- Credit is not flowing. In fact, credit is contracting.
That means things aren't getting better; they're getting worse. When credit
contracts in a consumer-driven economy, bad things happen. Business investment
drops, unemployment soars, earnings plunge, and GDP shrinks. The Fed has
spent more than a trillion dollars trying to get consumers to start borrowing
again, but without success. The country's credit engines are grinding to
a halt.
-
- Bernanke has increased excess reserves in the banking
system by $800 billion, but lending is still slow. The banks are hoarding
capital in order to deal with the losses from toxic assets, non performing
loans, and a $3.5 trillion commercial real estate bubble that's following
housing into the toilet. That's why the rate of bank failures is accelerating.
2010 will be even worse; the list is growing. It's a bloodbath.
-
- The standards for conventional loans have gotten tougher
while the pool of qualified credit-worthy borrowers has shrunk. That means
less credit flowing into the system. The shadow banking system has been
hobbled by the freeze in securitization and only provides a trifling portion
of the credit needed to grow the economy. Bernanke's initiatives haven't
made a bit of difference. Credit continues to shrivel.
-
- The S&P 500 is up 50 percent from its March lows.
The financials, retail, materials and industrials are leading the pack.
It's a "Green Shoots" Bear market rally fueled by the Fed's Quantitative
Easing (QE) which is forcing liquidity into the financial system and lifting
equities. The same thing happened during the Great Depression. Stocks surged
after 1929. Then the prevailing trend took hold and dragged the Dow down
89 percent from its earlier highs. The S&P's March lows will be tested
before the recession is over. Systemwide deleveraging is ongoing. That
won't change.
-
- No one is fooled by the fireworks on Wall Street. Consumer
confidence continues to plummet. Everyone knows things are bad. Everyone
knows the media is lying. Credit is contracting; the economy's life's blood
has slowed to a trickle. The economy is headed for a hard landing.
-
- Bernanke has pulled out all the stops. He's lowered interest
rates to zero, backstopped the entire financial system with $13 trillion,
propped up insolvent financial institutions and monetized $1 trillion in
mortgage-backed securities and US sovereign debt. Nothing has worked. Wages
are falling, banks are cutting lines of credit, retirement savings have
been slashed in half, and home equity losses continue to mount. Living
standards can no longer be bandaged together with VISA or Diners Club cards.
Household spending has to fit within one's salary. That's why retail, travel,
home improvement, luxury items and hotels are all down double-digits. The
easy money has dried up.
-
- According to Bloomberg:
-
- "Borrowing by U.S. consumers dropped in June for
the fifth straight month as the unemployment rate rose, getting loans remained
difficult and households put off major purchases. Consumer credit fell
$10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according
to a Federal Reserve report released today in Washington. Credit dropped
by $5.38 billion in May, more than previously estimated. The series of
declines is the longest since 1991.
-
- A jobless rate near the highest in 26 years, stagnant
wages and falling home values mean consumer spending... will take time
to recover even as the recession eases. Incomes fell the most in four years
in June as one-time transfer payments from the Obama administration's stimulus
plan dried up, and unemployment is forecast to exceed 10 percent next year
before retreating." (Bloomberg)
-
- What a mess. The Fed has assumed near-dictatorial powers
to fight a monster of its own making, and achieved nothing. The real economy
is still dead in the water. Bernanke is not getting any traction from his
zero-percent interest rates. His monetization program (QE) is just scaring
off foreign creditors. On Friday, Marketwatch reported:
-
- "The Federal Reserve will probably allow its $300
billion Treasury-buying program to end over the next six weeks as signs
of a housing recovery prompt the central bank to unwind one its most aggressive
and unusual interventions into financial markets, big bond dealers say."
-
- Right. Does anyone believe the housing market is recovering?
If so, please check out this chart and keep in mind that, in the first
6 months of 2009, there have already been 1.9 million foreclosures.( http://baselinescenario.files.wordpress.com/2009/08/90-day-chart-big.jpg)
-
- The Fed is abandoning the printing presses (presumably)
because China told Geithner to stop printing money or they'll sell their
US Treasuries. It's a wake-up call to remind the Fed of its limits.
-
- That puts Bernanke in a pickle. If he stops printing;
interest rates will skyrocket, stocks will crash and housing prices will
tumble. But if he continues QE, China will dump their Treasuries and the
greenback will vanish in a poof of smoke. Either way, the malaise in the
credit markets will persist and personal consumption will continue to sputter.
