By David Stockman – Re-Blogged From Contra Corner
That Hillary Clinton has—–unaccountably——stood by her man for 40 years is her particular foible. But now she wants 320 million Americans to stand by him, too, by electing her President so she can make Bill the nation’s economic czar:
During a speech in Kentucky Sunday she referred to “my husband, who I will put in charge of revitalizing the economy ’cause he knows what he’s doing.”
Actually, he doesn’t.
Herein follows a two-part essay on why Bill and Hillary Clinton had precious little to do with the vaunted prosperity of the 1990s, and why another twofer would be exceedingly bad for the nation.
In truth, it was the doing of Alan Greenspan, and not in a good way.
In fact, the roaring tech era prosperity was but an old fashioned crack-up boom. That is, a simulacrum of prosperity that was an artifact of monetary inflation and financial speculation. It was not merely unsustainable; it was guaranteed to boomerang against the future, and it has in spades.
The Greenspan Boom was thus the very fount of the financial toxins which have plagued this century. To wit, the housing and credit implosions after 2007, the stock market meltdown and the collapse of the Wall Street gambling houses in 2008-2009, the disabled, stall-speed main street economy since the crisis, the unspeakable windfalls to the 1% enabled by NIRP and QE and the desperation in the flyover zone of America that begat Donald Trump—-all had their roots in the 1990s monetary perfidies of Easy Al.
None of the Cool-Aid drinking “economists” of Wall Street or Washington are capable of exposing the Clinton Prosperity myth, even if they were politically inclined. That’s because they are linear-thinking paint-by-the-numbers practitioners of one or another form of the Keynesian gospel.
Accordingly, they think policy intervention—-especially central banking stimulus——-makes a permanent difference. That is, it causes economic growth, living standards and wealth to be higher than otherwise, and that it accomplishes this in substantial part by taking the kinks out of the business cycle, thereby countermanding market capitalism’s purported tendency toward underperformance, recessionary slumps and worse.
To be sure, why would economists think otherwise? Even rain dancers invariably believe in their own magic and efficacy.
But a fair reading of the last 25 years suggests there has been no magic at all. In fact, the massive monetary intrusion initiated by Greenspan after Black Monday in October 1987 has not flattened the business cycle, but has supplanted it with the booms and busts of Bubble Finance. It has thereby functioned to distort, deform and displace economic activity, not expand it, and to massively falsify financial prices and inflate asset values, not permanently elevate economic wealth.
Accordingly, what is proffered by primitive Keynesian linear-think as evidence of the Clinton era’s economic success is actually its very opposite. In fact, average real GDP growth of 3.8% per year between Q4 1992 and Q4 2000 is exactly the reason why growth has drastically decelerated to 1.2% per annum during the last eight years.
Greenspan’s purported monetary magic actually stole from the future—-and massively so—in order to pump-up the 1990s. So doing, it left the future deeply and permanently impaired. The good middle class jobs that have gone missing, stagnant real household incomes, bloated transfer payment rolls and debilitating public and private debt are its legacy.
At the heart of the matter is the debt explosion touched off by the Greenspan Fed, and especially after the so-called bond vigilantes revolt of 1994. From then on, money markets became ultra easy and credit way too cheap.
But as explained below, Easy Al’s conversion to monetary profligacy couldn’t have come at a worse time, given the global financial and economic context. What the free market would have generated in the face of the massive 1990s eruption of export mercantilism in China and its Asian and EM supply chains was exactly the opposite of the Greenspan/Clinton Boom.
That is, in order to adjust to the drastic downward shift in the global labor and production supply curve that resulted from the “China price”, the domestic US economy would have reverted to high interest rates, high savings, tepid consumption growth, low domestic debt and austere financial markets.
As it happened, however, the household savings rate plunged from 10% in late 1992 to 4% by the end of 2000. At the same time, total credit market debt outstanding soared from $15.8 trillion to $28.6 trillion or at a 7.7% annual rate.
This surging growth of household, business and financial sector debt far outpaced the growth of nominal GDP, which increased at a 5.5% annual rate. Consequently, the quintessential feature of Bubble Finance was off to the races.
