Bailout World

Traders are exceedingly short term focused, seeking catalysts in band aid solutions that don't get to the core of the problems.  They want quick face ripping rallies off these band aids.  They could care less what happens in 3 months.  This coming Spain bank bailout is one such example.  Are we supposed to believe that the eurozone problems will be solved with these kind of bailouts?

One would have to have lived in a cave the last 4 years  to not realize that insolvent banks WILL get bailed out eventually.  They always do.  Whether its US or Europe.  The Chinese banks are probably in the worst shape and they too will eventually get bailed out, either publically or by stealth.

Politicians and central banks will never bite the bullet.  The easiest thing to do is overspend and print money to spread out the pain among the rest of the paper currency holders.  Remember this during the darkest hours, they will print loads of money.  So we will not see another 2008.  Maybe mini 2008s, like last fall, but no big ones.  Wall St. has learned its lesson.  Buy the crashes because they precede torrents of liquidity.  Paradoxically, the worse the crisis, the more money that will be printed and the more the markets will rally.  It is like a coiled spring, the more you press down on it, the more potential energy that builds.

All this will lead to a perpetual state of purgatory.  In order to create economic booms, you need to suppress demand and let it build up for it to explode into economic growth in the future.  But with all this money printing, demand is never sufficiently suppressed during the downturns to have explosive expansions.  The recessions don't last long enough for demand to get pent up.  The expansions are weak, unless force fed huge amounts of pork or bubbles built.  All that is left is higher nominal prices that feels like the economy is doing ok looking at asset markets, even when the average person doesn't feel it.

If you have enough productivity and efficiency growth, the pain is invisible.  If you don't, the pain is palpable.  With the kind of fiscal and monetary policy run by most of the world, and continuous population growth, the extra money ends up chasing the same number of goods.  Leading to high inflation.  The only way to prevent high inflation is increase productivity or find more resources to reduce commodity costs.  Well, we are at peak oil so there goes that resources boom.  Shale gas is a short term boost in energy supplies, which fades fast once the wells peter out, which is quicker than conventional gas wells.  Make more with less.  But with most technologies maturing, and few game changers like the microprocessor or the internet on the horizon, there will be minimal productivity gains in the near future.

The end game will be a loss of faith in fiat currencies and a drive to protect from inflation by either buying stocks, commodities, or real estate.  The poor will not be able to protect themselves, unable to afford stores of wealth.  The rich will do well.  More inflation means higher nominal prices which drive the animal spirits until the imbalances get so great that you get another crash.  Rinse and repeat.