- Barack Obama and Fed chairman Ben Bernanke were reading
from the same playbook this week, hyping hope in the economy, but still
wringing all the necessary leverage out of public fear to justify the certainty
of future bailouts. Obama claimed he could see "signs of economic
progress," while Bernanke echoed the foolishly optimistic remarks
of John McCain when he said "I am fundamentally optimistic about our
economy." Bernanke said there are signs that the "sharp decline"
in the US economy is slowing. Even if that were true, which is by no means
certain, there are still other major crises ahead. It is of little consolation
when the bottom is nowhere in sight. Obama's speechwriters had injected
into his remarks some defensive remarks targeting the growing backlash
against the bailouts as exemplified by this week's Tea Party protests nationwide.
- Obama rejected criticism that he was acting with "reckless
abandon" by touting the old mantra that deep crises require powerful
actions: "History has shown repeatedly that when nations do not take
early and aggressive action to get credit flowing again, they have crises
that last years and years instead of months and months - years of low growth,
years of low job creation, years of low investment, all of which cost these
nations far more than a course of bold, upfront action." That's a
distortion of economic history and a classic case of "pushing on a
string" --an economic term for trying to increase supply of credit
when there is little desire to take on more debt. Interest rates are effectively
at zero percent and few are taking the bait.
- Past depressions were caused by a tightening of monetary
policies after a period of expansion of the money supply. This crisis was
caused by a purposeful and massive expansion of credit, which cannot be
overcome with more credit, even at zero rates. Business wants profits and
needs them fast, not more debt. Their ratio of debt to equity is already
too high to pay off, unless you are the recipient of bailout moneys. That's
why Goldman Sachs and other insider banks are showing "profits"
--easy to do when you have billions in bailout funds to undergird your
expenses, but those profits aren't real, and are only being bandied about
to spur a buying of bank stocks.
- All the world's major financial powers know that a major
sea change is in the offing, and they are desperate to find a way to get
out of dollars--without selling them directly into the financial markets,
which would collapse the value of the dollar. They know that US monetary
policy has only one way to go and that is toward massive inflation--which
only the US can get away with, at least for a bit longer, due to its massive
quantitative advantage. The big money holders are betting against the dollar
in the long term even though the dollar is so far holding its own (due
to the weakness of other currencies).
- China has made a decisive decision not to wait any longer
for the dollar to collapse. It is moving to buy up massive amounts of strategic
materials and minerals while prices are cheap and while the dollar still
has some value. As Ambrose Evans-Pritchard of the Daily Telegraph noted,
"China's State Reserves Bureau (SRB) has been buying copper and other
industrial metals over recent months on a scale that appears to go beyond
the usual rebuilding of stocks for commercial reasons. Nobu Su, head of
Taiwan's TMT group, which ships commodities to China, said Beijing is trying
to extricate itself from dollar dependency as fast as it can. 'China has
woken up. The West is a black hole with all this money being printed. The
Chinese are buying raw materials because it is a much better way to use
their $1.9 trillion of reserves. They get ten times the impact, and can
cover their infrastructure for 50 years.'
- "The SRB has also been accumulating copper, aluminum,
zinc, nickel, and rarer metals such as titanium, indium (thin-film technology),
rhodium (catalytic converters) and praseodymium (glass). While it makes
sense for China to take advantage of last year's commodity crash to restock
cheaply, there is clearly more behind the move. 'They are definitely buying
metals to diversify out of US Treasuries and dollar holdings,' said Jim
Lennon, head of commodities at Macquarie Bank. John Reade, metals chief
at UBS, said Beijing may have made a strategic decision to stockpile metal
as an alternative to foreign bonds. We're very surprised by Chinese demand.
They are buying much more copper than they will need this year. If this
is strategic, there may be no effective limit on the purchases as China's
pockets are deep.'"
- This same strategy is being employed even here at home
as more and more middle-class professionals jump on the preparedness bandwagon
and start stockpiling commodities, survival equipment and retreat properties.
Clearly they are not swayed by the facile ploy of pushing economic optimism
on the American public.
- Most of the statistics about growth are illusory and
sometimes based upon temporary stimulus offerings that won't last. For
example, new home sales saw a spike this last quarter specifically because
of monetary incentives passed by state legislatures and Congress, but only
applicable to new, never before occupied home. Those new homes sales figures
are being driven mostly by the lure of getting a freebie from government.
