The final countdown

Downward arrow on world map

Alasdair Macleod – February 18, 2013

Governments have refused to accept the necessity of a period of economic re-adjustment following the credit-bubble. The bubble burst about five years ago and economic progress has been effectively suspended ever since. The consequences of this refusal to accept reality are at a minimum to make this adjustment unnecessarily drawn out and needlessly painful, without offering a better eventual outcome.

Reduced to its bare bones, the choice has been either to accept that unviable businesses and over-extended banks must go bust, or to ignore the problem and hope it goes away. We are familiar with this dilemma as investors: a business that refuses to adapt to new realities will eventually fail. Before it does, its investors have the chance either to sell their shares and perhaps reinvest their money more profitably, or to refuse to accept an early loss on their investment. Most of us, being human, take the latter course and usually regret it.

The lesson, if we care to learn it, is that the product of time and money is more valuable than the desire to avoid a book loss. In economic terms, it is better for resources to be deployed efficiently than to tie them up in inefficient or unwanted activity. This is a decision for markets, not governments, which brings us back to the necessity for economic re-adjustment. Governments have simply not faced up to the reality that we are in a post-credit-bubble mess: they still hope the problem will be resolved by time.

At this point we must dismiss objections that you cannot compare national accounts with those of a business. Such platitudes display wishful thinking more than a grasp of reality. However, wishful thinkers have a minor point in that governments have the wherewithal to put off the inevitable for longer than failing businesses; but the result is the zombie-like economy we face today.

Governments are refusing to let markets clear: prices have not been permitted to fall to a clearing level. They put it off because the American economist Irving Fisher came up with a plausible theory about financial deflation in the 1930s, and they don’t want to face the bankruptcies of the over-indebted, the businesses that rely on the state for their survival, and the banks that have foolishly lent them too much money.

Reality is now catching up with western governments. Their underlying financial position is rapidly deteriorating, with welfare costs spiralling out of control and governments already heavily in debt. They cannot realistically underwrite the global banking system, which is insolvent and considerably larger than the governments themselves. The economic recovery which is the governments’ get-out-of-jail card will not occur without that economic readjustment.

We are long past the point of no return: that was probably when the Federal Reserve Board under Greenspan decided to rescue the stock market by cutting interest rates to 1% in 2003/04. It has been crisis management by the state ever since. We have progressed to the point where governments have chosen to protect themselves, in preference to looking after the true interests of their electorates.

Governments are now reduced to screwing their electorates for their own survival, which is their last refuge from reality.

8 comments

  1. Dave Redick says:

    Right!! Over 90% of congress folks are self-serving cowards.

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  2. Aaron says:

    Most government responses have sought to improve the message rather than improve the policy. This just leads to more empty, broken promises. Electorates will eventually catch to these lies as the austerity enacted on them brings them to a tipping point.

  3. Woody Guthries says:

    “We are long past the point of no return: that was probably when the Federal Reserve Board under Greenspan decided to rescue the stock market by cutting interest rates to 1% in 2003/04. It has been crisis management by the state ever since. We have progressed to the point where governments have chosen to protect themselves, in preference to looking after the true interests of their electorates.

    Governments are now reduced to screwing their electorates for their own survival, which is their last refuge from reality.”

    Yes, and then what? You know and I know, 3 letters, starts with W.

  4. Solonsays says:

    The stock market has recovered from the 2008 financial crisis but marginal debt used to stabilize the economy has been relegated to the unborn. Why can’t you be more direct about the cause and effect described in your article? Wall Street and the Federal Reserve banking system lives as parasite at the expense of the rest of us.

  5. Charlie says:

    A heavy hint surfaces today from Fed minutes suggesting it is now sinking in that all those billions in the QEs have not produced very much at all, except a growing trend towards increased consumer prices. I can’t think that the Fed will totally abandon printing because it has no other option except austerity and politicians do not wish to face that prospect. I suspect printing will continue but with the money being channeled into other avenues than bond purchase.However I don’t know what they might be. The Fed is getting desperate for a solution, and previous Fed minutes suggest they don’t have one to hand.

  6. Pete says:

    Its true, if the majority of the population knows that nothing has actually been fixed or changed, except for the printer being turned on, the only thing that will happen is that we will give our wealth away, are 10 dollar bill will become 100$, then a new bill will need to be made at 1000. Look at Poland 1990′s. Its like people have blinders on. I give it about a year at most. Money has to come from work and product, no product no wealth. We have a huge parasite problem, and as you know, even walmart poor employees, have noticed customers are now poor too. SO they can try paint a picture using shi&, but its still stinks. Its just a matter of time, then government will have to be rolled back to normal levels.

  7. debra says:

    Final Countdown is right, but sooooo few people are aware that there is far worst ahead of us. For example, 93% of the UK population believe that the debt is being paid down, whereas the debt is growing like topsy and has been since the 2010 election. I agree that financial repression is the way forward (the French government is proving particularly adept on this point). All we can expect is the Government to steal our wealth, and capital to flee. The only issue is that the world of paper money and globalization makes it harder to flee.

  8. gold eagle says:

    Normally I don’t learn article on blogs, however I would like to say that this write-up very pressured me to try and do so! Your writing style has been amazed me. Thank you, quite great article.

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