Here is something that you might rarely hear: Sen. Elizabeth Warren (D-MA) is right. Although she is wrong on nearly every subject, from economics to public policy, the progressive presidential candidate is right about sounding the alarm bells for the next economic collapse.
Because households, governments, corporations, and central banks have been living on borrowed time for the last decade, the next financial crisis will be more severe than the last recession. But this isn’t something just concentrated in the United States; nations worldwide have adopted the same Keynesian nostrum to resuscitate anemic or dying economies. And don’t think it is a partisan issue; it’s a mistaken philosophy on both sides of the aisle of how an economy functions and grows.
As Margo Channing famously said in All About Eve, “Fasten your seatbelts. It’s going to be a bumpy night.”
Sounding the Trumpets
Writing in a Medium blog post, the senator outlined her ostensibly correct prognostications from the past before delivering this statement:
“Warning lights are flashing. Whether it’s this year or next year, the odds of another economic downturn are high — and growing.
“The country’s economic foundation is fragile. A single shock could bring it all down. And the Trump Administration’s reckless behavior is increasing the odds of just such a shock.”
Elizabeth Warren
She listed the trillions of dollars in household debt, the 40% spike in corporate debt in the last two-plus years, and the manufacturing sector sinking into a recession as potential drivers of the next downturn. Warren also predicted that refusing to raise the debt ceiling would be “more catastrophic” than the fall of Lehman Brothers – little did she know that this limit was extended for two years (we will get to that later).
Warren finished off her list with the US Treasury yield curve sloping downward, a brief lamentation on Brexit, and a few surveys of economists forecasting a recession.
She was building some credibility, but then she proposed interventionist solutions that would contribute to an economic slowdown and a fiscal nightmare for the public purse. Warren desires to slash household debt by canceling up to $50,000 in student loans, introduce a $15 minimum wage, strengthen unions, and help workers elect 40% of board members at large corporations. She also plans to spend $2 trillion to make the manufacturing industry go green, tell corporations what to do with their money, move ahead with some vague trade plan, and eliminate the debt ceiling or automatically raise it to match spending by Congress.
Put simply, it is an a la carte menu of far-left schemes.
For all the talk of Warren’s wonky campaign, none of these policies are good ideas. In fact, 300 million Americans will need Marianne Williamson’s healing crystals just to cleanse our spirits from learning about Warren’s proposals. That will certainly stimulate the economy!
The Warren Economics
If you look at some of the hiccups in the economy that Warren cites, a lot of them surfaced during former President Barack Obama’s reign.
In the last six years, for instance, US household debt skyrocketed from $11.3 trillion to $13.5 trillion. As another example, corporate debt has been on an upward trajectory since 2010, thanks to historically low interest rates.
Now, when it comes to the debt ceiling, Rep. Thomas Massie (R-KY) said it best in a recent tweet:
“Now the Repub leader will come to the House and say ‘vote for it: lots of spending for the military’ and Dem leader will come to the House and say ‘vote for it: more welfare and no funding to stop illegal immigration.’ And big biz will say ‘fund all the things, we like debt.’”
First, the debt ceiling debate has been prevalent for the last 20 years under both parties. This isn’t a Donald Trump thing, though his administration and Republicans are exacerbating the pecuniary mess.
Second, removing or permanently increasing the debt ceiling will only kick the can down the road even further. It will not address the ballooning $23 trillion national debt or the $1 trillion budget deficit. But this is good for free-spending politicians because now they do not need to worry about this nuisance that comes up every year and is used as a political football. So, should Warren win the White House in 2020, then she can spend with reckless abandon.
That’s bad economics.
When it comes to surveys, you should not hold your breath; even perma-bears have lost faith in these polls of economists. Since the recession, there has always been a Reuters study or a Bloomberg report of experts who say a recession is imminent. For instance, a lot of surveys said a recession was going to take place in 2016. That obviously did not happen. Now, the polls are pointing to 2021 as the year of the next dip. Who knows? Just pick a random year and hope you’re right – you can then appear on CNBC and say, “You suckers! I predicted the recession, you didn’t! Losers!”
Tossing a Yield Curve
The US Treasury yield curve is a plot of the yields on all Treasury maturities (from one month to 30 years). It typically trends higher because bond investors anticipate a higher yield for taking on additional risk by holding bonds with longer maturities than shorter ones.
If you have been watching the business news networks or skimming through market headlines, you may have heard about the yield being inverted for more than a month. This means investors do not have confidence in the near-term economy, so they are demanding a greater yield for a short-term investment.
The Federal Reserve has called it “the best summary measure” for a contraction, spawning a debate over whether this signals a recession or not. The gauge has a great track record because it has inverted mostly before recent recessions.
To Austrian theorists, however, in an unhampered free market economy, an upward sloping yield curve is unsustainable. They argue that it initiates taking advantage of price differences in other markets – arbitrage – that transition from short to long maturities, increasing short-term rates, and decreasing long-term rates, which produces a uniform interest rate.
Really, people, it’s simple economics!
A Fall Guy
When the next downturn occurs, it is expected that the left will blame Trump. But a recession is inevitable – bull markets do not last forever. And, contrary to what some experts say on television, it is no different this time from the dot-com bubble or the housing debacle.
Like in the seminal Dashiell Hammett novel, The Maltese Falcon, every incident requires a fall guy.
“There’s another thing that’s got to be taken care of first. We’ve got to have a fall-guy. … The way to handle them is to toss them a victim, somebody they can hang the works on.”
Trump is that fall guy. Everyone in the media, academic community, Democratic Party, Hollywood, and global elite will pin the next crash on 45, whether that happens next year or in 2024. Should he be a patsy for all the largesse? Hardly. But he did set himself up to be the scapegoat for big-government acolytes and Keynesian disciples by taking credit for everything; that logic demands he be held responsible for economic failures, too.
But maybe that won’t be such a bad scenario. Consider what Kasper Gutman tells Sam Spade in the same novel: “Will they stop right there? Or will the Fall Guy be a fresh clue that as likely as not will lead them to information about the falcon?”
Perhaps lies will lead to the truth of everything that ails the economy: the Federal Reserve System.
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