Meddling with Markets for Work and for Pleasure

The popular economic theme being reported by the popular press still remains.  That the economy is grinding higher.  That growth is improving, albeit slowly.  That blue skies are just over the horizon.

Naturally we have some misgivings.  As far as we can tell, business is not humming along.  Earnings are stagnant.  Profits are slim.  Moreover, corporate reductions in force (RIFs) are being executed with the imprecise targeting of a sledge hammer.  Even Google’s laying off staff.

Most notably, if the economy were improving there’d be demand for raw materials and new construction equipment to fabricate it into stuff.  This doesn’t appear to be the case at the moment.

Earlier this week, for example, Caterpillar CEO Doug Oberhelman remarked that, “Economic weakness throughout much of the world persists and, as a result, most of our [Caterpillar’s] end markets remain challenged.  In North America, the market has an abundance of used construction equipment, rail customers have a substantial number of idle locomotives, and around the world there are a significant number of idle mining trucks.”

Oberhelman’s comments were delivered as part of Caterpillar’s third quarter earnings report.  What’s more, he wasn’t too optimistic about the coming year either.  “We remain cautious as we look ahead to 2017.”

Structural Deficiencies

Perhaps Oberhelman is being overly guarded.  But given his company’s core market of providing equipment for mining and construction he gets a unique window into the demand for materials and construction.  By Oberhelman’s account, global demand is poor.  What to make of it?

The explosion of debt coupled with policies of mass money debasement over the last 40 years has relentlessly borrowed demand from the future.  Tomorrow’s demand was already attained yesterday.  Thus, in place of today’s demand, is an abundance of slack.

In other words, the world has been pushed well past the effectiveness of such policies.  Stimulating new demand with new debt no longer results in new growth.

Even negative interest rates have failed to give the economy much of a boost.  As far as we can tell, capacity has so far outpaced demand that a recession is needed to bring things back into alignment.

Alas, efforts to combat the Great Recession did not solve the economy’s structural deficiencies.  They merely suspended the recession.  What’s more, in doing so, they set us up for something even greater…like a depression.

By our estimation, things have become quite precarious.  The U.S. stock market, as measured by the S&P 500, is nearing its all-time highs.  So, too, U.S. housing, as measured by the Case-Shiller Index, is just 0.1 percent below its record high set in July 2006.  At the same time, over the last eight years, the national debt has nearly doubled to $19.7 trillion.

Yet even with all this new government debt and inflated asset prices, GDP slumps over like a weighty sack of potatoes.  The cost of greater and greater issuances of debt now far outweighs any benefit.  Nonetheless, the Federal Reserve intends to keep juicing the credit market.

Here’s why…

Meddling with Markets for Work and for Pleasure

Fed Chair Janet Yellen’s primary liability is not her bowl haircut.  To the contrary, that’s her primary asset.  Rather, her primary liability is her 40 year career yanking the chains of credit to her liking.

Unfortunately, Yellen’s long run of employment has had the ill effect of making her believe she’s somehow good at her job.  But how does she really know if she’s any good?

If government statistics say unemployment’s 5 percent, inflation’s 2 percent, and GDP’s 3 percent does that mean she’s doing a good job?  Or does it mean the propaganda mill still supports her?  Certainly, any accomplishments she can point to are all based on fluff.

To be clear, Fed Chair Janet Yellen has been meddling with credit markets – and by extension the economy – since Moby Dick was a minnow.  That’s a long time to be doing something that, in effect, is so broadly destructive of wealth.

Undeniably, Yellen’s main accomplishment is that she primes the pump for Wall Street and the big banks so they can siphon off the accrued livelihood of the hoi polloi.  All the while she mucks around with the lives of hundreds of millions of people in ways that only the most ardent of central planners could find pleasure slobbering over.

Sincerely,

MN Gordon
for Economic Prism

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