It is tough to proffer observations from what are widely considered the fringes of common sense. Because society generally is so caught up in running faster just to stay in place, running faster (or trying to) becomes the norm. Few can see merit in slowing down or, at least, adopting a measured pace so as to promote endurance.
An unchecked fiat monetary system inevitably leads to an accelerating inflationary dynamic. But as a dynamic that conforms to the law of diminishing returns, persistent, pervasive and aggressive inflation burns through the productivity phase quickly (when prices and wages rise across the board) and enters the speculative phase sooner than necessary. At that point, inflation manifests itself across the board in terms of cost of living but in terms of nominal earnings it manifests itself in fewer and fewer sectors until, towards the conclusion of the inflationary trajectory, it only manifests itself in the financial sector.
This is the point at which the character of government is the most distorted and its behavior aberrant. This is the point at which government has a vested interest in disregarding the letter of the law and even in colluding in practices that are criminal all in the hope to maintain a positive inflationary trajectory.
Bailing out failing companies is just such aberrant behavior. Companies fail because of a number of reasons including bad management. But as one of the inherent consequences of the inflationary cycle is to bring about excess industrial capacity, companies fail because when interest rates are the lowest in historic terms, credit markets can no longer be expanded thus demand is reduced.
Bailing out companies in an environment of gross overcapacity guarantees less revenue for every other company in the sector including for the beneficiary of the bailout.
Bailouts may temporarily work at earlier stages of the inflationary dynamic as credit markets have room to run. Take Japan as a for instance. Japan has been mired in a deflationary recession for the past twenty years. However, though they were much further along the inflationary dynamic than anyone else, Japan hobbled through the crisis because the rest of the world could still expand their credit markets and buy Japanese manufacturing.
Today however, that no longer seems the case. Global industrial capacity utilization is at the lows along with interest rates. Thus credit markets world wide are contracting. There are arguments to suggest that China’s credit markets are still expanding but nobody really knows. But even if that were the case, it is unclear whether China by itself can drag the rest of the world along.
Anyway. Bailing out companies when industrial capacity and debt burdens are the highest and interest rates the lowest only postpones the problem at greater cost to society.
“Analysts expect more bailed-out firms to fail in the months ahead. Others may survive but will struggle to repay the government. Steven Rattner, the former head of the government’s efforts to bail out the auto industry, said recently that the full public investment in GM is unlikely to be repaid. Meanwhile, AIG is dismantling itself, selling healthy subsidiaries at what critics say are bargain prices in an all-out effort to get cash to repay the government.”
More bailout money going to gross overcapacity… and I won’t even go into the legal or moral considerations inherent in this boondoggle.
“But tucked inside the law was another prize: a tax break that lets big companies offset losses incurred in 2008 and 2009 against profits booked as far back as 2004. The tax cuts will generate corporate refunds or relief worth about $33 billion, according to an administration estimate.”
Aberrant? You bet. Immoral? Absolutely. Legal? Not in a presumably capitalist economy.
How long till we say enough?
Gold looking better by the day.