THE Riddle Has Been Solved

Many readers will think that the last person whose opinion should be consulted on the issue of rating agency reform is a former rating agency employee. Maybe they’re right, but I did learn one thing from rating hundreds of complex securities. Contrary to what some may think, there are no easy solutions here. Unintended consequences are guaranteed. Gary Witt, former MD of Moody's Investor Services

What riddle?

Why is the industrialized world in the mess it's in?

Mr. Witt, writing at The Baseline Scenario answers this question, in my view, correctly.

We're in the mess we're in because there are no easy solutions. There haven't been easy solutions for quite a few decades as all of the "low hanging fruit" of industrialization currently being harvested in countries like China has long ago been harvested in the west.

Industrialization for economies is like adolescence for humans. It's a period of time when natural growth overpowers constraints that would hobble children or mature adults. There are easy solutions for adolescents and young adults but as we age our choices are more often an exercise in finding the lesser evil.

So it is, I believe, for US (and European and Japanese) economic policy makers. Shifting away from a financially centered economy will be painful. Wealth will be lost, interest rates will rise, and investment capital will become more scarce. We'll have to compete again, which tends to difficult for those who have grown accustomed to dominating.

"What evil," you might be wondering, "makes the above the better option?"

The alternative, in my view, is all of the above, but worse, and with less ownership. We won't be competing, we'll be sharecropping, as Warren Buffet once quipped.

In other words, I believe our economic woes are already built into the system. The expected growth in the New American Century, upon which dream, in part, credit was extended, didn't materialize.  Our choices now are between growing out of our dilemma- paying down debt with income(and lots of inflation)- or selling assets in lieu thereof.

Western Economies are, in a sense, middle-aged. There are no quick fixes available, just choices between accepting reality and having it forced on us.