“Market” Panic: The Era of Regime Certainty has Begun

In a 1997 paper for the Independent Review, economist Robert Higgs argues persuasively that the Great Depression lasted so long largely due to the phenomenon of “regime uncertainty”:

Taken together, the many menacing New Deal measures, especially those from 1935 onward, gave businesspeople and investors good reason to fear that the market economy might not survive in anything like its traditional form and that even more drastic developments, perhaps even some kind of collectivist dictatorship, could not be ruled out entirely.

Higgs’s analysis is sound as far as it goes. That is, we can reasonably set aside questions spanning the left/right divide — whether the set of property relations prevailing before, during and after the New Deal were just, and for whose benefit the changes in those relations were really engineered, for example — and see the glittering diamond of truth in his hypothesis.

Political uncertainty depresses investment. An environment of sweeping change in the state’s posture toward the market, regardless of the content of that change, makes investors nervous. Nervous investors stop investing. They hoard what wealth they have rather than risking that wealth on building new enterprises and expanding old ones.

Since the collapse of the housing bubble and the insurance/bank “TARP” bailouts of 2008, Higgs has posited a growing “regime uncertainty” effect in today’s economy as well, and I think he’s got that right, too.

I suggest, however, that over the last week the balance has tipped, and that the S&P downgrade of US “sovereign debt,” the ongoing stock market collapse, etc. are symptoms not of regime uncertainty, but of regime certainty.

To put it as bluntly as possible, the US government — Congress, the White House, the Treasury, the quasi-governmental Federal Reserve — have made it crystal clear, beyond any doubt, that they are unable or unwilling to deal with their own habits of deficit spending and ever-expanding indebtedness.

The “debt ceiling deal” was the final instance of that over-used expression, “kicking the can down the road.” The can’s too big to kick any more, and there’s no road left to kick it down.

The US government is at a dead end: It’s either going to balance its budget, cut its spending and start paying down, instead of racking up, debt, or it’s not.

And the answer is: It’s not. Period. With Rome in flames, the politicians openly debated whether to pick up the fire hose or the fiddle, and chose the fiddle.

There’s no uncertainty on the subject. The US government has clearly signaled its intent to keep borrowing as much as it can, for as long as it can, which will be for as long its credit holds out. Corollary to that intent is the intent to take debt service out of your hide and mine until the credit line fully and finally collapses.

What’s driving the markets down and gold up is not uncertainty as to whether or not the politicians will get their borrowing and spending under control. It’s certainty that they won’t.

The up side for the rest of us? A rift is beginning to open up between factions of the political class. State privileges and political connections lose their attraction when the state dances, to the tune of its fiddling politicians, on the rim of history’s dustbin. The relationship between Big Government and Big Business collapses when politicians can’t or won’t deliver on their end of the bargain.

The state’s captive “markets” are falling to pieces, as is the state’s ability to deliver those “markets” to its lackeys and hangers-on. The counter-economy — the whole of the real market, functioning beyond the authority or control of political government — is growing like Topsy, taking up the slack of the failed state. And a big round of defections, from the political class to the productive class, is coming.

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