Our Malinvestment In President Obama Will Bring Painful Consequences

The choice for the status quo made in last week’s presidential election was an uninformed one—at no fault of the voters—made in the fog of monetary distortion and Federal Reserve Chairman Ben Bernanke’s continuous campaign of disinformation.

President Barack Obama managed to overtake Republican challenger Mitt Romney on the exit poll question “Who is better for the economy?” and a strong majority of Obama voters felt that the economy is better off than four years ago. Indeed, anyone (particularly Bernanke) would concede that without the Fed’s zero interest rate policy we would be experiencing a far worse economy—the true Obama-Keynesian economy.

The danger here, as we have seen in every other bust for a century or more, is that we can only suspend the laws of economics for so long. And in general we are only good at considering immediate consequences, while being very, very bad at considering later consequences. As 19th century French economist Frédéric Bastiat observed, “The bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil.”

In the short run (and this is what is so insidious about the Fed’s artificially low interest rates), all we are seeing is an illusion of economic progress. Specifically, the Fed has manufactured a distortion intended to trap both consumers into spending more and entrepreneurs into investing more, or lengthening their production periods (becoming more “roundabout,” as the Austrian School economists said), as if savings were more plentiful. This combination would never occur in an unhampered, noninterventionist economy for the simple fact that higher consumption would mean higher interest rates (from less savings), which would discourage longer production.

Thus, investment in this illusory economy is malinvestment, or investment that always unravels with the intervention’s inevitable end, due to either untenable credit levels (such as today’s corporate debt-to-asset ratio, still at historic highs) or a resource crunch (rising commodity prices) that eliminates any advantage from printing money; and one or both of these scenarios is unavoidable.

Economic progress requires a chain reaction from lower time preferences: foregone current consumption and a higher pool of savings lowers interest rates and triggers a natural entrepreneurial response, greater productivity, and subsequent economic growth. (The “Paradox of Thrift” that warns of the hazards of higher savings is the nonsensical stuff of the ivory tower.) By circumventing this process, as we have today, we have built but a temporary façade.

This leads to another unfortunate kind of malinvestment, of a higher order, if you will: the malinvestment of an electorate in its political class and their policies. Just as entrepreneurs cannot differentiate between real economic information and monetary illusion, so too the electorate cannot differentiate between the effects of Obama’s fiscal policy (of his historic assumption of debt) and that of Bernanke’s loose monetary policy—and without the latter the former wouldn’t have even been feasible. Both Obama and Bernanke pursue a great economic evil to come, but Bernanke keeps them both cloaked as a great present good.

As the Austrian economist Ludwig von Mises noted, laboratory experiments cannot be performed in an economy; “We are never in a position to observe the change in one element only, all other conditions of the event remaining unchanged.”

This is our grievous position in the United States today, trapped in the status quo by first consequences, by what we can see, due to a cause that we cannot even see. And so we are left to learn from experience, an eventual tragic unfolding of our collective malinvestment. As Bastiat said, “Experience teaches effectually, but brutally.”

Mark Spitznagel is the founder and Chief Investment Officer of California-based Universa Investments LP.

Reposted from Forbes.com with the kind permission of the author.

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9 comments to Our Malinvestment In President Obama Will Bring Painful Consequences

  • D

    Yes!

    First the Fed breaks the economy with the ‘tech wreck’, then for good measure hands is a ‘housing bubble’, which of course morphs into a ‘credit crisis’ which it mops up with even more economic distortions no less.

    If at first you don’t succeed in an economic nuke-ing of the economy, keep trying until you get the full Fukushima Effect. But always always always make sure your banking masters get richer by the second.

  • Norman

    Interesting read. I do have to ask though, just who are the beneficiaries of all the easy money? Where exactly is it going to? With all the pot holes in this country, it certainly isn’t going to repair the 20th century infrastructure. Perhaps the Empire builders should return home with the money that they are wasting in the futile effort of incurring a new world order. Oh, and just who appointed Bernanke in the first place? Food for thought.

  • Joe

    consider the EPA and shutting down of COAL power plants
    now CONSUMERS are getting stuck with big $billion bills for new NATURAL GAS fired ones – only to find CARBON TAX will be implemented by this MAL-INVESTMENT PRESIDENT

  • George Orwell

    Norman,

    The primary beneficiaries of the easy money are the obvious masters of Bernake (The FED is owned by member banks) and one of the hidden masters of Obama (financial industry).

    Keep supporting enormous deficits and ZIRP because your Fearless Leader tells you to, right up until collapse. Don’t worry Obama loves you and will take care of you no matter what happens (you’ll even get a free phone).

    I have always been a one issue voter (reduce the deficit) and I have never had a single politician follow through (Don’t say Clinton did it, it was forced on him by the Republicans and only possible through massive accounting fraud i.e. bringing SS payments on budget as general fund tax revenues while considering SS payments as ‘off budget.’

    ZIRP and monetization of the deficit (around $800B of every $1T deficit spending is bought by the FED) cannot continue much longer. How long is hard to say. Maybe past the end of my life but I doubt it. More likely the collapse they cause will be the cause of end of many people’s lives. Sometimes learning by experience is so brutal that the student is killed.

  • mak

    George, well said….and oh my, so many students will be in line…

  • Janeb

    The only thing I can say is that, sadly, the US voters will get what they deserve by supporting Obama and Bernacke. The future is on display in Europe before our eyes. Does’t seem to matter though. The Keynsian clowns continue. Pretending that we will get rich by consuming and borrowing and printing money endlessly. This takes a PHD to figure out I guess.

  • V

    Romney had Keynsians on his staff also, and he saw no problem with the FED.

    • dd

      he did have Keynesians, V, but he had such a problem with the Fed that he said The Bernank would be replaced if he were elected. probably didn’t go over so well for him.

      the electorate has changed, V. you’d be nutso, absolutely bonkers to think Romney is a Keynesian, but it is 100% impossible to get elected without some Keynesian ideology on board.

      we are screwed.

  • mitch

    The American Republic will endure until the day Congress discovers that it can bribe the public with the public’s money. – Alexis de Tocqueville

    not just congress…