'One-day wonder' market correction [updated]
$5 trillion, and counting. That's around how much the governments of the US, UK, Germany, France et al have spent in recent weeks "stabilising" markets, buying up worthless assets and nationalising banks.
Germany, France, Austria, Spain, Italy, Sweden, Poland, and Norway pledged over $2.3 trillion just yesterday, thanks very much, to nationalise banks and spray around truck-loads of "liquid confidence," and the Brits themselves pledged around half that amount themselves to make the government sector larger than its been since Clement Attlee essentially wrote The Communist Manifesto into the British constitution.
It's possibly the single- biggest monetary inflation the world has ever seen.
And yes, after that magnanimous golden shower, the world's stock markets are up. Today.
Yes, the NZ dollar has stabilised. Today.
But if you really think that huge monetary inflation is going to have any long-term effect in changing the real value of worthless assets, in changing lead into gold -- in fixing the problem of worthless assets that has poisoned the balance sheets of the world's banks, and the problem of inflated values that poisoned those assets -- then I have some Florida swampland and Dot.Com bubble stocks to sell you.
Monetary inflation, of whatever magnitude, can't do a thing to change real values -- but it can inflate them artificially. Monetary inflation, however fast the printing presses are working, can't do anything to effect the necessary economic correction - but it can delay it for a few more years. Monetary inflation, however large, can't do anything to transform unsustainable businesses into sustainable profit-making ones -- but it can and will keep alive these malinvestments, those walking zombies, which are only alive in any case because of the monetary inflation of previous years.
Says Warren Buffett about market corrections, "It's only when the tide goes out you can see who's been swimming naked." This sea of monetary inflation won't stop the tide going out, eventually -- but it will delay the time when we can see who needs to be drowned.
You see, there is no choice about the pain of correction. It has to happen. Unprofitable businesses need to be liquidated and the resources therein transferred to something more profitable. Bad loans need to be liquidated, and any assets involved used as fertiliser for real growth. People have blundered, and we have no choice about the need to liquidate those blunders so they don't go on consuming real resources. We have no choice about correction. The only choice is how long it takes -- how long the pain of correction will last -- and how many real resources are consumed along the way.
You'd think that someone would have learned from Japan's lost decade, where the same medicine was tried in the early nineties, ensuring their necessary recovery was delayed for a decade.
You'd think someone might have learned from the meddling of Herbert Hoover, (continued by Franklin Roosevelt) whose meddling in the face of depression did precisely the opposite of what he intended: instead of protecting failing businesses and providing the funds necessary for recovery as he hoped, the failure to let the market contract and flush out the dead wood and malinvestments merely prolonged the pain.
So, yes, the markets are up today. But don't bet on it lasting.
UPDATE 1: Read how a play-money auction shows yet another iniquity of these "bailouts": it punishes the virtuous, and rewards the profligate.
UPDATE 2: Peter Boettke, among others, points out that that expecting governments to bail out businessmen leads to another significant problem for businessmen: "regime uncertainty."
A lot of important economic concepts have filtered into journalist accounts and even everyday conversation about our current finanacial crsis. Moral hazard, liquidity, credit contagion, deflation, etc. have all been used in various accounts that often demonstrate the old adage that "a little bit of knowledge is a dangerous thing" as much as the usefulness of these economic concepts to aid understanding.
To my mind, one of the most important economic concepts to be developed in the past decade is Bob Higgs's [and Gene Smiley's] idea of "regime uncertainty" and the application to which he has put that concept to use to explain the depth and length of the Great Depression. Given the earlier application, the relevance of the concept of "regime uncertainty" to our current situation should be evident.
UPDATE 3: Regime uncertainty? That's what Tim Selwyn's talkin' about, y'all:
As for the stockmarkets, supposedly good barometers of humanity, 15-25% down for last week in most countries and now the US has come back 11% today. Erratic and wild fluctuations. Why? Nobody knows what the fuck is going on.
UPDATE 4: Peter Schiff points out Americans blew through their savings in the Dot.Com failure, too few people want to lend to Americans now, so top pay for all the rescue plans "we're reaching for the printing press.
Weimar Republic here we (all) come.