Not So Sanguine About The Dow’s Wednesday Spike

The Dow soared past the 12,000 mark Wednesday on news that the Fed would ease Europe’s liquidity crisis. Here’s the Times account:

Wednesday’s rally was among the biggest yet, with the three main indexes on Wall Street rising 4 percent or more, and the Dow Jones industrial average rising 490.05 points, its largest gain since March 23, 2009. Still, some analysts warned that the central banks’ action addressed only some symptoms of the euro financial crisis, so this rally, too, could evaporate.

“It helps to prop up the banks for a while which is going to buy time for Europe to fix the problem,” Burt White, the chief investment officer for LPL Financial, said. “This is basically a Band-Aid.”

Burt White’s quote sums up my feelings: this is a temporary measure that boosted the market on Wednesday, but won’t do anything to alter the global financial crisis over the long-term. It’s simply a stop-gap measure.

Nothing has fundamentally changed. Financial elites are still acting as if they tinker around the edges and flood Europe with dollars (in this case), all will be well. Banks will lend, demand will pick up, and recovery will ensue.

I fear it won’t happen that way. The Euro crisis requires re-examination (and ultimately abolition) of the single currency system. That’s not going to happen overnight, and I doubt it will ever occur. After all, Europeans have aspired to a united Europe and a common currency (a United States of Europe) since 1945.

Rejecting this system won’t come naturally, but market forces might ultimately demand Europeans to do so. Quantative easing is not the long-term solution: At best, it will lead to a boom and bust economy; at worst, it will lead to hyper-inflation when the economy picks up.

To better understand my thoughts on the situation (and my policy recommendations for all developed economies), I encourage readers to watch the Youtube lecture on the Austrian business cycle theory.

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