The Death of the Muddle-Through Economy?
By
John Mauldin
Oct 19, 2009 8:00 am
Or just a painfully slow and jobless recovery?
In 2007 I wrote that we would indeed get back to a Muddle-Through Economy after the end of the coming recession. If you Google the term, at least in the case of the first four pages, more than half the references are to this e-letter. I get a lot of flak from both bulls and bears about being either too optimistic or too pessimistic. Being in the muddle-through middle is comfortable to me.
Last week I expressed my concern that we as a country are taking actions that could indeed “kill the goose” of our free-market economy (see: The Killing of America's Free-Market Economy). I rightly got letters asking me how I could maintain Muddle Through in the face of that letter. I’ve given it a lot of thought and research. How likely are we to muddle through in the face of $1.5 trillion and larger deficits? Today we take another look at Muddle Through. It should be interesting.
Muddle Through, R.I.P.?
I defined a Muddle-Through Economy in the past as one of slow growth (in the area of 1-2%) and a slack employment environment, such as we had in 2002 and the early part of 2003. In early 2007, I suggested we’d return at some point to such an environment at the end of the recession I was predicting.
I’m not surprised about the response of the Fed to the current recession and credit crisis -- whether it’s the large monetization of debt or the low interest rates. Assuming they more or less remove the monetary easing in a reasonable manner, there’s nothing that would make me think we don’t eventually recover, albeit at a very slow Muddle-Through pace, with a jobless recovery that lasts for several years. It won’t be pleasant, but we’ll survive.
However, never in my wildest dreams did I think we could be looking at government deficits of $1.5 trillion dollars and actually budgeting future deficits of over $1 trillion as far as the eye can see. And there’s real reason to think that under current plans, $1 trillion deficits are optimistic. Look at the graph above from the Heritage Foundation. They suggest that current policy would bring us closer to a $2 trillion deficit by 2019.
And that assumes nominal growth that’s north of 3% and unemployment dropping back below 5% in reasonably short order. If you make less optimistic assumptions, the number can become much larger rather quickly. Where do we find that much money to finance that large a deficit? We’ll look at what might be the answer, but first we need to look at a basic concept in economics.
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Reply
2009-10-19 12:53:02
There Is No free Lunch
John,
You should be commended for explaining to people "there is no free lunch". Something the "berries" will try to avoid at all costs, as it is not a "feel good" message that brings votes.
You should be commended for explaining to people "there is no free lunch". Something the "berries" will try to avoid at all costs, as it is not a "feel good" message that brings votes.
2009-10-19 13:13:51
Debt, demographics and structural imbalances
Few people, even those willing to see the facts, are able to discuss openly how bad things are going to be. This is not so much a 'muddle-through' economy as one which is muddling toward reality despite all the denial it can muster. Deep down we know we are in a vehicle with failing brakes, headed for a cliff while pretending very, very hard that everything will be okay. There might still be time to fix not only the brakes but the whole d@rn vehicle but that sounds like way too much work and it would mean we would have to admit to ourselves just what a mess we've made. Better to keep borowing and printing money to prop up all these 'too big to fail' companies until the real question emerges...is the entire United States too big to fail?
2009-10-19 16:32:23
Japan
Reality is not a disease. The 'Japanese disease', 'lost decades', etc. is nothing less than recognition that growth based economic models only function up to a limit. Beyond that limit, further growth can only occur by debasing the physical [eco-] and social environment. The Japanese could have sustained export fueled growth on a par with China via massive immigration, but at the cost of Japan ceasing to be a Japan that the Japanese people recognize. To criticize Japan for choosing to remain Japanese is a bit arrogant. Everyone in the world did not mindlessly swallow multiculturalism. All the Japanese have to worry about is the aging of their population and a return to more modest population densities in an otherwise stable and pristine urban and natural landscape.
