Violent unrest may be sparked around the world by a prolonged global slump unless governments act with greater urgency to jump-start stalled economies, the head of the International Monetary Fund said on Monday. Dominique Strauss-Kahn sounded a stark warning over the consequences of what he argued was weak and uncertain government reaction to the economic crisis. He used a hard-hitting speech in Madrid to single out euro-zone nations over what he attacked as an inadequate response. – Times Online
Dominant Social Theme: We are concerned and more action is necessary.
Free-Market Analysis: One believes that the Western monetary leadership is focused on the economic crisis more clearly these days. But whether it makes any difference is not so clear. Ultimately, what has occurred is that the distortion of the economic system due to an ongoing oversupply of money has hit a tipping point. And despite what Strauss-Kahn believes – and calls for with obvious urgency – additional activism by Western powers may not help much.
A recent article by a hard-money analyst pointed out that economies that experience the kind of deleveraging that is taking place right now have taken aggressive steps to make sure that other generations do not have to go through the same difficulties. In China, which has seen successive episodes of paper-currency implosions, fiat money was actually banned in the 18th century. That it has made a return is testament to the allure, unfortunately, of this sort of monetary formulation.
The Depression of the 1930s only ended after a world war. But it does not follow that a war will provide an end date for this episode of monetary contraction. Nor even is it clear that World War II was the proximate cause of the Great Depression's wind-down. The idea that "greater urgency" on the part of governments around the world will do the trick in the 2000s is questionable as well.
Monetary stimulation inevitably results in mal-investment. Once the market has recognized the mal-investment, all the money in the world will not reignite the mania that swelled the misdirected investments. Not only this, but the bubble, whatever it is, is not restricted to a single asset class once a major deleveraging begins. Mere observation would seem to confirm that while bubbles such as the tech bubble of the 1990s were specific in nature, a larger episode deleverages asset classes throughout the investment spectrum.
How is government action going to stop this sort of worldwide deleveraging of over-priced assets? How will government action, no matter how well intentioned, provide a cure? Resources and industry will have to realign without the false stimulation, and pouring money into what has not yet been party to the deleveraging will only delay the inevitable. The common wisdom throughout the financial industry is that the current downturn will BEGIN to end in June '09 with a final wave of mortgage write-downs. But this assumes that what is apparently a $500 trillion derivatives overhang will be resolved at the same time – and the European Union has apparently taken steps to ensure that this murky market comes entirely to light. The surprises that will result from this sort of transparency could push any recovery backward even further.
The monetary elite fears the results of fiat money and they will apparently take any action to stave off the inevitable unraveling. But this only shows that even those at the top of the financial heap have little understanding of what makes economies work in the long run. In fact, free-market economists and analysts on the Internet have proven far more accurate in their predictions from a macro-perspective than those who are in charge of Western monetary policy.
What does the future hold? If redistribution continues under the guise of "bailouts," the realignment of resources worldwide will be retarded and the deepening recession will stretch on and on. And as part of the process, the discontent and violence that the elite fears may become a reality. This will be very bad for the fiat money system, which could conceivably collapse as a result. But it would not be the end of money or markets – which would merely revert to historical gold and silver market-standards.