"One should always keep an open mind, but not so open that one´s brain falls out." – Bertrand Russell
The big questions being asked today are if and when governments will withdraw their stimulus efforts in light of the sluggish global economic recovery.
These questions enveloped the recent news surrounding Greek and EU sovereign credit risk. Concerns in this context have dominated financial markets and price action over the past week. The EU, led by Germany and France, has now 'dutifully stepped up to the plate to defend and to safeguard stability'. This triggered a mild relief-rally allowing most markets to close modestly in the black last week. With just a little sign of softness and 'government generosity´, markets are happy again.
In my opinion, if you can be certain of anything today, it is that no kind of real monetary and fiscal discipline is on the horizon anytime soon. Like a drug addict thirsting for just one more shot of relief before quitting cold turkey, financial markets are not truly ready to give up their addiction to government manna. Despite all the talk of reform, discipline and tightening, any real action is NOT to be expected, certainly not from the G-7 or G-20 members.
The latest G-7 meeting ended last week. It took place in the 'boondocks´ of Canada, a far-off location called Iqaluit. For the first time, the meeting ended without a communique or any form of official press release. Whatever was discussed up there, from climate change to banking regulation to China's currency, you can be assured that the number one topic was "the absolute necessity for continued public stimulus".
US Treasury Secretary Geithner told the press after the meeting: "What you saw was … a strong commitment together to try to make sure we're putting in place the kind of strong reforms that would prevent these kinds of crises from happening again." What strong reforms?!?!
The only mutual plan going forward is one of continuing to borrow and spend. Anyone who has observed G-7 meetings over the past few years knows that a move toward 'strong reforms' was the least to be expected. The discrepancy between promise and delivery of any useable results is legendary by now.
In essence, Canadian Finance Minister Jim Flaherty summarized the G-7 double-talk-and-no-logic 'results´ from the meeting in two sentences: "The global economic situation has of course improved. We need to continue to deliver the stimulus to which we are mutually committed." Please reread that statement. It's a beauty of complete nonsense and contradiction in its own right. UK Cancellor Alistair Darling added this: "The position for most countries is to support the economies now and get the budget deficit down as the economy recovers."
For me the big question is: HOW LONG WILL MARKETS BUY THIS KIND OF BRAINLESS DOUBLE-TALK?
The only response governments are prepared to employ is a Keynesian one. The remedy? Oh yeah…mo´ money!! The results of 'stimulating the economy´ are well known: more inflation, more purchasing power depreciation, more public and private debt, more MIS-ALLOCATION. It's a game of BOOM OR BUST.
As our readers already know, the subprime hiccups were merely a symptom, the spillovers of a larger culprit called EASY MONEY. We've repeatedly alerted our readers to the effects of the past decades of soft monetary policy.
However, in all humility, we admit that today, once again, we stand puzzled before the same question as everyone else: What's next?
Since most people believe that we simply (as usual) need a little more liquidity to give the necessary pick-me-up to the US and global economies, it appears that the aforementioned brainless jibberish is all it takes for one more round of pain deferment.
In fact, most economists and financial experts seem convinced that the Keynesian model will get us a real recovery which will carry us forward with renewed energy. They believe it is all that we will need to get over this recession altogether.
Well, I am always open to solid theories and good ideas. However, we also like to keep with what Bertrand Russell once said: "One should always keep an open mind, but not so open that one's brain falls out".