Pulling the Splinter Out

“Where would U.S. incomes, earnings and corporate cash-flows be today if it weren’t for the $4.5 TN increase in federal debt over the past 10 quarters? Ponder for a moment the liquidity backdrop in the Treasury market had the Fed not intervened in the marketplace with quantitative easing (#1) and “QE2” - in the process convincing the marketplace that the Fed had committed to operating as a reliable market “backstop bid?” What would be the state of the household balance sheet today if not for the unprecedented fiscal and monetary policy response? Is it sound analysis to trumpet the pristine state of the corporate balance sheet and celebrate the improving household balance sheet - when the Fed is doing unconscionable things to its balance sheet and the federal government is in the process of destroying theirs?”

“How would global markets and economies be functioning these days had it not been for the almost $1.6 TN increase in international central bank reserve holdings over the past 12 months – or the $2.75 TN, 40%, growth in two years, to $9.45 TN?”

“Today, ECB President Trichet stated that “it is important that the dollar is a strong currency.” He also said that “fixing imbalances must focus on deficit countries.” To this day, Greenspan argues that foreign central bank Treasury purchases were instrumental for the rate environment that inflated our nation’s housing Bubble. And the argument that our trading partners – and their undervalued currencies and steady accumulation of American I.O.Us – are most responsible for global imbalances will not be resolved anytime soon.”

“Let the world adjust; just ensure that the Fed keeps doing what it's doing. And I just scratch my head in disbelief at how little we’ve allowed ourselves to learn over a turbulent 20 year period of interplay between “activist” policymaking and serial market Bubbles. After doubling mortgage Credit in seven years, our system is now on track to double federal debt in 4 years. And the markets couldn’t be more pleased with it all. It leaves one pondering what type of circumstance will be necessary to finally force us to start getting our house in order – to return to some semblance of disciplined central banking and fiscal responsibility.” David Nolan - Weekly Commentary


As I was reading the above quote I really started to think about everything our government has inserted itself into and had to start thinking: Where would our economy be if our government had not made money and services so easily accessible to all?

I think that really you can take two views on that. You can either say that we would be in a complete pit of depression for years (probably what the fellow I quoted believes) after each economic correction or you can believe that deep down that Americans are workers. When our backs are against the wall, and sometimes even when they aren’t, we step up to the plate and work harder putting us into a new boom cycle.

So where do I think we would be without government “help”? I think we would be regularly going through the boom and bust cycles we have been, but with a lot less of the extremes like we saw in 2008, and in general we would be prospering. Of course the government and central bank did step in too much and now they will have to get out or we will again have a huge burst. When they do step out of the way it is going to hurt. This interference has become very much like a splinter that has been allowed to fester for too long. Sure we could leave it there and keep covering it up or we can remove it (with all of the complaining and whining that comes with it) and finally start the healing process. While I don’t believe that many of our current representatives have the stomach for it, some do. Also, while there is a lot of anger out there and most can’t agree on how to start getting the splinter out, most agree (according to some polls I have read) that it has to come out now.