Leading the Next Economic Downturn

Markets went haywire again this week.  The DOW flipped and flopped like a fish out of water.  Something spectacular is heading this way…you can just feel it.

U.S. government debt has now eclipsed $18.1 trillion.  Tack on the debts of households, businesses, and state and local governments, and the total U.S. debt jumps to $59.2 trillion.  Personal debt alone, which includes mortgage, student loan, and credit card debt, now stands at over $16.7 trillion.

These numbers are significant.  They’re astounding too.  Not only for how ginormous they are.  But, more so, for what they imagine to life.

In particular, these massive debts produce a mirage of prosperity.  They also produce an abundance of false demand.  This, in turn, conjures an abundance of productivity that otherwise wouldn’t exist.

Millions of people wake up each morning to do jobs that are made possible only by cheap money or inflated prices.  Sometimes they require just one or the other.  Other times they require both…like oil fracking or mortgage brokering.

Perpetually increasing debt makes it all possible.  More credit.  More demand.  More consumption.  More jobs.  More productivity.  More…more…more…  Where does it all lead?

Naturally, it leads to more debt.  But how much more?  Well…that depends on how much inflation there is.

The Absurd World as We Understand It

The absurd debt based money system we live in requires some price inflation to keep the wheels from coming off.  Just a brief moment of price deflation – or even a pause – and the whole credit structure breaks down.

So how much price inflation is needed?

An inflation target of 2 percent is optimal according to the brain trust at the Federal Reserve.  This, you see, is not too much.  Nor is it too little.  Somehow it is just the right amount.

From what we gather, a 2 percent inflation rate reduces the debt burdens of society in a way that doesn’t totally reduce its moral fabric.  For with a 2 percent inflation rate it takes about 34 years for a debt burden to be cut in half.  This rate of debt burden lightening may be subtle enough to keep borrowers in check.  But it also is just enough to keep mass defaults from occurring.

From the Fed’s perspective inflation is better than deflation.  Unfortunately, as far as the Fed’s concerned, the debt based financial system has been pushed to the max.  The economy wants to deflate…it wants to purge the bad debts away via defaults.  The Fed wants to hold things together…and inflate the bad debts away with some light price inflation.

We’re not saying we agree with the Fed’s price inflation games.  Nor are we endorsing them.  We’re merely outlining it in the crude and simple way we understand it.

We also understand that the Fed isn’t in control of things the way it pretends to be.  Perhaps 2 percent inflation may be optimal.  However, willing 2 percent inflation into existence and sustaining it by monkeying with the price of money is like willing a headache away by whacking one’s head with a hammer.

Leading the Next Economic Downturn

After six plus years of massive monetary intervention the Fed has pushed their policy options to the max.  The federal funds rate has been pushed down to practically zero since late 2008.  They must now tighten things back if they want to preserve even a smirk’s worth of credibility.

At the same time the economy appears to be rolling over.  First oil prices collapsed.  Then gas prices.  Now, each and every day, it’s becoming more and more apparent this is less about a supply glut and more about a demand dearth.

The latest evidence is revealed by the DOW transports index.  A reduction in fuel costs should be a boon to transports, and it usually is.  But this latest price collapse is far from usual…

“If you want to know whether lower oil prices are benefitting the economy, take a look at the Dow Jones Transportation Average DJT,” explains Mark Hulbert.

“The picture isn’t pretty.

“Consider what’s happened over the five weeks…

“…oil prices have dropped 20 percent.  If cheaper oil were a net positive for the economy, one of the first places you’d expect to see it show up is the transportation sector.  Yet it hasn’t: Over this same five-week period, the Dow Transports have fallen nearly 2 percent.”

Hulbert also notes that the transports are a leading indicator of economic downturns.  For now, the Fed won’t blink…

“The Fed gave no sign that it is wavering on hiking interest rates some time in the second half of 2015,” reported MarketWatch on Wednesday.  “The U.S. central bank was upbeat about the economy, while the policy makers repeated that they think inflation will move back to the 2 percent target after being pushed down by temporary factors.”

Just wait until the S&P 500 drops below 1,500.  By then the Fed will be in full panic mode.  They may even start printing money to buy stocks outright.  Sounds crazy…we know…

But if they’ll print money to buy bonds, why wouldn’t they print money to buy stocks?


MN Gordon
for Economic Prism

Return from Leading the Next Economic Downturn to Economic Prism

This entry was posted in Inflation, MN Gordon and tagged , , , , , . Bookmark the permalink.

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.