Juggling Dynamite

Stocks are rallying this afternoon suddenly on headlines that the Italian PM may be stepping down.  Or turning round, or holding his head upside down.  Here is a latest from Bloomberg:   “BERLUSCONI: PRESIDENT WILL DECIDE HOW TO RESOLVE CRISIS.”  Oh you can fix this? Great, well why didn’t you say so earlier?

It is amazing to me how many people from all sides of the political aisle today are looking to governments and Central bankers to “turn the economy around.”  Notice a universal theme today is that governments are being voted in and thrown out at record pace because they are not “doing enough” to fix the crisis.  Democratic governments are designed to maintain roads and basic public services, but command the economy?  This is simply a ridiculous expectation.  It is up to free market forces to find an equilibrium for the economy.  What amazes me is that even those who express staunch conservative allegiance and say governments need to stay out of business are today criticizing incumbent governments for not “creating jobs”.  Say what? 

The system is already flooded in tons of cheap credit, adding more is not the answer.  In fact the relentless calls from the left and the right to lower rates and increase liquidity over the past 10 years are a huge part of the mess we are now in.  The truth is that no one–neither democrats nor republicans have been true fiscal conservatives over the past 20 years.  Everyone wanted to take more for themselves and their own pet causes and no one wanted to make cuts or save for the rainy days. 

The truth is that those who seemed like brilliant leaders and business heads during the great leveraging phase were actually not very brilliant at all.  Jack Welch? Jamie Dimon? Give me a break.  They were simply aiding and abetting the great leverage bubble up.  Demand seemed insatiable and defied reasonable expectations because all reasonable rules and traditional relationships were tossed aside in order to goose profits year over year at all costs. There was a cost though. The cost of then is the price the world is paying now for the great unwind of the prior systemic excess and abuse.  The world has truly earned its current plight.

Meanwhile the Chinese yield curve has just inverted in a classic warning of the incoming global downturn.  But apparently this afternoon we prefer to dance, distracted by nonsensical musical chairs in club-med governments.  Here is Dallas Fed head Richard Fisher talking about the limits on what monetary policy can do to resolve present issues. Watch the video interview here.

We hear so much horse dung today about what kind of “solutions can be orchestrated to resolve the debt crisis”. 

It is dead simple: we let the bad loans go bust, we let the investors who made bad bets take losses, and we start over with new much lower limits on the level of debt and leverage people, companies and institutions are allowed to take on.  We also ban outright “off-balance sheet accounting”, “special purpose vehicles” and all the other euphemisms we have developed to gloss over the devastating practice of allowing borrowers to lie about their debts.  This is why the system has gone bust:  we allowed “financial engineering” to hide truth about how much debt every person, city, county, state, government, financial institution and company ALL OVER THE PLANET held. 

Now the truth must be finally acknowledged, zeros written off and bad accounting gimmicks outlawed.  Enough already.

This interview with Jim Rogers is on point.  It is such a huge relief to hear sanity call bullshit on the great debt pyramid that so many are still trying to extend and pretend: 

“In America, we’ve had states go bankrupt, cities, counties. This has happened before. It didn’t end America, didn’t end the US Dollar. You let entities collapse, go bankrupt. This happens all the time. This happened throughout history. That’s all you have to do, let them go bankrupt, let the people who made the bad loans take their losses and start over from a sounder base. But just pushing into the future and letting debt go higher and higher will mean it’s going to end very, very badly and then you know, five years from now, you may have a complete collapse of the Euro, the EU and for that matter, all the Western world.”

Watch Rogers on Reuters here.

Right here this U.S. economy is dipping into a recession and nothing that has transpired changes a forecast for a recession, says Lakshman Achuthan, Economic Cycle Research co-founder/chief operations office, who adds that highly negative growth rate is still being seen by key economic data.

For those unable to view this clip, click here.