The US Economy is a Zombie Economy

Sep 17, 2013

Baltimore, Maryland

Another good day for stocks...and a rare decent day for gold.

But the big news yesterday was that Larry Summers had withdrawn from the race to be the next Fed chief.

Now, if only Janet Yellen, Don Kohn, and Tim Geithner would do the same!

Then, who would be left in front of us in line for the post? Only about 50,000 economists - every one of whom is smarter, better educated, better connected, with better social skills and a better haircut...

From the very beginning, our campaign to become the next Fed chief has faced long odds.

In the first place, we're completely unqualified to play the game. In the second place, we're totally unwilling to play the game.

In the third place, we believe the whole game is rigged...corrupt...and foolish.

And in the fourth place, if we needed another place, almost everyone thinks we're wrong, about everything.

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And where can you find reliable recommendations for the same easily?

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Uh, Bill,' he begins...or words to that effect, 'John Mauldin and Gary Shilling [not to mention your own colleague Justice Litle] have solid arguments as to why this will be a very good decade for America and US equities. Don't' you think you should reconsider your position?'

Evidence is mounting, they say, that the US dollar is and will remain the world's most reliable currency...that the US economy will beat all others in the years ahead...and that the whole US capital structure is not only sound...but getting sounder.

We can abbreviate the argument as follows:

    In the years ahead, America will have more babies and more barrels of oil than its rivals.
The US fertility rate, for example, is 2.06% -- near the top of the charts for developed countries. But while this adds more people, and probably more GDP, it doesn't do a thing for what really counts - real wealth per capita. If this were otherwise, countries with high birth rates, such Niger and Afghanistan - both with fertility rates over 7 - would be the richest countries on earth. Having more babies is not enough.

As to oil, it is supposed to be a gooey magic elixir. Has your old get-up-and-go got up and left? Try some oil. Your industries will have a competitive advantage...your consumers will pay less for energy...and your current account will come nicely into surplus.

Oh yeah?

If that were so, what went wrong China, Russia, Saudi Arabia and Iran? It turns out that 4 out of 6 of the world's top oil producers are not rich countries. They're poor countries. Which tells us that there's more to the energy story. A lot more.

What really counts is not how much energy you produce, but what you do with it. And as stable societies mature they tend to use their energy less efficiently. Energy is wasted complying with regulations...paying for lobbyists...filling out tax forms, dodging taxes...and supporting zombies.

Yes, zombies proliferate. As reported in The Week, now 7 out of 10 people in America receive more from the federal government than they pay in taxes. They get food stamps. They get defense contracts. They get student loans...and don't pay them back.

But The Week's figures only scratch the surface. Zombies are everywhere. Monday's Wall Street Journal included an article about how "Protectionists Pick Your Pocket Again." The story tells how the plywood companies were able to keep out Chinese-made plywood. Why? To keep prices...and their own profits...high. Plywood makers are productive, honest, God-fearing Americans, we imagine. But their lobbyists have turned them into rank zombies - using the police power of government to transfer money from consumers to themselves.

Whole industries are corrupted. Education, health, defense and finance - none produces a net gain for the US society. That is, each additional dollar 'invested' in any of these industries yields less than a $1 of real benefits. And yet, these are the industries with the big teams of lobbyists. These are the industries that get the money. These are the areas where the additional energy resources will go.

Just look what is happening in the stock market. Stocks are going up...on the promise of investing even more resources in a dead-head program. Bloomberg:

    U.S. Stocks Rise as Disappointing Data Ease Taper Concern

    U.S. stocks rose, with the Dow Jones Industrial Average capping its best week since January, as disappointing economic data fueled bets that any Federal Reserve stimulus cuts this month would be moderate.

    "The view is that we're recovering and continue to do it in a slow pace," Channing Smith, who helps oversee about $1.2 billion at Capital Advisors Inc. in Tulsa, Oklahoma, said in a phone interview. "The Fed will begin to taper but will be on a magnitude of $10 billion, which shouldn't have an impact."

In effect, the Fed has turned investors into zombies too. It prints up money (out of nowhere) and the money lifts prices for investors' assets...making them, relative to other Americans, richer.

So, where will these new energy resources go? Into the real economy? Or into the fast-growing Zombie Economy?

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

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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1 Responses to "The US Economy is a Zombie Economy"


Sep 17, 2013

Good article. With the upcoming budget cuts and looming shutdown of the government, the republicans resistance to the President's magnum opus, the healthcare bill, the president's ostentatious obsession with Syria, and all other election promises fallen on the wayside, the big question looming above all of us is how long this charade can be sustained.

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