What's good for General Motors may not ultimately be best for the global economy. The Bush administration's $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat. The intervention comes at what may prove to be a steep price. Future investment may be allocated less efficiently as risk-averse politicians make business decisions. Whenever banks decide to lend again, they are likely to find new capital requirements that will curb how freely they can do it. Interest rates may be pushed up by government borrowing to finance trillions of dollars of bailouts. – Bloomberg
Dominant Social Theme: It's too bad, isn't it? But what else is there to do?
Free-Market Analysis: This article is yet another "tough" analysis of the results of statism yet is still manages to avoid the real reasons for the current mess. By avoiding an analysis of the problem, the writers make the results palatable, or try to. Read the article and it seems there is no choice. The market has failed and though the market is preferable to the state, the current implosion has made private industry less efficient and practical. No way out of it. The article further excerpted below explains cogently what is coming down the pike: higher bond prices, less efficient industries, more inflation, perhaps lots more, and rising interest rates.
Until recently, "investors could, broadly speaking, ignore the role of the government when thinking about markets," says Alex Patelis, chief international economist at Merrill Lynch & Co. in London. "This period is over." Regulation is back in style as policy makers seek to avoid a repeat of the financial crisis. Leaders from the Group of 20 nations are crafting a plan to require banks to maintain higher capital levels and disclose more about their holdings. That likely means a lower "speed limit for growth," as banks have less cash available to lend and invest, says Mohamed el-Erian, co-chief executive at Pacific Investment Management Co., the Newport Beach, California-based manager of the world's biggest bond fund. "There will be less lubrication in the form of credit creation," he says. Bailouts and economic-stimulus plans are also running up government borrowing. Economists at JPMorgan Chase & Co. estimate the budget deficits of developed economies will more than double next year to 6.3 percent of gross domestic product.
Good enough, so far. Other good points: Reflation may temporarily alleviate the most severe industrial difficulties, but such reflation would likely turn an industrial crisis back into a fiscal one. This is inevitable, given the amount of money that central banks are printing in an effort to keep credit circulating.
Bigger deficits, while necessary now, could spell trouble down the road if they lead to higher borrowing costs or prompt consumers to save more now on the assumption that bigger shortfalls will mean higher taxes later. "We'll end a financial crisis with a fiscal crisis," says Vito Tanzi, former director of fiscal affairs at the IMF. "We'll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so."
Does it begin to come clear? Despite the above positives, what we have here is unfortunately one more in a series of analyses by the Western mainstream press that spells out the dangers of increased state interference in markets – but makes such seem inevitable. Not only does the article not explain the underlying problems of money-generation that brought us to this place, it treats the involvement of Western governments as one that must occur cyclically, like the seasons.
Another lesson that the Western consumer ought to learn is that there is no necessity for tax dollars to be spent on serial bailouts. The American TARP bailout of $700 billion was promptly followed by a less publicized Fed effort that generated some $2 trillion in bailout cash. In fact, central banks can print as much money as they want – thus the necessity of using tax dollars makes little sense to begin with.
There is a lot going on that is not being talked about. And the endless stream of mainstream business articles bemoaning what is going to occur usually seems to neglect causes. The result is that the reader is left with the impression that markets are inherently flawed and that governments and regulators are a necessary part of capitalism. Not so! So many things would probably work better if we were ever, someday, able to really try market capitalism with free-market money. Unfortunately, at this time, we seem to be moving in the other direction.