Chris Whalen Throws It In Their Faces


Long-time readers of FedUpUSA are familiar with Chris Whalen, but for those of you who are not, here’s a link to a bio.

Well well look what the cat dragged in…

Government intervention is the root cause of the financial crisis and the maladies identified by Roubini. Many of his proposals, such as debt restructuring and maintaining liquidity to solvent borrowers, are common sense initiatives that ought to be followed immediately. But the proposals by Roubini and others that governments should borrow and print even more fiat currency to fuel further fiscal stimulus are badly considered. Economists from Paul Krugman in the US to Adam Posen in the UK all call for more stimuli. They are all wrong.

Yep.  As I’ve repeatedly noted the premise of Keynesian Stimulus is mathematically bankrupt.  We’ve run this for the last 30 years and yet have not produced prosperity – we instead produced serial bubbles.

Deflation does hurt debtors and lenders, but it also advantages savers and institutions with cash to buy assets cheaply. The buyers of dead banks and bad assets generate real growth and jobs. When Roubini, Posen and other mainstream economists call for measures to avoid deflation, they actually cut off one of the few ways that consumers and private business have to offset the ill-effects of secular inflation — the real culprit behind the financial crisis.

Reversion if an inflationary bubble (the S&P 500 went from about 100 to 1200 today!) is not deflation.  It is mean-reversion.  If you inflate something to 10x it’s original size and then deflate it back, you did not experience “deflation.”  You repaired an unsustainable bubble.

But for the inflationary policies of the Fed and the ECB to stimulate pseudo “growth” over the past several decades, there would have been no financial bubble and no mountain of housing-related debt. Why do economists like Roubini and Krugman say we need more of this medicine? Such pathetic proposals for more-debt-driven government intervention are what pass for mainstream economic thinking today in the G-20 nations.

Keep in mind that there are still hundreds of billions in bad debts in the US and EU tied to real estate and other speculative endeavors — debt which must eventually default. Until the global financial system is cleansed of these bad debts, market volatility and uncertainty will remain high. Unless we bite the bullet and write down debts to levels that will allow private growth and employment, there will be no recovery.

You mean like this Chris?

That is what our government has created.  That’s the gross increase (or decrease) in GDP on a quarterly basis along with the gross increase (or decrease) in debt in all sectors.

Debt expansion must never exceed growth expansion on a durable basis.  The reason is that it mathematically can’t – you must always, to have a stable economy, grow from excess capital – that is, the amount of wealth left after you pay all the costs of production.

Borrowing has its uses, but it cannot replace capital formation.  If it does, you get what we got.  If you keep trying to run the scam you eventually go over the edge of the waterfall.

I hear roaring water around the next bend.

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