Sy Harding: There’s never a shortage of ‘big picture’ theories, usually of the gloom and doom variety. They certainly sell books; often cause anxiety, sometimes even fear, often keep investors out of the market at the best buying opportunities. But they almost never come to pass.
In the mid-1940s, as World War II entered its final stage, ‘big-picture’ theorists warned that the pending demobilization of 10 million men and women serving in the military would send unemployment into double-digits and the economy into a serious recession, probably a depression. They warned “when the war ends the government can’t just disband the military, close down munitions factories and stop building ships. The result would be disastrous”. They sure made it sound convincing, pouring out impressive statistics that supported their theories.
But the government did immediately demobilize. Instead of disaster, one of the most prosperous periods the country ever enjoyed began. Returning servicemen, anxious to get their lives started again, had increased experience and confidence in their abilities, and their wives and girl-friends had discovered they could also earn money. With two members of the family working they could afford homes and cars and appliances and all the things they dreamed of, demand for which more than replaced the manufacture of munitions and ships.
In the 1950s it was automation that would create economic Armageddon. Well-known mathematician Norbert Wiener wrote that it was “perfectly clear” that automated machinery coming into increasing use would produce joblessness that would “make the Great Depression seem a pleasant joke.” The statistics and presentations were very convincing.
Instead, yes, automation meant more goods could be produced by fewer workers and at lower costs. But as a result employers were able to bring in the 5-day, 40-hour week and still pay workers more. The workers, with more idle time to enjoy, and more money to afford things to fill that time, created whole new leisure time industries, and employment actually grew.
In the 1980’s U.S. government debt soared to then record levels as the Reagan administration launched a strategy of aggressive government spending in an effort to pull the country out of the malaise of the 1970’s. Federal budget deficits soared at such an alarming pace that economists competed with each other with dire forecasts of how soon the country would be bankrupt, the most likely year chosen being 2000. Their arguments were so well presented and documented that we all believed it.
Instead, Reagan’s 1980s efforts to pull the economy out of the problems of the 1970s worked exceedingly well. The resulting booming economy of the 1990s allowed government spending cut-backs to be offset by significant growth in private industry, particularly in the technology sector. Combined with a big surge in tax revenues created by the booming economy and soaring stock market, the result was not only a balanced Federal budget by the late 1990s but annual budget surpluses.
Now fast forward to the financial meltdown in 2008. The budget surpluses had already reversed to deficits as the result of the terrorist attacks, home defense and military build-up, and the Iraq and Afghanistan wars. The subsequent bursting of the housing bubble, the financial crisis, and resulting ‘Great Recession’ were tackled with still more government spending, on massive government bailouts and stimulus efforts.
The gloom and doom theorists came out of the woodwork again. First there was no way the massive bailouts could work. They would result in the government being investors in, and lenders to the auto companies and banks for decades, perhaps even being forced to nationalize and run them as government entities. Then it was that the massive stimulus efforts and resulting additional debt load would drag the economy lower rather than result in recovery. And lastly, the easy money policies could not help but create massive spiraling inflation.
Even now, almost four years after the 2008-2009 recession ended, after the stock market has recovered all the way back to its pre-crisis level of 2007, the big-picture theorists are warning that disaster has only been delayed, that the record debt load will still sink the U.S.
However, while they remain fearful, convinced their theories will still work out, the economic recovery continues into its fourth year. Most of the bailout money has been paid back – with interest. Automakers and banks are awash in profits again. Inflation remains under control. The housing industry and jobs picture continue to improve.
Even the shorter-term worries; the fiscal cliff, extension of the debt ceiling, that Washington will be unable to break from dysfunctional political deadlock, have been handled with more success than expected.
The bipartisan Congressional Budget Office even reported this week that although the budget is still running at an annual deficit, and so the overall national debt continues to rise, the improving economy and legislative changes have cut the annual deficit in half over the last four years. Even that ‘big-picture’ worry is headed in the right direction.
Of course there are still big problems ahead.
Will Washington initiate the necessary belt-tightening slowly enough to allow the strengthening economy to absorb the spending cuts without rolling over into another slowdown?
Will the Fed manage the second half of its massive stimulus program, reversing it by selling off the $trillions in bond assets it has accumulated, allowing interest rates to rise, and so forth, slowly enough that the economy is not affected?
Neither Washington nor the Fed have demonstrated such perfection in the past. There will doubtless be more scares, market corrections, and gloom and doom headlines as those problems are tackled over the next year or two or three.
Even as the massive spending and debt levels of the Reagan years worked so well to pull the economy out of the 70s mess, there were setbacks, the 1987 market crash, the 1990 recession. But in spite of the periodic setbacks and unceasing doom and gloom predictions of the ‘big-picture’ theorists, the long-term path to good times continued.
And the odds are high that, intermediate-term stumbles notwithstanding, in fact to be expected, that we are on a similar long-term path in this cycle.
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