YOU CAN’T PRINT YOUR WAY TO PROSPERITY
I am hopeful that yesterday’s Fed meeting marked a change in sentiment. Investors are fed up with seeing the dollar get trashed by the Federal Reserve and wasteful government policies. The boom, bust cycle and blatant manipulation of the capitalist system must not be allowed to continue. This flawed idea that we can somehow print our way to prosperity is finally seeing some resistance. The only way to achieve prosperity is via fiscal prudence, sound monetary policies and free market capitalism. That means keeping your financial house in order – even if you have a printing press in your basement. The citizens of this country should hold our government to a higher standard. They should not be allowed to destroy the money in our pockets just because they can’t manage their checkbooks.
Yes, I know, times are tough. There’s a recession going on. But what do people do in times of recession? They cut costs, maximize income and save cash in case things get worse. Our corporations are doing a fantastic job of this as is seen in corporate earnings. Our citizens are doing an incredible job despite 7MM job losses, stagnant wages and the most challening consumer environment in decades. But for some reason our government has turned to the same flawed tactic that helped cause this mess – the printing press. When times get tough for the government they decide it is wise to take on more debt, devalue the currency and increase the tax burden on their primary income source. Many investors think that we have stared into the abyss and staved off disaster. But what is so different about today than 2008 or 2002? Did we not implement the exact same strategy in 2002? Have we actually fixed our long-term structural problems?
Ben Bernanke thinks the printing press can save us from a repeat of the Great Depression 2. I’ve said it once and I’ll say it again – we were never even close to an economic downturn like the Great Depression. But what we are in very real threat of is Japan 2.0 – a long and drawn out period where real output actually climbs, but a debt burden plagues the entire system.* Sounds familiar, right? The data of late appears fine, but under the surface the consumer is still struggling and the system is bloated with debt. As I’ve detailed previously, the cause of Japan’s problems lied in massive government and corporate debts. They implemented nearly identical strategies of low interest rates, quantitative easing and allowing the banks to merge and earn their way out of their problems, but the underlying structural problem of too much government and corporate debt persisted and plagued the system for years to come. Fiscal stimulus and wasteful spending only compounded the problems in the long-run:
We can only hope that yesterday’s dollar reversal was the markets way of telling the Fed: “enough already”. It’s time for our government to stop with the wasteful spending, wasting taxpayer dollars on zombie banks and destroying the currency in our pockets. A dollar rally might kill the stock market rally, but the message it sends to the Fed will almost certainly be in the best interest of every investor in the global economy.
* For more on Japan 2.0 I highly recommend you visit Mish’s site here.
I have a problem when you say we were never close to this being The Great Depression 2. You, nor I, really know what went on behind closed doors in the Federal Reserve and Congress. All I know is that Paulson would not have gotten on his knees to beg Nancy Pelosi to get Congress to authorize money and bail outs and programs if it wasn’t something unimaginable.
Indeed, Rep. Paul kanjorsk said that the REAL thing that would have crashed the whole world economy was that there was an electronic run on the banks, 550 billion was withdrawn at 11AM on Sept. 15 2008, and within 24hrs it would have been 5.5 trillion.
http://www.youtube.com/watch?v=-xKPcyvlfnc
So you don’t know what you are talking about really if you are comparing unemployment numbers right now as your justification that we were never close to experiencing a Depression 2.
If we weren’t close to GDII then Bernanke and Paulson clearly over-reacted. The TARP was NOT needed. Just break up Citibank and BoA and any other bank the FDIC can’t handle and be done with it. Buying Treasuries and Agency Securities to keep rates down is also clearly NOT needed. The higher mortgage rates go the better. Home prices will fall back to equalibrium quicker. As it is this will be a long drawn-out process with lots of uncertainty. Are home prices cheap without government intervention they are still expensive relative to rent, but with continued government intervention they may have hit bottom. But is that really a good thing?
I think if the $ were to vote on Fed policies, it would crash, not rally. Additionally, I think it is naive to think the market would vote against free money, never happened before, never will happen. It will respond (vote) once the consequences of that free money are dire and/or are proven to be ineffective (not the case yet).
