Centrally managed economies always end in economic disaster, tyranny, or both. We are currently in the midst of an economic disaster that is the result of governmental and quasi-governmental manipulation. It is a side effect of central planning, and free market economists knew as an absolute certainty that it was going to happen.
Because central planning upsets normal rational economic behavior, and interferes with the normal corrective measures in markets, it always causes asset bubbles and malinvestment.
Nearly everyone now acknowledges that the Fed’s actions in depressing interest rates to “stimulate” borrowing and spending, combined with the well-intentioned but ill-advised social engineering of politicians, created the housing bubble. Asset bubbles attract speculators and eventually an entire economy can be sucked in by the prospect of easy money. Capital spent inflating a bubble, is capital that would otherwise have been spent and invested wisely. Once the bubble bursts, normal economic growth cannot resume until the malinvestment is liquidated. Governments and central planners, reacting to the pleas of distressed businesses and citizens, desperately try, in vain, to keep the bubble inflated. In so doing, they delay the inevitable liquidation, ultimately making matters worse. In extreme cases the central planners will do anything to prevent the market from working. Such a case might involve nationalization of insolvent industries like, say, financial services, insurance, and automobile manufacturing. This is a particularly vile form of socialism, and I’ll have more to say about that another day.
As the very fabric of our economic system is being unravelled by government action, and as our national values and virtues are being compromised daily in a foolish and vain attempt to centrally manage our economy, another bubble is being inflated, and the nation, still bleeding from the wounds caused by the last one, seems oblivious to it.
The stock markets have risen about 40% over the past three months. There is no good fundamental reason for that. Any rise in the markets should be primarily a function of corporate profits. This one is not. It is a function of unfounded optimism, and government manipulation.
The Federal Reserve continues to hold the overnight rate at zero percent. Soon we will look back at this just as we now look back at Mr. Greenspan’s disastrous policies. This ridiculous policy, which steals the savings of the prudent and foolishly incents the very behavior we should be repudiating, has the effect of driving savers and investors into equity markets, where they hope to get a return that will outpace inflation. The stock market thus becomes a place for malivestment.
Meanwhile, the Fed has propped up bankrupt financial service companies, printing up a trillion new dollars to exchage for their worthless assets, essentially transfering private debt to the public, then monetizing it. This has enabled the financial service sector to raise capital that it would otherwise not receive. Further, the commercial real estate shoe has not yet dropped, and by year end the fantasy valuations of the assets of these entities will be known. But for now we have malinvestment, and another bubble.
And of course the government has churned out a trillion dollars in borrowed “stimulus” funds, designed to create make-work jobs and to pay off corporate constituents. This unnatural spending is counterproductive, delays liquidation of malinvestment, and diverts capital from its best use. And of course it sinks the nation deeper into an impossible debt. But until the day of reckoning, trillions of phony dollars, not the product of any economic activity, are flooded into an economy that desperately needed just the opposite.
To cap it all off, a charismatic and totally clueless executive looks into the camera and assures Americans that things are improving.
And so a bubble inflates.
We cannot be sure when the stock market bubble will burst. But we can be sure that burst, it will.
Likely Mr. Bernanke, having been instrumental in creating the bubble, will have no choice but to burst it. He’s sprinkled so much fairy dust that he’s actually got people zestfully buying stocks. And because the “flight to safety” is now turning into a “flight to danger,” we can’t unload all that treasury debt at absurdly low interest rates any more. And as treasury rates increase, so does the interest on the national debt. Borrowing trillions to reflate the stock market will drive up rates, quantitative easing or not.
What’s the best way to increase demand for treasuries? Put differently, what’s the best way to start a stampede to safety?
Y’all please be careful out there.