My Two Cents - "Dogmatic Follies or Fundamentals?"

4/27/2007

Dogmatism is defined as 'clinging to a belief or position despite overwhelming evidence to the contrary'. To see examples of dogmatism, one only has to engage in a debate about politics, religion and lately, global warming. Core assumptions form the basis for beliefs, and beliefs form ideologies. Economics is no different in this regard, and from time to time we find our assumptions and the beliefs that sit upon them challenged.

For a long time I believed that the debacle in the housing market would ultimately cause the unwinding of the US economy. Why did I have this belief? I based it on the assumption that borrowing more money than you could ever hope to repay was a bad thing and that people who engage in this practice are often forced into insolvency and/or bankruptcy. I believed that the destruction of credit caused by the wave of foreclosures would cause a credit contraction, and force consumers to begin living within their means for the first time in several decades. I believed that the wave of unemployment caused by the housing slowdown would spread like a contagion throughout the economy and bury once and for all the notion that somehow the world relies on our consumption to survive.

However, the consumer has proven more resilient than anyone could have imagined. Refueled and reloaded with more available credit and an entitlement attitude, the consumer has thumbed his collective nose at the naysayers and continued to spend. Where home equity extractions once fueled the fire, now does consumer credit. Conventional media would have us believe that all of these expenditures are being financed by higher wages, but anyone who pays any real attention to prices knows that those nominal gains are incinerated by inflation before the direct deposit even hits the bank account.

Periodically, it is good to question the assumptions upon which our conclusions are founded. In a conversation the other night with a like-minded friend of mine, we threw out the phrase 'burn the economics books'. For it seems that in terms of economics and good sense that up is down, down is up, right is wrong, and wrong is right. Does this mean that things will stay this way? Absolutely not. Human nature will not allow it. We are easily cajoled into believing in 'new economies', 'new paradigms', globalization and the like. However, the one basic rule on this planet is scarcity and that means that everyone cannot have everything all the time. Once that rule is realized (again), the power gradient will adjust itself accordingly and those at the top will try to make sure they get more than their fair share, ultimately at the expense of those further down on the gradient. This is already happening to a large degree. No amount of credit, free money, inflation or anything else will stop the reversion to the mean.

In short, it will not be the housing bubble that takes out the US economy. The powers that be are in tune with the rapid deceleration of home sales and are already talking bailout. Mother Government will now engineer the mother of all bailouts; in the tens of billions most likely ensuring that people will be rewarded for their failure to exercise due diligence. The balance of us in our entirety will pay for this bailout through higher prices on pretty much everything. The government cannot go to the savers and issue bonds because there is no savings. The money to engineer the bailout will either be printed or borrowed from foreigners. Take your pick; both solutions are awful.

The housing bubble, the current account deficit, and the lack of savings on both a personal and government level will not cause the destruction of the US economy and ultimately our standard of living. The firestarter will be something that comes out of nowhere; a complete surprise. All of these other economic imbalances will become the fuel for the inferno and once it begins it will be nearly impossible to put out until all the wrongs of the past 35 years have been made right. In a way, the fact the powers that be got away with one in 2001 with the NASDAQ collapse and are on the verge of repeating it again with the housing bubble only guarantees the inevitable. With each passing day, complacency creeps further and further into our collective mindset and sows the seeds of ruin. In essence, in the end we will ultimately be killed by our own monster.

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.