I do agree that this was nothing but a strong recession, a la the 70s’ and 80s’, nothing close to the G.D. magnitude. It is a shame that the Fed treats it that way, and I do believe we will pay for the hysterical and disproportionate response in the long-run. Until then, it is a bull market that needs to be enjoyed.
Love your blog, btw.
tpc,
whats your take on this chart (total debt):
http://1.bp.blogspot.com/_2fuk3iGxQxM/Spv9kyCoczI/AAAAAAAACno/XQBnO1SABco/s1600-h/debt+chart.png
to simplyfied it, thats one the reasons “the big bears” are telling us that GD1 repeat is a sure thing.
it seems to me as quite logic, but not that i want to see it.
I get the comps to the GD, but its apples and oranges. The US economy is an entirely different economy than it was in the 30’s. Comparing today’s US economy to the 30’s is like comparing Microsoft today to the Microsoft of 1985. Its two entirely different animals. We are such a mature and developed economy now. That doesn’t mean we can’t experience long and protracted recessions, but there will always be a huge amount of productivity in the US because our businesses are so entrenched in so many people’s lives.
As for the debt chart – Credit Suisse debunked that specific chart a few months back. They claim the debt levels are actually much lower, but still high historically. I think they’re correct. You can find it here and decide for yourself:
http://www.businessinsider.com/2009/2/us-debt-levels-are-fine-debt-to-gdp-chart-is-wrong-and-meaningless
TPC,
Thanks for the laugh.
A quote from the article you linked: http://www.businessinsider.com/2009/2/us-debt-levels-are-fine-debt-to-gdp-chart-is-wrong-and-meaningless
“There is no evidence at all from this ratio that the aggregate household sector has a debt servicing problem.”
Well, maybe the “aggregate household” doesn’t have a problem servicing debt, but a lot of people do because there is a record number of home foreclosures and credit card defaults:
http://www.ft.com/cms/s/0/99a9b232-9dff-11de-8de8-00144feabdc0.html
http://moderateinthemiddle.wordpress.com/2009/09/24/update-us-credit-card-defaults-hit-record-highstiglitz-no-job-growth-for-at-least-2-years-existing-home-sales-and-prices-drop/
Quoted from BR from the comment section of the linked article “Your aggregate analogy is bogus because income and debt is not divided evenly across the population. Consider another analogy using the same aggregate numbers.
Imagine the US as 101 people. One American has income of $90,000 and no debt. The other 100 Americans each have an income of $100 and $3,500 in debts.
See the problem?”
Perc,
I am not saying the country doesn’t have a massive debt problem. As a regular reader, you definitely know that. All I am saying is that I can speak to the validity of the original chart.
I don’t think there is any doubt that there are huge debt problems in this country, but whether they are twice the size of the GD is entirely up for debate….
TPC,
You said “Credit Suisse debunked that specific chart a few months back”.
So, I was just pointing one of the flaws in CS’s rebuttal to the chart by using “aggregate household”. Like BR’s example, the super rich can really skew the data and make things look better, but the super rich are NOT going to be covering the masses missed mortgage or credit card payments.
Also if you look at CS’s charts the peaks today are just as high as during the GD, so I don’t find that comforting.
I listened to Dr. Faber the other day and he made a good point about our debt in that a lot of it was spent on unproductive assets like homes or yachts and was wasted on trips to Vegas or crappy made Chinese goods. So the losses are going to be greater because there is little or no liquidation value whereas during the GD a larger percentage of debt went into productive assets.
I know we agreed to disagree on this issue, that’s fine. I was just trying to give your readers something to think about.
Keep up the great work!
Perc,
Always nice to see both sides of the coin. Thanks.
The damage to so many peoples lives is the true measure of the economy’s failure. Reaction politically so far indicates it will happen again, and sooner than later because the cycle is getting faster, especially without Glass-Steagal.
