Cause and Effect of a Broken Market

According to the professionals, the economy’s improving.  Can you believe it?  Despite the fact that first quarter GDP declined at an annual rate of 1 percent, economists are coming up with the darnedest reason why things are getting better.

“Late Friday afternoon, the Federal Reserve released data on consumer credit for April,” reported MarketWatch one week ago.  “Student and auto loans have been powering that growth for some time, and that continued last month: Nonrevolving credit rose at a seasonally adjusted annual rate of 9.5 percent, the fastest growth since February 2013.

“But the real news was in credit-card growth, which leaped 12.3 percent.  That’s not just the fastest one-month growth since February 2001 — credit-card growth hasn’t even exceeded 7.5 percent since the recession.”

Somehow, the statistic showing consumers are increasing the rate at which they’re spending money they haven’t earned is pointed to as a sign that the economy’s getting better.  This sounds crazy we know…but it’s happening all the same…

“Continued improvements in the employment picture, as well as home and equity values, mean that consumers are starting to feel more comfortable about taking on debt,” noted Kristin Reynolds, U.S. economist at IHS Global Insight.

Phony Growth

Obviously, Reynolds is focused on growth…regardless of where it comes from.  But real long-term sustainable economic health is achieved with increased savings and investment.  Not increased debt.

Pumping up GDP by pumping up consumer debt represents a kind of phony growth stimulated by drawing down capital and burning up wealth.  These sorts of growth shenanigans are the impetus behind the Fed’s zero interest rate policy.  Since the 2008 financial crisis they’ve succeeded at pushing up public debt.  But that isn’t all they’re after…

Now it appears private debt is following.  This, alas, twists and turns the economy in ridiculous directions.  Most of all, the individuals who live and function within this economic framework are unable to discern what’s real economic productivity and what’s credit induced growth.

Without a full functioning pricing mechanism to convey clear economic signals, borrowers and spenders alike are misguided in disastrous ways.  Most of all, they’re compelled to ruin themselves.  Over the time, the whole of society’s finances get stretched beyond what the economy can support, which is where we presently find ourselves.

After years and years of ever increasing debt the economy’s become dependent on it.  That’s why new public and private debt is needed to push up GDP growth.  Without it, the economy shrinks and defaults cascade down like a Rocky Mountain avalanche.

Cause and Effect of a Broken Market

At this point, all it takes is for the rate of new debt creation to slow down a little and the whole economic shebang comes undone.  Through policies of mass debt creation the government’s painted the economy into a corner.  There’s no way to get out without making a great big mess.

These are the realities of the world we are living in.  You can’t change it…or fight it.  The best you can do is not to be on the wrong side of it when things really fall apart.  Though what happens next is anyone’s guess?

Stocks look like they are poised for a massive crash.  Yet they keep going up higher, farther, and faster than any rational man of modest means and honest intent thought possible.  Perhaps they’ll go up even more.  Maybe the S&P 500 will hit 2,000 and the DOW will hit 17,000.

Quite frankly, nothing could surprise us.  Of course, the full functioning pricing mechanism has been broken by the Fed’s zero interest rate policy.  The price of money has been distorted down and the price of stocks has been distorted up.

“I’m not a big fan of stocks, particularly at these prices,” said Gina Sanchez, founder of Chantico Global.  “The market is well ahead of itself.  So, you can count me in the bear camp.  However, as long as interest rates stay low and somewhat benign, that’s really what’s been keeping stocks where they are.”

“The fundamentals just don’t support valuations where they are.  I’m not sure what it is that kicks the legs out from under this market, but something is coming.  It’s hard to call the timing on it.  But, what I can say is this isn’t a value here.”

Sincerely,

MN Gordon
for Economic Prism

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