If you want to point fingers, start with statism
After two weeks of panic, fear and something called “pure fear,” global stock markets rebounded Tuesday and settled down. Exactly why is anybody’s guess. Maybe investors, whoever and wherever they are, just exhausted their supply of fear and decided to engage in a little exuberance, global debt crises be damned, while they restocked fear for another day.
When markets go down rapidly, investors are caricatured as lunatics driven by dark forces. When markets go up, the same investors are often portrayed as rational responders to allegedly sound policy from some government agency or to some new upbeat if obscure statistic.
The best that can be said for Tuesday’s market rebound in New York (4%) and Toronto (3.8%) is that investors did not find any fresh horror in the latest pronouncements from the U.S. Federal Reserve. The market already knew what the Fed would say: The state of the U.S. economy is much worse than the Fed’s giant forecasting machine had predicted. As a result, the world’s greatest central bank will now hold interest rates at about zero through to the middle of 2013.
Two years is a long time at zero, and by 2013 the Fed’s base rate will have been at near zero for more than six years — an unprecedented relaxation of monetary policy that is so far beyond precedent as to be in another galaxy. At some point economic theorists and historians will be able to explain why this great experiment in interest-rate manipulation failed to deliver on its promises. Nor is there much evidence that quantitative easing — in which the Fed buys U.S. government bonds — has been successful.
This apparent failure of monetary policy to deliver the growth and jobs its proponents firmly predicted, in the United States, is one piece of the financial puzzle now gripping the world economy.
Without that promised growth, the United States will not be able to repay its debts. That’s the reason markets tumbled in recent weeks. Despite attempts by assorted pundits to pin the market collapse on the Tea Party and a haywire ratings downgrade by Standard & Poor’s, the stock markets around the world more likely reflect the fact that there’s a global government debt crisis.
Above is a table that captures the magnitude of the global expansion in government debt. Supporters of fiscal stimulus like to claim that the world economy suffers from a lack of government stimulus. U.S. economist Paul Krugman, now a mentor to self-declared conservative columnist David Frum, wants another trillion from the U.S. government alone.
But the data compiled by the McKinsey Global Institute show that global government borrowing by 2010 had already delivered plenty of trillions — $25-trillion since 2000, and $11-trillion over the last three years alone. During the 1990s boom decade government borrowing held steady at about 43% of global GDP. Last year borrowing soared to almost 70% of GDP, or $41-trillion, most of it racked up since 2007.
The major players to increased in government debt since 2008 are Japan (+15%), the United States (+13.4%) and Western Europe (+10.4%). More debt has been piled on since 2010.
Where will the money come from to repay the debts? Growth is the only answer. McKinsey spelled out the options: “Developed countries may need to undergo years of spending cuts and higher taxes in order to get their fiscal house in order.”
Nowhere is this more true than in the United States, where total government spending jumped to $5-trillion a year in 2010 from $4.2-trillion in 2007. As a percentage of GDP, U.S. government spending has jumped from 30% to 35%.
In denial before all this the progressive left and a collection of liberals and conservatives who appear to believe that this growth in governments spending and debt is not enough. David Frum, writing recently, laced into what he apparently sees as one of the root causes of U.S. economic troubles and “the devastation wrought by this crisis.”
After seeing the recent poor growth data for the United States, he singled out as a possible cause “the drift of so many conservatives away from what used to be the mainstream market-oriented Washington Consensus toward Austrian economics and Ron Paul style hard-money libertarianism.”
In a bizarre comparison, he wonders whether conservatives today are making a mistake with regard to free markets that liberals in the 1950s and 1960s made regarding Communism. Just as liberals failed to recognize the evils of communism, says Frum, so conservatives today apparently failed to recognize the evils of libertarianism. “Imagine, if you will, someone who read only The Wall Street Journal editorial page between 2000 and 2011, and someone in the same period who read only the collected columns of Paul Krugman. Which reader would have been better informed about the realities of the current economic crisis? The answer, I think, should give us pause. Can it be that our enemies were right?”
In another commentary, Jonathan Kay in the National Post Tuesday also lit into the apparent radical libertarian takeover of policy in Washington. He pinned the U.S. ratings downgrade on the failure of the U.S. government to raise taxes to meeting the spending explosion, a failure that stems from the rise of the Tea Party and the rise of nutbar roll-back-the-state radicals. “There seems to be no clear end to the crisis, aside from outright bankruptcy, because there is no policy solution that can simultaneously satisfy the dictates of both 21st-century economic reality and 18th-century libertarian dreamscape.”
This is some stretch. For nearly five years we’ve had massive and unprecedented run ups in government spending and debt in the United States and around the world. We’ve had vast expansion of government powers over banks, energy policy, financial markets, health care and other sectors. We’ve had staggering and unprecedented monetary policy interventions across Europe and in the United States. All of which have produced no growth and lousy job numbers, with the likelihood that the debts may not be repaid as a result. And the charge is laid that a small cadre of congenitally ineffectual free market libertarians is the cause of it all.