One thing that seems to keep getting lost in all of the Eurozone bailout/default talk is that losses are the destruction of capital, of part of the productive capacity of society. Accounting rules can be changed, bailouts can be arranged, and free money can be dropped from the sky, but sooner or later someone somewhere is going to take that hit.
All government and central bank actions under discussion are nothing but trade-switching schemes. A coerced version of musical chairs with bureaucrats determining the losers, while the total wealth of society remains diminished. The prevailing assumption seems to be that by passing these trade-switching transactions through the halls of power, a magic pixie dust is applied which causes that problem to disappear. The negative effects aren’t immediately apparent in the statistics, speeches are given, the economy is saved. Hooray!
Unfortunately there is no magic pixie dust. Losses have an unavoidable impact. Increasing prosperity isn’t due to a historical imperative, but from the ability of human ingenuity to outpace the capital consumption of successive rounds of government waste, bubble blowing and socialized losses. Though in the very long-term human ingenuity has always prevailed, there is nothing to prevent destruction from taking the lead for centuries at a time.
This doesn’t mean markets can’t rally for long periods before succumbing to the death by a thousand cuts. The amazing resilience of human ingenuity can overcome great odds and mask the effects of incredible amounts of stupidity. Ever greater amounts of credit will be required to keep the bubbles expanding, with decreasing results each time, but since the purported resolutions of the resulting banking crises are all in some way infusions into the financial markets, they naturally tend to rally to some degree.
Is the leader board for the race between ingenuity and destruction about to change? There’s no way to be sure. However, when central banks all over the world are pushing uppers through garden hose IV tubes and the patient still can’t get out of bed, it’s likely not a good omen.