Even then, the pool of potential buyers who can qualify is relatively small--and
more than half the buyers are speculators.
- The spike in sales of used homes was primarily due to
the steady rise of foreclosures. As Bloomberg News reported, "U.S.
foreclosure filings rose to a record in the first quarter as employers
cut jobs in the recession and temporary programs to delay action on defaults
came to an end RealtyTrac Inc. said. 'A total of 803,489 properties received
a default or auction notice or were seized, 24 percent more than a year
earlier... Filings for the month of March totaled 341,180, also a record.'
'Foreclosures haven't peaked yet,' said David Olson, president of the mortgage
research firm Wholesale Access in Columbia, Maryland." But the spike
in numbers of used home sales doesn't tell the other half of the equation--that
prices are still falling. According to the S&P Case/Shiller Index of
20 U.S. cities "prices fell 19 percent in January from a year earlier,
the fastest drop on record. The measure has fallen every month on a year-over-year
basis since January 2007. Mortgage applications declined last week for
the first time in a month, a sign that even with borrowing rates below
5 percent may not be enough to spur a housing recovery." None of this
supports an optimistic view of the economy.
- What about the housing rescue plan by the Obama administration?
"The housing-rescue plan is intended to help as many as 9 million
homeowners near default refinance into cheaper loans. About 7.6 million
mortgage holders don't qualify because they owe too much more on their
mortgages than their homes are worth, according to real estate valuation
service Zillow.com. Obama's plan allows owners to refinance if their mortgages
exceed their property value by 5 percent or less."
- Other economic reports show a worsening pattern in the
US. Rex Nutting of MarketWatch says, "The economy continued to worsen
across the United States in March and early April, amid scattered signs
that the pace of the decline was lessening in some regions... the economy
declined at a 6.3% annual pace in the fourth quarter, and economists are
forecasting a decline of 5% in the first quarter and about 2% in the current
quarter. Almost all sectors were contracting or slowing in almost all regions...
Manufacturing weakened, retail spending was 'sluggish,' the housing markets
were 'weak' and banks reported rising delinquencies and deteriorating loan
quality." A good part of that declining loan quality is in the commercial
sector. As that sector falls into delinquency, a lot of heretofore stable
banks, which evaded subprime mortgages, are going to go under.
- Nutting also wrote that the decline in industrial output
is the worst since VE Day after WWII. "The output of the nation's
factories, mines and utilities fell 1.5% in March despite higher production
of motor vehicles and a boost from utilities, the Federal Reserve reported
Wednesday. Industrial production is down 13.3% since the recession began
in December 2007, the largest percentage decline since the end of World
War II. Output fell at a 20% annual rate in the first quarter, and is now
at the same level as December 1998. Factory production fell 1.7% in March.
Factory output has fallen 15.7% during the recession, also the largest
decline since 1945-1946. Capacity utilization fell by a full percentage
point to 69.3%, the lowest since the data series begins in 1967."
- As expected, consumer prices, according to Bloomberg,
"posted their first annual decline since 1955 and unused American
manufacturing capacity reached a record, alleviating concern that Federal
Reserve actions will cause inflation to soar. The consumer price index
fell 0.4 percent in March from a year before, and 0.1 percent from the
previous month, the Labor Department said in Washington." In reality,
this is good news as declining prices tend to lead to a positive resolution
of economic woes. If only the feds would stop trying to prop up home prices
and let them fall further. Despite current declines, home prices are still
too expensive relative to people's income.
- The bottom line, as expressed by John Silvia, chief economist
at Wachovia Corp. in Charlotte, is this: "We are going to have an
economic recovery, but it won't feel like one most of us are used to."
That's because a permanent change is taking place in foreign and domestic
consumption. People will remain wary for many years about returning to
the free spending, easy credit buying habits of the past. Don't expect
those to come back (unless hyperinflation arrives--which will drive people
to buy now just to avoid rapidly rising prices). For now, people and businesses
will have to get used to a permanent lower level of consumption, which
is healthy for the economy.
- (End of excerpt)
- World Affairs Brief, April 17, 2009 Commentary and Insights
on a Troubled World.
- Copyright Joel Skousen. Partial quotations with attribution
- Cite source as Joel Skousen's World Affairs Brief http://www.worldaffairsbrief.com