What a grand charade the world of finance and economics has become! All the rules that we knew have been reversed upside down, and with the passing of each day another abnormality becomes the standard practice, as people try to find solutions to a problem which has already been shown to be without one: how to have a free lunch, and avoid the aftermath.
In one of the previous articles at this site we had made the prognostication that eventually it would not be possible to pay for the excesses of the past years without pain, and chaos. All that is happening nowadays here and there, as news on government insolvency, volatility in the markets, the rise of the USD, and gold, and the collapse of the Euro keep popping every day. All this would have been easy to forecast just on the basic assumption that the picture changed fundamentally in August 2007, when BNP Paribas failed to price certain complex instruments derived from mortgages owned by irresponsible people. But few have made this realization, and even now, many refuse to acknowledge the basic fact that the higher you fly, the faster and harder you fall. After years and years of basic errors in policy, judgement, and character, it is but natural that the payback time will be harsh, and long-lasting, just as the days of boom were sweet.
Indeed, if one can look beyond the headlines and consider what is really being done by politicians and business people, the simplicity of the picture is striking. When there is a problem, you take it from the suffering entity, and give it to somebody else. It works until everybody is suffering, and nobody is left safe. When mortgage borrowers default, one bails them out by reducing their interest rates, making saving money impossible, and erasing the returns of those who have assets that could fuel real economic activity if deposited in bank accounts in a healthy environment. Those with savings naturally turn to assets like gold, or bonds, which only suck out cash from the economy, and lead to a general downturn.
To save the situation, one decides to print money. People who can't deposit their funds in bank accounts due to low returns, buy bonds - so the government just buys bonds back from them, hoping that this will liquefy the economy. All that it manages to do is attract more buyers for bonds and equivalent safe assets, as it has been shown time and again in the ECB's liquidity operations, and the Treasury's bond auctions. Seeing that this approach doesn't work, governments choose to go in directly and purchase goods and assets from private producers, banks, and corporations, generating gigantic budget deficits, masking the difficult situation of the private sector. Once again, there is temporary relief, but all that is achieved shuffling debt from one pocket to another, since as the private sector stabilizes, the public goes bankrupt.
The public has bailed everybody out, but who will bail the public out now? Well, in a poignant demonstration of failure, the governments of Spain, Greece, and Portugal are now announcing very large cuts in spending, budget deficits which will be tackled by the reductions in the share of the suppressed, and unhappy layers of society. So the public is bailed out by the poor. The rich are saved, and the problems resolved. At least such is the hope.
That method doesn't work. Everybody took part in the big game, no doubt, but those who took the greatest risk, and got rich from that should pay the heaviest price. That not only makes sense, and is just, but also is crucial for a functioning economic life. Yet, now that the whole world will be sharing the cost of their excesses, do they really win? In our opinion, this will go down as the dumbest bailout in the history of economics, and the grandest Pyrrhic victory that the elites have ever achieved over the poor, because once the real cost that must be paid in social unrest, extremism, economic chaos, and even warfare, makes itself known, the greatest losers will be the "Haves". The "have nots" already have not, and chaos is but new opportunities for some of them. Now that their bread has been withdrawn, if we are excused the hyperbole, they have little to lose, and are ready to take from those who have made them pay excessively for the crimes of others.
Disclosure: No positions