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balancing on edgeAs Europe continues in an economic slumber, its financial leaders have determined desperate times call for desperate measures. Of course European governments do not think times are so desperate as to impose such common sense measures as reducing draconian CO2 regulations, lowering suffocating taxes or even loosening their labor rules. Their central bankers on the other hand seem to think that all is needed is inflationary smoke and mirrors growth. Frustrating their desires is the fact that, despite huge sums of money setting idle, no one is spending. In what can only be described as cutting your nose off to spite your face, the European Central Bank (ECB) has implemented negative savings rates for commercial banks wishing to deposit their idle funds at the ECB. In something akin to hiring rain dancers to end a drought, the bank hopes this will incentivize banks to loan cash no body wants to borrow. While it is unlikely this new measure will introduce any more money into the economy, it will undoubtedly weaken European banks already reeling from years of bad economic conditions.

The problem Europe is facing is a loss of confidence by business that things are going to improve. This underlying pessimism means that money that would normally be entering into the economy is now setting on the sidelines, creating a situation where deflation is a distinct possibility. To combat this threat the ECB is likely to enter into more desperate measures in the future. Of course, if the situation changes, the actions taken could create runaway inflation. Such is the balancing act facing those who have abandoned basic economic principles.

On the other side of the pond, the United States is in a similar situation. The Obama administration now holds 4 of the top 5 records for years with the most new regulations. Regulations whose compliance cost now exceed what companies pay in taxes. Add to this the total dysfunctionality created in 1/6th of the economy by ObamaCare along with a massive increases in the national debt, and you get an economy that is buckling under the load. In a desperate attempt to keep the economy from total collapse, the Federal Reserve (FED) has been buying huge amounts of securities with money it creates out of thin air. Despite this, or more precisely because of this, the markets have become distorted in ways no one thought possible.

On the bonds and stocks seesaw, it is an accepted fact that Stocks and Bonds rise and fall in opposite directions. Bonds representing safety in troubled times and Stocks the place to be when things are looking up. In today’s twisted, upside down world this is no longer the case. The FED has created a situation where people are parking cash in bonds while money still flows into Wall Street. What has been created is a alternate universe where reality is warped by those for whom fantasy economics drives all they do. Adding to this conundrum is that, like Europe, the future holds the possibility of both runaway inflation, if the massive amounts of sidelined cash starts to flow, and deflation if businesses and people continue to be too fearful to spend.

The present situation reflects the distorted economic viewpoints of those in power. they have created a situation where the old rules seem to no longer to apply. Of course, the laws of economics do apply and will make themselves known. Presently, normal economic forces are not being allowed to balance out naturally. The result has been economies that are on an artificial knife’s edge where the slightest move to either the right or the left ends in disaster. Unfortunately, the balancing act can’t last. The forces of economic reality will come into play and will drive the situation back into normal equilibrium, even if that means shoving the U.S. back into recession or even a depression. As Neil Cavuto from Fox Business said, “Stay tuned, this stands to get very interesting.”

“The Conservative Mind”

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