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Heart of the Problem


We have unprecedented debt as the result of bureaucratic hubris.


Bennet's article on the business cycle is the heart of the problem.

A business cycle, like any cycle, is caused by excesses torn down then built up. As an economic expansion begins, money gets easy by definition. Why? Because along with economic expansion comes risk taking...things are getting better so business takes more risk. As I have said repeatedly, increasing risk creates liquidity.

Marginally what happens is that less productive businesses benefit along with productive ones. A little business comes along that will market another's products because business is expanding, not because the little one is any good.

As the economic expansion continues, unproductive businesses begin to compete for resources. At the top of the business cycle when economic expansion is at its zenith there are more unproductive businesses competing for resources than ever.

The market realizes this and forces rates up. A recession is triggered to eliminate unproductive assets in the economy. It wipes them out. From the ashes new productive businesses can sprout.

Along come the bureaucrats, really in earnest beginning in 1987. Their solution has been to provide extraneous credit at any hint of the market tightening credit. They have decided that unproductive assets deserve capital just like productive ones.

What we have gotten is not an elimination of cycles, but a prolongation and deepening. We have unprecedented debt as the result of bureaucratic hubris.

The unwind of that cycle is likely to be severe. Because we haven't seen it yet, the bulls say it doesn't exist. But looking at the why of it is pretty simple.

No positions in stocks mentioned.

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