The Dow Jones and Standard & Poor's 500 indexes reached record highs on Thursday, having completely erased the losses since the stock market's last peak, in 2007. But instead of cheering, we should be very afraid.
Over the last 13 years, the stock market has twice crashed and touched off a recession: American households lost $5 trillion in the 2000 dot-com bust and more than $7 trillion in the 2007 housing crash. Sooner or later - within a few years, I predict - this latest Wall Street bubble, inflated by an egregious flood of phony money from the Federal Reserve rather than real economic gains, will explode, too.
Since the S.&P. 500 first reached its current level, in March 2000, the mad money printers at the Federal Reserve have expanded their balance sheet sixfold (to $3.2 trillion from $500 billion). Yet during that stretch, economic output has grown by an average of 1.7 percent a year (the slowest since the Civil War); real business investment has crawled forward at only 0.8 percent per year; and the payroll job count has crept up at a negligible 0.1 percent annually. Real median family income growth has dropped 8 percent, and the number of full-time middle class jobs, 6 percent. The real net worth of the "bottom" 90 percent has dropped by one-fourth. The number of food stamp and disability aid recipients has more than doubled, to 59 million, about one in five Americans.
So 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.
David Fuller's view Had this article come from some other sources
it would be tempting to dismiss it as a contrary indicator. However, David Stockman
had been a former Republican congressman from Michigan, and more importantly,
he was President Regan's budget director from 1981 to 1985. He has also recently
published a book on this subject: "The Great Deformation: The Corruption
of Capitalism in America".
I also saw him interviewed on CNBC recently and he was not the wild-eyed old extremist that some might hope. I think that at least some of his views will resonate with the Austrian School of economists and analysts. Mr Stockman's assessment will also increase anxiety regarding what may happen when the Federal Reserve winds down the quantitative easing (QE) introduced by Ben Bernanke.
However, what interested me most were the readers' comments following the article. I certainly have not read them all, but I skimmed a number and there was a tendency to dismiss Stockman as an angry and sadly out of touch crank. Subscribers can decide whether or not they agree with the critics, or read their responses as evidence of anxiety, because Mr Stockman had the courage to state what others may fear.
I do think Mr Stockman's views lose a degree of credibility by dismissing the USA's capitalistic achievements following the post WWII presidency of Dwight D Eisenhower and William McChesney Martin's corresponding leadership at the Federal Reserve.
Nevertheless, with the exception of Paul Volker's period at the Federal Reserve from 1979 to 1987, we have seen every US government since Eisenhower's pump up money supply to foreshorten natural, cyclical, and arguably necessary corrections. Consequently, the US economy has required a bigger reflationary effort to launch each successive recovery. Moreover, these reflations have bought progressively less GDP growth, as we have seen most recently with Mr Bernanke's QE, which is unprecedented since at least WWII.
Therefore one can agree with David Stockman that the benefits of dramatic increases in monetary stimulus to curtail cyclical corrections are debatable in terms of the long-term outlook for economic growth. However, this is a criticism of economic governance. Meanwhile, capitalism continues to foster the accelerated rate of technological innovation which I have often mentioned. This benefits many consumers and particularly the highly successful corporate Autonomies so often reviewed by Fullermoney.
David Stockman advises that we "get out of the markets and hide out in cash". This may be right in the short term and Fullermoney frequently pointed out that stock markets were entering a corrective phase at the beginning of February. However, we think another crash similar to 2000 or 2008 is extremely unlikely anytime soon.
Instead, we think that the secular valuation contraction cycle, which commenced with 'old economy' stocks in 1999, is now in its latter years. Inevitably, there will be some turbulence, as is the nature of stock markets, not least as investors understandably fret about Europe's lack of GDP growth and the end of QE. However, we maintain that before the end of this decade, we are much more likely to see evidence of another secular bull market. This is likely to be led by increasingly powerful Autonomies which have outgrown their native economies by selling goods and services to the world's rapidly increasing middle classes.
Lastly, since the NYT and IHT printed David Stockman's article, I think it is appropriate to include one of Paul Krugman's replies in the same publications: "The Conscience of a Liberal: More Stockman". You can also see a link to his earlier short piece on Mr Stockman's article, just to the right and slightly below Mr Krugman's photo on the NYT page.