'This Time is Different'

"This time is different."

Such is the warning of popular delusions relayed by John Mauldin, who carefully reviewed the evidence presented by economists Carmen M. Reinhart and Kenneth Rogoff in their new book This Time Is Different.

"...highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked..."

Reinhart and Rogoff analyzed 800 years of economic history, including 250 financial crises in 66 countries. They looked for patterns, similarities and differences. Put simply: this time is not different. Their prediction, to paraphrase Mister T, is simple: Pain.

An excerpt of their summary expands upon Clubber Lang's word of wisdom.

"The lesson of history, then, is that even as institutions and policy makers improve, there will always be a temptation to stretch the limits. Just as an individual can go bankrupt no matter how rich she starts out, a financial system can collapse under the pressure of greed, politics, and profits no matter how well regulated it seems to be. Technology has changed, the height of humans has changed, and fashions have changed.

"Yet the ability of governments and investors to delude themselves, giving rise to periodic bouts of euphoria that usually end in tears, seems to have remained a constant... we have come full circle to the concept of financial fragility in economies with massive indebtedness. All too often, periods of heavy borrowing can take place in a bubble and last for a surprisingly long time. But highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever...

"This time may seem different, but all too often a deeper look shows it is not."

Mauldin tacks on some excerpts from the latest quarterly newsletter from economists Van Hoisington and Hunt, who also reference This Time is Different.

At $3.70 of debt for every dollar of GDP, U.S. debt is excessive... the unwinding of [these elevated] debt levels results in prolonged economic distress...

[Regarding the Democrats' 'Stimulus' program:] ...government actions, even involving sizable sums of money, are far less helpful than they appear... 'Infusions of cash can make a government look like it is providing greater growth to its economy than it really is.'

...It has been more than a year since the Federal Reserve began a massive expansion of Federal Reserve Bank credit, from $1 trillion to $2.2 trillion, flooding the banking system with reserves. This unprecedented action naturally raised inflationary fears since it was assumed that this was the beginning of a monetary creation process which would eventually lead to job and income growth, excessive expenditures, and finally massive price increases.

[Regarding the Democrats' continued hamstringing of the private sector:] ...[the] very first step toward an inflationary cycle has to be to get the monetary aggregates expanding vigorously. That cannot be accomplished with the Fed "printing money", i.e., adding more reserves into banks that cannot or will not make loans. The reason this process has not begun (and will not for a time) is [that no] one needs to borrow, or has the resources or balance sheet to borrow, and banks are busily writing off bad debt.

Despite the concurrent developments of little money growth and declining loan growth... the fear nevertheless remains that an inflation surprise might be just around the corner. The reason to discount this notion is that excessive debt has contributed greatly to a flat, or perfectly elastic aggregate supply curve. A country's inflation is determined by the interaction of aggregate supply and demand.

[Democrats have yet to learn the maxim that "Central planning never works":] ...Whether the supply curve is in a flat, normal, or upward sloping position depends on the extent of excess resources in the economy. Today it is obvious that the U.S. economy has plentiful excess resources, so any increase in demand will result in little price change. This will be the case until our unemployment rate of over 17% (the U6 measure) drops by a considerable amount and we begin to use our factories well above our current 68% utilization rate.

Thus, our current economic circumstances guarantee there will be no surprise inflation...

[Democrat policies are thereby crushing the real economy:] ...The consequences of excessive debt are already painful at the household level. The civilian employment to population ratio, a highly important barometer of the average household's standard of living, fell to 58.2% in December, the lowest reading in 26 years and down from a peak of 64.7% in April of 2000... Thus, the standard of living has worsened as the debt to GDP ratio has marched steadily higher. With debt to GDP still rising, a further deterioration of the standard of living is inescapable.

[And the history books demonstrate that everything the Democrats are doing is wrong:] Deficit spending only provides a transitory boost to the economy. It initially raises GDP, as it did in the second half of 2009, but then the effect dissipates and later is reversed, as financial resources available to the private sector are reduced.

...In a separate research study Rogoff and Reinhart write, "At the height of Japan's banking crisis in the 1990s, repaving the streets in Tokyo became a routine exercise. As a result, Japan's gross (government) debt-to-GDP ratio is now nearly 200% and a drag on what once was a vibrant economy."

Our present high deficit situation suggests that taxes will rise (including those of state and local governments), depressing economic activity further. In addition to the expiration of the 2001 and 2003 tax cuts, the Obama administration is proposing substantial taxes on financial institutions to pay for the cost of the financial bailout. Since the tax multiplier is high, this will reinforce the drag on economic activity from the lagged effects of deficit spending.

For decades, and to this day, Democrats have ladled entitlement program on entitlement program, bureaucracy upon bureaucracy, debt upon debt until the whole American economy is wobbling on its foundation.

Democrats coerced, bribed, lied and intimidated various constituencies to enact the New Deal (which was originally ruled unconstitutional), the Fair Deal, the Square Deal, Great Society, the War on Poverty, the Community Reinvestment Act, Social Security, Medicare, Medicaid, Fannie, Freddie, the Stimulus Package, and hundreds of unionized bureaucracies, agencies, offices and other groups of lifetime government employees -- most voting Democrat -- in a relentless pursuit of an utterly unconstitutional expansion of the federal government.

Every one of their programs has failed. Every one. And they are about to touch off a catastrophic implosion. The modern Democrats are not smarter than a fifth grader, certainly not one who has read and understands the Constitution and The Bill of Rights.

The Democrat Party must be politically crushed in the next several elections if we are to return fiscal sanity and constitutionality to the federal government.