A lingering mist fills the air, artfully hiding the chaos beneath. There exists a significant disparity between the financial markets and the real economy. Yet, only the most irritable dare to discuss it.
Last Friday, European unity received a temporary reprieve, prompting cheers from investors around the globe. The DOW and S&P 500 concluded the week at record highs.
The headline news revolved around the extension of Greece’s bailout for an additional four months. The reality that Greece is unlikely to repay its creditors is of little concern at this moment. The clever strategy of extending and pretending has been successfully upheld.
This is the state of affairs in 2015. The global economy advances, seemingly smoothly, creating vast amounts of digital currency and spending it liberally. It is clear that such a situation cannot persist indefinitely.
The more duct tape and safety pins are used to hold this system together, and the more currency is created to temporarily disguise the issues, the greater the impending financial fallout will be. This uncomfortable truth tends to be overlooked in favor of short-term fixes.
A New Paradigm
Life carries on. Plans are created. Decisions are made. Individuals strive to make the most of their circumstances. Some search for fresh opportunities with decisive insight, while others merely drag their coffee-laden selves to their daily grind. Everyone finds themselves reliant on government support programs—where some give reluctantly, and others receive due to misfortune or indifference.
At Economic Prism, we diligently observe, analyze, and document these phenomena with a critical eye and sober perspective. How is it that such absurdities persist for so long? Can this situation endure indefinitely?
Presently, it seems we have entered a new paradigm. What else can account for such a remarkable reality? The old, unyielding laws of nature appear to have been disregarded. There are no boundaries. There are no repercussions. Bailouts are extended, and stock markets reach unprecedented heights.
Why should we care if this entire system is fundamentally flawed? Not when everything feels so pleasant and tranquil. Not when we enjoy endless sunny days at 74 degrees Fahrenheit.
Local grocers are perpetually stocked with fresh produce and choice cuts of meat. Treats like cotton candy and strawberry soda are plentiful. There’s an abundance of free entertainment available at our fingertips. Most importantly, refreshing hot showers await us every morning, perpetually predictable as the dawn.
The End of the New Paradigm
Governments worldwide are grappling with excessive debt. The overwhelming consensus for a solution? More debt. As long as governments can continue borrowing, they can avoid confronting their true financial realities. Thanks to the mechanisms of central banking, governments can borrow with seemingly no limits.
Years ago, Herbert Stein, an economic advisor to both Richard Nixon and Gerald Ford—and father of Ben Stein—formulated what is now known as Herbert Stein’s Law. His assertion was simple: “If something cannot go on forever, it will stop.”
A scientific law, unlike a theory, is a conclusion drawn from repeated observations that describes an aspect of the universe. For instance, water consistently boils at 212 degrees Fahrenheit. This is a scientific law, supported by continuous observation since before the introduction of the measuring scale.
Today’s financial and economic landscape seems to challenge Herbert Stein’s Law. We exist in a time where something that should not endure indefinitely shows no signs of stopping. Amazingly, it continues to unfold.
Of course, forever is an extensive period. On the path to eternity, a multitude of outcomes is possible. Just because something has yet to occur doesn’t guarantee it never will.
Just as managing debt by accumulating more debt may work for the moment, there are those in power keen on maintaining this unsustainable situation. However, it will not last forever.
The new paradigm will eventually crumble when it can no longer sustain itself. We suspect that day may be approaching swiftly.
Sincerely,
MN Gordon
for Economic Prism
