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Magical Thinking: Coming soon to a Government near you!

OK, that was a stupid title for a post, since magical thinking seems to be a requirement for a government job.

I found an interesting article on the likelihood of significant inflation in our near future.  Disclaimer:  Denninger publishes at a website called 321Gold.  There is an obvious bias towards investing in precious metals.  I don’t think that necessarily negates the points he’s making.

A good portion of the article is about foreign investors shying away from US debt.  The cool part is this:

Here’s the issue, in a nutshell: Bernanke surmises that he wants long-term (and short-term) interest rates low to “spur borrowing” and thus attempt to kick the economy back into growth. This in turn “mandates” an extraordinarily loose monetary policy.

The math says this is idiotic: We are in this mess because of too loose a monetary policy for too long, which in turn engendered too much debt in the system for the economy’s productive output. The economy got drunk on too much credit; you can’t fix it with a bottle of whiskey.

He goes on:

The fallacy Bernanke (and other policy-makers, including Congressfolk) have is that “they’re in control.” In fact the market is in control; you can offer all the bonds you want, but you can’t force anyone to buy them. What we’re now seeing is outright rejection – it began slowly, but as it has become clear that The Fed was hellbent and determined to go to the wall, consequences be damned, that trickle of rejection has turned into a veritable flood.

There is no “solution” for this problem that maintains what Bernanke (and other policy-makers) want: rates must and will rise; we are now only left with the ability to choose the method by which they do. (emphasis mine – cziltang)

Jumpstarting the economy by borrowing money is just plain stupid, and as interest rates rise it becomes even more so.  We’re going to find ourselves in a situation much like the folks that bought houses they couldn’t afford with those Adjustable Rate Mortgages, thinking interest rates would always stay low.

I was impressed by the article until I got to this line in reference to the new, higher interest rates:

It will force the US Government to cut back its spending to a level it can actually afford.

Nothing ever forces the government to cut back on anything it doesn’t want to cut back on, and there isn’t anything it wants to cut back on.  Cutting back means less money, less power, less bureaucracy and it pisses off all the people who have come to expect their daily ration of government “freebies.”

The interesting question for me is, are the folks in the Obama administration and Congress 1) really such chuckleheads that they don’t understand that the economy can’t be fixed by adding massive debt, or 2) is it (as a number of conspiracy theorists suggest) they are doing this deliberately to crash the entire system in order to cause widespread chaos and destruction that will require a massive government intervention and the re-making of America into a purely socialist country?

Occam’s Razor suggests that the “Chucklehead” option is probably correct.  Barring a continuing series of examples of spectacular (or even marginal) competence by Obama, his administration, and by Congress, arguing for a vast conspiracy to overthrow the government from within puts one in the tinfoil hat group.

Of course, the tone-deaf, ham-fisted, bumbling incompetence thing could all be a very clever act, meant to put us off the scent…

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