Mr. Bernanke has finally said it out loud. The "recession" is "most likely over". Poor Ben tried to hedge his bets there a bit with his use of 'most likely', understandable given his stellar personal record of predicting the business cycle in the past and the general reputation of the professional economist clique in predicting the last 13 of the 12 recessions. A man who never saw the greatest economic collapse of the last half a century hit him like a ten ton truck, though half a dozen other observers did so on record, surely knows when better days are upon us. Doesn't that make perfect sense? Welcome to the wonderland that is America circa 2009.
The reason why we're supposedly in a "recovery" now is because home sales are 'improving', banks are not failing anymore, credit spreads are narrowing, consumer "confidence" is increasing and most importantly the stock maket is going up. There is also some marginally less horrible production data. You see, all we have to do is change the measuring stick. We're in a post modern world now, everything is relative. If we're not doing as bad as last quarter of 2008 or 1st quarter of 2009, we're in good shape. But are we? Let's take the "signs" of recovery one at a time.
Are homesales improving? Barely, on a seasonally adjusted basis, but at a much lower average price. If 0% fed funds rate and the resultant lower mortgage rate cannot put the homesales market on fire then I'd not hitch my wagon with real estate to get me out of this depression. Are banks not failing anymore? Yes and no. You're not seeing the big name trillion dollar banks fail because Uncle Ben has adopted a "too big to fail policy" and have given away literally trillions of dollars in direct and indirect stimulas to keep them alive by life support. [http://www.youtube.com/watch?v=n0NYBTkE1yQ] [http://www.youtube.com/watch?v=PXlxBeAvsB8&feature=channel][http://www.youtube.com/watch?v=Mj0JAfq4esk&feature=channel]. Half a trillion dollars have been given to foreign entities that they don't know the identities of or won't say. Please watch the videos to see for yourself what is really keeping the Citi, BoA, Goldman, AIG, Morgans etc of the world to NOT go bankrupt. Are credit spreads narrowing? Yes, it is in all markets. But why? What has happened to mitigate the risk? What transpired is an aggregation of risk from banks and other private entities into the balance sheet of the US government. By direct take over of the largest insurance company in the world [AIG], by direct take over of Freddie and Fanie, by massively extending loans [on and off balance sheet] to banks and taking equity position in them, US government has made them their responsibility. Their fate now inextricably tied to the fate of the sovereign credit of the government itself. What is so wrong with that? I'll explain that a little later. On to consumer confidence recovery, first of one must remember, any "confidence" number is subject to statistical manipulation by the publishing entity. Also, since "loss of consumer confidence" didn't cause the crisis, so whatever the changes in it will not address the root causes of the crisis itself. After 24/7 bullish propganda by main stream media and after the meme of 'green shoots' in every media outlet possible, the reality is people are still spending less than before and saving more. People are also still losing jobs by the thousands. So what is there to be confident about? Mr bernanke, Mr. Giethner and their buddies have a lot actually to be confident about. Now they have managed to socialize their risks and have Uncle Sam back stop every thing they do with the free money [0% interest] the Federal Reserve is lending them. Worry no more. But what about the rest of us? We actually have a plenty to worry about. No wonder people are buying Rep Ron Paul's seminal book "End the Fed" and voting with their recession dollars by the millions to get Peter Schiff elected to the US senate.
But the stock market is going up. Dow is almost touching ten thousand again. Worldwide markets are rising. Risk appetite is back. Aren't happy days here to stay again. Hell even Jim Cramer has called another bull market. Yes markets have rebounded ferociously around the world since March 2009. But when you account for 18% decline in the dollar index against a basket of other foreign currencies you realise US markets have greatly underperformed other markets. If everything is relative, it cuts both ways, not just when it shows positive picture for us. A closer look shows that the more fundamentally impaired the sector is, better it has performed [for example the financial services lead the market in terms of percent gains]. These are signs of a classic bear market rally. If we look at historical parralels we see similar 'recoveries' and price behavior after the crash of 1929. Even current don of the establishment economics Paul Krugman admitted the possibility of a double dip recession.
So what is really going on here? What we're seeing is a desperate attempt to reflate the economy to hide a deflationary collapse that comes at the end of an artificial boom. American consumers are spending less and saving more, as they should. There is a belated realization to an increasingly greying nation of the need for real savings for retirement. So they're reacting just like the Japanese consumers did after their real estate bubble burst in the 80s. They're keeping their money in their pocket. That of course is profoundly deflationary in a fiat currency environment. In order to offset that Uncle Sam is picking up the slack and doing the spending for them, essentially by borrowing from the future [and thus future consumption]. Government is increasing its balance sheet and spending like its going out of style. Net result of all this profligacy will be inevitable detoriation of sovereign credit quality. Already the interest on the national debt is about 750 billion dollars a year. At the current pace of debt growth and increase in government/social spending it will reach parity with total tax dollars received soon. It is clearly headed in an unsustainable direction, one that most of Uncle Sam's largest creditors are not oblivious too. Around the world every major governments from Europe to China to Japan are preparing for a post dollar hegemony world in various ways.
Now lets go back to the fact that we socialized the risks and concentrated all that risk into the U. S. government balance sheet. What happens when that balance sheet itself comes into question? The whole financial system comes to a halt and we have a currency crisis. There is mass pandemonium. That is why I believe the real crisis is still ahead of us and the blood letting we saw in 2008 was just a preview of what happens when our current inter linked financial system suffers a structural shock. It was a great teaching moment. Unfortunately Mr Bernanke and other Keynesian quacks running our economic policy drew the wrong lessons from it. They're trying to fight what is fundamentally a monetary crisis by fiscal means and in the process creating a new crisis to compound the first. At its root are Keynesian claptrap that credit is capital, liquidity can substitute for savings, zero percent or even negative interest rates are advisable to fight deflation. I am afraid all of this is hogwash and have nothing to do with real practice of the market mechanism. Mr. Bernanke has followed this prescription to the T since he claims to be a "Depression expert"[ Perhaps he means in creating one;)] . He has created trillions of dollars of bank reserves that are now kept as reserves with the central bank by the banking system. They would rather keep it there at 1% or less interest than lend it out for higher interest because there is no one to lend to. Private lending and business lending is collapsing at a rapid clip. The credit crunch in this real sense never went away because M1, M2 and MZM are all contracting. Monetary Credit base is deflating. But why're they not lending out the trillions at the central bank vaults? Because if the banks start buying the trillions of treasury bonds the government is issuing to finance their deficit spending the fractional reserve process will take over and inflation will reach uncontrollable levels. That magnitude of monetizing debt will also destroy whatever confidence is left on the dollar as a reserve currency bringing about a rapid disorderly depreciation. On the otherhand, the standard response to inflation in a Central Bank regime of raising interest rate will be self defeating to the U.S. government as it will make its debt unsustainable faster [as the total interest payment will be larger faster] and worsen its credit quality faster to its creditors. So Mr. Bernanke is in a hot seat with no "exit strategy" in sight. "Green shoots''...hardly...more like "wilted weeds" I say.
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