The Bubble Machine - Part III

The US of A is in the midst of a market based correction of too many years of excessive spending, excessive credit availability and massive deficits which have accumulated into destructive levels of US dollar denominated debt. TheFundamentals refers to this destructive behavior as The Bubble Machine. The last opportunity the US had to engage in a market based correction of this unsustainable pattern of economics was after the dot.com stock market bubble burst in 2001. The appropriate market based corrective measures would have been a combination of sensible tax policy and spending limitations to avoid massive deficit spending coupled with sensible interest rate policy to restrain excessive credit lending activity. Instead we got unnecessary tax reductions, dramatic increases in government spending and ridiculously low levels of interest rates that could be characterized as leaving the bank vault doors open 24/7. The result was a feeding frenzy of bad lending practices, bad regulation by those paid to oversee and prevent bad lending and a general sense from the President, the Congress and the Federal Reserve that everything was go and everything was A-OK. Deficits and debts skyrocketed to unimagined levels.
Here are some observations from that time period when the country had an excellent opportunity to take a bit of corrective and preventative medicine.

“We must do all we can to keep the days of deficits in the past. Budget deficits
force the Government to borrow money in the private capital markets. That
borrowing competes with (1) borrowing by businesses that want to build
factories and machines that make workers more productive and raise
incomes, and (2) borrowing by families who hope to buy new homes, cars,
and other goods. The competition for funds tends to produce higher interest
rates.”

“Deficits increase the Federal debt and, with it, the Government’s obligation
to pay interest. The more it must pay in interest, the less it has available to
spend on education, law enforcement, and other important services, or the
more it must collect in taxes forever after.”

Source: Budget of the United States Government Fiscal Year 2001. Yes folks that was your government speaking then. Before Bush and his disastrous policies followed now by the junta of Obama, Reid, Pelosi, Geithner and Bernanke. The junta should follow the advice of their fiscally responsible predecessors. Their wasteful spending, based on scare tactics of threatened financial doom, will extend the bubbles in government services, health care, education, state deficits and excessive pension plans and result in a continuation of reduced private sector employment in real wealth producing entities. Pension plans, health care, public sector unions, education and government bureaucracies are wealth destroyers. They must be limited in an environment that promotes and rewards wealth creation. The current debt based expansion of the balance sheet of the United States will come to be known as “The Mother of all Bubbles.” Watch the junta run for cover when this bubble bursts.