To wit, during the Clinton Presidency credit market debt outstanding rose by nearly $13 trillion or by 3.4X the $3.7 trillion expansion of nominal GDP during the period.
From this deformed equation all else followed. Most importantly, consumption expenditures began to outrun wage and salary income growth, meaning that the process of leveraging-up balance sheets in order to enable households to live beyond their means got started with a vengeance. It did not reach the breaking point of Peak Debt until 2007 when the chickens finally came home to roost.
Elsewhere we have referred to the nearly parabolic rise in household leverage ratios shown above as the one-time parlor-trick of the Greenspan Fed. Self-evidently, central banks can make nominal GDP grow faster by temporarily supplanting Say’s Law.
That is, if the natural source of consumption and investment spending from current household wages and business cash flow, respectively, is augmented with incremental borrowings against balance sheet capacity, total spending or GDP will balloon. But that trick only works until the leverage ratchet reaches the saturation point or what might otherwise be called Peak Debt.
Needless to say, that condition was fulfilled in 2007-2008, and the nation’s stall-speed economy has been laboring under its burden ever since. But the boom part of the parlor trick was harvested during the 1990s. The Clintons just went along for the ride.
Indeed, what actually happened was that the Greenspan monetary bubble gradually lost its front-loaded efficacy as the financial system became more saturated with debt and speculation. Thus, after expanding at a 3.8% rate during the span of 1992-2000, real GDP growth decelerated to 2.4% during the next seven years thru the cyclical peak in Q4 2007. And then during the eight years since then it has sunk to 1.2% per annum.
Here’s the thing. There is no eight year span in modern history where growth has stalled-out even close to that extent. The miserable Obama Economy being experienced by the nation’s flyover regions is essentially the Bill and Hillary morning after.
Stated differently, the massive financial speculation that fueled the post-2000 housing and credit boom and then its spectacular bust was part and parcel of the financial deformation that put all those big numbers on the scoreboard during the 1990s. Contrary to the Keynesian narrative, we were not visited by some kind of alien “contagion” arriving on a comet on September 15, 2008, and the tepid “recovery” ever since is not owing to some kind of extraordinary one-time setback. It was all the handiwork of the same destructive central bank intrusions.
So the essence of the Clinton Prosperity stems from Greenspan’s giant policy mistake 25 years ago—-a fatal error that has left main street households buried in debt and stranded with a simultaneous plague of stagnant real incomes and uncompetitively high nominal wages.
It happened because at the time that Mr. Deng launched China’s great mercantilist export machine during the early 1990s, Alan Greenspan was more interested in being the toast of Washington than he was in adhering to his lifelong convictions about the requisites of sound money.
Indeed, he apparently checked his gold standard monetary princples in the cloak room when he entered the Eccles Building in August 1987. Not only did he never reclaim the check, but, instead, embraced the self-serving institutional anti-deflationism of the central bank.
This drastic betrayal and error resulted in a lethal cocktail of free trade and what amounted to free money. It resulted in the hollowing out of the American economy because it prevented American capitalism from adjusting to the tsunami of cheap manufactures coming out of China and its east Asian supply chain.
As we explained last week, the only policy compatible with Greenspan’s inflationary monetary regime was reversion to completely managed trade and a shift to historically high tariffs on imported goods and services.
That would have dramatically slowed the off-shoring of production, and actually also would have remained faithful to the Great Thinker’s economics. After all, in 1931 Keynes turned into a vociferous protectionist and even wrote an ode to the virtues of “homespun goods”.
Alas, inflation in one country behind protective trade barriers doesn’t work either, as was demonstrated during the inflationary spiral of the late 1960s and 1970s. That’s because in a closed economy easy money does lead to a spiral of rising domestic wages and prices owing to too much credit based spending; and this spiral eventually soars out of control in the absence of the discipline imposed by lower-priced foreign goods and services.
By contrast, soaring domestic debt in an open economy—–and one being pushed into even freer trade as did the Clinton White House——results not in CPI inflation, but in drastic inflation of the import accounts. Indeed, the explosion of household borrowing touched of by the Fed in the early 1990s resulted in nearly a lockstep march of rising household debt and a soaring inflow of cheap Chinese manufactured goods.
