A market that is rife with political manipulation and in which interest rates bear no relation to actual market events not only generates grossly distorted signals; most businesses and entrepreneurs simply have no way of discerning the accuracy of those signals. If they want to remain in business, they have little choice but to respond to the signals they do get, irrespective of whether those signals accurately reflect the nature of the market or whether they are providing a distorted caricature of what is actually happening in the real economy. The meltdown of the American mortgage market illustrates the destructive effects of distorted signals propagated through the markets.
 

Hair of the Dog

          That meltdown is having a ripple effect throughout the American economy, as well as the Canadian economy. It has led to a decline in the demand for oil and a consequent fall in world oil prices that has in turn begun to have an impact on the economy of Alberta. Escalating oil prices over a year ago were caused by excess printing and circulation of new currency in the USA and distorted market signals for the automotive sector. American monetary policies that date back to before the escalation of oil prices created events in the American economy that led to a demand for large private vehicles like sport utility vehicles (SUVs).

          The combination of monetary policies, natural events, and political events caused oil prices to rise and remain high over an extended period of time. The American automotive sector received those market signals when sales of large vehicles dropped, leaving large stockpiles in manufacturers' parking lots. As a result, production and employment in Ontario's automotive sector have declined significantly. Politicians have agreed to bailout the automotive sector with easy loans to produce small, fuel-efficient vehicles beginning during a time of declining world oil prices. Somehow, the market is generating signals that lead decision makers to such a conclusion at a time of 1% interest rates.

          The American government has announced that it will increase spending in order to stimulate the economy. Leading politicians are calling for new money and more regulation as means of "getting the economy going." The problem is that the printing of new money and changing economic regulations are what created the current economic debacle in the first place. It's like trying to get a drunk sobered up and out of the gutter by giving him more booze to drink. Restrictions will be placed on him to regulate his behavior, to be sure, but they will simply be more elaborate versions of the kinds of restrictions in his life that caused him to drink to excess in the first place. Fortunately for actual drunks, Alcoholics Anonymous and similar programs are privately run and free from political intervention. If only the same could be said for the economy as a whole.