Profound Ignorance

From Reuters: Depression risk might force U.S. to buy assets.

Fear that a hobbled banking sector may set off another Great Depression could force the U.S. government and Federal Reserve to take the unprecedented step of buying a broad range of assets, including stocks, according to one of the most bearish market analysts.

That extreme scenario, which would aim to stave off deflation and stabilize the economy, is evolving as the base case for Bernard Connolly, global strategist at Banque AIG in London.

"Avoiding a depression is, unfortunately, going to have to involve either a large, quasi-permanent increase in the budget deficit -- preferably tax cuts -- or restoring overvaluation of equity prices," Connolly said on Monday.

"If conventional monetary policy is not enough to produce that result, the government may have to buy equities, financed by the Fed," Connolly said.

Let's say the obvious thing first. Mr. Connolly is a complete and utter fool.

That's right! I'm claiming that the global strategist of Banque AIG who worked for the EU quite literally doesn't understand elementary finance.

Let us avoid all the legal nitpicking about having to get Congressional permission and all that jazz, and let's stick to just the economics.

The short reason for why something like this can't work is that there isn't enough money to do so. You are talking about assets that are a significant fraction of World GDP.

So just "print the money" you say?

That would send the dollar into a tailspin; furious capital flight à l'Argentina; and long bond rates soaring to unheard heights.

This is turn would cause more foreclosures, cause a complete meltdown of the global financial system, and morph into a Financial Mad Max scenario.

You won't need land or gold then; you will need guns. And ammo. Lots of ammo.

Is this "possible"? Certainly.

In the same way that you might read in tomorrow's news about a homicidal killer on a unicycle who decapitated exactly 17 children while nibbling on a decomposing rabbit.

It's definitely "possible".

However if you think it is "likely", I suggest you send your resumé to Banque AIG pronto!