Three Reasons to Be Worried About The Economy

Yonathan Amselem
Mises Institute
Feb. 08, 2016

On January 12, America’s central planner-in-chief gave his State of the Union address. The president promised nothing less than to feed the hungry, create jobs, shape the earth’s climate, and make everyone a college graduate. There’s nothing new here, though. We’ve heard variations of this silly song and dance every year under both Democrats and Republicans. The president lambasted naysayers as fear-mongers that were too partisan to admit we have a booming economy. The fact that the Dow Jones cratered roughly 9 percent in the same thirty-day period President Obama gave his address did nothing to quell Obama's optimism about America’s future. In fact, he labeled the US economy “the strongest and most durable in the world.”

Despite our leader’s unwavering confidence in America’s fortunes, a quick peak under the hood reveals a pretty grim state of American commerce.

1. The Federal Reserve and US Government Have Warped the American Economy

In just the past decade, the Federal Reserve’s balance sheet has grown from roughly $800 billion to over $4 trillion. Our central bankers engaging in massive asset purchases to pummel interest rates downward is not news to anyone. We’ve been living in a world of falling interest rates since the 9/11 terrorist attacks. Yet, few mainstream economists have taken a good look at the destructive effects of this unprecedented monetary expansion. The calamitous distortions Fed policy has created for actors on both Main Street and Wall Street since 2008 have laid the groundwork for yet another crash.

Low interest rates stemming from a growing money supply are the only reason the US government has managed to service its gargantuan debt in recent years. The Congressional Budget Office itself has pointed out that even a slight rise in interest rates could potentially result in anywhere from $700 to $900 billion in annual tax payments just to service the interest on our debt. At this pace, paying the republic’s creditors will become our largest government program in no time. Future Americans might go to work and have 50 percent of their paychecks seized not to pay for government services, but simply to service debt forced on them by central planners.

But public debt is far from the only distortion artificially low rates have wrought. Mortgages, auto loans, credit cards, and student loans have ballooned total consumer debt to $12 trillion, and this number is only trending upward. The easy credit economy manufactured by central bankers has obliterated American savings and replaced them with debt. The average American consumer has less than $1,000 in his bank account. He lives praying for no car trouble or a broken arm. There was a time when Americans were rewarded for saving their earnings with double-digit interest rates but this is a distant memory. If Americans want to earn a return nowadays they must play the central-bank sponsored stock market casino. In fact, calling the stock market a casino is a little insulting to casinos — at least Blackjack has consistent rules.

2. American Corporations Are Debt-ridden and Unproductive

The post-recession bull market inspired a lot of confidence in the American economy and Obama’s recovery, but this is akin to praising great happy hour specials on the Titanic. Soaring stock market prices are not a result of increased productivity or innovation — they are a symptom of central bank fueled asset inflation and corporate debt. In fact, since 2008, corporate debt has doubled. Almost 100 percent of all corporate issued debt has been used to buy back stocks and prop up equity prices. This bears repeating. Almost none of America’s recently issued corporate debt has gone toward investing in plant and equipment, increasing the workforce, research and development, or expanding operations in any meaningful way.

Our central bankers, regulatory agencies, and fiscal policies have created a financial system so distorted and removed from real assets and real cash flow generation that corporate executives can rake in billions in bonuses while producing almost nothing of real value. Investing in the real American economy is just not worth the risk. The massive long-term obligations assumed by American companies high on low interest rates will slowly crush the life out of our economy. The only answer is to start producing real goods and begin generating real cash flow. But this won’t happen in the bubble-finance nightmare cycle we’re now in.

Our current money commissar, Janet Yellen, recently “raised rates” from 0.25 percent to a paltry 0.5 percent. If this rounding error of a rate hike can send the market tumbling off a cliff, what would happen if the fed raised the target rate back up to 6 percent like in 2000?

3. American Entrepreneurship is Dying and American Workers Are Unproductive

Financial chicanery aside, we have to come to terms with the fact that Americans themselves just aren’t built like they used to be. President Obama’s administration constantly cites low unemployment as a sign that our economy is back on track. To say unemployment numbers are massaged is an understatement. Of course unemployment recovered since 2008, President Obama was sworn in at the end of a market crash! But more importantly, the American economy is not producing architects, engineers, machinists, or other high value, goods-producing workers. We are pumping out an army of waiters, social workers, and associate professors with worthless six-figure degrees they have no hope of paying off in this life or the next. American workers are not interested or encouraged to start businesses, learn new skills, or innovate in some way. The typical American graduate firmly believes he can turn a six-year sociology degree into a job that doesn’t involve bringing people mimosas for brunch.

Our unproductive workforce is not all the fault of its members.The disincentives for entrepreneurship and wealth creation are colossal in this country. Dealing with licensing boards, zoning commissions, health inspectors, unions, and other regulatory bodies at the federal, state, and municipal level is extraordinarily burdensome, particularly for the poor and nascent immigrants. Successful entrepreneurs then have taxes levied at the federal, state, and local level across a cavalcade of confusing forms and attachments. The state and its many institutions make it nearly impossible for the average American citizen to just try something. This is the lifeblood of a “durable economy.” Unfortunately, business failures are now outpacing business startups.

The political class has completely disrupted the American structure of production, made American workers uncompetitive, snuffed the life out of entrepreneurs, and burdened the entire nation with a debt obligation the size of Jupiter. The US economy is not the strongest and most durable in the world — it is an unskilled thirty-two-year-old waiter crashing at his parent’s place and trying to pay down an $80,000 international relations degree.