Hard to Sugar Coat It

So we got the debt limit increase and a tentative promise (wink-wink-nudge-nudge) to cut government spending in the sweet bye-n-bye. How did the markets respond? That was the screaming of Richie Rich bailing out of his penthouse suite yesterday. A 512 point decline is not the expected response to good economic news.

And, in Chicago, the emperor fiddled...er danced before a throng of his adoring followers.

Now I'm not a real believer of a guy who writes a publication called the "Boom, Gloom and Doom Report" but there isn't much here to disagree with:

Crash, Crumple, Worthless Paper and War

You might want to get out the history books and review some past experiences. Take a look first at the Weimar Republic.

The situation there was post-WW I Germany. They had punitive reparations imposed as part of the treaty of Versailles. They couldn't rebuild their shattered nation while giving up huge chunks of their production to Britain and France. The solution was "monetization." That's simply printing more money. Print day and night at max production. That isn't creating something from nothing. It is simply making more pieces of currency which still is a fraction of the total value of the nation. Each piece when you have many more pieces is worth less than eventually worthless. Taken to extremes it is called hyper-inflation. Think of what that does to your savings, your investments, your wages, your retirement.

That's the solution of QE-1, QE-2 and the increasingly probable QE-3. We aren't talking Cunard liners here. We're talking in euphemisms. It is monetarization renamed "quantitive easing". It is an increase in the total money supply which essentially makes each single unit worth less...and less.

Then skip a few years in that history book. Fast forward to 1933 and Franklin D. Roosevelt. The depression means he must act aggressively in response to public demands for help. He drastically expands the power of the federal government. It isn't usurpation, it is response to the mandate of the masses. Do we see a similarity today?

The only essential difference is that then people demanded action to get back to productivity. Today people demand action because they believe that government will sustain them with housing, money, cell phones, food, child care, cable TV, internet access, education through college and beyond and of course health care. No work, just enjoy.

The Keynesian solution of pump-priming or flooding the market with government largess didn't really solve the Depression. The solution didn't come from New Deal policies. It came quite simply from World War II. Put the unemployed in uniform. Turn the factories on 24 hours a day producing rapidly consumed war materials and then reap the harvest of huge pent-up demand for civilian products after the war.

I hadn't been truly worried until yesterday. This isn't going to work out well.