|Momentum, Are We On The Way Down?|
The drop from 5% GDP growth only a few quarters ago to what is now seen as under a half a percent growth in the current quarter is an indication all is not well. Many factors come into play as to how successful the launch of a recovery is. The amount as well as the kind of stimulus are both components that mix together and combine with the cause and severity of the recession to be crafted into an economic solution to promote growth. Sadly, those in charge have forgotten the quality of growth matters and it must be based on a sustainable foundation, this means allocating money and resources in a way they will contribute to the economy for many years and result in long-term dividends that add to our ability to compete. It is blatantly clear the crux of current central bank policies have been geared to "extend and pretend" and ignore the necessary structural changes that need to be made.
For years the wisdom of our current path has been questioned as the interest of Wall street and the too big to fail have been placed in front of those of Main Street. The recent downgrading of future growth has been ignored by many even while it has been repeatedly pointed out that due to QE much of the economic landscape was beginning to look like something out of "Alice And The Looking Glass." A bizarre and unrecognizable land has developed, a land distorted and papered over by ream after ream of paper. This paper has been rolling off the printing presses of central banks all across the world for seven years in an attempt to mask reality. Peter Schiff says, printing money is to the economy what taking drugs is to a drug addict. In the short term it makes the economy feel good, but in the long run it is much worse off.
Again, it must be cautioned that what was once the "long run" or "distant future" may be getting much closer. We must remember the influx of monetary stimulus from QE and massive government deficit spending has moved consumption forward creating the illusion of more pent up demand than exist or can be substantiated. This results in an elevated baseline for comparing year on year growth, in short we have to move forward faster next year just to keep growing. For example, if we manufacture and sell twelve million automobiles this year up from ten million because of low interest rates and easy money, we now must sell the same number for the economy not to contract.
The whole concept of economic growth is based on an ever growing trend of year over year increased production. At times we see a sector rotation such as computer sales increase when clothing falls, but overall we seek numbers that reflect an upward and onward slope. History shows that such trends falter when they become overdone and unsustainable. Economist often talk of headwinds and tailwinds, much of what has been done in recent years has acted as a "artificial tailwind" but this is not a normal state and cannot be sustained. We have recently seen currencies coming under attack because of the policies of low interest and easy money from central banks as well as a drop in oil prices from overproduction at the same time as the GDP forecast is quietly downgraded.
So again we must ask the question, what happens after the momentum ends? What happens after QE can no longer increase demand. After most or all of this easy money has flowed into the investment "of the day," what happens when it begins to flow out? Much of this recovery has been constructed on the unstable base of false demand. It seems that we always think that we will see "it coming," we always think we will have ample time to react if it becomes apparent the markets are about to crash but the speed at which events can occur is often a surprise. One thing remains certain and that is it is pure folly to base any economic recovery on selling automobiles to people who must take out a sub-prime loan in order to complete the purchase.