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SMOKE AND MIRRORS
By James R. Cook
The deafening propaganda about an economic recovery ain’t necessarily so. New orders, shipments and production are stuck at levels below last year. There’s no real improvement in capital spending (other than government hocus-pocus). Corporate profits edged up, not from increased business activity, but from stock speculation, currency and commodity gains. There is zero growth in employment incomes and unemployment is high, despite fancy government formulas that lower the number. Here’s the bad news; the private economy is weakening.
Richard Benson of Specialty Finance Group summed it up nicely. “The new market driven economy is based on managing expectations always upward and manipulating markets to keep asset prices up, and the appearance of wealth high. This is designed to keep businesses and households spending. This economic model, however, has an air of desperation about it. At present, corporate cash flows, and the rate of capacity utilization does not justify any meaningful pick-up in corporate investment or hiring. The household sector continues to spend beyond its means and is sustained only by the extraordinary increase in annual mortgage debt.”
The bubble in mortgage debt may be over. Stephen Roach of Morgan-Stanley writes, “It’s a nightmare scenario, even for me. Sharply rising real long-term interest rates are the last thing an economy on the brink of deflation needs. Such an outcome would depress an already weakened state of aggregate demand, conjuring up notions of the dreaded deflationary spiral. The extraordinary correction in the bond market over the past seven weeks tells us not to dismiss such a possibility out of hand.” Doug Noland adds, “the Fed has lost control of the interest rate market, with onerous portents for the highly leveraged and speculation-rife U.S. credit system.”
Lance Lewis sums it up. “Refi and homebuilding activity is what has sustained the consumer and supported the economy. With rates no longer falling, that game is over, period. Business spending will not be picking up unless demand accelerates. And with the rest of the world still soft and the U.S. consumer losing his mortgage bubble lifeline, what’s going to be there to catch the economy? The answer is ‘nothing.’ The second half fable is just that, a fable.”
A rise in rates not only takes the starch out of housing, it kills the stock market. According to Bill Buckler, “It is the cost of carrying debts which is now so dangerous to the REAL U.S. economy as it cuts into fragile U.S. corporate cash flows and earnings. Wall Street has managed to hoist the U.S. stock markets back towards the 10000 level. Over the next few weeks, it faces increasing warnings about the economic recovery being aborted by climbing market interest rates. U.S. stock markets are set up for another massive downwards break.”
Apparently, government spending has become the economy’s new savior. The war boosted second quarter G.D.P. and additional government juggling (adding dollars that weren’t spent) accounted for most of the rest. There’s close to a trillion-dollar swing from budget surplus to budget deficit. Where’s the money going to come from? Economist Ludwig von Mises wrote, “If the government provides the funds required by taxing the citizens or by borrowing from the public, it abolishes as many jobs as it creates.” Not such a godsend after all.
Kurt Richebacher describes the Austrian theory of business cycle. “Recessions are periods in which consumers and businesses correct their spending excesses built up during the earlier boom. But such necessary adjustments are not taking place this time…..Instead of restraining the excess in consumer spending, the Fed’s looser and looser monetary policy has fostered new, dangerous bubbles sustaining the same ill-structured economic and financial development as in the past years.”
Mises elaborated on the outcome if the depression is continuously postponed by money and credit creation. “Finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against ‘real’ goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scraps of paper. Nobody wants to give away anything against them.”
Lately, the prices of high-quality collectibles, art and antiques have begun to go through the roof. They used to double in price every decade. Now they are doubling in two years. Is this a sign of the forthcoming crack-up boom that Mises warned about? Everyone doesn’t get out of dollars into tangibles at one time. A few people initially decide to shed dollars in a hurry and buy assets. I’m one of those, and there are numerous others. Most of the economic thinkers I pay attention to are looking for a crash and a depression. Maybe we’re all looking the wrong way. Maybe we should think about hyperinflation. Consider that the first G.I. Joe doll just sold at auction for $200,000.
My late business partner, back in 1972, used to claim that bread would someday cost a dollar a loaf. We scoffed at him. I have a Beach Boys concert poster from years ago that offers tickets for $2.00, $3.00 and $4.00. Recently my wife and I went to a Fleetwood Mac concert. Ordinary seats were $150 each. Yet, the government assures us that there is no inflation. Here again, they’re massaging the numbers. It’s all smoke and mirrors. We use the term “sticker shock” to describe what’s really happening to prices.
Scarce collectibles and antiques are exploding upward in price. These collectors items are outside the realm of government manipulation. Their price rise can’t be controlled. Maybe that’s another reason they’re rising. Will they double every year, every six months, every month? While red-hot prices prove that a lot of people have a lot of money, it may also be the start of hyperinflation. It has to start somewhere. Money and credit cannot expand indefinitely. As more goods and services begin to adjust to the abundance of money, more people refuse to hold cash. Prices rise more drastically. A panic ensues that obliterates the purchasing power of the currency. If the Fed maintains the present course, more and more people will begin to believe that the quantity of money and credit will increase beyond all bounds. We’re not there yet, but we’re further down this road than many would like to believe. According to the great thinkers of the Austrian School, there are one of two outcomes ahead; depression or runaway inflation. Don’t bet against the latter.