-
- The basic problem is that consumers are buried beneath
a mountain of debt and have no choice but to curtail their spending and
begin to save. Currently, the the ratio of debt to personal disposable
income, is 128% just a tad below its all-time high of 133% in 2007. According
to the Federal Reserve Bank of San Francisco's "Economic Letter: US
Household Deleveraging and Future Consumption Growth":
-
- "The combination of higher debt and lower saving
enabled personal consumption expenditures to grow faster than disposable
income, providing a significant boost to U.S. economic growth over the
period. In the long-run, however, consumption cannot grow faster than income
because there is an upper limit to how much debt households can service,
based on their incomes. For many U.S. households, current debt levels appear
too high, as evidenced by the sharp rise in delinquencies and foreclosures
in recent years. To achieve a sustainable level of debt relative to income,
households may need to undergo a prolonged period of deleveraging, whereby
debt is reduced and saving is increased.
-
- Going forward, it seems probable that many U.S. households
will reduce their debt. If accomplished through increased saving, the deleveraging
process could result in a substantial and prolonged slowdown in consumer
spending relative to pre-recession growth rates." ("U.S. Household
Deleveraging and Future Consumption Growth, by Reuven Glick and Kevin J.
Lansing, FRBSF Economic Letter")
-
- A careful reading of the FRBSF's Economic Letter shows
why the economy will not bounce back. It is mathematically impossible.
We've reached peak credit; consumers have to deleverage and patch their
balance sheets. Household wealth has slipped $14 trillion since the crisis
began. Home equity has dropped to 41% (a new low) and joblessness is on
the rise. By 2011, Duetsche Bank AG predicts that 48 percent of all homeowners
with a mortgage will be underwater. As the equity position of homeowners
deteriorates, banks will further tighten credit and foreclosures will mushroom.
-
- The executive board of the IMF does not share Wall Street's
rosy view of the future, which is why it issued a memo that stated:
-
- "Directors observed that the crisis will have important
implications for the role of the United States in the global economy. The
U.S. consumer is unlikely to play the role of global "buyer of last
resort"- other regions will need to play an increased role in supporting
global growth."
-
- The United States will not be the emerge as the epicenter
of global demand following the recession. The world is changing and the
US role is getting smaller. As US markets become less attractive to foreign
exporters, the dollar will lose its position as the world's reserve currency.
As goes the dollar, so goes the empire.
-
- July's employment numbers came in better than expected
(negative 247,000) lowering total unemployment from 9.5% to 9.4%. That's
good. Things are getting worse at a slower pace. What's striking about
the BLS report is that there's no jobs-surge in any sector of the economy.
No signs of life. Outsourcing and offshoring are ongoing, and downsizing
is the new path to profitability. Businesses everywhere are anticipating
weaker demand. Thus, the jobs report is probably a one-off event; a lull
in the storm before the next round of layoffs begin.
-
- Unemployment is rising, wages are falling and credit
is contracting. In other words, the system is working exactly as it was
designed to work. All the money is flowing upwards to the gangsters at
the top. Here's an excerpt from a recent Don Monkerud article that sums
it all up:
-
- "During eight years of the Bush Administration,
the 400 richest Americans, who now own more than the bottom 150 million
Americans, increased their net worth by $700 billion. In 2005, the top
one percent claimed 22 percent of the national income, while the top ten
percent took half of the total income, the largest share since 1928
-
- Over 40 percent of GNP comes from Fortune 500 companies.
According to the World Institute for Development Economics Research, the
500 largest conglomerates in the U.S. "control over two-thirds of
the business resources, employ two-thirds of the industrial workers, account
for 60 percent of the sales, and collect over 70 percent of the profits."
-
- ... In 1955, IRS records indicated the 400 richest people
in the country were worth an average $12.6 million, adjusted for inflation.
In 2006, the 400 richest increased their average to $263 million, representing
an epochal shift of wealth upward in the U.S." ("Wealth Inequality
destroys US Ideals" Don Monkerud, consortiumnews.com)
-
- Working people are not being crushed by accident, but
by design. It is the way the system is supposed to work. Bernanke knows
that sustained demand requires higher wages and a vital middle class, but
what does he care. He's not a public servant. He works for the banks. That's
why the Fed's monetary policies reflect the goals of the investor class.
Bubblenomics is not the way to a strong/sustainable economy, but it is
an effective tool for shifting wealth from one class to another. And that's
the point. Wall Street doesn't give a fig about productivity, capital formation
or free markets. What they care about is moving every farthing in your
account into their account. The Fed's job is to facilitate that objective,
which is why the economy is headed for the rocks.
-
- The free market is a sham to conceal the crimes of the
rich. Read Taibbi. Read Marx. Karl, not Groucho.
-
- The financial meltdown is the logical outcome of the
Fed's monetary policies. That's why it's a mistake to call the current
slump a "recession". It's not. It's a planned demolition.
|