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Economies Out of Balance

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Government miscalculations, mistakes to blame for market failure.

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Stock markets are down this morning on concerns of the impact of swine flu; that's understandable.

What's more difficult to understand is the rally we have seen in stock prices despite failed policy. By metrics developed by central bankers themselves, indications are that risk-free borrowing rates must be held implicitly at -5% for some time to keep economies running. That's like saying we must suspend gravity so we can stand up. If Keynesians cannot admit that their philosophy is a failed one -- when their own methodology calls for negative rates -- they're about as stupid as a stump.

The British are raising taxes on the very rich; other developed nations will soon follow, as governments and their central bank Bobbsey twins won't stop "spending" our way out of the "problem." The PPIP plan is a re-levering of an already too-levered system through government means. We're supposed to de-lever, fellas.

The economy is a physical system that's way out of balance. Keynes' ideas of how to pull us out of one particular situation have become an everyday thing, a policy with their own name. They have institutionalized stupidity.

The "market" didn't fail by itself. By definition, a market is a self-correcting mechanism. The failure was due to a cumulative process whereby government 1) kept real interest rates too low (negative), thus providing the "market" with free money with high risk-taking; 2) the development of quasi-government entities like Fannie Mae (FNM), which absorbed off-balance-sheet lending and encouraged further risk-taking; and 3) the elimination of good regulation -- like Glass-Steagle -- which prevented flawed market institutions from recognizing the difference between real capital and borrowing.

In trying to figure things out, I often take things to extremes, to see if they make sense. Currently, 60% of the people in the US don't pay income taxes. Let's take that number to 90%. Can you imagine what things will be like then?

If you think that's stupid, look again: If you have to keep nominal rates at zero and provide enough stimulus such that rates are -5% because of deflation, you're in a very risky world.
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