Thursday, May 1, 2014

Facing Our Economic Armageddon

We may soon be forced to face our economic Armageddon. The forces that have driven stock markets ever-higher and upward may be beginning to wane. Many markets became distorted years ago when QE and super low interest rates hit the economy in an effort to lessen many of the missteps of recent years.  This has been more helpful in holding up the underlying value of assets and derivatives it now appears than helping to repair a wounded economy. QE has up to now stopped an implosion of derivatives including the resulting contagion and shock that would have spread throughout the financial system. Unfortunately the economy has not fared as well as these asset prices and in many ways these policies have harmed Main Street.

Today the economic recovery that the media and talking heads have been bantering around remains elusive to many people across America and the world. The ever higher market prices morphed into a self feeding loop the trend  strongly supported by manipulation. Untold damage has been done by stripping savers of their interest and forcing them into risky investments. Over the years we have witnessed the type of market reversals that only those supported by the Fed can generate with a concerted effort to buy S&P 500 index futures at crucial support points late in the day. On many occasions this has proved more than enough to turn the markets from red to green in the blink of an eye.  This manipulated stock market distorted by recent economic policy masks the real truth of how fragile our economy really is.

The stock market has become ground zero and the poster child in a war those in power have waged to convince the world all is well. Fact is if QE or the massive government deficit spending that props up our economy is removed it will fold like a cheap umbrella. What has transpired since the 2008 crisis is far from business as usual. Central banks, especially the Federal Reserve, stepped in with monetary injections to prevent the worst from happening as they should have done in such a situation, but power went to the head of an arrogant Ben Bernanke. Over the last several years a pattern of random statements from the Fed and several other sources have caused crazy and illogical rallies. The unholy alliance formed between the Federal Reserve, the government, and the too big to fail has left those of us who question the validity of an economic recovery in a precarious position.

For the big boys it became a game of  insider information and computer trading, this includes computing patterns that exploit where stops are placed improving their ability to wash the timid and weak bears out of their positions. With the support of those in power it was no contest. Bottom-line once Bernanke and the Fed switched on the printing press to prevent the financial markets from collapse instead of showing responsibility and restraint they let them run. It is one thing to get a market to rise and make new highs but a far more difficult task to hold them at these lofty levels. As of late market supporters point to what many see as a baffling lack of inflation and the talk of downright deflation to muddy the economic waters and justify more easy money.

It may be time to throw out the window many of the traditional measurements used in past years about what constitutes an economic recovery. It is becoming increasingly clear that not all economic growth is created equal. If you spend money but afterwards have little to show for it, you have wasted it. This brings into question the quality of growth based on recent policies and raises questions if the current economic momentum is sustainable. When the money driving this demand  is borrowed it has long-term ramifications, sadly much of the money the American government spends falls into this category. Modern economics is complex with cross border money flows, carry trade, and issues concerning how fast money moves throughout the economy. The modern economy that has evolved over the last several decades is loaded with interwoven contracts reeking of contagion. 

I contend that faith will drop in these intangible "promises" and money suddenly flows into tangible goods seeking a safe haven. This will cause inflation to soar. In a recent article I wrote "never before has mankind diverted such a large percentage of wealth into intangible products or goods" this is the primary reason that inflation has not raised its ugly head or become a major economic issue in recent years." Like many of those who study the economy I worry about the massive debt being accumulated by governments and the rate that central banks have expanded the money supply.  It will soon become apparent the economic efficiency of credit is beginning to collapse and the additional money poured into the system coupled with lower rates is no longer effective in driving the economy forward at that time many economic policy options will evaporate.

Footnote; Your comments are welcome and encouraged. If you have time check out the archives for other post that may be of interest.


  1. If one ponders the Western world from the end of WWII until now, it sheds some light on how we got to where we are. At the end of WWII, the US was the 'last man standing'. No other developed nation had the productivity of the US; it had all been bombed away. Our prosperity was assured – for a generation. By the mid-60's, much of the world had caught up in productive capacity, but in the midst of the cold war and with the sway of socialism in Europe because of their destroyed economies, the US was still dominant, however, cracks could be seen forming in the base of prosperity that had developed. Loathe to raise taxes, these cracks were patched with deficit spending, thus hiding the situation from a Polyannish public.

    The 'war on poverty', civil rights, Viet Nam, ever bigger government, and a generation that believed they were entitled to affluence was shaping the future. All of these things were driving our productivity into the ground. Continue with Kuwait, Iraq, Afghanistan, money spent on security since 9/11, and other events, and today, our productivity is abysmal just at a time when globalization has reduced trade barriers to their lowest levels ever. We are no longer competitive, and efforts to sustain our prosperity via federal policy are doomed. It doesn't matter what the stock market levels are if people can't get jobs that will support them.

    Productivity is not even in the national debate. There is nothing more important for nothing can be accomplished if the purse is empty, and nobody will loan you money. The only recourse is to inflate the currency or default. Pick one. (Actually, you could pay off the debt, a key factor affecting productivity, by reducing spending, but don't run for office on that.).

    1. Complete claptrap! Last I heard the overnight yield is. 25% and everyone and his mom still use dollars for settlement? This country offers a lot more to the universe than its countrymen give it credit and missing the boat since 1981? Your just jealous about missing out on cheaper dollars year after year for 30+ years? No productivity if your rip van Winkle?

  2. Stocks are little league! Whatever happens to wall street effects main street is a weak meme? What happens on wall street only affects John q. If its in the news? JQ cares little about anything stocks(Jane q. Would rather spend day at walmart than care about anything wall and broad) unless he can use the moment to make him look smart? Today everyone is calling tops but before 2007 not a soul could find wall and broad on a globe!
    The bond market is the casino and has been since 1913? The BM is were the juice comes from and not from index price discovery? Consider the dollar? In 83 the overnight rate was over 15%. Recently it has been around. 25% and the dollar still has collapsing ROOM? The Fed uses the bond market to steal your national income to give it to the FOREIGN potion of the central banking mechanism? You are spinning your wheels and its right under your nose!