Stated differently, had the household leverage ratio not been levitated in the nearly parabolic fashion shown above, total household debt at the time of the financial crisis would have been $6 trillion, not $14 trillion. And that means, in turn, that during the 1990s the domestic economy would have been put through the wringer of deflation.
There would have been no Clinton Prosperity. Yet the interaction of sound money and the pricing system would have reset the competitive position of the US economy. Nominal price, wage and cost levels would have ended up far lower than what actually materialized during the Greenspan Boom. Consequently, a dramatically lower share of US goods and services production would have been off-shored.
By now competitive growth in the domestic economy would have been regenerated. There would have been no debilitating hangover on main street from the 1992-2007 financial party, either.
Likewise, Wall Street would not be luxuriating in its multi-trillion windfalls from drastically inflated stock, bond and real estate valuations; nor would the bicoastal elites be feasting on the spillovers in Silicon Valley and elsewhere.
In effect, the inflationary policies of the Greenspan Fed and its successors created a giant hole in the supply side of the US economy, and then filled it with $8 trillion of incremental debt which sucked in the tsunami of imports shown above, but also remains an albatross on the main street economy to this day.
In perverse fashion, therefore, beneath the surface boom recorded in the GDP accounts during the Clinton era and after, there arose a bread and circuses economy. Unlimited imports massively displaced domestic production and incomes—even as they imposed an upper boundary on the rate of CPI gains.
The China Price for goods and India Price for services, in effect, throttled domestic inflation and prevented a runaway inflationary spiral. The ever increasing debt-funded US household demand for goods and services, therefore, was channeled into import purchases which drew upon virtually unlimited labor and production supply available from the rice paddies and agricultural villages of the EM.
In a word, the Fed’s monetary inflation was exported and along with it a huge chunk of the domestic production economy was off-shored. Indeed, the chart below is the smoking gun. Quite simply, nothing like the giant plunge into deep red in the US current account during 1992-2008 could have remotely happened under a regime of sound money.
The Keynesian money printers and doctrinaire free traders, of course, say there is nothing to see here. Americans purportedly choose to borrow massively from their foreign suppliers in order to import cheaper foreign goods and services.
No, they didn’t “choose” to bury themselves in debt; they were induced, incentivized and subsidized by cheap credit. The free market does not steal from the future to live high on the hog today because honest interest rates clear the market before debt bubbles gets out of hand.
Free trade also permitted many companies to fatten their profits by arbitraging the wedge between Greenspan’s inflated wages in the US and the rice paddy wages of the EM. Indeed, the alliance of the Business Roundtable and the Keynesian Fed in behalf of free money and free trade is one of history’s most destructive arrangements of convenience.
In any event, the graph below nails the story. During the 29 years since Greenspan took office, the nominal wages of domestic production workers have soared, rising from $9.22 per hour in August 1987 to $21.26 per hour at present. It was this 2.3X leap in nominal wages, of course, that sent jobs packing for China, India and the EM.
At the same time, the inflation-adjusted wages of domestic workers who did retain there jobs went nowhere at all.
That’s right. There were tens of millions of jobs off-shored, but in constant dollars of purchasing power, the average production worker wage of $383 per week in mid-1987 has ended up at $380 per week 29 years later
During the span of that 29 year period the Fed’s balance sheet grew from $200 billion to $4.5 trillion. That’s a 23X gain during less than an average working lifetime. Greenspan claimed he was the nation’s savior for getting the CPI inflation rate down to around 2% during his tenure; and Bernanke and Yellen have postured as would be saviors owing to their strenuous money pumping efforts to keep it from failing the target from below.
But 2% inflation is a fundamental Keynesian fallacy, and the massive central bank balance sheet explosion which fueled it is the greatest monetary travesty in history.
The Clinton Presidency occurred during the launch phase of it and therefore got the front end jolt. But it was not prosperity——and especially so with respect to the fantastic stock market bubble and Wall Street boom that issued from the Fed’s printing presses.
Indeed, it was from the latter that the Clinton Foundation harvested its billions. Accordingly, what America really needs is not a reprise of the Clinton twofer, but a reckoning for their corrupt appropriation from the false bubble that arose during their otherwise feckless watch in the White House.