“Without the destructive power of the banks, hedge funds and other investment companies, the world would not be where it is today — at the edge of an abyss.”
—Der Spiegel, “The Destructive Power of the Financial Markets”
Tuesday’s 322 point surge on the Dow Jones must rank among the dumbest rallies of all time. The proximate trigger for the triple-digit moonshot was the feint hope that Fed chairman Ben Bernanke might pull another rabbit out of his hat at his Jackson Hole confab and announce another round of his bond purchasing program called Quantitative Easing. Keep in mind, that at the same time high-frequency computers were juicing the market with an ocean of liquidity sending near-dead equities into the stratosphere, skittish investors with hard cash were headed for the exits. 2-year Treasuries hit a record low yield of 0.22 percent as the flight-to-safety continued apace a full 3 years after Lehman Brothers crashed. Plunging Treasuries confirm that the economy is still in the throes of a multi-year Depression that hasn’t been mitigated by any of interest-hacking strategies of the Fed or by the blinkered budget-cutting antics of our vacationing executive, Barack Hoover Obama.
Is it any wonder why confidence in the markets and the country’s main institutions is at an all-time low?
Look; Unemployment is tipping 9 percent, GDP has slipped below 1 percent for the last 6 months, the fiscal jet fuel that kept the economy in the black is gone, the credit markets are beginning to refreeze, and Europe’s in the shitter. Is there any reason to load up on stocks expecting brighter returns in the future?
The bond market is blinking “Depression”. The benchmark 10-year is hovering around 2 percent as terrified investors load up on risk-free assets that actually lose money when adjusted for inflation. Does that sound like a ringing endorsement of current policy?
So what does Obama do? He pushes through a structural adjustment program (The “debt ceiling” agreement) that stuffs the stimulus-starved economy into a fiscal straightjacket, and then crows about how mush he “cares about jobs”.
Right. How can the government create jobs when the new law forbids expansion of the deficits? It can’t be done. So, unemployment will stay unnecessarily high for the foreseeable future, all because of Obama. Is that why the markets are so happy?
Here’s a clip from an article by Michael Spence at Project Syndicate:
“The world is witnessing is a correlated growth slowdown across the advanced countries, …and across all of the systemically important parts of the global economy, possibly including the emerging economies. And equity values’ decline toward a more realistic reflection of economic fundamentals will further weaken aggregate demand and growth. Hence the rising risk of a major downturn – and additional fiscal distress.” — Michael Spence, “Stagnant and Paralyzed”, Project Syndicate
Great summary. Not only is demand flagging across the industrial world, but political gridlock in the EU and the US has increased the likelihood of another slump. Austerity-obsessed policymakers have slashed spending and implemented belt-tightening measures that are dimming the prospects for future growth. Add to that the fact the EU is in the midst of a credit crunch, and you have all the ingredients for another stomach-churning stock market crash followed by years of vicious contraction. Needless to say, policymakers in the US and EU have no idea of how to put the economy back on track. They remain committed to a flawed ideology that’s pushing the world to the brink of disaster.
Let’s look at the eurozone for a minute. It’s generally accepted now that saving the 17-member monetary union will require some kind of financial transfer from the rich countries to the poor. Eurobonds provide the easiest way of achieving that objective. But how much would that cost a country like Germany? If we can figure that out; then we can determine whether the plan will be acceptable or not to German policymakers. Here’s an excerpt from an article titled “The Future of the Eurozone” by Max-Planck Gesellschaft:
“A transfer mechanism that simply equalizes 50 percent of the difference from average, based on 2007 figures, sums up to 445 billion euros per year. For Germany, for instance, this would be a contribution of almost 74 billion euros per year, on the basis of the 2007 figures….
These rough calculations show: a transfer mechanism that achieves little more than half the amount of equalization in governmental revenues would have transfers that are magnitudes larger than the total current EU budget. …
It is hard to believe that Europe could survive the political antagonisms that would be created by transfers of this magnitude….” (“The Future of the Eurozone”, Max-Planck Gesellschaft)
This plan is never going to fly in Germany, so we can assume that the eurozone will eventually break up, although it could take a year or so. That means the panic in the credit markets will intensify, widening the spreads on bond yields and putting more pressure on the EU banking system which is chock-full of garbage bonds that are set to take hefty haircuts when the sh** hits the fan.
Is that why the markets are surging, because traders just love the idea on another credit meltdown?
And, while the credit-noose is tightening in the EU, what’s going on in the US?
Nothing. No jobs programs, no extension of unemployment benefits, the payroll tax break ends on December 30, and Obama refuses to stump for second round of stimulus. How’s that for a “pro growth” strategy?
The economy needs more stimulus and it needs it fast. Take a look at this chart on Paul Krugman’s blogsite that shows how the depletion in government stimulus coincides with the decline in growth.
Now, take a look at GDP, which peaked in late 2009 and early 2010, and has slipped ever since: (4Q 2009-3.8%; 1Q 2010–3.9%; 2Q 2010–3.8%; 3Q 2010–2.5%; 4Q 2010–2.3%; 1Q 2011–0.4%, “revised” 2Q 2011—0.9%)
Get the picture? The recovery was stimulus. Absent the stimulus, there is no recovery. Credit is not expanding, households are still deleveraging, business investment is way off, and aggregate demand is weak. In other words, the economy is dead-in-the-water. Without sustained government spending to shore up the flagging economy, recession is inevitable. But policymakers—led by Obama–refuse to budge. They remain fully committed to their bad ideas.
Economist Peter Dorman answers this question in his essay titled “It’s the Political Economy, Stupid!” Here’s a short excerpt:
“….We are not living through an epoch of intellectual failure, but one in which there is no available mechanism to oust a political-economic elite whose interests have become incompatible with ours. This is not some sudden development, much less a coup d’etat as is sometimes claimed. No, the accretion of power by the rentiers has been systematic, structural and the outcome of a decades-long process. It is deeply rooted in modern capitalist economies due to the transformation of corporations into tradable, recombinant portfolios of assets, increasing concentration of and returns to ownership, and the failure of regulation to keep pace with technology and transnational scale. Those who sit at the pinnacle of wealth for the most part no longer think about production, nor do they worry very much about who the ultimate consumers will be; they take financial positions and demand policies that will see to it that these positions are profitable….
The real problem is political, and it is profound. Unless we can unseat the class that sees the world only through its portfolios, they may well take us all the way down. Unfortunately, no one seems to have a clue how such a revolution can be engineered in a modern, complex, transnational economy. (“It’s the Political Economy, Stupid!”, Peter Dorman, Econospeak)
So, when does discontent turn to open rebellion?
The sooner the better.
Mike Whitney lives in Washington state. He can be reached at: email@example.com.