08/31/10 Paris, France – Why don’t people borrow?
Because it’s not a liquidity problem. It’s a debt problem. A solvency problem. And it won’t go away by making more cash and credit available. Instead, all those bad decisions, bad loans, and bad investments have to be cleaned up. And that takes time. And while the economy is de-leveraging, people are becoming more cautious…more risk-averse…more modest in their expectations.
What do Rogoff and Reinhart say about governments’ efforts to fix these problems? What does history show?
They say the feds often make the situation worse.
Not only do governments typically pour bad money after good, they also disrupt the process of correction. Insolvent banks are kept alive. Big businesses that ought to go broke and be sold off are instead propped up…the lights are kept on by government subsidies, preventing new competitors from occupying the space. Consumers and investors keep waiting for the promised “recovery”…for the cure…for the fix. Instead of quickly adjusting to the new circumstances, they delay…they hesitate…they postpone unpleasant changes.
They might quickly sell a house at a loss, for example. They could then go on with their lives. But when they hear the feds tell them they have a new program in the works…or a new stimulus bill in Congress…or new action by the Fed…what are they supposed to think?
“Maybe I should wait and see if this new effort does the trick…” they say to themselves. “I’ll feel like a real fool if I sell now and then the feds get a new bull market going.” “Maybe I should wait before accepting a job at a lower salary; it says in the paper that the economy should recover by summer…”
The economic setbacks of the 19th century were sharp, but fairly short, affairs. The contribution of modern economics has been to stretch them out and make them worse.
How about China? Won’t growth in China and the other BRICs lead the whole world out of its funk?
We wouldn’t count on it.
First, the Chinese economy has been growing at near double-digit rates for the last ten years. It didn’t stop the crisis and so far it hasn’t helped the developed nations – at least the US – get out of it.
More important, China is probably getting itself into a big mess too. All we know is what we read in the paper on the subject. But what we read is that the spectacular growth China has enjoyed so far was made possible by freeing the private sector. But now the Chinese government is muscling the entrepreneurs out of the way.
“Now…it is state-run Chinese companies that are on the march,” says The New York Times.
Railroads, mining, airlines, manufacturing, hotels, yogurt… The Chinese government either owns it, controls it, or invests in it.
And if you think private investors make mistakes, you should see what the government does!
A Daily Reckoning dictum: people make mistakes all the time; but if you want to make a real mess of things, you need taxpayer support.
Regards,
Bill Bonner
for The Daily Reckoning
Bill Bonner
Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010.
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“Our great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of our nation, therefore, and all of our activities are in the hands of a few men…who necessarily, by very reason of their limitations, chill and check and destroy economic freedom.” – Woodrow Wilson
The crucial factor. Scams, frauds are undermining the otherwise well performed global capitalist economy. Fraudulent practices send the whole system out of alignment. The destructive force is immense and the consequences are of grave concerned. Let us not talk about a potential nuclear fallout from a megaton blast, of which the contaminations carried half-life, quarter-life or 1/3-life hyper-reactive hazard. We should be more concerned of the immediate threat posed by the ‘fraud $$$ particles’ that possess full-life or even eternal-life, which are already shrouding the whole economic arena. Technology in the absence of sincerity will only produce flukes, a grand economic forum initiating from zero hour to the 24th hour will only procude private friendly discussion.
the chinese growth miracle comes from counting production rather than sales as gdp….nice statistics if you can get it…
The problem is the very connectivity of the banking sector and the overwheening power of government controlling every aspect of everything. Why should I have to suffer for other folks’ mistakes?
I’m part of a web that should never have been created. Power should have been diluted among the the People and not centralized. Competition would have kept the large houses from combining into the Oligarchy.
This counrty was built on the premise – “mind your own business and keep your hands to yourself”.
I am not government’s friend.
I think the imagination-rich readers would somehow or rather figure out the major scams of the centuries or the greatest fraud in economic history. The brutal destructive force cast upon the economic system.
Capitalism as a whole, could be blamed for weakness in scam resistance and vulnerable to heavy frauds. Money, whether decent or filthy easily seduces it like a pretty one seducing a dumb guy.
Silver Tiger Bar said:
“Our great industrial nation is controlled by its system of credit. Our system of credit is privately concentrated. The growth of our nation, therefore, and all of our activities are in the hands of a few men…who necessarily, by very reason of their limitations, chill and check and destroy economic freedom.” – Woodrow Wilson
If this is true, then for the life of me I cannot understand why he abetted the consolidation by signing the Federal Reserve Act in 1913.
Unless this quote came afterward, in a moment of brooding over what he’d done, sort of like Oppenheimer after the flash and heat of Almagordo.
makes me want to drink alchoholic beverages