In his fantastic essay The Political Economy of Moral Hazard, Jörg Guido Hülsmann defines the term ‘Moral Hazard’ as;

 

… the incentive of a person A to use more resources than he otherwise would have used, because he knows, or believes to know, that someone else B will provide some or all of these resources. The important point is that this occurs against B’s will and that B is unable to sanction this expropriation immediately.

 

Many financial commentators have written about this perennial problem over the past few years, however they have done so with limited vigor (by my perception at least). Here, I get to grips with the problem of Moral Hazard, and discuss why the profit-motive has been perverted. Finally, I highlight the investment implications of this sociopolitical structure and consider the inevitable consequence: a dwindling stock of capital.

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An update of the Daily Treasury Statement charts for 23/5/11:

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