In defense of Mr. Market
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Bill Bonner Guest blogger
Monday was a disappointment. Tuesday too. The Dow rose 26 points yesterday.
After last week, we were hoping for more. A hard rain鈥 cleansing wash鈥 flood that would flush the trash out of this market.
We鈥檙e ready for the next chapters in the story 鈥� chapters 7 and 11鈥�!
Hey, wait鈥ou鈥檙e probably thinking 鈥� 鈥淗ow heartless can this man be?鈥�
Well, we can be a whole lot more heartless. Just give us some widows and orphans to evict! Give us some malingering employees to fire! Show us a man who is down鈥e鈥檒l give him a kick!
But鈥hucks鈥ou know we鈥檙e kidding. We are such a softie; we can鈥檛 fire or evict anyone. And kick a man when he is down? We wouldn鈥檛 think of it鈥nless he is a world improver.
Yes, dear reader鈥an鈥檛 anyone rid of these pesky meddlers?
The reason we want a collapse on Wall Street is that it鈥檚 only way for the economy to get back on its feet.
Birds gotta fly. Fish gotta swim. And a Great Correction has to correct.
It has to clean up the mistakes. It has to sweep out the debris. It has to un-screw up the economy.
Who screwed it up? The fixers鈥he world improvers鈥he meddlers鈥he democrats and republicans鈥�
Now, stocks have to fall. Banks need to go out of business. Companies need to go broke鈥nd households need to default鈥�
Asset prices need to go down. Unemployment needs to go up.
The pieces have to fall鈥r you can never pick them up.
If the feds would just leave well enough alone Mr. Market would have handled the whole thing. And we鈥檇 be out of this Great Correction by now. He would have knocked down almost all of Wall Street. He would have put dozens of our leading companies into Chapter 11鈥lown up trillions of dollars in derivatives鈥nd forced thousands of bankers, brokers, businessmen and hedge fund managers into early retirement.
That problem of unequal distribution of wealth鈥he rich getting richer, and all? He would have taken care of it!
And he would have done it all in a few short weeks in late 2008. By now, we鈥檇 have full employment again. And people building real wealth.
In other words, if the feds had not poured trillions of dollars down so many rat-holes鈥ood money after bad鈥he whole thing would be over by now. We鈥檇 have a growing economy. We鈥檇 have real businesses producing real stuff鈥nd paying real wages to real workers.
But the feds are on the job. And the job they鈥檙e on is to protect their voters鈥nd their campaign donors鈥rom Mr. Market.
Of course, all they can do is delay the fix. They can make the problem worse. They can make the losses bigger. But they can鈥檛 fix anything.
Fixing requires pain. And the feds try to avoid pain at all costs鈥�.especially when they are the ones who will feel it.
So, they borrow and spend鈥nd then print and spend鈥ntil the whole thing blows up.
And here comes another world improver, Larry Summers.
鈥淲hat is to be done,鈥� he asks.
The question reveals the conceit. Why is it any of his business? Left alone, people generally get what they have coming 鈥� at least in the world of economics. Why not give markets a chance?
Ah鈥ut then Mr. World Improver would not be such a very big shot, would he?
What if Mr. Summers could only throw his weight around in his own home鈥n his own businesses鈥t his own club? Imagine how lucky his family would be, with all that problem-solving brainpower focused on such a small enterprise.
Instead, his fixit energies are dispersed all over the world. Solve China鈥檚 problems one day鈥�Japan鈥檚 the next鈥nd America鈥檚 the day after. So what if it鈥檚 Saturday? There鈥檚 work to be done!
So, instead of minding his own business, Mr. Summers has come to the aid of a world suffering from a Japan-like slump.
鈥淭he question is not whether the current policy path is acceptable. The question is what should be done?鈥� he asks again in the same article.
鈥淩ather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less.鈥�
Hey鈥pend more鈥uy more stuff. Then, people will want to lend you more money!
How does that work, again? Well, the idea is an old one. You spend more money鈥he economy gets revved up鈥nd you pay off your debts out of the greater flow of revenue. Perhaps Mr. Summers hasn鈥檛 noticed. But that formula has worked less and less well ever since WWII. This time the feds borrowed and spent more than ever before鈥nd they got the weakest, palest, saddest excuse for a recovery on record.
Mr. Summers is right about one thing. When some fool is willing to lend you money at negative real interest rates, you should generally take it. Dear Readers will recognize this as essentially Japan鈥檚 strategy for the last 2 decades. The lumps want to lend you money. They don鈥檛 want anything in return. So you take their money.
You can use it to build roads, sports facilities鈥ny damned thing you want. Are they worth the resources? Who鈥檚 to know? Government improvement projects are never marked to market.
鈥淚t would be amazing if there were not many public investment projects with certain equivalent real returns well above zero,鈥� writes Summers.
But how could you tell? Maybe if you put in a toll bridge, or something like that. Otherwise, you鈥檇 never find out鈥nd our strong hunch is that the net return on these government 鈥渋nvestments鈥� would be well below zero.
The Japan solution鈥hich is also Mr. Summers鈥欌�s a solution to a non-problem. A Great Correction brings a lack of demand, as consumers and businesses cut back spending. The lack of demand lowers prices鈥hich makes assets attractive, labor affordable and investment projects profitable again. That鈥檚 how a correction works. Without a lack of demand you can have no correction.
But the meddlers think they have to make up for a lack of real demand by substituting an ersatz demand from government. The result? Ersatz 鈥済rowth.鈥� You get an economy that seems to be functioning more or less well, but which is really digging a deeper hole for itself. Government debt increases鈥hile real production is pushed aside in favor of boondoggles, bailouts and bunkum.
Regards,
Bill Bonner
听蹿辞谤 The Daily Reckoning
