Dodging a Contraction - It’s an Election Year

"It's the credit bubble, stupid," says Forbes.

Yes, that is what it is... a credit bubble that is deflating. The tide is going out, as Warren Buffett puts it. Now we see who's been swimming naked. Not a pretty sight. So ugly, in fact, that people can't stand to look.

"Fed takes boldest action since the Depression," says an article in the London Telegraph.

Yes, dear reader, our leaders are doing something. Now, we just wait to find out how much damage they have done.

The hardest thing to do is nothing.

But in matters of politics and money that is usually the best thing to do.

As we've pointed out many times, nothing gets no respect. "Do something," come the cries from all corners. Even those who should know better implore public officials to take action:

"When a man is having a heart attack, you have to intervene... you can give lectures about his diet later," they say.

But the U.S. economy is not dying. It is merely adjusting to a new set of circumstances. The consumer is tapped out. Without more income he cannot increase his buying. And without more spending, the consumer economy stalls... and contracts. No, don't even think of lending the consumer more money - he has too much debt already.

This is an election year and the politicians want to dodge a contraction in the worst possible way. What would be the worst possible way? Easy - add more debt. That is precisely what the Bernanke Fed is doing. Yesterday, they offered another $200 billion to their friends in the banking industry - lent against the trashy collateral that no one else would accept. Now, the Peoples' Bank of America - ultimately, the taxpayer - will be holding the bag.

Bill Bonner
The Daily Reckoning Australia

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