Show Me The Money!

July, 19, 2012

According to Chairman Bernanke’s testimony in Congress the other day, he said he is concerned by two major events: The Fiscal Cliff on January 1, 2013 (expiration of the Bush tax cuts and the imposition of new taxes in the health insurance program) and the deteriorating situation in Europe. Oh yea, the economy is “growing” too slowly and employment levels are unacceptable. Also, that the Federal Reserve stands ready to add additional “accommodation” if necessary.

 

Here is the translation: without more money from the government, the economy is headed back into recession. Why?

 

1. We have not solved the problems associated with the b bursting of the financial bubble (bank, housing, consumer debt, etc.)
2. The “solution” (increasing the money supply) we have taken has made matters worse.

• Stimulus wasted
• QE1, QE2, Twist, Zero interest rate policy, etc. causing mal-investment
• Chronic, excessive spending at over $1 trillion per year
• Regulations that don’t make sense and are undefined
• We haven’t even discussed current mal-investments (other bubbles) like education, free healthcare, bloated government and financial system.)

3. Will more money solve our problem? No, but we have been able, through massive insertions of money, to “reduce the pain” of recession by postponing reality; but this only means that it will take longer and the problems will get more severe when we are forced to deal with reality. For example:

 

• We have added, in sovereign debt alone, $9 trillion (nine thousand billion dollars) and we can not even cut one billion from our spending.)
• Our debt is now (before next year’s budget and a new higher debt limit) at 102% of our GDP. That of course is before corporate debt, consumer debt, state and municipal debt, etc.)
• Even more troubling is that our sovereign debt is now at 10% of our revenues (taxes) and 10% is the line that determines risk and no risk. And that’s at our current low interest rates. Therefore, going forward, by definition, U.S. Treasuries will no longer be “risk free;” and you can see what’s happening in Europe. 

Will we solve our economic problems?

 

Yes. But the method and timing are uncertain. In the meantime, we are left with letting the economy slide back into recession (enabling the problems solve themselves) and accepting the pain that goes with it OR adding more paper money and trying to kick the can a little farter down the road. My guess is that the politicians will, when they begin to feel the pain of reelection, show us the money.

 

It is theoretically possible to get a politician to define and articulate a strategy to get our economy back to reality in X number of years. But, if that politician doesn’t show up soon, we will eventually be left with two options: default or very high inflation.

 

Our economy and markets are now unfortunately left to the whims of politicians which mean we have to think differently and adjust our strategies to match reality.