Tuesday, March 16, 2010

The Wound That Never Heals

Imagine one day your going along with your daily routine when you fail to see something sharp and it cuts your arm. What do you do? You let it heal, of course. Depending on the severity of the cut, you might just need to wash it with soap and water and let it be. Perhaps a bandage is required. Some ointment. But the point is that you let the cut fully heal; you don't mess with it.

Now take our economy. It overheats during the 90's tech boom, with resources misallocated and market corrections coming on strong. So what does Alan Greenspan do? He slashes interest rates to much lower levels than what a market would set them out and holds them there for too long. Pretty soon, everyone is trying to get into real estate, and lo and behold, Greenspan, Bernanke, and a lot of other people fail to see this crisis coming.

The wound is now deeper, nastier, with so much interference stopping true recovery. So when the bubble bursts this time, it really pops - companies and banks go under, people lose their homes, personal debt reaches an all-time high, unemployment rises etc. But things still aren't allowed to correct. Businesses that should fail are propped up, an avalanche of new money is created through stimulus programs and toxic assets added to the Federal Reserve balance sheet.

Now, what began as a nasty scratch, is an outright severing of the economic artery. And when this bubble - which will stem from massive deficits, inflation, low interest rates, money creation, and whatever else the politicians have done wrong - finally bursts...Sorry, I don't want to think about that.

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