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Market Rally No Cause for Celebration

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Reducing risk only way to survive.

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Editor's Note: The following originally appeared on March 7, 2007 and, in light of current events, has been reprinted here for the benefit of the Minyanville community.

The relatively small sell-off in global stocks has the media scrambling for reasons, while apologists regurgitate their normal excuses. The Wall Street machine churns out bull after bull to assure us that "the bottom of the housing slump has been reached" and "stocks have no more downside."

There's a reason for the sell-off, though it hasn't been touched on by mainstream sources. Does anyone remember Japan raising rates? For nearly a week, nothing happened, so the connection was lost.

Even marginally higher interest rates are death to the massive structural problems that exist. The fact that they'll take years to correct is something that most don't want to contemplate. Central bankers assure us everything is fine. If I can identify one thing as the problem, this is it.

A market economy works because its participants are entrepreneurs. The economy rewards their production and mercilessly punishes their sloth. The economy should provide its own liquidity through production, then savings. In its self-interest it seeks the best value and destroys the worst. It tightens liquidity when debt gets too high and loosens it when it's too low. Government steps in with some regulation to ensure fair play. Fine.

But when government grows too big and through its hubris believes its bureaucracy knows more than the market, the seeds of eventual deflation are sewn. I'm not talking about the re-distribution of income through taxes (that is another story); I'm talking about direct intervention in the supply of credit to "ensure price stability." That lie is due to the political refusal to allow the market to tighten.
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