Politics and economics are natural enemies - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 17 May 2012
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Baltimore, Maryland

Attention: Our "Crash Alert" flag is flying.

Dow down.

Oil down.

Yields down.

Gold down.

What's going on?

Yesterday, we drove into Washington, DC, to the Argentine embassy. Friends from Salta were hosting a wine-tasting. It seemed strange to see our Argentine friends - who live in a remote corner of the country - in our nation's capital. But it was a pleasure to see them...and taste their very strong, high altitude malbecs.

Washington has largely escaped the financial crisis. There is plenty of money in the city, but hardly anyone in town knows anything about economics or finance. It is politics they care about. That's how they get money, in the old fashioned way - by taking it away from someone else. So, it is only natural that they believe the world of economics should be approached in the same way - by brute force. Command, control, and central planning...that is Washington's method. That's what politics is all about.

Of course, politics and economics are natural enemies, not natural friends. An economy works best when willing buyers and sellers, investors and entrepreneurs, consumer and producers are able to get together on their own terms. As Adam Smith explained it, they all look out for themselves...and are all guided, as if by an "invisible hand" towards an outcome that is best for the group. Hayek described it in more detailed. Willing buyers and sellers set prices freely. Those prices are rich in information. They tell investors where to invest...and shoppers where to shop...and businessmen where to apply themselves.

The more you interfere with this process, the more screwed up things get. Artificial prices - such as the price of credit set by the Fed - send the wrong signal. Investors make mistakes. Resources are misallocated. Bubbles are pumped up...and then, blown up.

But Washington doesn't care. It's not really the gross welfare or wealth of the people it worries about, but the relative wealth. "Fairness," they call it. And relative to the rest of the nation, Washingtonians are getting richer. That's fair, isn't it?

Washington is a bad place to run over a pedestrian. If he is a white male, he is almost certainly a lawyer. So, if you run over him...our advice is to back up quickly and run over him again. Finish him off. Otherwise he'll sue you.

The houses in Georgetown and the Northwest section of the city are handsome. They have carefully-tended lawns and gardens...and a Prius or Volvo parked in front. DC residents - at least those in the Northwest of the city and the Virginia suburbs - are conscious of their 'carbon footprint.' They recycle. They are well-meaning, earnest and public spirited... Just the sort of people you would like to run over, in other words.

Driving in Massachusetts Avenue...then up Wisconsin Avenue...and then along MacArthur Blvd...we passed many of the places we've heard so much about over the years. Fannie Mae's huge headquarters...Homeland Security...the Brookings Institution...SAIS...the White House...the Capitol...the US Treasury...the Eccles Building, where the Fed is headquartered... It's all there.

"It's amazing how much damage has been done from such a little geographic area," Elizabeth remarked.

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*** The question we have been asking ourselves for the last 5 years.

Which way will America go? To Tokyo or Buenos Aires? To deflation...or to inflation? To a long, cold drawn-out slump...or a fiery blow-up?

Mr. Market is pushing the US towards Japan. No question about that. After 60 years of credit expansion we now have a natural credit contraction. Households and businesses are paying down...and defaulting on...debt. They're hoarding cash rather than splashing it around.

For example, young people are driving less...and buying fewer 'starter houses.' Gasoline use in America is going down. So are housing prices.

Part of the reason young people are buying fewer houses is that they can't afford them. The Financial Times reports:

"Young put off buying homes under weight of student debt."

Yes, dear reader, the feds practically force-fed young people student loans. Like shyster subprime lenders, the feds offered students money at low teaser rates. Now, the rates are supposed to double.

Of course, the poor student thought he would be in fat city when he got out of school. He thought he'd have a well paying job!

Now, he'll be lucky to have any job at all...

It looked for a while as if the economy really were recovering. At least, that's what everybody said. But now Mr. Market has asserted himself again.

Yesterday, US stocks fell again. Oil, copper, Treasury bond yields...everything is going down.

Truck buyers were cancelling orders at the fastest rate in two years.

As to housing prices, the FT continues: The number of first-time buyers has plunged - they comprised 37 per cent of home purchases in 2011, down from 51 per cent in 2010 - sapping the struggling housing market of a traditional source of vitality.

High levels of student debt, along with tighter mortgage requirements and stagnant wages, are forcing young people to delay buying their first homes. Is there any fed policy that hasn't backfired? Not that we know of. And the biggest fed policy now - aside from world domination - is the attempt to hijack Mr. Market's plane, en route to Tokyo, and force it to Buenos Aires.

The feds have put their hearts and souls into this effort. Too bad they haven't put their brains to it too!

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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