I Have a Very Bad Feeling About This
Unexpected things tend to happen when the real source of problems are papered over and then suddenly reality intrudes.
What an interesting juncture we’ve reached. We’re constantly assured all is well with what matters–the economy–as the all-powerful Federal Reserve has managed not just the hoped-for “soft landing” but a resurgence of growth: yowza, no recession.
The list of good things is striking: unemployment is low, wages are rising, the wealth effect from explosive increases in housing prices has fattened the home equity of households and the soaring stock market has pushed the economy to giddy heights of wealth and confidence.
The spot of bother with inflation has receded and everyone anticipates interest rates will soon follow inflation back towards zero. China has entered a rough patch but it won’t affect us. And so on.
Despite all this uniformly good news, something about the situation is setting off alarms: I have a very bad feeling about this.
Perhaps the root of the feeling that danger is far closer than we discern is the universal confidence that finance can always fix any and all real-world problems. Whatever the problem, central banks can solve it by lowering interest rates and flooding the financial / banking system with liquidity, i.e. monetary easing, making it easier and cheaper for enterprises and households to borrow more money.
On the government-spending side, the central state can fix any and all problems by borrowing and spending however many trillions are needed–fiscal stimulus.
In other words, we don’t need to suffer any inconvenient sacrifices or systemic changes, we simply need to borrow more and spend more. This is certainly a tidy solution to all problems: borrow more and spend more. Everything in the real world can be fixed with monetary and fiscal easing and stimulus.
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