when he said that the IMF had “"an entrenched propensity to overstate prospects" for growth in the world's largest economies.”  Real economic growth will NEVER come by government edict.  It can only occur thanks to the creativity and sweat of real people, trying to solve real problems and fill real voids.  Government can serve as a policeman, insuring that things get done honestly.  However, when we turn to government, and that includes central bankers, GSE’s, or other Frankenstein-like creations of government  (IMF) to stimulate economic vibrancy we will get exactly what we all deserve.  Elections are coming up in November.  Maybe we can ask some hard questions of candidates and begin to hold them accountable?  Could it be time for a reckoning?

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