Death Spiral

We cannot add debt, so the IMF says we must draw down our future pensions and future health spending to keep today’s economy afloat. “A modest cut in the growth rates of entitlements can buy substantial fiscal space for continuing stimulus.”

Shouldn’t bulls be sobered that the bastion of hard-nosed orthodoxy feels the need to talk in such terms, or that White House officials are preparing the ground for another round of emergency spending even as it reveals that fiscal deficits will reach $9 trillion over the next decade. This is $2 trillion worse than feared in March, and based on rosy growth assumptions.

It has certainly alarmed US retail tycoon Howard Davidowitz. “As a country we are out of control, we’re in a death spiral,” he said.

All that has happened over this crisis is that huge private losses have been dumped on society: but the losses are still there, smothering the economy. Taxes must rise. Debts must slowly be purged. “As long as economic growth relies on the state, you cannot talk about durable recovery,” said European Central Bank member, Yves Mersch.

via Our quarter-century penance is just starting – Telegraph.

Well, that’s certainly some cheery news! Are things really that bad?

We should all remember that predictions and forecasts are themselves speculative. We should also remember that the forecasters have a pretty poor track record. That being said, however, the picture does not look good. Our primary global problem has been too much debt. Our current political leadership thinks the solution is to pile on more debt even as markets grind away at liquidation to correct the old debt overhang. If you extrapolate from current trends, a 25 year slump doesn’t seem so unreasonable.

But extrapolating from current trends never gets the right answer. Trends change and a lot could happen. People aren’t happy with their current circumstances and, when people aren’t happy, they try to change their circumstances. Many independent minor changes can create trends, changes in economic patterns, and changes in the polity. Granted, the change could make matters worse, but even that would change eventually.

In the long run, things will only get better when we put a dent in our debt. One way to do that is raising taxes, but that always destroys jobs and we’ve already destroyed enough. A better way is to create wealth by backing away from the excessive regulation that strangles our entrepreneurs and small businesses. That will require some adult supervision in Washington – and the sooner the better.

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