Why bubbles should be allowed to collapse? - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 9 October 2014
Why bubbles should be allowed to collapse? A  A  A

Baltimore, Maryland

How do you like that Dow? Down 272 on Tuesday. Then, back up almost exactly as much on Wed.

As we predicted, investors are beginning to squirm. Why? The Fed is pulling out of the market. The easy cash is getting scarce.

"We are trapped in a cycle of credit booms," writes Martin Wolf in the Financial Times.

Wolf is wrong about most things. But he is not wrong about this. "On the whole," he writes, "there has been no aggregate deleveraging since 2008."

--- Advertisement ---
Grab These Secret Stocks Before It's Too Late...

We are going to tell you about some secret stocks that could help you grow your wealth significantly.

Earlier, some of these secret stocks have given our subscribers returns like 1,811% in 5 years, 217% in 3 Years and 11 Months, and 250% in 2 Years and 1 month...

So we suggest you grab these secret stocks as soon as possible, before every investor finds out about them. Click here for full details...

The sooner you act, the higher will be the potential for profit.

He does not mention his supporting role in this failure. When the financial world went into a tailspin in 2008, caused by too much debt, he joined the panic - urging the authorities to take action. As a faithful and long suffering reader of the FT, we recall how Wolf howled against 'austerity' in all its forms. His solution to the debt crisis? Bailouts! Stimulus! Deficits! In short, more debt!

Since then, only America's household and financial sector has deleveraged, and only slightly. Businesses and government, meanwhile, have added to their debt. Overall, the world has much more debt than it did 6 years ago - more than $100 trillion worth.

Wolf has come to realize where his own misguided policy suggestions lead: (quoting the authors of 'Deleveraging? What Deleveraging?') they lead to "a poisonous combination of higher and higher debt and slow and slowing real growth."

That is the world we live in. Thanks a lot, Martin.

The future is a blank slate for us all. It whacks us all - but differently, depending on how exposed we are. What can we do, but try to protect our backs....and squint, peering through the glass darkly ahead.

"These credit booms did not come out of nowhere," writes Wolf. "They are the outcome of previous policies adopted to sustain demand as previous bubbles collapsed..."

Why sustain unsustainable demand? Why not just let the bubble collapse?

Under oath, in a New York courtroom, two former US secretaries of the treasury have told us why. Not bailing out AIG would have been 'catastrophic,' said Henry Paulson on Monday. A failure of AIG would have led to 'mass panic,' testified Timothy Geithner on Tuesday.

At least they had their story straight.

But it is not hard to connect the dots... When a credit bubble pops, it causes fear and panic. The authorities take action to stop it. What can they do? 'Whatever it takes,' is their answer. What does it take to stop a deflating credit bubble? More money! More credit! More debt!

"We need to escape this grim and apparently relentless cycle," Wolf concludes.

Meanwhile, "IMF warns of third Eurozone recession since financial crisis," adds another FT headline.

The IMF also downgraded its forecast for world GDP growth to 3.3%.

High debt. Slow growth. And another crisis coming.

No wonder investors are nervous.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Get The Daily Reckoning directly
in your mail box.
Just enter your e-mail address » 

Read our Privacy Policy and Terms Of Use.

Equitymaster requests your view! Post a comment on "Why bubbles should be allowed to collapse?". Click here!


Recent Articles:
Dear PM Modi, India is Already Land of Self-Employed, and It Ain't Working
August 21, 2017
Most Indians who cannot find jobs, look at becoming self-employed.
Trump Takes a Beating
August 18, 2017
Donald J Trump, a wrasslin' fan, took a 'Holy Sh*t!' blow on Tuesday.
Which Gods Will Bring Down the US Empire?
August 17, 2017
Mr Trump is in the White House and the gods are in their heavens; what's not to like?
Will They Haul Off Trump's Statue, Too?
August 16, 2017
All across the country, the old gods become devils. New, gluten-free gods take their places...