Within the Vice-like Grip of the Secular Bear

Posted on September 11, 2012 by MN Gordon

The Labor Department released the August jobs report last Friday.  The median estimate of economists surveyed by Bloomberg was for a gain of 130,000 jobs.  The actual number of new jobs created was just 96,000.

This means several things.  First it means the estimates of expert economists were off by 35 percent.  Naturally, it must be nice to work in a profession where it’s perfectly acceptable to miss the mark by 35 percent.  No doubt, in most professions, missing the mark by 35 percent will severely impact one’s performance review.

The other thing the dismal jobs report means is that Wall Street’s expectation for more quantitative easing will now reach a fever pitch.  Don’t you know?  In this upside down world of monetary folderol, bad news for the economy is good news for stocks.  For this may just be the dreary data Fed Chairman Ben Bernanke needs to initiate a program of open ended Treasury purchases.

Here at the Economic Prism we believe Bernanke’s hands are tied for the moment.  What we mean is, although he may be a madman, he’s not a complete idiot. Continue reading →

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Providence Is With Us

Posted on September 7, 2012 by MN Gordon

Yesterday European Central Bank President Mario Draghi announced what could be an unlimited bond buying program to save the euro.  Later in the day, after running up 28 points, the S&P 500 closed at its highest level since before Lehman Brothers vanished from the face of the earth.  You can make of it what you want.  But from our perch, we see another disaster in the making.

A broken clock is right twice per day.  What we mean is, any day now, the stock market could crash.  That’s our story, at least…and we’re sticking to it.

On July 20th we published an article titled, Get Ready for a Massive Stock Market Selloff.  In summary, the article warned that the lack of monetary easing, an economy on the verge of recession, and a Congressional stalemate as the country drives full speed ahead toward the fiscal cliff would result in a massive stock market selloff.

Quite frankly, we thought the stock market would reverse course by now.  That it would no longer continue going up…it would go down.  Yet since July 20th the stock market has not gone down; it has gone up.  In fact, as measured by the S&P 500, it has gone up over 5 percent. Continue reading →

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More Credit, More Debt: Lessons from the Last Great Unraveling

Posted on September 4, 2012 by MN Gordon

“The lord giveth increase, but man devised credit.”  — Garet Garrett

Solving the Debt Problem with Credit

Something quite remarkable happened in the years following the war to end all wars.  European economies were ruined and European governments were buried in debt owed to the United States Treasury.  On top of that, Germany’s economy was being strangled by reparation payments to France as part of the Versailles peace treaty.

One option for Europe was to default and repudiate the debt.  While such an option would have been incredibly disruptive, it would have given Europe the opportunity to clear the financial baggage of the war, and slowly rebuild a sound economy.  Instead, Europe’s solution to its mammoth debt burden was to attack it with credit.

The United States’ government, which was owed a bundle, resisted financing European reconstruction.  However, private American creditors and speculators were eager to put their excess capital to work.  In fact, Wall Street was so enthusiastic to invest in Europe they too fell under the delusion that Europe’s debt problem could be solved with American credit. Continue reading →

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The Clever Fellows of Jackson Hole

Posted on August 31, 2012 by MN Gordon

The cony-catchers assembling in Jackson Hole, Wyoming, believe the darnedest things.  They think they can decide the price of the economy’s most important component – its money – better than the market can.  Moreover, by low-balling the price of money they think they can get consumers to spend money they don’t have to buy goods and services they don’t need.

This may sound absurd, we know, but it really is the principal objective of monetary policy these days.  Still, this isn’t the half of it…

For when commercial bankers choose not to transmit all the cheap credit into the economy via personal and business loans, central banker plans to goose the economy break down.  That’s when fiscal policy is called upon to pick up the slack.  To this end, government economists believe they can stimulate the economy by spending gobs of money the government doesn’t have – a minor detail, of course – on programs the world doesn’t need.

So to get the money that it doesn’t have to stimulate the economy with spending programs, the government borrows it from the central bank. Continue reading →

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