Government Bail-Out culture leads to a Sleep-Walking Economy

Sleep-walking Economy

Our economy will suffer from a sleep-walking type of an economy in the next several years. Everyone is afraid to wake up the sleep-walker, but the faster we can make him up, the sooner we get back to business as usual. Our government needs to allow the free markets to do more of the heavy lifting. Instead the government is becoming the world’s largest hedge fund. Recently John Deere, American Express, GE, and many other blue chip corporations have gotten the U.S. government to back up their debt, and as a result, taxpayers are on the hook for billions of dollars if the economy worsens and these companies default.

The government is backing the debt because corporations are finding it extremely onerous to borrow money. In many instances corporate debt is yielding record highs, and as a result, borrowing costs have doubled and tripled. The higher cost of borrowing for corporations effectively shuts down capital expenditure projects by either delaying them or cancelling them completely. The impact on the economy is reduced employment and GDP growth.

Reduced employment and falling GDP are part of the free market business cycle. They are signals to the economy that it has overshot in one direction. Unfortunately, the law of demand and supply is being temporarily suspended through the FED’s and Treasury’s actions. The natural forces of the market are signaling that corporate projects should be suspended due to possible oversupply.

Right now the government is creating a price floor which is preventing the migration of prices down to equilibrium. Prices need to fall to restore aggregate demand again. Moreover, the expectations of additional money becoming available to businesses and investors from the government are also creating an artificial floor above equilibrium. The longer the government gets in the way of the free market the longer we will be in a sleep-walking sort of an economy. Everyone is afraid to wake up the sleepwalker, but the alternative is an anemic and aimless economy which will last indefinitely.