The USA is embarked upon the totally opposite course. We will pursue growth at any cost, regardless of the social and environmental consequences, even to the point of totally redefining the social fabric of the country. In a generation, we will be looking at a USA with half a billion people organized into a patchwork of squabbling and possibly, warring, ethnic factions pursuing a standard of living that the planet is physically incapable of sustaining.
Japan is the future of countries that choose to retain 1st world standards of living with slow/no-growth economic policies behind secure borders and stable cultures. The USA and those gripped by limitless-growth-at-any-cost ideologies are going down the toilet and taking the planet with them.
The USA is embarked upon the totally opposite course. We will pursue growth at any cost, regardless of the social and environmental consequences, even to the point of totally redefining the social fabric of the country. In a generation, we will be looking at a USA with half a billion people organized into a patchwork of squabbling and possibly, warring, ethnic factions pursuing a standard of living that the planet is physically incapable of sustaining.
Japan is the future of countries that choose to retain 1st world standards of living with slow/no-growth economic policies behind secure borders and stable cultures. The USA and those gripped by limitless-growth-at-any-cost ideologies are going down the toilet and taking the planet with them.
2009-10-19 22:54:28
Japan
I certainly agree on the conclusion that the USA has pursued growth at any cost. Including turning a blind eye toward the illegal immigration problem.
However, I do not agree on the necesity of becoming Japan like in order to retain standards of living with slow/no-growth economic policies.
Benjamin Franklin, while not a moralist, when it came to slavery, but rather a pragmatist, saw slavery as insidious because it made the country weak with people that woud use someone else to do work that they should do. He saw work as a character builder that made people independent and strong.
This is what our shifting of labor to Chinese workers and to illegal immigrants has done to us. Made us weak and dependent. Given us a sense of entitlement and the feeling that the government should take care of us... and so we put up with the nonsense that is going on with government spending.
However, we do not need to be Japan like to experience growth. We need to return to our roots with hard work and less government intervention. Capitalism can provide the framework for hard work and innovation to create jobs. The pain must come. It would be better to take our dose now and not prolong it with more debt.
Another great article Prof Mauldin. Please keep up the great work!
However, I do not agree on the necesity of becoming Japan like in order to retain standards of living with slow/no-growth economic policies.
Benjamin Franklin, while not a moralist, when it came to slavery, but rather a pragmatist, saw slavery as insidious because it made the country weak with people that woud use someone else to do work that they should do. He saw work as a character builder that made people independent and strong.
This is what our shifting of labor to Chinese workers and to illegal immigrants has done to us. Made us weak and dependent. Given us a sense of entitlement and the feeling that the government should take care of us... and so we put up with the nonsense that is going on with government spending.
However, we do not need to be Japan like to experience growth. We need to return to our roots with hard work and less government intervention. Capitalism can provide the framework for hard work and innovation to create jobs. The pain must come. It would be better to take our dose now and not prolong it with more debt.
Another great article Prof Mauldin. Please keep up the great work!
2009-10-20 11:04:10
John, I usually enjoy your insights, but your using the "Heritage Foundation" as a credible source of data is laughable. Let's try to keep phony tools of either political party out of the "as evidence for" equation, shall we. Good god, man, the train wreck that is our over-leveraged consumer debt driven economy is bad enough without having to resort to faux foundations to provide graphs drawn with magic markers and "suggested" lines.
2009-10-20 12:13:45
Japan
Mark, I couldn't have said it better myself. Evryone talks about 'fixing' the economy. There are no magic fixes. We are either going to compete in the global economy with hard work, innovation and sacrifice or we are going to fail as a country. This idea that Americans are 'too good' to pick their own fruits and vegetables, clean their own restrooms or work in their own canning factories and slaughter houses is beyond arrogance.
It is obvious that wages, beneftis and standards of living need to rise in developing countries and fall in the U.S. for the structural trade imbalances to be relieved. In addition, while it might theoretically be possible for the CEOs, banksters and politicians to keep playing this game that allows them to reap such obscene profits relative to the workers of thw world they should think twice. History shows such inequities have a nasty way of working themselves out.
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