Ominous lies
Mark Twain's famous statement about lies and damned lies was a condemnation of how a dishonest man can take a statistic and interpret it in a manner that serves his purpose. But what does one call a statistic that, by its own lights, is openly and verifiably inaccurate? This is particularly troublesome because it is these very statistics on which the managers of the American economy base their Olympian decisions.
The Keynesian theory of economics is the prime justification for federal control of the economy. (Yes, I said control.) It dictates the use of monetary and fiscal policy to artificially expand the economy in bad times and, in theory, keep it from getting out of control in good times. Even Keynes admitted that, in the long run, this wasn't going to work, but the excuse his theory provided the politicians to do what they love best - spend taxpayer money - was simply too useful to ignore.
Of course, since Keynesian theory has dominated the American economy for almost 60 years now, one begins to wonder just when this long run, in which we are all dead, can be expected to kick in.
The Austrian theory of economics, championed here in the United States by the Mises Institute, teaches to the contrary that macroeconomics statistics are largely fiction and that the chairman of the Federal Reserve can no more control the economy than he can command the weather. This is not to say he cannot stand on top of Wall Street with a garden hose and convince derivative-sotted traders that it is raining, (and fractional-reserve banking is one Godzilla of a hose), but he has no more control than a tick riding the back of a dog.
Which theory is correct? The Keynesians are back in boom mode as, by their metrics, the economy is growing at a solid 4.1 percent rate with mild 1.2 percent inflation. According to them, these are, if not the best of times, pretty doggone good times about which you'd have to be a fool to complain.
Call me a fool, then. Let's look at one example, courtesy of the raving genius that is Mogambo. The U.S. Treasury announced it purchased $64 billion in debt last month. Annualized, that is $768 billion, which amounts to 7.3 percent of the $10.5 trillion American economy. And yet the projected deficit for 2004 is only $478 billion, or 4.6 percent of the economy. Which number would you guess is dtd by the economists and used to make political decisions?
So, if a dollar is borrowed to buy something off-budget, is any money actually spent?
It gets much worse than that, of course. Adam Hamilton has calculated that according to the historical link between commodity prices and the 10-year Treasury bond, which has a long-term correlation of more than 90 percent, interest rates should be over 10 percent already. Yet the Fed, in its desperate attempt to keep a monetary finger in the dyke, has kept rates so low that the 10-year is trading below four. And anyone who has pumped gas recently does not need to understand the arcane mechanics of hedonic adjustment, substitution and rental equivalence to be suspicious of the CPI as a measure of inflation.
What do the Austrians have to say about all this chicanery? First, that it is inevitable. Those with an interest to concealing the precariousness of the situation and the power to do so will always take every opportunity to hide their failures. As surely as bust follows boom, every artificial stimulus designed to put off judgment day will only worsen the reckoning when it finally arrives.
When will that day come? I can no more predict it than I can foresee the date of the Second Coming. But in both cases, the wise can see the signs. Nine months ago, I was totally wrong about the immediate need to exit the stock market, although my advice to go into metals at the time was impeccably sound. (Gold is up 18 percent and silver an incredible 72 percent since then). And a suspicious mind, seeing that 10 percent of the Dow stocks have just been swapped out for new blood, might contemplate what happened the last time this took place.
Does November 1999 happen to ring a bell?