What Could Have Been a $700 Billion Slap in the Face

By Jack Crooks, Editor of World Currency Options and edtior of The Money Trader.

I'd be hard-pressed to say that a single American doesn't yet know about Paulson's proposed bailout of the financial system. It's been dominating the airwaves lately and even the presidential debate devoted half of their time to the crisis at hand.

Despite the meandering dialogue of panels on CNBC and other business news sources, I want to be abundantly clear about one thing. This bailout constitutes the single greatest case of ignoring the free market in modern history.

As we went to press, it seems as if the bailout plan isn't going to make it past Congress...but just the fact that they would propose it at all is a major affront to the free market system.

In fact, Henry Paulson repeated over and over again exactly how agitated, disgusted, annoyed, infuriated, angered, embarrassed, and irritated he felt about asking for this amount of money, or any money at all. Sounds sincere if you stop it right there.

But apparently those feelings weren't enough to reinvigorate his free-market spirit, abolish potential bailout plans, do away with unnecessary regulation and let those who deserve to suffer, suffer.
What's REALLY supposed to happen
in the "Free Market"

Availability of credit allows money to flow between savers and borrowers.

Resources and funds are allocated to various projects or investments during a boom phase.

Eventually borrowing becomes excessive and leads to malinvestment, thanks to the suppression of the real rate of interest by our illustrious Federal Reserve Banking system.

At this stage, adherence to the free market theory would allow for an efficient cleansing period and a healthy recovery period. How? Irresponsible and unprofitable businesses fail. Bad debts get liquidated. Excess resources go on sale, flow into more stable ventures and pool together with more profitable resources controlled by healthy corporations or entities.

Sure, pain is felt by certain parties who can't keep things going. But the moving parts become more efficient and stronger. Healthier, more efficient businesses emerge.

As the Austrian School of economists says, the bigger the boom generated by manipulation of money and credit, the bigger the ultimate bust.

That's important, because thanks to the massive manufacturing and sale of derivatives, there has never been a boom supported to such a large degree by thin air. And since the laws of gravity haven't been outlawed yet, what goes up must come down.
What's ACTUALLY Happening in the Free Market

Unfortunately, self-proclaimed free enterprisers - President George W. Bush is one among many - are either ignoring or are unable to accept the fact that some people must suffer as the purging process runs its course.

Often their vision is blurred by their quest for a tighter grip on the private sector. They call it "compassion," but I call it "zeal for power." Worse yet, they use other people's money — namely, yours!

In its infinite wisdom and undying compassion for the public, our government does all it can to hamper the market's cleansing tools — recessions and deflation.

Instead of one swift painful smack in the head by the invisible hand, their very visible hand "helps" to ensure the economy will grow much less efficiently AND remain much more vulnerable to future shocks to the system.

That's not compassion...it's nonsense!

Really, on a historical basis, many parts of the U.S. economy are in awfully good shape. We're told to believe otherwise because doom and gloom dominates what the mainstream media consistently reports.

One of the biggest fear indicators they use: Employment numbers. After all, Americans don't want to lose their jobs.

But look at the current employment situation on a historical basis: While U.S. job losses are on the upswing, they are fairly modest ... and should be expected in a self-cleansing market.



As my chart shows, taking into account only the last 40 years, today's unemployment rate sits relatively low compared to 1975, 1983, and 1993.

If we play our cards right we could see the current rise in unemployment top out around the same levels as it did roughly five years ago. That would be nothing to panic over.
We May Just Be the "Least Ugly" Right Now By Comparison

Let's look at inflation — another economic boogeyman...

Current CPI in the U.S. sits just north of 5%. That's easily less than the roughly 6% to 7% back in 1991. And in 1980, for example, inflation reached almost 15%.

Countries, particularly emerging markets, would kill to have inflation as LOW as 5%!

More to the point, Americans can afford necessary food items as easily as ever. Here's a snippet from an article put together by the Federal Reserve Bank of Dallas last month:

Based on the average U.S. pay rate, it takes less than two hours of work to pay for 12 basic food items — tomatoes, eggs, sugar, bacon, milk, ground beef, oranges, coffee, lettuce, beans, bread, and onions.

That figure is nearly as low as it's ever been.

Consumption may finally be taking a breather, as it should, but discretionary items like computers, DVD players, cell phones, digital cameras and color TVs have become far more affordable. And that even includes those families considered "poor."

Moreover, despite my view that the U.S. government is dipping its hand way too deeply into the markets, making them increasingly less free, it's all a relative game.

Many other countries around the world are either officially in, or about to slip into, recession.

And on a relative basis, because their governments are much more entrenched in the market than Uncle Sam is in ours, their ability to recover is hampered even more.

Why is this an important part of the dollar equation? Because it means that, despite all our warts, it's quite possible the U.S. might still win the global economic beauty contest by getting judged the least ugly.