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Savers Will Prosper at the Bottom


Risk will be high for years.

I have read several stories, some on Minyanville, about moral hazard and conservative investors lamenting that they are being punished by government policy for being prudent with their finances. Yesterday Congressman Barney Frank and others introduced more legislation to alleviate home foreclosures with public money (of course there is no money left, only more debt to be borrowed from our children).

I share their frustration and concern. I have written about socialization, nationalization, intervention, and manipulation by government in markets. It's all pretty plain to see by anyone willing to look.

I have only one thing to say: this is not new. If you really study the 1930s depression, it has all happened before. The Fed pumping and pumping debt into the system to try to save it (despite Mr. Bernanke's incorrect view of what happened), Congress at every turn trying to bail out their constituents (not people but business… same as today), and finally rhetoric and opinion designed to encourage people to do the wrong thing, spend their money and not save it, as quick fixes to a basic problem: too much debt.

The definition of a market is balance: participants in an economy allocating their capital personally over millions and millions of times to create efficiency. When a government can intervene in a market and create debt out of nothing, it creates imbalances. When the Fed drove real interest rates to negative territory in 2002 the mis-allocation of capital became rampant. The amount of debt in the system through derivatives, securitized debt, and even traditional debt can not be over-stated.

It's all happened before, over and over in slightly different ways depending on the magnitude of debt, and it will happen again. Thomas Jefferson realized this long ago: whenever you give the government the power to create "money" out of nothing it will eventually destroy the currency. Perhaps Mr. Bernanke should go back a little further in his history lessons…and read a bit more closely.

The really unfortunate thing is that big government will use the situation to gain even more power. The Barney Franks of the US government will come to the rescue to put out the fire when it was the government's arson all along. And it's working. Why? Because people do not understand the context of things. Even those that are conservative and prudent don't understand that their frugality will eventually pay off. When the bottom is reached, when the excess debt (way more than any rating agency is willing to admit) is destroyed, it will be their savings that will create new business and technology. Those with savings will prosper at the bottom.

The bottom won't be reached until the debt burden is reduced. Despite S&P's opinion (an opinion that is probably coerced and worthless if you go by its track record) that writeoffs by banks are near an end, I personally believe we are far from the bottom if you really analyze the amount of debt in the system away from traditional sources. SP is conveniently not looking at the fact that the derivatives market holds vast debt.

The government's solution of more debt (any bailout borrows more money from the future) to solve the problem of too much debt is laughable, but sad. It only defers and magnifies the problem.

Risk will be high for years.
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