Saturday, June 9, 2012

The Modus Operandi - Or - 5,000 Calorie Austerity

Let me tell you how this round of this circus plays out. Bernanke (US Fed) and Draghi (ECB), both MIT grads, are seeing eye to eye these days. And let's make Merkel (Germany) the third leg of the stool. These are the players (Bernanke and Draghi) who can send your portfolio right back to that comfortable March 31 value with the push of a button (money's created electronically these days). And don't sweat it, that is the plan. However they don't have to, and prefer not to, just yet. They're sending a very direct message, albeit soft, to the politicians: Do some structural reform, make some commitments, do a little housecleaning - and then we'll talk about QE3, another LTRO, pool some debt, create an FDIC-type program for European bank deposits, and maybe even do the Eurobond (Merkel).

I expect all that (promises of reform and pushing of buttons) to play out. And while the skeptics are out in force suggesting that we're not going to get much bang for all those electronic bucks, when it comes to the stock market, recent price action says otherwise. Stocks are clearly signaling a strong desire for yet more monetary accommodation. When it comes to the global economy, long-term, however, I concur.

The other day I wrote a column titled Throwing Money at Problems Caused by Throwing Money at Problems: that's clearly the modus operandi. But there's this view among some that capitalism's the culprit. That we're throwing money at problems caused by unfettered markets. That we're where we are because of too much private sector freedom, now exacerbated by not enough government spending.

One problem (there's plenty more) with the too-much-freedom argument is that, when it came to large financial institutions, it was precisely the opposite - they lacked the freedom to lose (thanks to government bailouts). As for the claims of high profile economist Robert Reich (and others)- that we're smarting due to a decline in government spending - let's just say he's blatantly misleading his readers. To in any way stress that we're suffering due to (or even experiencing) a decline in federal spending, conveniently (and grossly) ignores the spending explosion in 2009. That's like saying in the beginning of 2009 you went from consuming 3,000 calories a day to gorging yourself on 6,000, but now you're starving your body with a 5,000 calorie diet. Oh and make no mistake, as Reich points out, out of control government spending is not merely a phenomenon of the past three years...

As for Europe; anyone who would have us believe that capitalism has somehow put them in this fine mess, is insulting our intelligence in the worst way...

Thankfully, the U.S. economy remains diverse, deep, and in the end resilient. Keynesians, those who believe governments should deficit spend during recessions, will claim victory when the economy finally begins gaining traction. When in reality this mess (the depth of the recent recession and the slow crawl since) was created by decades of governments throwing money at problems caused by governments throwing money at problems.

Stay tuned...

PS: I can't stop there without addressing Reich's article. I totally agree with his message that rampant cronyism exists on the right side of the aisle. The problem is that this unrepentant partisan continually, and egregiously, manipulates and misrepresents data in his articles and videos (sponsored by a billionaire-funded entity that spent millions trying to unseat GWB). To put himself out there as some righteous whistleblower, without the slightest mention of the $hundreds of millions labor unions are fixing to spend to defend their man (who, in the auto-bailout,twisted the lawsof this country) - entirely demolishes his credibility.


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