Richard Fernandez wonders whether we’re in “The Last Bubble,” the final economic gasp before another Great Depression. The Obama administration’s unprecedented borrowing may be keeping us afloat now, but at the expense of a catastrophic collapse just over the horizon. It won’t be evident until it hits, and then the first few to escape may do very well indeed; the rest will suffer in a way people have not witnessed for generations.
Peter Boone and Simon Johnson call it the Doomsday Cycle:
I hope, of course, that it’s not the case. But for the first time in generations it seems a real possibility. None of it is inevitable; we face no unprecedented crises, except perhaps for a crisis of leadership. We have to stop borrowing and start living within our means. We have to start making difficult choices, recognizing that there isn’t enough money to fund every politician’s wish list. We have to do things that will spur growth rather than suppress it on the grounds that its benefits won’t be evenly distributed. None of this seems likely while Obama is President. And so we will borrow increasing and previously inconceivable amounts to keep the party going.
The reason why you cannot borrow indefinitely is that that the credibility of the game goes bust at some point and people cash in all these promissory notes at once. Since these promissory notes are backed by the sum of what is available in the present and this huge inflated expectation from the future — and once it becomes clear the future isn’t going to pay up — the assets of the present will only cover a fraction of the ultimate claims. In a crash, some will get 100 cents on the dollar while others will get pennies. A crash is like a huge Ponzi scheme coming down in ruins. Those who get paid early will have something. Those who get paid late will lose their entire claim….
It is the stoppage of the system which ultimately destroys wealth. That’s happening now on a small scale. Factories which could produce something are closed; people in long term unemployment are losing their skills. The real economic system destroys itself when the game becomes unplayable, when to play the game with its broken rules is to lose according to the scoring system. So people get out of the game and the music stops. Taken to the limit a large percentage of the real economy will find itself paralyzed. In that paralysis as with the paralysis of a person, real atrophy will set in. Farms will go uncultivated. Goods will stop being produced. Actual poverty will become widespread. Starvation will become a reality in many places.
Simple, isn’t it? And that makes the behavior of the current crop of leaders all the more reprehensible. What are they spending all these borrowings from the future on? On useless things like public employment, cap and trade to stop ‘global warming’ and on bloating the health care system. They’re spending it on government handouts. For show, to perpetuate the illusion that they can’t perpetuate anyway. They’re not just bubbles; they’re baubles. The result will be predictable. When the cash flows from the future will dry up they’ll try to inflate it with more bubbles. One day it will be clear that’s what they’re doing; that securities all around are only worth a fraction of their face value and then the race will be on to encash before the others find out. They’ll fail and in the process the first ones to the cashier will succeed beyond anyone’s wildest dreams.
The world is in a race between the politicians bent on bubbling their way out their fecklnessness and a somnolent public which must act in time to stop them….
This entire health summit and the economic policies of which it is a part will be remembered for decades, maybe even a century hence for the complete idiocy that it is.