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More Dry Tinder

Central bankers could let the fire burn itself out. But what odds really...?
 
WE ARE in Buenos Aires, writes Bill Bonner in his Diary of a Rogue Economist, enjoying a rainy afternoon on Calle Gurruchaga in the Palermo Soho neighborhood.
 
It is calm. It is pleasant. The food is good. The wine is strong. The women are good-looking.
 
And the US government has our back!
 
No kidding – the NSA probably told the US embassy that we were in town. The following message came to our cellphone, unbidden:
"The US Embassy informs US citizens living and traveling in Argentina of a silent march in Buenos Aires from Congress to the Plaza de Mayo, planned for Wednesday, February 18, from approximately 5:00 p.m. to 9:00 p.m. (17:00-21:00), to mark the one-month anniversary of the death of Alberto Nisman.
 
"You should expect disruptions in public transportation and traffic. While this event will take place in the capital city, marches may occur in other cities throughout the country.
 
"Even demonstrations intended to be peaceful can turn confrontational and escalate into violence. You should avoid areas of demonstrations, and exercise caution if in the vicinity of any large gatherings, protests, or demonstrations.
 
"Review your personal security plans; remain aware of your surroundings, including local events; and monitor local news stations for updates. Maintain a high level of vigilance and take appropriate steps to enhance your personal security and follow instructions of local authorities."
It would be impolite and ungrateful not to thank the embassy. Its concern for our safety is admirable.
 
But let's turn our attention to that rare phenomenon: real intellectual progress.
 
Well, let's not overstate it. In the world of ideas, there is one step back for every step forward. This at least is a step in the right direction.
 
We used to think every forest fire had to be snuffed out immediately. Now, forestry officials realize it is often better to let them burn themselves out. They burn up the dry tinder and help the forest regenerate.
 
So, too, it was only a few decades ago that we believed that childhood fevers were something to be feared and stopped.
 
"I'll give him something for that fever," said the friendly pediatrician. Then they came to see that fevers, too, were not a bad thing. They were nature's way of combating germs. Raising the body's temperature made for a swifter recovery.
 
This intuition has also been picked up in the business world. We're not up on the latest airport biz jargon. But we've observed that organizations that have the least top-down, least authoritarian business cultures seem to do best.
 
If this has become a fad in the business world, we would like to claim some credit for it. For the last 35 years, we have been answering employees' questions as follows: "I don't know. What would you do?"
 
This response was regarded as evidence of stupidity at the time. Lately, it has been attributed to cleverness. But it arose naturally out of ignorance and desperation; we really had no idea.
 
But central banks have learned nothing. Instead of letting the correction of 2008-09 do its work, they put out the cleansing blaze with a hose of liquidity.
 
The result: Dry tinder continues to build up. As reported last week, the world's debt pile has risen to $200 trillion since the crisis.
 
Governments and businesses kept borrowing without letup. And now comes word that the consumer sector is also going deeper into debt. 24/7WallSt.com reports:
"In its fourth quarter 2014 report on household debt and credit, the Federal Reserve Bank of New York said that debt rose by $117 billion in the quarter, and total indebtedness at the end of December totaled $11.83 trillion. That is a year-over-year increase of $306 billion."
The feds have stopped corrections. They've stymied fevers. And now the tinder is thicker than ever. But watch out: We're beginning to see more and more sparks.
 
For instance, $1.6 trillion in government debt with negative yields.
 
From Ambrose Evans-Pritchard in British newspaper The Telegraph:
"Sweden has cut interest rates below zero and launched quantitative easing to fight deflation, becoming the latest Scandinavian state to join Europe's escalating currency wars.
 
"The Riksbank [Sweden's central bank] caught markets by surprise, reducing the benchmark lending rate to minus 0.1% and unveiled its first asset purchases, vowing to take further action at any time to stop the country falling into a deflationary trap.
 
"The bank presented the move as a precautionary step due to rising risks of a 'poorer outcome abroad' and the crisis in Greece.
 
"Janet Henry from HSBC said the measures are clearly a 'beggar-thy neighbor' maneuver to weaken the krone, the latest such action in a global currency war that does little to tackle the deeper problem of deficient world demand."
If Europe is alight, China is an exploding fireworks factory. In the space of a few months, China has gone from trying to damp down its credit bubble to trying to reflate it.
 
Why?
 
China's huge debts are secured by real estate. New home prices in the world's most populous country just recorded their biggest annual decline, reports ZeroHedge. Sixty-four out of 70 cities monitored by China's National Bureau of Statistics saw housing prices fall from the previous month (versus 67 out of 70 cities in December). The largest month-over-month price fall came from Guangzhou, a lower-tier city in Fujian province.
 
But let nature take her course? Let the fire burn itself out?
 
Not a chance.
 
Telling other people what to do – even though you don't know what you're talking about – is the cornerstone of US foreign policy. Worldwide, the economics profession – forgetting two centuries of thoughtful analysis on the subject – has taken it up too.
 
Economists have become control freaks, desperate to stop any freely occurring event in the markets, especially if it is a correction.
 
But what is a correction if not a forest fire – burning up the mistakes, getting rid of the undergrowth, and cleaning up the economy?
 
And what is a bear market if not a fever – raising temperatures so as to kill the parasites that feed on the economy's vital organs?
 
Without little corrections and small fevers, won't the next crisis be even bigger?

Bill Bonner has co-authored a number of New York Times Bestsellers including Financial Reckoning Day, Empire of Debt and Mobs, Markets and Messiahs. In his own opinion, Bill's most recent title, A Modest Theory of Civilization: Win-Win or Lose, is his best work yet. Bill also founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group have exposed and predicted some of the world's biggest shifts since that time, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and more recently the election of President Trump.

See full archive of Bill Bonner articles

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