Endless Stimulus, Like Steroids, Crack or Heroine, is Doomed to Fail

Governments around the world collude with the largest financial institutions to keep the greatest debt and financial-asset bubble in modern history from busting after it started to do so violently in late 2008.

Their actions are nothing new.

They’ve colluded through low interest rates, stimulus and the “wealth effect” for decades. I’m talking since the creation of the Fed in 1913. They did it with the New Deal in 1934, the endless trade and budget deficits (and Nixon) that broke the gold standard in 1971, and in 2000 under a Republican president.

Will they succeed this time?

Not a chance.

You don’t mess with Mother Nature or the Invisible Hand.

If you want to read a book that will make you sick to the stomach with its detailed and astute analysis of the confluence of political and financial institutions to create a debt and financial bubble that makes the Roaring ’20s look like child’s play, then read David Stockman’s The Great Deformation.

There will not likely be a greater book than this one.

It covers the political side of this bubble from the eyes of an insider who was Reagan’s budget director, a trader at Salomon Brothers from 1985 and at Blackstone Group recently.

This guy has seen, heard and done it all.

His book is long and detailed, but well worth the read, even if you just skim through it for the key events of most interest to you.

In fact, it’s very much like Niall Ferguson’s The Ascent of Money, in which he outlines the growth of financial leverage and bubbles over centuries. Stockman does the same over the last century and there simply is no other book to rival it in the political and financial realm.

My point is this: When you think you’re greater than larger, universal forces – like Mother Nature or the Invisible Hand – you’re cruising for a bruising.

Just ask the last of the Roman emperors… the mid-western, mid-1830s real-estate speculators… the railroad tycoons and speculators of the early 1870s… the stock speculators into 1929… the gold speculators into 1980… the tech-stock traders into early 2000… the real-estate flippers into early 2006… or the Wall Street wizards of leverage buyouts, mortgage-backed securities, collateralized debt obligations and credit default swaps into 2007.

Governments and their central banks have simply decided: We won’t have another financial meltdown or great recession like we had in 2008 and 2009. They won’t allow the greatest debt bubble in history to deleverage like such bubbles did from 1720 to 1787 or 1835 to 1843 or 1873 to 1877 or 1930 to 1939.

They’re not willing to admit they conspired with major financial institutions to create the greatest bubble in modern history through the generation of unprecedented debt and leverage.

And now they’re “protecting” the everyday household by bailing out the very financial institutions that created the bubble with government’s great help.

This is the greatest BS story I have ever heard.

Governments never let markets correct the debt and speculation imbalances. They’ve stepped in every time and supported the economy and markets by lowering interest rates and injecting more money where needed.

They give accolades to the Invisible Hand, but the truth is they don’t trust God, Mother Nature or the free markets at all, because they know there are consequences for their actions and they simply don’t want to accept them.

We don’t want our athletes to take steroids to perform better – although some of us secretly do – so why would we want to put our economy on steroids or crack? Such things never end well!

Have you ever seen someone die from the overuse of steroids, or from an overdose of crack or heroine? It’s ugly.

Back in the late ’90s I watched an exercise trainer literally shrivel up and die within weeks. He’d been a weight-lifter who’d taken steroids for decades. It finally caught up with him, suddenly and painfully!

There will always be consequences for cheating by over-stimulating. Isn’t it enough that natural processes already grow exponentially, despite cyclical set-backs, as George Gilder AND our research clearly shows?

Do we need to stimulate the natural process even more?

Governments and financial institutions seem to think so.

I think they’re greedy and stupid.

Governments can only fight natural forces for so long. The “great reckoning” is coming. Expect it between 2014 and 2019.

Cheers to David Stockman, an intelligent realist in a world turned upside down.


Harry

P.S. I’m on my way to The Sovereign Society’s annual Total Wealth Symposium, which started today in Las Vegas. Tomorrow morning, at 8:10 a.m. I will talk to the 450 attendees about the demographic cliff countries face. And I’ll tell them how to survive and prosper during the great deflation ahead.

On Saturday, Rodney will stand up and show how and where to find the bright spots in America’s lost decade. If you aren’t at the conference, then I urge you to make a plan to get there next year. But in the mean time, lucky for you, you still have a chance to listen to our presentations, as well as the presentations of all the other, high-caliber speakers. Simply start here.

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About Author

Harry studied economics in college in the ’70s, but found it vague and inconclusive. He became so disillusioned by the state of the profession that he turned his back on it. Instead, he threw himself into the burgeoning New Science of Finance, which married economic research and market research and encompassed identifying and studying demographic trends, business cycles, consumers’ purchasing power and many, many other trends that empowered him to forecast economic and market changes.