Jerry, that’s a great point. And as for the market there is now an entire generation of people retiring who are terrified of the stock market and refuse to jump back in. Hence the huge flows into bonds. People are tired of getting whip lashed in stocks. The boomers might never get back into stocks again. It’s very similar to what occurred in Japan in the 90’s.
Many very credible views have been offered indicating that had the state/fed not intervened, a GD would have likely taken place. One can never no for sure, of course.
In any case, seems the government/Fed have put themselves into a corner; the only way to keep the economy propped up is by way of intervention. The situation is such that the only perceived way out of this is to blow another bubble, this one government debt and the Fed balance sheet. I have the impression that when it comes to the Fed, what we are witnessing is simply the moving of paper from one account to another. As an example provided from the Wash. Post article you posed yesterday in the evenings readings: the Fed buys Fannie and Freddie paper from investors who turn around and use it to buy Treasuries.
The circular movement from one account to another appears to my naive eyes as a Ponzi scheme, delaying the situation in hopes that the economy will eventually rebound. And if the economy does not rebound, at least not to the extent to allow the Fed to reduce it’s balance sheet without throwing the economy right back into a tailspin? This is the dilemma that seems to be crystalizing now in the stock market.
No doubt, the Fed needs to keep the stock market up sufficiently to support consumer demand and the re-growth of the economy.
I agree, with you TPC, that US/FED is doing or already did some of the mistakes that Japan has done for more than a decade. But one main aspect is that Japan has always been highly depended on its export and US are not. US trade balance is negative…Well, you know all that but I think that it might help US in this recession with a lower dollar and to inflate some….which eventually will get people back to work and pay their debts. The problem with the dollar is of course the negative correlation with oil but I don´t think anything else will work at this time than to inflate some and lower the dollar …..MORE DEBTS WILL PROBABLY NOT WORK!:)
A recovery with a high unemployment is just based on bad and unplanned stimulus packages and other costly support from the gowerment which soon or later have to be paid for( 1 percent tax rate = 2-3 percent of GDP).These stimulus are also NOT allowing the market to adjust to consumer demand, private investments are put on hold and the recession should probably become shorter without them.
A good and old(2002) article about Japan’s Recession you find here http://mises.org/story/1099
TPC and other contributors,
You make this one of the very best financial/economic blogs out there. This is exactly the debates that need to be had. I for one join TPC in his semi-defense of Bernanke.
Look, the guy probably knows what most think but what did we expect him to do. The frigging house was on fire and he has been severely handicapped by all the shite that has piled up. I think he has done an ok job.
What I would like to see from him is what we have been seeing with regard to pulling back from a lot of the policies he has implemented and a stronger policy on the dollar. That MUST happen. If it does not, then we are all screwed. What I would also like to see is the CBO, Treasury and Fed get together and say look, Congress/President should not be allowed to dump endless programs and debt on the American people.
I have great faith in the majority of the American people. Do you wonder why the healthcare debate has stoked so much outrage. 1) The American people smell a rat and it’s a big one in the house. 2) put aside political considerations, but Bush’s addition to part D with the prescription drug plan will already bankrupt us, now we want to hurl on a massively larger insolvent enitlement program.
Unless one is an idiot, then we’ve got to pull back or be a slave nation to our creditors for the next hundred years. It’s pretty frigging scary stuff and right around the corner if we don’t act soon.
@ prescient11
I agree with most of what you said except that Banana Ben has done an “ok job”. This is what pisses me off, we’re congratulating a guy who drove us off the cliff.
I’m paraphrasing Nassim Taleb “Bernanke drove the ship right into an iceberg which not only sunk the ship, but killed everyone on board except for the captain and his lieutenants and we’re giving this guy a medal?”
Bernanke doesn’t give a sh!t about John and Jane Doe, his only concern is the welfare of his banking oligarch buddies.
As Jesse from the http://jessescrossroadscafe.blogspot.com/ is fond of saying “The banks must be restrained, and the financial system reformed, and the economy brought back into a balance between the productive and administrative sectors, before there can be any sustained recovery.”
Why does anyone listen to Banana Ben?
http://www.youtube.com/watch?v=Fx4XJQ-Z4og
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