The Bitter Pill We Should Have Swallowed Three Years Ago

In response to the global financial crisis G20 governments have spent more than $5 trillion (£3.14 trillion) in an attempt to engineer a recovery, and rather predictably we don’t have one, or at least not a healthy one that can stand on its own two feet without the aid of life-support.

Past the point of no return

If we had let the crash and subsequent recession of 2007/2008 run its natural course, it would have been very painful, a great many banks and businesses would have gone to the wall, unemployment would have spiked a great deal higher and an awful lot of wealth would have been destroyed. But, three years down the line, we would now be emerging from the ‘Second Great Depression’ with an economy and financial markets that had been reset. Malinvestment and bad debts would have been cleansed, assets prices would be fairly valued and coupled with the right policy reforms, the world would be ready to begin a new cycle of prosperity. The private sector, if freed from red tape and onerous taxes, would be beginning to create new and competitive industries.

Contrast that to today where we have stubbornly high unemployment, record public liabilities and a failing economy artificially supported by record low interest rates and massive money printing. I believe that we are now so far down the road of ‘Ponzi Finance’ that we are past the point of no return. Our neo-Keynesian central planners will therefore do everything in their power to prevent a collapse, which means more money printing, more bailouts and much higher inflation down the road, possibly even hyperinflation in some countries.

We don’t have capitalism and we don’t have free markets

Government has no place propping up markets and bailing out troubled businesses, they should just get out of the way and let the market determine the rightful value of debt, stocks, property etc. It is the first rule of capitalism that if you make good decisions you get to profit, but if you make bad decisions you have to pay the price. That’s what bankruptcy is for. Entrepreneurs or bankers who made bad bets have to pay the price but they get to walk away and start over again – hopefully to engage in something more successful.

By bailing out the banks, insurance companies, mortgage brokers, car manufactures etc. government turned a banking crisis into a sovereign debt crisis. This socialisation of risk is abhorrent and thanks to government intervention we no longer have a system that even remotely resembles capitalism and yet we have voices blaming capitalism for the mess we are in and calling for even more state intervention. That would be the worst possible thing we could do.

In 2007 the world’s sovereign debt level stood at $23 trillion. This rose to $34 trillion in 2010 and is forecast to rise to $48 trillion by 2015.

Recessions are a natural part of the business cycle and they serve a useful purpose. Those in charge should stop trying to prevent them taking place. Each time they do, they serve only to create more misallocations of capital.

Harder to swallow

The situation we have today is unsustainable so despite their best efforts we can only “extend and pretend” for so long and all they are doing is making the pill that much harder to swallow when the time comes.

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