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Why Obama’s “Phony Money” Won’t Fix Economy

There’s a lot of anger towards President Obama. Most of it is misplaced. Obama is a slick young politician with high approval ratings. He replaced a president who had 90% approval ratings at one point – the highest of any president in history. Both have sacrificed the free-market principles America was founded on. Partisan politics mean nothing when both parties insist on spending the country into oblivion.

We challenge you to find the “green shoots” in this picture. It shows the severity of the financial crisis in terms of corporate profits.












As we’ve said before, you may be able to have a jobless recovery, but we seriously doubt you can have a profitless one. Unless the negative trend line of this chart changes direction, you can forget about a sustainable rebound in stocks.

What you’re looking at is by far the biggest decline in earnings on record (the data goes back to 1936). It shows that 12-month as-reported S&P 500 earnings have declined over 90% over the past 20 months (with over 90% of S&P 500 companies having reported for Q1 2009). (Hat tip to The Big Picture.)

This decline will not be fixed by Team Obama “phony money” solution. At best, the complete abandonment of sound fiscal principles will put off the great credit unwinding. And there is evidence in current stock valuations that it is having an effect on investor sentiment. But as recent experience has taught us, credit expansion cannot go on forever. And a bubble in treasuries is no exception.

Here’s what RBS chief credit strategist Bob Janjuah has to say about phony money. (Apologies to the grammar police: Janjuah isn’t one for the finer points of syntax and spelling.)

As absurd as the shrill chorus that is busy spinning that fact that coz central banks are going print-tastic, this means stocks are going higher and higher. Have folks learnt NOTHING!! The events of the last few yrs highlight the difference between ILLUSORY wealth/growth and REAL wealth/growth. The illusion can win out for a while, but ultimately REALITY WILL BITE HARDER the longer the illusion persists. But somehow this shrill chorus is given air-time and column inches – I am stunned by this. Be Warned – reckless central bank printing has NEVER succeeded over any meaningful investment horizon as a means of delivering real grwth and real wealth gains, and it is NOT going to wrk now. In fact, if the REFLATION/NOMINAL GRWTH policy trick does get legs, it will be simply setting up the next even more nasty balance sheet recession, from which the road back to normality will be horrible and much worse than what we have now.