Last week in an interview on CBS Network
News, Economist Mark Zandi, the chief economist for
Moody's, unwittingly revealed a central error of the global economic
establishment. Zandi has made a career out of
finding the middle ground between republican and democrat economic talking
points. As a result of this skill, he has been rewarded with large quantities
of airtime from media outlets that want to appear non-partisan, despite the
fact that his supposedly neutral analysis often leaves listeners frustrated.
When asked about the recent
deterioration in the global economy, Zandi said
that "the worst possible scenario" at present would occur if Greece
were to leave the Eurozone. He claimed that the economic gyrations and
liquidations of bad debt that would result from such an exit would be
sufficient to create a vicious cycle that could drag the global economy back
into recession. As a result, he urged policy makers to take whatever steps
necessary to maintain the current integrity of the 17 nation Eurozone.
Given what most economists now know, few
would actively argue that Greece's entrance into the Eurozone back in 2001
was a good idea. In fact most concede it was a terrible idea based on bad
forecasting and outright fraud. There is little disagreement over the fact
that Greece grossly misrepresented its financial position in order to gain
initial entry into the monetary union. It is also widely agreed upon that in
the ensuing decade Greece exploited its monetary advantages to borrow
Much has been written about how the
fundamental misfit between Greece's economy and currency gave birth to a
deeply flawed system that was destined to run off the rails. Most also agree
that the countries like Greece and Germany are too economically and
culturally disparate to exist under the same monetary umbrella. But despite
all this, Zandi wants to maintain the status quo.
In his opinion, it is so imperative to prevent the deflationary consequences
of an economic restructuring that it is preferable to prop up a failed
system, perhaps indefinitely, rather than allow a newer, healthier system to
replace it. In the process, the moral hazard created not only assures that
Greece will become an even greater burden on Europe, but so too will other
nations whose leaders will be emboldened in their profligacy by the
anticipation of similar help.
perspective (and he is certainly in the majority on this point) the goal of
economic policy is to keep GDP growing. It follows then that he will oppose
large-scale debt liquidations which drag down GDP in the short term. But
sometimes debt needs to be liquidated. Bad ideas need to be abandoned. Once
economies stop throwing good money after bad, capital is freed up to flow
into more economically viable purposes. But economists and politicians never
look at the long term. Their job seems to be to manage the economy for the
The same "damn the torpedoes"
mentality dominates economic thinking with respect to the U.S. economy as
well. Years of artificially low interest rates, and government subsidies that
direct capital towards certain sectors and away from others, has created an
economy with too little savings and production, and too much borrowing and
consumption. The ultra-low interest rates currently supplied by the Fed serve
to perpetuate this unsustainable artificial economy. Higher rates would work
quickly to redirect capital to the more productive sectors. But high rates
could bring deflation and liquidation, which few economists are prepared to
We have too many shopping malls selling
stuff, but not enough factories making stuff. We have too many kids in
college studying liberal arts, and not enough in the workforce acquiring
skills that will actually increase their productivity. Banks are loaning too
much money to individuals to buy houses, and not enough money to
entrepreneurs to buy equipment. We have too many tax-takers riding in the
wagon, and not enough taxpayers pulling it. The list is long, but the
solutions are short.
We need to let interest rates rise to
market levels, and allow the economy to restructure without government
interference. We need to stop beating a dead horse and hitch our wagon to an
animal that can really pull. The process will be painful for many, but like
ripping off a band-aid, the pain will be over
relatively quickly. However, since a painful restructuring means recession,
politicians resist the cure with every fiber of their beings. So instead of a
genuine recovery, one that will provide productive jobs and rising living
standards, we get a phony recovery that produces neither.
Preserving a broken system merely to avoid the pain necessary to fix it only
makes the situation worse. Propping up sectors that should be contracting
prevents resources from flowing to other sectors that should be expanding.
Keeping workers employed in nonproductive jobs prevents them from gaining
productive employment elsewhere. Encouraging activity or behavior the market
would otherwise punish discourages alternatives that it would otherwise
Unfortunately, leaders on both sides of the Atlantic put politics above
economics, and economists like Mark Zandi provide
the cover they need to get away with it.
Peter Schiff is CEO of Euro Pacific Precious Metals, a gold and
silver dealer selling reputable, well-known bullion coins and bars at
competitive prices. To learn more, please visit www.europacmetals.com or call (888) GOLD-160.
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