Mark Pernice
By DAVID A. STOCKMAN
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.
THIS dyspeptic prospect results from the fact that we are now
state-wrecked. With only brief interruptions, we’ve had eight decades of
increasingly frenetic fiscal and monetary policy activism intended to
counter the cyclical bumps and grinds of the free market and its
purported tendency to underproduce jobs and economic output. The toll
has been heavy.
As the federal government and its central-bank sidekick, the Fed, have
groped for one goal after another — smoothing out the business cycle,
minimizing inflation and unemployment at the same time, rolling out a
giant social insurance blanket, promoting homeownership, subsidizing
medical care, propping up old industries (agriculture, automobiles) and
fostering new ones (“clean” energy, biotechnology) and, above all,
bailing out Wall Street — they have now succumbed to overload, overreach
and outside capture by powerful interests. The modern Keynesian state
is broke, paralyzed and mired in empty ritual incantations about
stimulating “demand,” even as it fosters a mutant crony capitalism that
periodically lavishes the top 1 percent with speculative windfalls.
The culprits are bipartisan, though you’d never guess that from the
blather that passes for political discourse these days. The state-wreck
originated in 1933, when Franklin D. Roosevelt opted for fiat money
(currency not fundamentally backed by gold), economic nationalism and
capitalist cartels in agriculture and industry.
Under the exigencies of World War II (which did far more to end the
Depression than the New Deal did), the state got hugely bloated, but
remarkably, the bloat was put into brief remission during a midcentury
golden era of sound money and fiscal rectitude with Dwight D. Eisenhower
in the White House and William McChesney Martin Jr. at the Fed.