More Credit From Central Banks Can’t Solve Insolvency in World Markets

Everything is always the same. And everything is always changing. People come and go. So do bubbles.

Humans apparently came to be what they are by millions of years of evolutionary selection. We were shaped by circumstances just as giraffes or warthogs were created by their environments…and chance.

Here at Markets and Money we observe humans the way botanists look at flowers. We watch them bloom and wither…and trace the seasons of their lives. Sometimes they are bullish and colourful. Other times, they fear the chilly winds and close up upon themselves.

Circumstances change all the time. But humans evolve too slowly to keep up. Today’s people are the same, more or less, as those who stormed the Bastille…built the Pyramids…and crossed the Bering Straits wearing skins. They always hope to get something for nothing…and are deeply disappointed when they don’t. Thus do they create their own cyclical patterns of temptation, error and regret…repeated over and over again…from the dawn of creation to the crack of doom.

What is new and different is that never before have we seen economic and financial patterns played out on such a magnificent scale. Never before has so much money chased so many goods and services. Never before have central banks had so much power to distort markets. Never before has any nation been able to get away with such grand larceny as the United States. Never before have any people been permitted to go so deeply into debt as Americans. Never before have capitalists been able to buy so much rope with which to hang themselves – on credit, no less. And never before have so many institutions come to the rescue, and never more quickly, than when the capitalists recently slung the rope over the rafters and got ready to step up on a chair.

We were just settling down to watch the body jerk and shake…and listen to the gurgling sounds…when the central bankers cut the cord…slicing the discount rate so as to given unworthy banks even more credit. Then, along came George W. Bush with encouraging words for the nation’s debt-laden homeowners. They may have bought houses they couldn’t really afford, with money they didn’t really have, but now…they can count on the president to help them hold onto them.

In other words, we suspect that the basic program for this cycle will be the same as it always is. When money is too easy to get, people tend to use it unwisely. Mistakes are made. Gradually, the mistakes build up until a correction becomes inevitable. Naturally, people who hoped to get something for nothing…and seemed actually to get something for nothing when the going was good…expect ‘relief’ and ‘rescue’ when the something seems to be getting away from them.

And then when the rescue squad shows up, they tend to breathe a sigh of relief…there is a doctor on the case!

The US stock market hit a high on July 19th. It may have been THE HIGH for the entire worldwide credit bubble; we don’t know. What we know is that scarcely had prices fallen – less than 10% from all-time highs – when every financial official deemed it essential that he act swiftly and resolutely to forestall even greater losses. A month later, the Dow hit a low and has been recovering since. Yesterday, the index rose 91 points.

“ALL IS WELL,” everyone said in unison.

But all is not well. The basic problem is that the financial world is not really suffering from a syndrome that modern financial medicine can cure. If the ailment were merely a temporary lack of liquidity, central bankers could clear it up tomorrow. But the problem is not illiquidity, it’s insolvency – caused by too much credit, not too little. People, businesses, nations – debtors owe more than they can repay. Borrowing more may postpone the crisis…maybe even disguise it, but is not the solution.

Bill Bonner
Markets and Money

Bill Bonner

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 Markets and Money.
Bill Bonner

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