brianoh

Recent Policy Decisions and a Greater Depression

The problem as I see it is one of fundamental direction. It is rather like the question in 2001 – should I buy the Dow or is it way-overpriced? It was overpriced. If one gets the overall strategy wrong, then the medium and long-term results are going to be wrong. Needless to say that with the Dow, many traders still made money during the 2001-2008 period even though the Dow was overpriced. These people were not the long-term holders however.

The analogy is similar with the economy. The overall strategy is wrong (Keynesian), however some of the results may still be favorable on a short-term basis. Quite simply, we have the wrong people running the economy – Cheap-Credit Academics.

Greenspan is a perfect example of this. In his recent speech to the NY Economics Club he was basically saying (in part) that we need high stock prices so that we can get credit creation. This I presume explains his moves to prop-up the Dow bubble in 2001 and created the problem that brought us here. Even I can see that it is ludicrous to pump-up the Dow in order to provide the mechanism for credit. The Dow has to earn the level that it has, not be pushed there by Greenspan. We now have a Greenspan protégé as Treasury Secretary.

There are many negative consequences from this “Keynesianism God Mad”. One of the main problems is an imbalance in the economy that was caused by fictitious wealth. There are many, many businesses that need to down-size, and this will not happen overnight.

While the US has the wrong people charting the course, the long-term results will be negative. To generalize the problem – the problems caused by cheap credit cannot be solved by more of the same. The economy requires restructuring and that will not happen until the NORMAL supply-demand dynamics are allowed to play-out. Prop-ups, bailouts, mailouts, rate drops, stimulant measures, and deficit spending all create a wrong-sized economy that is unsustainable long term. In addition, the losses in the financial system that resulted from the misguided policies need to be written off, not propped-up.

It is extremely difficult to make economic decisions knowing that the policymakers are manipulating the free market at unprecedented levels. Time to let the chips lie where they fall and let industries survive or fail as a result of their own decisions.

S&P Set for 50%+ Gains? Not So Fast, UBS

The problem that we face as we all know is inflated asset prices being restored to more normal levels. In 2001, US stocks were valued at a PE ratio of 30 (Dow). For that to be sustained, other income-earning assets had to be inflated to a similar level (ie. R/E). Greenspan caused these problems with cheap plentiful credit, and the resulting bursting of the R/E bubble followed by stocks. Historically, stocks have had PE ratios circa 15, not 30. I still hear some economic commentators talking in terms of PER 30. Obviously that does not reward investment and price risk. In a recession, the DOW deserves a price of something like 6,000 and in normal times, perhaps 7,000 to 8,000. Mister Market is simply re-pricing the inflated assets. The impact of that re-pricing is obviously impacting the inflated and cheap liquidity levels that were based on those inflated asset prices (assets prices fall and must be liquidated). Greenspan and his cronies obviously caused these problems, and that “era of largest wealth creation” is being shown for what it really was – asset-inflation. Pretty simple really. As the Fed attempts to re-inflate those asset prices it simply causes a bubble in bonds, because people have already been conned once. One of the Fed mandates is price stability and they have simply applied that selectively to consumer prices and cheap imports have sustained that. What the US needs is some proper economists to stand up and be counted. I have not seen much evidence of that. It is all prop-up, bail-out, and mail-out, and funded by the people that save money to rescue the people that have debased their cash.

The U.S. Economy Is Still on Life Support

As I see it, the problems and causes are quite simple. The desire of the US Fed and Treasury to inflate assets and keep them that way. Obviously that is not wealth creation, it is asset-inflation. Quite simply, stocks rose too high up to 2000/2001 - circa 800% in circa 10 years. As they were about to come back to more normal PE ratios, Greenspan decided that would cause a recession and to prevent that he created the housing bubble. These Keynesian economists are destroying the US economy with phony assets that fuel consumption until the bubble bursts. Time for some real economists to start on the restructure of the US economy to create some real wealth. Trouble is, all of the people with power want short-term solutions, and that means bailouts and printing of money - socialization of the losses. Bernanke at long last recognizes this and now talks of preventing asset bubbles - talk is cheap and easy. He has the chance to prevent this one by allowing market forces to prevail.

Bracing for Another Round of Credit Related Woes

One major point is that the Fed Rate of 2% improves bank's profitability, or at least reduces their losses. The spread between what they pay and what they receive on mortgages is very high. This means that those with cash are paying for their losses on bad loans. As for stocks, it is a question of what are reasonable PE ratios. Based on historical rates stocks are at least 30% overpriced and the Fed and Treasury are fighting like mad to keep them there - hence the housing bubble caused by Greenspan. The whole FIAT money system is at risk as a result of printing too much money and inflating asset prices.

Are Subsistence Wages Killing the US?

The point I was making is that current legislation allows the 3rd world worker to replace the 1st world worker. These goods are then sold in the 1st world at 1st world prices. The jobs of creative people in the 1st world are being lost. Big companies are the only ones on this side to benefit. Only time will tell where this will lead, however based on current experiences it will lead to destruction of the US economy. The trade deficit, the budget deficit, the loss in value of the USD, the bursting of the housing bubble, the bursting of the dotcom bubble, REAL CPI-inflation over 10%. Don't all of these things spell out an economy that is ruined? The only thing that has kept it going is that all the bubbles have not burst. The Fed is fighting like mad to ensure that the last domino, Wall Street stays high. That itself was a bubble from 1990 to 2000 and was about to burst in 2001. Now Bernanke is holding it up in much the same way as Greenspan did in 2001. This time however there is no housing bubble to absorb the liquidity, there is only stocks. Bernanke has the misguided notion that lessons learnt from the 1930s will solve everything and flooding the economy with cheap liquidity will fix everything. The point he misses is that the way to stop the bursting of bubbles is to stop them forming. They do not do this because their Wall Street cronies would not like it (IMO). The US woke the Asian monsters and now they are about to beat the US at it's own game - consumption. US consumption is on the decline because real wages have declined for over 10 years. The housing bubble replaced those wages, and now that has withered. Companies like GM and Ford have the wrong products that consumers can no longer afford. So what we have is an economy that can no longer afford products manufactered by it's own companies and must import products to survive. Standards of living are declining and will continue to do so inversely to standards in China. To aid that process, the US govt sends out tax rebates for people to spend on cheap imports, further helping the foreign economies. Obviously the US has the wrong people in power and making decisions that shape the future of the US over the next century. Look at the start of this century as a guide.

Are Subsistence Wages Killing the US?

Some very interesting comments. What it all boils down to is a class structure designed to benefit the very wealthy and multiply their wealth. Globalization - read: cheap offshore labor, Cheap money - read: don't let the Dow fall, Fed loans on rubbish loans - read: look after your mates. Bankers running the economy with disregard of trade deficits and USD loss-of-value - read: madness. A private central bank - read: madness. Subsistence wages - read: the rich benefit. I totally disagree with the concept that it was inevitable that globalization has to force down wages and thereby productivity is replaced by service industries. It is happening because the powers-that-be let it happen to satisfy Wall Street.

Bernanke Blames Saving Glut for Housing Bubble

The US has many economic problems mainly relating to productivity and the service economy they have created at the behest of multinationals and investment banks. The current problems with the housing bubble was caused by Greenspan in order to protect an overpriced stock market in 2001. The Fed is illogical to put it mildly. Greenspan allowed the stock bubbles up to 2001 and when a correction was overdue, he prevented it and created a housing bubble. The US economy has been using asset inflation for about 15 years. It has to end eventually. Creation of liquidity to support overpriced assets is a bad strategy.