In defense of Mr. Market

Monday was a disappointment. Tuesday too. The Dow rose 26 points yesterday.

After last week, we were hoping for more. A hard rain…a cleansing wash…a flood that would flush the trash out of this market.

We’re ready for the next chapters in the story — chapters 7 and 11…!

Hey, wait…you’re probably thinking — “How heartless can this man be?”

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…we’ll give him a kick!

But…shucks…you know we’re kidding. We are such a softie; we can’t fire or evict anyone. And kick a man when he is down? We wouldn’t think of it…unless he is a world improver.

Yes, dear reader…can’t anyone rid of these pesky meddlers?

The reason we want a collapse on Wall Street is that it’s 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…the world improvers…the meddlers…the democrats and republicans…

Now, stocks have to fall. Banks need to go out of business. Companies need to go broke…and households need to default…

Asset prices need to go down. Unemployment needs to go up.

The pieces have to fall…or 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’d 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…blown up trillions of dollars in derivatives…and forced thousands of bankers, brokers, businessmen and hedge fund managers into early retirement.

That problem of unequal distribution of wealth…the 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’d 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…good money after bad…the whole thing would be over by now. We’d have a growing economy. We’d have real businesses producing real stuff…and paying real wages to real workers.

But the feds are on the job. And the job they’re on is to protect their voters…and their campaign donors…from 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’t fix anything.

Fixing requires pain. And the feds try to avoid pain at all costs….especially when they are the ones who will feel it.

So, they borrow and spend…and then print and spend…until the whole thing blows up.

And here comes another world improver, Larry Summers.

“What is to be done,” he asks.

The question reveals the conceit. Why is it any of his business? Left alone, people generally get what they have coming — at least in the world of economics. Why not give markets a chance?

Ah…but 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…in his own businesses…at 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’s problems one day…Japan’s the next…and America’s the day after. So what if it’s Saturday? There’s 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.

“The question is not whether the current policy path is acceptable. The question is what should be done?” he asks again in the same article.

“Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less.”

Hey…spend more…buy 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…the economy gets revved up…and you pay off your debts out of the greater flow of revenue. Perhaps Mr. Summers hasn’t noticed. But that formula has worked less and less well ever since WWII. This time the feds borrowed and spent more than ever before…and 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’s strategy for the last 2 decades. The lumps want to lend you money. They don’t want anything in return. So you take their money.

You can use it to build roads, sports facilities…any damned thing you want. Are they worth the resources? Who’s to know? Government improvement projects are never marked to market.

“It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero,” writes Summers.

But how could you tell? Maybe if you put in a toll bridge, or something like that. Otherwise, you’d never find out…and our strong hunch is that the net return on these government “investments” would be well below zero.

The Japan solution…which is also Mr. Summers’…is 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…which makes assets attractive, labor affordable and investment projects profitable again. That’s 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 “growth.” 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…while real production is pushed aside in favor of boondoggles, bailouts and bunkum.

Regards,

Bill Bonner
 for The Daily Reckoning