Given Hubris, Policymakers Have No Answers

IDW-2016-02-26+picsMy IDW tells in one picture what the establishment is finally coming around to realize and that is that they have no answers about how to stimulate growth. While my IDW had a blip higher this past week to close at 132.57, is there any doubt as to its destiny? With continued propaganda and massive Plunge Protection Team buying, “they” have for the moment managed to keep the stock market from an immediate decline. But there is no doubt as Michael Oliver said on my radio show last week, leaders of the G20 countries are in a complete panic mode.

Just take a look at the headlines in the Financial Times over the past couple of days.

“World trade back to crisis levels as EM demand slides.” This February 26th article comments that for the first time since 2009, world trade contracted in 2015, largely because of “weaker demand from emerging markets.

“IMF urges top economies to join forces in growth push.” The article starts out as follows: “The international Monetary Fund has urged the world’s leading economies to join forces and take bold action in a bid to boost growth, highlighting concerns that global market turbulence is starting to hurt the real economy.” The article goes on to say that U.S. Treasury Secretary Jack Lew (pictured above), has dampened hopes for significant G20 policy changes.

It struck me this past week that in their own way, both of the establishment gentlemen pictured above are admitting that they have no answers. U.S. Treasury Secretary Jack Lew’s admission needs to be read between the lines a bit though Blackrock’s Peter Fisher offers an outright admission that the establishment is clueless. After all a Treasury secretary who openly admits he has no answers could really send the markets reeling to the downside instantly. I listened to him talk on Bloomberg about how nations need to depend more on fiscal stimulus. But who is kidding who? Everyone, most of all the Chinese and Japanese, has been stimulating full blast for years, leading to massive mal investment and bad debts that cannot be paid, placing the global economy on the precipice of total destruction. But what makes Lew’s discussion completely nonsensical is that he warns against the ongoing currency devaluations but the only answer he and other Keynesians have it is to debase currencies by the continued creation of them at a faster and faster rate of speed to fund fiscal stimulus without allowing the markets to price capital via free market interest rates. No wonder Jack Lew is holding down expectations for the G20. The only answers he and all the other Keynesian economist have is to feed the global economy with the same poison of deficit spending and currency destruction that is actually the root cause of our global depression.

Regarding Peter Fisher, he very correctly and strongly objected to the institution of negative interest rates, noting that it would only serve to reduce lending by flattening the yield curve and taking away profit margins to lenders. He noted that Larry Summers and other “great” economists are only looking at the demand for credit, not the supply of credit. By forcing the short end of the yield curve further into negative territory, you further reduce profit margins for lenders, thus further insuring less, not more economic growth. Moreover, he argued that by boosting financial asset prices through the lowering of rates, you get the opposite of the “wealth effect” which is an argument put forward by Wall Street for higher stock prices. You get the opposite effect because you are taking money out of the pockets of ordinary Americans. Of course that has been an ongoing pilfering of average people for decades but has become especially acute since the financial crisis of 2008.

What is the Answer?

It is clear to all Austrian economists that fiscal and stimulus policies while seeming to generate short term gains are pathological to the functioning of a free market economy and as such to society as a whole over the longer term. It has been clear to me and others of the Austrian school that a day of reckoning will come when more of this same poisonous policy hits a peak debt scenario when more stimulation actually leads to a contracting economy rather than an expanding one. That is true simply because it constricts the lifeblood of capitalism, namely capital by denying the price discovery of capital.

We are now at that point where more debt-based stimulus is sucking the global economy further into a bottomless vortex! And I think the policy makers are very reluctantly starting to recognize it, even if they don’t consciously allow themselves to know the truth about how to make things better. Peter Fisher’s answers to the Bloomberg anchor who asked him why central bankers persist in pushing for negative rates is very revealing. Peter said, “The Fed doesn’t want to admit they have run out of ammunition. It’s become an article of faith that in order to have credibility they have to say things that don’t have any credibility. I think the Fed has lost their heads here. They want to present the notion that they are still in charge.”

There’s the answer. It’s hubris! As defined in its ancient Greek context, “hubris” typically describes violent and excessive behavior rather than an attitude. We normally think of “hubris” as extreme pride or self-confidence. But in its ancient Greek context, it typically describes violent and excessive behavior rather than an attitude. When it offends the gods of ancient Greece, it is usually punished. One Republican candidate for President especially appears to possess this dangerous trait, but actually most if not all of the existing candidates with the possible exception of Ben Carson display a considerable dose of hubris. That would also apply to the two remaining candidates in the Democratic Party.

For a nation that declared its independence from Britain because our Creator, not a king or President, gives us our right to be free, how did we get to this point where we chose to trust a human being in the White House or the institution of government rather than trust the free markets that God has given us? A thorough answer to that would take many pages. But one simple word that I believe explains why we as a people look to humans pretending to have all the answers is the sin of pride which in essence says, neither I nor human beings need their Creator. I can trust my own wit. I don’t believe in the omniscience or omnipotence of the Creator, as those foolish founders of the American Republic who believed in the natural laws of markets once did. In essence, I don’t need God. Out of hubris we as humans think we have all the answers rather than trusting and placing our faith in our Creator.

Proverbs 16:18 states, “Pride goes before destruction, and a haughty spirit before a fall.” That sounds a lot like the messages contained in Greek tragedies. Our humanism-orientated leaders practice hubris like never before. Perhaps it has been the spoils of World War II that has set the stage for our collective belief as a nation that we don’t need God. But looking at my country now in which we are clueless in our foreign policy as well as economic policy, the handwriting seems to me to be on the wall. Lies out of hubris can persist only so long before truth prevails. And with such major insiders like Treasury Secretary Jack Lew and Blackrock’s investment senior director Peter R. Fisher essentially admitting they have no answers, perhaps we are near that painful breaking point as a nation where we will be forced to refocus on truth rather than the prideful lies that stems from the sinful heart of humankind.

A Personal Note: I don’t mean to be preachy. This message is for yours truly as well as Jack Lew and Peter Fisher.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.