FacebookTwitterRedditEmail

The Dumbest Rally of All Time

“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? 

No. 

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. 

Why? 

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: fergiewhitney@msn.com.

More articles by:

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at fergiewhitney@msn.com.

bernie-the-sandernistas-cover-344x550
Weekend Edition
December 13, 2019
Friday - Sunday
Melvin Goodman
The FBI: Another Worry in the National Security State
Rob Urie
Establishment Politics are for the Rich
Jeffrey St. Clair
Roaming Charges: That’s Neoliberalism for You
Paul Street
Midnight Ramble: A Fascist Rally in Hershey, Pennsylvania
Joan Roelofs
The Science of Lethality
Joyce Nelson
Buttigieg and McKinsey
Joseph Natoli
Equally Determined: To Impeach/To Support
Charles Pierson
The National Defense Authorization Act Perpetuates the Destruction of Yemen
REZA FIYOUZAT
An Outrageous Proposal: Peace Boats to Iran
Lee Hall
Donald Trump Jr., Mongolian Sheep Killer
Andrew Levine
A Plague on Both Their Houses, Plus a Dozen Poxes on Trump’s
David Rosen
Mortality Rising: Trump and the Death of the “American Dream”
Dave Lindorff
The Perils of Embedded Journalism: ‘Afghan Papers’ Wouldn’t Be Needed If We Had a Real Independent News Media
Brian Cloughley
Human Rights and Humbug in Washington
Stephen Leas
Hungry for a Livable Planet: Why I Went On Hunger Strike and Occupied Pelosi’s Office
Saad Hafiz
Pakistan Must Face Its Past
Lawrence Davidson
Deteriorating Climates: Home and Abroad
Cal Winslow
The End of the Era: Nineteen Nineteen
Louis Proyect
If Time Magazine Celebrates Greta Thunberg, Why Should We?
Thomas Drake
Kafka Down Under: the Threat to Whistleblowers and Press Freedom in Australia
Thomas Knapp
JEDI Mind Tricks: Amazon Versus the Pentagon and Trump
Jesse Jackson
Trump’s War on the Poor
Michael Welton
Seeing the World Without Shadows: the Enlightenment Dream
Ron Jacobs
The Wind That Shook the Barley: the Politics of the IRA
Rivera Sun
Beyond Changing Light Bulbs: 21 Ways You Can Stop the Climate Crisis
Binoy Kampmark
The Bloomberg Factor: Authoritarianism, Money and US Presidential Politics
Nick Pemberton
Ideology Shall Have No Resurrection
Rev. Susan K. Williams Smith
What Trump and the GOP Learned From Obama
Ramzy Baroud
‘Elected by Donors’: the University of Cape Town Fails Palestine, Embraces Israel
Cesar Chelala
Unsuccessful U.S. Policy on Cuba Should End
Harry Blain
The Conservatism of Impeachment
Norman Solomon
Will the Democratic Presidential Nomination Be Bought?
Howard Lisnoff
The One Thing That US Leaders Seem to Do Well is Lie
Jeff Cohen
Warren vs. Buttigieg Clash Offers Contrast with Sanders’ Consistency
Mel Gurtov
The Afghanistan Pentagon Papers
Gaither Stewart
Landslide … to Totalitarianism
Kollibri terre Sonnenblume
How Blaming Nader in 2000 Paved the Way for Today’s Neo-Fascism
Steve Early
In Re-Run Election: LA Times Journalist Wins Presidency of NewsGuild 
David Swanson
If You’re Not Busy Plotting Nonviolent Revolution for Peace and Climate, You’re Busy Dying
Nicky Reid
Sorry Lefties, Your Impeachment is Bullshit
John Kendall Hawkins
The Terror Report You Weren’t Meant to See
Susan Block
Krampus Trumpus Rumpus
Martin Billheimer
Knight Crawlers
David Yearsley
Kanye in the West
Elliot Sperber
Dollar Store 
FacebookTwitterRedditEmail