Street Smart: 'Big picture' is bullish

by Sy Harding, editor Street Smart Report

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. 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 "the result would be disastrous". They sure made it sound convincing, pouring out impressive statistics that supported their theories.

But tinstead of disaster, one of the most prosperous periods the country ever enjoyed began. Returning servicemen 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 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. 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. Their arguments were so well presented and documented that we all believed it.

Instead, Reagan’s 1980s efforts 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 and the subsequent bursting of the housing bubble, the financial crisis, and resulting ‘Great Recession’.

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, 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, 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.

Of course there are still big problems ahead. And 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.

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.

Learn more about this financial newsletter at Sy Harding's Street Smart Report.

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