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When markets don’t perform the way politicians want, you can count on them tobypass, manipulate or manage these markets. All too frequently these attempts aremotivated by short-term political needs where appearances take priority over substance.Currently market distortions in housing, credit and the financial system are huge anddangerously unstable. We are now beginning to pay the price. There is a critical shortageof political will to tackle the underlying problems and band-aid solutions will likely keep uslurching from one crisis to the next over the coming years.As we discussed in
The Great Reflation
the steady increase in credit during the debtsupercycle hid a multitude of sins. Distortions in both the domestic and global economygrew virtually unchecked behind a veil of prosperity. Such a facade was supported by theexpansion of private debt relative to income or GDP–choose your yardstick. The distinctionbetween wealth and credit became clear in the aftermath of the financial crisis. Peeringbehind the veil reveals an ugly, distorted picture: unsupportable private debt levels,spiraling public sector debt, massive trade imbalances with the accumulation of reserveassets of a few countries, and a flawed international monetary system. All of these issuesimply economic stagnation and high structural unemployment in the U.S. and otherdeveloped countries.