Federal Spending And Annual Fire Damage: Playing With Fire by Evergreen Gavekal
“In a shift of secular or long term significance, the markets will be adapting to a new set of rules while most market participants will be still playing by the old rules.”
Famed market technician, Bob Farrell
Playing With Fire
- Just as the US Forest Service’s efforts to prevent and suppress wildfires over the last 100 years have led to a rise in devastating fires, the Federal Reserve’s attempts to prevent recessions and market corrections has created the environment for severe financial firestorms.
- While the Federal Reserve has managed to extend economic expansions and shorten recessions over the past several decades, its pursuit of stability and prosperity through lower interest rates has led to a massive increase in total debt/GDP, an expansion in government, and a structural slowdown in real GDP growth.
- By continuing to over-manage both the economy and financial markets by holding interest rates at zero, and by running the very real risk of going into the next recession with nothing but emergency tools, Ms. Yellen and her colleagues are focusing their efforts on preventing and putting out small fires at the risk of feeding a much larger blaze.
Only You Can Prevent Forest Fires.
For decades, the US Forest Service (USFS) has hammered this slogan into American pop culture with loveable children’s characters like Bambi, Thumper, and Smokey the Bear.
They taught us that forest fires are unnatural and unnecessary catastrophes often caused by unattended campfires or carelessly discarded cigarettes… that forest fires should be prevented at all costs… and that, whenever wildfires do occur, they should be snuffed out as quickly as possible.
In theory, if preventing wildfires actually results in fewer or less severe incidents, then there should be an inverse relationship between federal spending and annual fire damage. But like the late, great Yogi Berra used to say, “In theory there is no difference between theory and practice. In practice there is.”
Despite a more than three-fold increase in federal spending on wildfire suppression since the mid-1980s (not to mention thousands of honorable lives lost in the process)…
…there has been a dramatic increase in both the frequency and intensity of large fires in the Western United States. According to US Forest Service Chief Tom Tidwell, major wildfires are growing to sizes that would have been “unimaginable” twenty years ago.
While the US Forest Service has successfully contained 98% of all wildfires before they reach 300 acres in size, the other 2% are responsible for 97% of the total damage… which has also been trending up for the past few decades. While the graph below only runs through 2013, I should point out that 2015 is on track to be the worst year on record with over 8.5 million scorched acres.
To be clear, these unusually large, unusually intense fires are largely man-made phenomena triggered by a variety of catalysts but aggravated by wildfire prevention efforts. “Suppression generally begets larger, more intense wildfires, which in turn intensifies the agencies’ suppression response,” explained UC Berkeley Professor Malcolm North. “Many severe fires result from accrued management decisions.”
Small fires, you see, play an important role in the forest life-cycle. They cleanse and renew the ecosystem by thinning out smaller trees, helping new seedlings to take root, and clearing away the underbrush. In a healthy forest – where periodic burns prevent the buildup of explosive fuels on the forest floor – fires burn at lower temperatures and spread more slowly. As you can see in the picture below, such fires consume logs, saplings, and low-growth vegetation, but not the mother trees which stand firm as flames blacken the forest floor.
At least that’s what should happen in a healthy forest. But nature’s way of renewing itself is apparently too risky for bureaucrats in Washington.
“Nature’s script has been disrupted,” explains New York Times journalist John Schwartz. “Fewer fires caused the forests to grow more densely, and for grasses and dead trees to accumulate on the forest floor… The consequences of a century of forest policies to suppress fires are now combining with the hotter and drier seasons to create tinderbox conditions, producing high-severity fires that kill trees and are increasingly hard to bring under control.”
“Ironically,” writes National Geographic’s Laura Parker, “the century-old government policy of fighting fires instead of letting them burn has led to a build-up of the very tinder that lesser fires once destroyed as part of the natural process.” Instead of small, relatively-contained fires that rejuvenate the ecosystem, bureaucratic mismanagement has nurtured the conditions for large, runaway fires that turn imposing forests into desolate grasslands.
Sounds a lot like Federal Reserve policy doesn’t it?
The parallels are striking, although – based on the harsh criticism below from the Federal Reserve Bank of Minneapolis – the Fed doesn’t seem to understand that it is making the exact same mistakes in suppressing recessions and market corrections.
“Another factor behind the upswing in fire activity and costs is a decades-long buildup of woodland fuels that increase the likelihood of fires burning out of control. Ironically, over a century of successful fire suppression by federal and state agencies has contributed to this build-up; following Smokey Bear’s advice has stifled countless small wildfires that otherwise would consume deadwood, brush, and leaf litter… hot weather and a surplus of dried vegetation are an explosive mixture just waiting for a spark.”
If you’re like me, you’ve got to be wondering where it is in the Fed’s mandate to criticize the US Forest Service for the same series of miscues it has been making with its monetary policies. The lack of self-awareness here is stunning.
Just as small fires are vital to the health of a forest, recessions and market corrections are critical to maintaining a strong and resilient economy. Creation cannot happen without destruction, just like the green shoots of a jack pine cannot sprout without a fire. While bankruptcies and falling asset prices are unpleasant – especially for those losing money or jobs – prolonging the pain with lower interest rates only encourages the continued build-up of explosive malinvestments like tinder on a forest floor. You would think the Fed would have learned something from the financial crisis in 2008 as the “Great Moderation” suddenly gave way to the “Great Recession”; but, like the US Forest Service, the Fed continues to play the same old game. As decades of accrued management mistakes continue to fuel more intense crises, the Fed’s response is to keep upping the ante until the lender of last resort eventually exhausts its ability to intervene at all.
While the Fed has – even including the 18 month “Great Recession” from December 2007 to June 2009 – successfully extended the duration of economic expansions and shortened the length of recessions, it’s hard to call this stability. Remember, it’s the 2% of run-away wildfires – enabled by