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The chickens will come home to roost

The world’s governments have poured good money after bad. There can’t be much left.

I have written repeatedly on how these actions have distorted the markets, how they are making things worse in an attempt to stop failed enterprises from failing.

It’s hard to say how much money has been thrown away by the US Government alone. I would guess several trillion dollars. The US Government finds itself in the predicted horns of dilemma: they can devalue the dollar and potentially destroy those who would buy their debt. Or, they can finally let the crash happen, and watch several large sections of the economy implode, along with several government backed institutions like Fannie, Freddie, and several government pension funds, and the Fed.

I have always argued that the second option was always the best, because it would happen anyway, and the sooner done, the sooner it could be dealt with. Of course it would have been a lot easier to deal with before when the government hadn’t committed over 12 trillion (yes, trillion) dollars to making things worse. That’s roughly a year’s GDP. I think they’ll be lucky to get half of it back.

A little creative destruction right now would be a nice change from the status quo. At least after an implosion, all the poison would have been worked out the system.

Anyway, the financial crisis never went away. It was simply papered over with ridiculous amounts of printed money and reckless monetisation of bad debt. The semi-socialist states of Europe could not ever sustain their spending levels, and the USA has put itself on the hook for stupid amounts of money over the last year. When the rest of the world craters and the US loses buyers for its debt, we’ll be back to disaster as usual.

I don’t know when that will be, but I think the powers that be are running out of tricks, and places to hide bad debt. I would not be surprised by a ripple of sovereign debt defaults around the world. The ripples may take a long time to reach the USA, but they will come.

26Nov2009 | Ray | Comments Off | Continued