Skip to content


September 27, 2014


I have already treated the market topic of this essay to some extent in Part I, and have redefined labors’ new boundaries for what they really are as well. The following commentary will treat euro zone and our economic declines in more detail and again question the austerity regimes that are hobbling both of our potential recoveries as we continue to sip the toxic broth of failure by austerity provided by Wall Street here and Merkel-dominated euro zone austerity tactics in Europe (which will not work in either venue).

Stocks are very expensive these days, per Robert J. Shiller of the New York Times, who notes that the price-to-earnings ratios show little signs of abating. Indeed since 1881 the 10-year price-to-earnings ratio has been this high only three times: 1929, 1999, and 2007 – all on the eve of major market drops. I think this does not necessarily mean that a major drop is in our immediate offing, but I can guarantee that without drastic reform of our economic policies one is coming; only the timing is in question. It could be tomorrow or the day after, next year or the year after. With too many variables in the mix to guide prognostication, I will not hazard a guess on the exact day, month or year, but the clock is ticking.

What is more interesting than trying to play Nostradamus on stock market crashes is to try to divine the reasons for such crashes. This is tricky territory, but we can begin with austerity as policy and how it negates economic performance. Next, and adverting to the current “policy” of the Fed with its cheap money via low interest rates nostrum, and given that bond (but not necessarily stock) markets move in the opposite direction of interest rates, and all other factors remaining equal, it is not surprising that stock valuations are up to 1929 price-to-earnings ratios. Here’s why.

The investment class (rentiers as opposed to labor) has a lot of money at its disposal and oodles more via leverage at super cheap rates, so why not bid up the froth of overpriced equities? Just shoot the dice! Still another possibility for a crash as noted by Shiller is a very human anxiety for the future as /investors fret over another recession or impending job obsolescence. That anxiety, compounded with the lack of quality investment opportunities (as predicted by Piketty), drives such investors to bid up existing assets even if they are overpriced. Ignore reality; shoot the dice!

Parenthetically, investors may well have good reason to “fret over impending job obsolescence,” as I have occasionally blogged on the role of robots and AI on the production (and even more sophisticated) side of our economy. While replacing human labor with robots will make investments in such efforts look good initially since robots don’t join unions, strike, or complain about wages and working conditions, they also don’t buy the products they produce, thus joining the displaced millions of the unemployed who cannot afford to buy such products as well, a scenario that is a market crasher in and of itself and an invitation to a Luddite revolution of sorts.

The euro zone’s economic output six years after the global recession remains flat. The zone’s three biggest economies – Germany, France and Italy – are currently going nowhere, and Germany’s economy actually shrank during the second quarter of this year while that of Italy shrank for the second year in succession (with three in a row defined as recession). Some say the euro zone is running dangerously “close to outright deflation.” Others say the region needs “quantitative easing” a la our Federal Reserve and the Bank of England which have steered interest rates to virtually zero. I think that may be easier said than done in the euro zone, and for reasons that are one political and one policy.

With many members of the euro zone with varying domestic interests to serve or otherwise placate and all the political realities that go with that process, I do not think the euro zone has the flexibility to tell its central bankers to reduce rates to near zero. Central bankers of the United States and Britain do not have that problem since their quantitative easing (reduction of interest rates for investors under the guise of fighting inflation and unemployment) applies only to a single nation composed in our case exclusively of policy-setting investors who along with the rest of us (who due to our inattention and apathy) live with such policy’s consequences in our day-to-day lives.

The New York Times has a far better solution for the euro zone’s problems, and it involves drastic changes in policy. Without using the word “austerity,” the Times describes its effects in unmistakable detail in advising Europe how to return to prosperity, as in: If Europe hopes to save its economy, its leaders will need to rethink “the misguided policies” that they “stubbornly insist on pursuing.” Germany’s economic contraction should be a wake-up call, given that it has pushed the EU’s policy “that governments reduce their deficits by cutting spending and raising taxes.” It’s clearer now than ever that such tactics “are exactly the wrong medicine. . . .” “Fiscal policy must also be rethought and reworked” and now is the time to take advantage of low interest rates and “increase spending to kick-start their economies.” This Times commentary uses some of my language and is what my followers know I have been preaching day and night; it’s as though the columnist for the Times has been reading my blogs and has become a convert to Keynesianism. Both the EU and the United States and Britain take note, and for the umpteenth time as I repeat and repeat: Austerity policies do not work, have never worked, and will not work in large economies. Don’t take the word of an amateur economist like me for this insight; listen to a Nobel Prize-winning professional economist, Joseph Stiglitz, whose words I am paraphrasing.

How many times must both amateur and professional economists make this critical observation before our political class puts aside its reelection games and campaign contributions and, for a change, does something good for their country and the rest of us who inhabit it? What does it take to get their attention before our economic ship of state joins the Titanic?

Changing congressional personnel via an election would help, but even with new representation there is always the problem of old policy momentum, and, of course, frantic cries from campaign-contributing members of the investment class to stay the course, which makes about as much sense as the old joke in economics about the producer of goods who said that he was losing money on every sale, but making it up in volume. Let’s avoid that by seeking market equilibrium and expansion via Keynesianism as policy.

This part is long enough. I will discuss my stated topic of the economics of disease control and some of its disgusting and inhumane outcomes in Part III. Stay tuned.   GERALD   E

From → Uncategorized

Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

%d bloggers like this: