Reply #29: "The market has failed, and officialdom is perpetuating that failure."

[DemReadingDU]

12/18/08 London Banker: "The market has failed, and officialdom is perpetuating that failure."
By Mike Whitney

London Banker's snippet in Mike Whitney's article...

The latest essay by London Banker, "Deflation has become Inevitable", has been widely circulated on the Internet, but is worth reprinting here to underline the glaring and, perhaps, fatal flaws in Bernanke's thinking:

"For a while now I have been on the fence on the inflation/deflation issue .... I’m now coming down on the side of deflation for a very simple reason: there is no longer any incentive to save or invest, and so debt and investment cannot increase much beyond current bloated levels....


The determination to avoid any accountability for failed banks, failed business models, failed regulatory systems and failed academic rationales for all the above invites anyone with spare cash – an increasingly select crowd – to withhold it from further depredations. It is this instinct, more than confidence in the government, which is driving so many to seek the temporary safety of short-dated government securities.

The result of discouraging domestic and foreign creditors and investors must be inevitable deflation as debt levels become increasingly hard to finance and ultimately contract. Irresponsible central banks and governments can try to bail out the failed banks, businesses and municipalities at the centre of every popped bubble, but the bubble economies are ever more certain to deflate with each bailout. Each bailout further undermines the market discipline which is bedrock to a saver or investor’s decision to part with hard-earned cash by trusting it to the intermediation of the management of a bank or business.

It’s this simple: I won’t invest in a country that bails out failure and punishes savers. I won’t invest in the US or UK until they change course and protect savers and investors, ensuring a reasonably predictable positive return.

It is now clear to me that policy makers in the West are determined to apply every available resource to underpinning failure, misallocation and executive excess. As this discourages the honest saver from parting with cash, policy makers are ensuring that deflation will wreak its havoc on the financial and real economies of the world. Only when that deflation has played out and rational policies that reward market-based management and returns are restored will it be worthwhile to invest again. In the meanwhile, any wealth saved securely from state seizure will "swell" to buy more assets in future - a key aspect of deflation and a key means of restoring the control of the economy into the hands of more farsighted savers and investors.

Some day soon savers will revolt at financing further depredations. They will refuse to buy even government securities, gagging at the quantities of issue forced upon them under terms of only negative return. When that final massive bubble bursts, deflation will follow its harsh corrective course and clean out deficit-financed “unproductive works”.

The market has failed, and officialdom is collaborating in perpetuating that failure." (London Banker)

Well said.

read more from Mike Whitney...
http://www.informationclearinghouse.info/article21486.htm


edit to include link to London Banker's article
http://londonbanker.blogspot.com/2008/12/deflation-has-become-inevitable.html