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Catching a Falling Financial Knife

No Economic Recovery, Stimulus Spending and Intended Consequences?

Economics / Economic Stimulus Oct 08, 2010 - 12:28 PM GMT

By: Andy_Sutton

Economics

Best Financial Markets Analysis ArticleAs was generally expected, this morning’s employment situation report gave another bundle of evidence to suggest that there is in fact no recovery, never was, and that several trillion dollars of ‘stimulus’ has disappeared down a rat hole of greed. In typical fashion, the mainstream press tried yet again to put a positive spin on a negative reality, pointing to the fact that we should rest easy; the Fed is going to buy government bonds to save the day. It is in total wonderment that I listen to these happy expectations and can only guess if these people know what they’re even wishing for. Let’s look at a few examples.


AP Business Writer Stephen Bernard writes:

“High unemployment remains a major hurdle as economic growth continues to be sluggish. The Labor Department's report, considered the most important on the economic calendar, did little to alter anyone's perception about the strength of the economy.

While the job growth remains scarce, there could be a silver lining. Expectations are growing that the Federal Reserve will try to stimulate the economy through the purchase of government bonds. The gloomy jobs report could give the Fed more incentive to act.”

While this is certainly true, do we really want the private, non-government Federal Reserve buying more bonds? It is bad enough that the Chinese already own massive portions of our future economic output in the form of Treasury Bond holdings. They own scads of mortgage bonds as well. Does anyone out there feel comfortable about the Chinese holding the note on your house? How about the Fed? Do we really want them owning the notes on any more of our homes? I asserted years ago that the housing bubble was nothing more than a property-grab and all indications are that it has been little more than just that.

Let’s look at another news outlet and their thoughts. Greg Robb at Marketwatch writes:

“There is little in the data to suggest further easing measures aren’t up the Federal Reserve’s sleeve. Prior to the report, economists had said that a strong U.S. payrolls number would be needed to take pressure off the Fed to deliver a second round of quantitative easing.”

Essentially the same pabulum from another ‘independent’ media outlet. The fancy term quantitative easing (QE) must be explained to the masses. We’ll try to sum it up in a few sentences so everyone is clear. QE entails the printing of money. It is what happens when interest rates are already at zero. The Fed cannot reasonably pay people to borrow money (negative interest rates) and expect this charade to continue. So QE is the printing of money, which is then used to buy certain strategic assets such as stocks, bonds, etc in the hopes of goosing markets and giving the Treasury ill-gotten cash with which to continue ‘stimulating’ the economy. QE is, in essence, declaring a fire sale on America, then creating the money from nothing to take advantage of the sale.

To make an analogy, it is kind of like you and I lending a bunch of money to a store, getting the store hooked on easy credit, etc. etc. then when it breaks, walking into the store with a pile of Monopoly money and buying the entire inventory. This is robbery and needs to be called for what it is.

And now, perhaps my favorite, coming from Reuters:

“Expectations the Fed, which has already pumped $1.7 trillion into the economy by buying mortgage-related and government bonds, would announce a second phase of quantitative easing at its Nov. 2-3 meeting have buoyed U.S. stocks and prices for shorter-dated government debt and have undercut the dollar.”

There is QE again. Sounds mighty fancy to the untrained ear, doesn’t it? Notice that even Reuters gives the truth almost as an afterthought. QE, and/or the expectation thereof, has undercut the dollar. That affects Main Street. Wages are stagnant, jobs are very hard to come by, and the Fed is purposely undertaking a course of action that will further squeeze Main Street by driving up the cost of living. While the Fed might get a 9.5 for style points and the fancy terminology, it gets a big, red, F- in terms of stewardship of its two legal mandates: maximum employment and price stability. Round 1 of QE didn’t help and there is no reason to believe that more of the same will do any better.

And how about the recent rally in stocks? Are any of these gains real? Of course not. The dollar is tanking while stocks, Gold, and oil take off. The Fed is trying to rekindle inflationary expectations to artificially pump markets. If they are successful, it will most assuredly be at the expense of the American taxpayer-consumer.

This is the crossroads at which we now stand. The M3 contraction that has been occurring for the entirety of 2010 will either be allowed to continue, which would have a cleansing affect despite the many negative manifestations in the real economy, or the Fed will simply try to overwhelm market forces and fill a $200+ trillion fiscal gap with dumpsters of worthless paper dollars.

So far the Fed et al have proven to be completely unable to perfect the ‘kick the can down the road’ approach. The economy is sliding despite QE and other miscellaneous efforts to this point. Certainly things might be ‘worse’ had they done nothing, but we can certainly make the argument that in this case, the cure is worse than the disease.

By Andy Sutton
http://www.my2centsonline.com

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. His firm, Sutton & Associates, LLC currently provides financial planning services to a growing book of clients using a conservative approach aimed at accumulating high quality, income producing assets while providing protection against a falling dollar. For more information visit www.suttonfinance.net

Andy Sutton Archive

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Comments

Joshua Gamen
02 Nov 10, 14:11
Well said - I appreciate your writing!

People need to hear what you are saying - it's true and great stuff!

http://www.youtube.com/watch?v=7t4rzPBcKRo


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Catching a Falling Financial Knife