I am amazed at the near universal belief that everyone seems to have in the Fed and the government. The arguments proposed and the comments made seem to imply that the Fed can pull off some sort of miracle bailing out consumers by causing wages to rise, property values to rise, and the stock market to rise, and to create enough jobs so that everyone can live happily ever after.

That is not exactly a fair statement, because some think the Fed will overdo it to the point of causing hyperinflation. Either way, people give the Fed far too much credit and intelligence, when history proves otherwise. Yes, the Fed has, for what seems like forever, been willing to blow bigger bubble after bigger bubble. Here is the key: It was able to do so because banks were willing to lend and consumers were willing to borrow.

It can’t go on forever, simply because the ability to service debt at some point becomes impossible. The pool of real funding (savings) dries up, and financial speculation on its own accord stops being supportive of the real economy. Financial and asset speculations of this magnitude throughout history have never ended well. There were deflationary crashes in Japan, the Great Depression, the South Seas bubble, the John Law Mississippi bubble, Tulip Mania, etc. In each case, the bubble collapsed after sentiment changed toward speculation. Once sentiment changed, it was never again revived.

The root cause of the bubbles was a massive expansion of money and credit in conjunction with massive speculation by the public. Given that the cause of those bubbles was that expansion of credit and speculation, it is incredulous to believe that the Fed or the government can cure the problem by throwing still more money at it. That has never worked before in history, and it won’t be different this time, either.

Regards,
Mike Shedlock ~ “Mish”

Whiskey and Gunpowder

This entry was posted on Thursday, October 4th, 2007 at 7:56 pm and is filed under Archived. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.