This blog has a small soft spot in its sometimes hard heart for Herbert Stein, a chief economic adviser to Gerald Ford who was forbidden from using the word "recession" to describe the recession that Ford inherited, and therefore called it a "banana". Dr. Stein's son, Ben Stein (also a Ph. D. economist), did great work in the 1980s that helped expose Michael Milken's frauds, and has gone on to a career as a talking head, quasi-actor and general personality. He has a weekly column in the New York Times, perhaps because it can count him as a conservative when his true views are different.
In the summer of 2007, Stein fils was aggressively bullish on the financial structure of the U. S.
How, he doubted in print, could a modest amount of subprime mortgages bring on a recession, much less the dire consequences predicted by such people as Nouriel Roubini?
Last week, Dr. Stein wrote a column titled: Decline and Fall: A View From 2089.
He foresees China looking back at the rapid decline and fall of the American economy as follows:
THE future is now. To see how history might look back on our economic crisis, we bring you this excerpt from “The Decline and Fall of the United States of America,” Beijing University Department of Western Hemisphere History (Beijing Press, 2089):
The demise of an economy as mighty as that of the United States as of 2000 cannot be accounted for by anything less than deeply mistaken and foolish decision-making within that nation’s ruling circles. . .
The Credit Collapse and the government’s conflicting response to it — shoring up the banks and expanding reserves on the one hand, while putting lending officials at risk for aggressive lending on the other — led to a prolonged slowdown in the economy.
At the same time, the confidence that American lenders had in the rule of law, probably one of the main pillars of the economy, was demolished by government actions that invalidated some lenders’ long-held legal rights in favor of ad hoc attempts to please various political constituencies. . .
By 2012, after a substantial victory by President Obama over Jeb Bush of Florida, brother of George W. Bush, the United States had been mired in recession for six years. (The Obama victory was greatly aided by the unopposed secession of Texas and Alaska from the nation. . .
By 2014, the federal government’s debt had reached $25 trillion, while the economy had shrunk to roughly $10 trillion in annual output (at 2006 prices). At that point, the Treasury began to announce that it would suspend payment of interest to foreigners on United States federal debt except by the issuance of so-called P.I.K., or payment-in-kind, notes of the Treasury. These were simply payments by promises instead of by money.
At that point, only the Federal Reserve remained as a buyer of United States Treasury debt. Foreign holders sold as quickly as they could. The dollar collapsed, and the yuan replaced it as a global reserve currency. The resulting hyperinflation in the United States and the accompanying collapse of the republic are by now known to every schoolchild. ...
Barack Obama needs to worry when Ben Stein predicts his re-election! (And he will not face Jeb Bush. Jeb does not want the job, and the American people will not soon hanker for yet another Bush family President.) Mr. Obama also need not fear Texas and Alaska seceding; and if they do, such a move will hardly be unopposed. Even a "green" President knows we need oil.
From a markets perspective, let us simply point out that nine years ago, there was triumphalism in America. Nine years from now, there may be triumphalism again; or in perhaps nineteen years.
I for one do not buy the idea of quick Chinese supremacy or the idea of a straight-line decline and fall of America. The Brits retain a large, prosperous economy despite decades of economic mismanagement after WW II, and mismanagement again recently, and despite loss of the pound sterling's status as the world's reserve currency. America has been perhaps the kindest, gentlest imperial power in history. Only barbarians such as al-Qaedans have their knives sharpened for us. That fact should limit the downside risks to the expected relative decline of America as an economic power, as other countries grow faster from a poorer baseline.
A large and powerful hurricane is passing through the U. S. economy. Fraud and incompetence have allowed much more damage to be caused than was necessary. (The analogy is incomplete, as this hurricane was man-made, not a natural phenomenon.) Ben Stein did not recognize the outer rain bands as being portents of anything more than a summer shower. Almost a full two years after the outer rain bands arrived, he is extrapolating further disaster, such as a Katrina-like flood occurring after the storm passes, and worse than that.
One final analogy: After the economic and political disasters of 1973-4: OPEC's rise, Nixon's fall, and the humiliation in VietNam, the stock market and economy rose sharply for two years, then the stock market fell sharply adjusted for inflation from 1977-82 as the economy gyrated. Similar things happened in the 1930s-40s. More pain is probably coming, but the parts of the economy that were not dependent on easy credit have the high ground and should be spared even if the passing storm causes more flooding.
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