Whistling Past the Graveyard
Ordinary people face protracted Depression conditions.
by Stephen Lendman
Europe's sinking. Japan's in recession. China risks landing hard. America's sure to follow. Yet equity markets rallied impressively so far in January.
Be careful. Economist David Rosenberg warns about renting, not owning, rallies based on hope. They're sure to disappoint, especially ones fueled by speculative excess.
In his book titled, "Manias, Panics and Crashes: A History of Financial Crises," Charles Kindleberg wrote:
"The moral hazard problem is that policy measures undertaken to provide stability to the system may encourage speculation by those who seek exceptionally high returns and who have become somewhat convinced that there is a strong likelihood that government measures will be adopted to prevent the economy from imploding - and so their losses on the downside will be limited."
In the 1990s, it was called "the Greenspan put."- Advertisement -
"The moral hazard problem is a strong argument for nonintervention as a financial crisis develops, to reduce the likelihood and severity of crises in the future. Will the policymakers be able to devise approaches that penalize individual speculators while minimizing the adverse impacts of their imprudent behavior on the other 99% of the country?"
In fact, today's excess is unprecedented because policymakers allow, encourage, and support it with massive money creation and freedom from regulatory restraints.
In their paper titled, "The Real Effects of Debt," Stephen Cecchetti, MS Mohanty and Fabrizio Zampolli said:
"Debt is a two-edged sword. Used wisely and in moderation, it clearly improves welfare. But, when it is used imprudently and in excess, the result can be disaster. For individuals and firms, over-borrrowing leads to bankruptcy and financial ruin."- Advertisement -
"For a country, too much debt impairs the government's ability to deliver essential services to its citizens."
Beyond a certain level, debt hurts growth. "For government debt, the threshold is around 85% of GDP." Countries exceeding it must effectively put their fiscal house in order. Longer-term, they should avoid approaching dangerous threshold levels. The same goes for business and households.