Remember when the former President Bush said in the fall of 2008 that he needed to suspend free market principles in order to save the free market system? Well, now Angela Merkel, the German chancellor has been quoted as saying, “The excesses of the market that triggered this crisis are forcing us to cross borders and do things we would not normally do.”
Sounds familiar, as does Germany’s new €50bn Keynesian-style stimulus package... as do lower approval ratings of the new U.S. administration and Merkel's own CDU party.
Governments enforce laws, regulate commerce and allocate taxpayer funds. They also force themselves on the markets, creating inefficiencies in the process (and the allocation process is the definition of inefficiency). But these days, deflation magnifies these inefficiencies into deficiencies – to the point where the declining social mood (deflation’s main driving force) and the subsequently falling market confidence lead to political pressure to “right the wrongs.”
However, government is ill-equipped to correct that which cannot be corrected via regulation and increased spending. Over the past decade, individuals and corporations spent too much, borrowed too much and then leveraged that debt – the same debt that is now being destroyed by deflation. Spending money on behalf of your citizens, inefficiently or otherwise, does nothing to stimulate the economy – when the economy remains buried under the debt from the previous cycle.
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Unemployment rises, incomes are lost, frozen or declining, and tax revenue diminishes as deficit spending increases. It becomes clear that governments do not have the way to ameliorate the situation, so the inevitable result is populism, protectionism and extremism. That’s why we are starting to see a number of political grandstanding measures designed to give the appearance of “doing something.”
In the U.S., it’s witch hunts on bonuses and the government’s push to increase its regulatory and confiscatory powers. In Europe, Albert Rupprecht, German parliamentary committee chairman, wants hearings on the causes and the individuals behind the financial crisis. He wants to pick the members of this council, he wants subpoena powers, and he wants any findings outside the legal framework to somehow gain evidentiary substance within criminal proceedings.
I would suggest that all this is dangerous extremism. While we seek those “responsible” for our financial problems, we find that our liberties are eroding as fast as our economies.
This essay originally appeared on the March 24 U.S. Bond daily forecast page of Bill Fox’s Interest Rates Specialty Service. (What are Specialty Services?)
Bill Fox has been involved in the markets since graduating in 1988 from Vanderbilt University. He joined EWI in 1994; most of his subscribers are professional traders spread around the globe.