Evening in America

Addison Wiggin - Wed 23 Nov, 2005

"...Morning often looks a lot like evening - if you face the wrong way at the right time. In 1982, interest rates were high and stock prices were low. In 1982, there were a few people who wanted to buy stocks, and many who didn't. In 1982, America Inc. looked like a has-been economy. Yet, at that very moment, had an investor turned around, he would have noticed a brightening eastern sky..."

Under Ronald Reagan, Americans thought they had rediscovered their youth. They couldn't remember ever feeling more confident or more optimistic. Then, 12 years later, in George W.Bush, Republicans thought they saw their hero reincarnate, with another 20 years of prosperity ahead.

And why shouldn't it be morning in America again? We answer the question directly. It is not morning in America because it is evening. There is no bull market because there is a bear market. People are not getting richer because they are getting poorer. It is not 1981 because it is 2005.

Morning often looks a lot like evening — if you face the wrong way at the right time. But it is the opposite end of the day's cycle. In 1982, interest rates were high and stock prices were low. In 1982, there were a few people who wanted to buy stocks, and many who didn't. In 1982, America Inc. looked like a has-been economy. Its currency was widely considered near-trash and its bonds were described as "certificates of guaranteed confiscation."

You could buy nearly the entire Dow for just one ounce of gold in 1982. Now it takes 22 ounces. The trend of the time, in 1982, was down. Then, as now, smart people considered the trend of the time to be eternal. BusinessWeek proclaimed that equities were not just in a cyclical downturn, not just sick, but dead.

As the moon looked down in the summer of 1982, it shone on a wall of worry so high that only a knuckleheaded contrarian would think of climbing it. Every headline seemed to give another reason the bear market would last forever. Every poll showed that consumers expected it. Every price seemed to confirm the everlasting trend; the sun had set forever; the black of night was permanent.

And yet, at that very moment, had an investor turned around, he would have noticed a brightening in the eastern sky. Over the next 18 years, the sun rose higher and higher, until investors were so encouraged by the favourable growing conditions that they scattered their seed like confetti at a parade. Did anyone doubt that it would take root in the hard concrete of lower Manhattan's financial hothouse or the thin soils of the technology sector?

But the year 2005 is everything the year 1982 was not. Today, there are many people in the US who want to buy stocks and few who don't. Interest rates are nearly as low as they have been in half a century. Stocks are as high as they have ever been. Consumers — who were relatively reluctant to spend in 1982 — pick their own pockets today. The latest figures show consumer spending increasing at five times the increase in wages and salaries.

Can these sunny trends continue forever? They never have before. And no theory of economics explains how they might. Instead, the typical pattern is for night to follow day. It is also typical for the dumb things people did when they were feeling flush to be corrected by recession and bear markets. There is one more big difference: foreigners have been hot for US assets for years — an attitude we have come to count on, because we need $2 billion in capital inflows every day to cover our foreign-trade deficit. What happens as they cool off again?

Americans cannot expect foreigners to support them indefinitely. Someday, perhaps soon, they will realise that their main customers cannot pay their debts; they will get tired of lending to them. Then, the long, dark night will begin. It will not last forever.

Let us take a moment to stand back and gaze at America's great Empire of Debt. It is the largest edifice of debt ever put up. It sustains the most magnificent world economy ever assembled. It supports more people in better style than any system ever before devised...

In 2003, the American Enterprise Institute projected a $45 trillion shortfall; $47 trillion countered the International Monetary Fund in 2004; the National Center for Policy Analysis and the Brookings Institution came up with $50 trillion and $60 trillion respectively in their own research reports published in 2003.

Those are all incomprehensibly large numbers, of course, but the biggest of the projections came in 2004 from Social Security and Medicare trustees themselves. They estimated the unfunded benefit liabilities to have a current value of $74 trillion dollars.

As an empire matures, the imperial citizens believe more and more extravagant things. By the opening of the twenty-first century, Americans were spending more than they earned. Each day brought more new debt than real new wealth. Yet, between 2002 and 2005, every quarter showed growth in GDP. Americans mistook this growth for progress. They knew they had the world's best economy, its best system of government, and its finest culture. They could not imagine that they were growing poorer.

The growth, such as it is in the American economy, has come about by virtue of increased emphasis on the present tense. Americans have come to despise the past and neglect the future. The lessons of the dead and the desires of the unborn are both ignored. Instead, all that seems to matter is consumption in the here and now.

A dead man, F.A.Hayek, explains the consequences: "The economy in its entirety must continue to decline so long as more is being consumed than produced, and some part of consumption therefore takes place at the expense of the existing capital stock."

Without a theory, F.A.Hayek might have said, the facts are mute. But by the year 2005, both facts and theories had become blabbermouths. The trouble was that the facts had been corrupted so they no longer told the truth. And the old theories that might have been used to interpret the facts had been abandoned in favour of new, more convenient delusions. Americans could now run up as much debt as they wanted, said the new theorists.

The American economy may or may not be "growing" in late autumn 2005. But if traditional, time-tested theories about how wealth and poverty are correct, thank God it is not growing more. Every step taken by the world's single-largest economy - and the keeper of its No.1 currency - moves it deeper into debt and closer to bankruptcy.