Did you notice your hair on fire? Does it hurt?

The headlines scream “A nightmare on Wall Street. Dow plunges 635 points, sixth biggest drop in history” yet the World is buying U.S.Treasury Notes as if there was no tomorrow. Maybe for many there isn’t.

Wall Street Journal’s MarketWatch reported “…investors pulled funds out of stocks and most commodities and sought the liquidity and traditional safe-haven status of the U.S. debt market after the country’s credit rating was downgraded.”

My interpretation:

The world trusts the U.S. to do the right thing. Eventually.

However, faith has been lost in the U.S. market to self-correct itself through capitalism alone. There is little trust in the money movers and shakers to focus on anything other than worshipping at the altar of profit but for profit’s sake alone.

Responsible, rational self-interest does not exist. The forces behind the debt deal were all about freeing the market so that it could operate on its own. In its own way. With minimal interference. Perhaps not even the people that mouth those words actually believe them … or perhaps fewer today than yesterday.

The recent really bad debt deal forces the U.S. government into a position where it cannot aid the market — through Keynesian interference if that makes you feel better — but the market on its own is a sell, sell, sell! It is overvalued, overhyped and overleveraged. A tax increase would have barely scratched the amount of cash and fortunes that have dissipated overnight and over the last 10 days.

Yes, we need to cut governmental expenses whereever and whenever we can. We have a Congress that actually has that as one of its prime powers — the authority of the purse. Yet our Congress are a bunch of shills across both ends of the spectrum. If you want it then you must pay for it. The Democratic tax-and-spend is absolutely no different than the Republican spend-and-ignore the credit card bills approach to financial management. We are now paying the price for both ways.

To those that wanted to starve the beast — you have succeeded. Irrationally. The forces of capitalism have been spooked. Now the laws of unintended consequences have visited us. Except we wanted this. Didn’t we? Yes! Merry Christmas!



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2 responses to “Did you notice your hair on fire? Does it hurt?

  1. George S. Harris

    It may be the largest drop in terms of “points” but on October 29, 1929, the market dropped 12.8%, almost double today’s loss. BIG investors are running scared, but all I hear about the average Joe–stand pat. I refuse to think the glass is half empty yet. However, I would agree that we have brought this on ourselves by the people we have placed in charge. We sow what we reap but sometimes we sow a wind and reap a whirlwind. Tax and spend or spend and no taxes are opposite sides of the same coin. Either way it comes down, we lose. It will be interesting to see two things: Will Congress learn anything from this? Will the American electorate learn anything from this? Somehow I get the feeling the answer to both questions is, “Probably not. Both groups have the memory of a goldfish.”

  2. Thanks George for your note.
    One of the things that have changed since 1929 — and since just 1989 — is that our markets are now globalized and Americans no longer dominate our own market or own our Treasury Debt. As recently as 1990 we had no concerns about ‘sovereign funds’ and their impact on our own finances. When China announced that it was not buying any more dollar-defined investments that too sent a strong message to the world. Trying to predict the impact of economic policy changes with a truly globalized domestic economy is challenging for anyone of any economic philosophy.

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