Why The Future Is So Clear

Well, another Fed decision is in the books, and as expected they will continue to throw money at the problem in an effort to stimulate growth in the U.S. and across the globe.  We have said many times that this path forward is extremely predictable, however it is important to revisit why that is the case.

We need to step way back and look at how this system is setup.  Our entire society is based on short-term results.  Whether it is companies that focus on quarterly earnings, investors that move stock prices based on short-term news events, or politicians that are only in office four years before facing re-election, in every case those in power must focus on short term results, or they will be replaced with someone that will.

The inherent problem with this system is that decisions made to benefit our society and economy in the short term often have long term consequences.  However, that is of very little concern to those in power, as they are forced to show progress or make improvements to appease voters in the short term.   A politician who tells the voters that there will be no funding for improvements in the short term, because we cannot risk our country's future, will not be a politician for long.  He/she will be replaced with someone that will show results now.   You can see how the end game is a government filled with “short timers” focused solely on the here and now.

That brings us to the current economic situation across the world.  Let us retrace history for a moment.  The late 90’s brought about a revolution in communication and technology that changed the world.  It also created a lot of rampant speculation and excitement, which drove the stock market to ridiculous levels.  Once people woke up and realized that just being on the Internet was not a one-way ticket to unlimited profits, the market came down hard and fast.   The retreat was so fast that the economy slowed down and entered a recession.  That alone was no reason for panic, and at that point the economy should have been left alone and allowed to heal and reallocate capital.  However, September 11^th brought commerce to a halt in the immediate aftermath.  Again, at this point, the economy should have been allowed to heal itself. 

Now, can you imagine President Bush telling the American people that neither he, nor the Fed, were going to artificially stimulate the economy because they did not want to create a bubble?  Can you imagine a President saying that it was up to the people and the free market to heal on their own, and that the government was going to step aside and let the market work?  Of course not, so the Fed and the government pumped money into the economy and fixed rates at all-time lows to try and bring us out of the post-911 malaise.  Well, it worked, and they managed to create a wonderful situation were housing prices went straight up for a number of years.  Unemployment dropped, jobs came back, and everything was perfect.   Until of course 2008, when it became clear that the “free money” environment was a breading ground for unusual risk taking by the banks and brokers.   Once the bubble burst, we came crashing down to reality.  Home prices and equity prices corrected and credit froze up.  We found ourselves using terms like “Great Depression II” and facing unemployment the likes of which our generation had never seen before.  

Which brings us to the recent past.   Remember that day back when the crisis was fresh and Congress was voting on the first round of stimulus?   The market fell through the floor when the vote came down and the stimulus bill failed.  At that moment, the world turned upside down.  The vision of a world in which the government was not going to step in and help caused panic across the globe. It was quickly clear however that the fear was unfounded, because there was no way politicians would stand on the sidelines for long.  Doing so would mean certain political death to every single one of them.  We all know now that what transpired next was the greatest wave of government intervention in the history of the world.  We were told that anything less would risk total collapse, Armageddon, the end of life as we know it.

As a result of the stimulus, all asset prices are going up now.  All of course, except for housing.   However there is still a major problem.   The economy of the mid-2000’s was not real, it was a bubble.  The entire foundation of that economy is gone forever.  That economy was founded on unrealistic housing prices, which drove demand for products and services at a ferocious rate.   That market is dead, and so the economy that lived and breathed off of that market is also dead as is the economy that thrived off the false sense of wealth created by rising home values (autos, durable goods, etc.). 

Now we find ourselves in a very tricky spot.  We have an economy that is being propped up by unimaginable stimulus, however that stimulus is not enough to bring us back to the economy of the mid-2000’s.   No amount of stimulus will recreate those days of “bliss” we experienced just a few years ago, because the fundamental underpinnings of that economy are gone forever.

We have a world now that is beginning to face the reality of the consequences of this unprecedented stimulus.  Inflation is beginning to show in food and energy.  The problem is that our economy is not recovering in a healthy, strong manner.   The American people, the voters, are not happy.  They are demanding that something be done by the government to fix this problem.  Even if those in power understood the risks of more stimulus and monetary easing, they simply have no choice but to continue to pump money into the system so they can show short term results.  If they tell the American people that they are just going to have to “take their medicine” because any further stimulus will risk full economic collapse, they will not be in power for long.

This is why the future actions of our government and the Fed are so predictable.  They will continue to stimulate the economy, hold interest rates low, and leverage our future for short term benefits.  They will never admit that what they are doing could have dire consequences.  In the very unlikely event that they decide to do what is right and step aside so the free market can work, they will be voted out of office and replaced with those that make promises of a better day, no matter what the cost.


There is one thing that can break this cycle.  If the world wakes up and realizes the disastrous mess we have created, they will then lose confidence in our system.  When that happens, we will all be forced to take our medicine.  Unfortunately, we will be taking that medicine not only for our own mistakes, but for the mistakes of previous generations as well.   The good news is that all we will have left to build our society back up is the free market, and that is all we will need.