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Jim Cook



Every once in a while I switch the TV channel from Fox to CNBC to see what the liberals are saying.  After listening awhile I get a deep sense of hopelessness and foreboding for our country.  The most important thing for the left is giving money to people.  They are happy to see the growth of food stamps, disability payments, housing subsidies, free healthcare and all the other welfare benefits.  They utterly fail to see the damage it is doing to the recipients.  Whole cities that once flourished have deteriorated into rotting eyesores populated with shambling hulks of chemically dependent drones.  These people are no longer employable.  They have become incompetent and helpless and the liberals can’t see that it’s their doing.

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The Best of Jim Cook Archive

Best of Doug Noland
May 12, 2011
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Policymakers, the rating agencies and, apparently, the marketplace never recognized how (“Ponzi finance”) Bubble dynamics were distorting price structures throughout the economy.  The Credit system doubled mortgage debt and the markets pretended the quality actually improved (the price of mortgage debt increased!).  Amazing as it is to contemplate, it seems that virtually no one appreciated the degree of distortions and underlying fragility.  In hindsight, it should now be clear that the mortgage finance boom inflated home prices to unsustainable levels.  As important, this atypical expansion of finance inflated incomes and government tax receipts, while distorting the pattern of spending and investment (good old fashioned “Austrian” analysis).

I would argue that today’s atypical expansion in federal finance is having crucial, yet less obvious, impacts on incomes, asset prices and expenditures.  Ebullient markets are confident in the slow but ongoing healing process thesis (slow is good, ensuring protracted ultra-easy monetary policy).  In reality, fragilities quietly and methodically continue to mount.  The system is in desperate need of balance and restraint - but is receiving the opposite. . .

It is worth highlighting that some forecasts for Q1 growth have dropped to as low as 1.5%, a dismal showing considering unrelenting extreme fiscal and monetary stimulus (and resulting stock market gains).  Not surprisingly, the boom in federal finance is having a more muted economic impact when compared to that from previous mortgage excess.  The mortgage Bubble inflated the perceived Net Worth of most homeowners, while inciting huge booms in construction and consumption.  Today’s boom has certainly been instrumental in stabilizing incomes (at an inflated level), although asset price gains are benefiting a narrower cross-section of the general population.  Meanwhile, a large portion of the populace is today suffering from meager (negative real) returns on their savings – while losing out to rising inflation. 

I’m confident that S&P’s baseline case is too optimistic.  “Austerity” at the state and local level – and perhaps even a little from Washington – are poised to restrain an unbalanced recovery.  While no one wants to admit as much, U.S. and global economies are increasingly susceptible to highly speculative and unstable global risk markets.  And with U.S. private-sector Credit growth remaining almost non-existent, I believe S&P’s and others’ estimates for the growth in federal receipts will prove overly optimistic ("output" financed by federal government borrowing and spending will not resolve fiscal troubles).  The odds of a recession over the next few years are not low.  And I would argue strongly that the longer the government finance bubble runs the more difficult the adjustment when this vital source of finance is scaled back.  At the end of the day, massive expansions of a particular strain of Credit – albeit mortgage, household, corporate, or government – are destabilizing and difficult to normalize from.

And I refuse to take seriously recent intentions to begin addressing this problem until I hear leadership - from the Halls of Congress, from the Oval Office and from both parties – commit to sticking with spending restraint even in the face of recessionary conditions (weak economy and/or markets).  This is where the rubber will meet the road.  We’re now two years into both an economic recovery and one heck of a market boom, so politicians will talk tough and extrapolate a favorable backdrop.  Yet, it wasn’t many months ago that both parties were too willing to go with another round of borrowing and spending stimulus.  I fear both parties will have a very difficult time parting ways with the notion of government as economic/market backstop.  I’m not sure the public is really ready to part ways. . .

The government finance Bubble is the second – and concluding – systemic Bubble.  It's bigger in dimensions than the mortgage Bubble and is having more problematic systemic effects on incomes and the financial markets.  In particular, acute vulnerabilities resulting from the previous Bubble period now ensure that, in particular, the municipal debt and mortgage markets remain susceptible to any retrenchment in federal spending (or rise in market yields).  And, importantly, there is no potential Creditworthy debt issuer of last resort waiting in the wings to bail out the system when market confidence in U.S. government debt falters.   Ironically, the bigger the Bubbles get the less conspicuous they appear to most.