No thinking person can feel good about the insane surge in asset prices over the past two months. Actually it is horrifying. The US Federal Reserve is flooding capital around world markets with a fire hose. And the content of their spray is not water, it is kerosene and it is igniting a firestorm of risk around the globe. Yesterday I was trying to describe the situation to my 11 and 12 year old kids. Growing up around a couple of analysts makes them unusually aware of world events, but I realized in trying to explain this most recent wave of whacko that we have now reached a whole new dimension of dark and sinister. The mess is now so big and far-reaching it is increasingly unclear how it will finally get sorted out, and which people will have the leadership and fortitude to get the money-gushing harpies back into the bottle.
There is no good that can come of forcing interest rates to virtually nothing and funnelling capital into wild speculation in everything from oil to food. It is penalizing the prudent people in the world who have carefully amassed some savings. It is undermining the solvency of all the institutions that a civil society depends upon for stability. Insurance companies, pensions, social agencies, and savers all depend upon guaranteed deposit rates to control risk and fulfill crucial funding obligations.
Worse still, it is ballooning commodity prices in basic necessities for people who are already under-employed and barely making ends meet. Basic materials and oil are all now back at prices seen before the credit crisis collapsed. Oil is above its 2008 level at a time when world oil demand has fallen by more than 10%! There is no logic to any of this. Thoughtful people can’t be fooled. We know we are not wealthier from fleeting bubble gains on paper assets. We have seen this film several times already. Each bubble bursts in carnage more damaging than the last.
See an excellent summary of the knock-on effects in the real economy here: Bernanke's folly: the end game.
“The implied tax that has been imposed on the economy thus far since QE1 was put in place is a stunning $250 billion annually due to oil's price increase alone, or nearly four times the so-called “Bush Tax Cuts” for the rich. QE2 will add another $1/gallon (roughly) to gasoline which is another $140 billion, for a total of almost $400 billion each and every year.
And that's just in oil prices – then you have to add in all the other input cost-push problems, from corn to wheat to oats to cotton to wood pulp. The total effective tax increase from QE2 is in fact the entire $600 billion QE package, plus whatever the market anticipates Ben will do as a follow-on!
What is being done here, if it is not stopped by Congress and/or the people, will destroy the economy. There is no ability to withdraw the QE-anything without causing all of the previously-hidden costs to immediately assert themselves in the economy. This is not speculative – it is factual. We cannot get wage inflation due to the lack of pricing power by labour in a market with 17% of the people either out of work or underemployed and another 7 million who are not counted as they are not part of the labour participation rate, which has declined by 5% in the last two years. The true unemployment rate is thus closer to 25%.”
Moral hazard has been writ large on the face of global stability because the financial harlots who drove the economy into the swamp were all bailed-out and promoted over the past couple of years by the politicians they helped to appoint. Meanwhile real people have been left to pay the price and suffer hard lessons that will last for years to come.
The economy is incredibly weak so yes there is an argument in favour of government stimulus plans aimed at supporting employment now in projects that will benefit the country and its citizens for decades to come. Spend 350 billion refurbishing schools. Rebuild antiquated water and sewage treatment systems. Develop clean domestic energy sources. But stop funnelling tax payer dollars into financial bubbles to goose the short term profits of a few traders and bankers. The real economy, one that is actually worthy of investment, is crumbling before our eyes.
Let’s hope that Ron Paul can start to turn the tide back to sanity and reign in the run away Federal Reserve. See: Ron Paul is about to totally revolutionize the House Monetary Policy Panel.For anyone who saw it David Stockman, former budget director in the Reagan administration, gave a remarkably candid and important interview on Bloomberg Television yesterday November 4 at 3:30 pm ET on the outrageous nature of QE spending. Unfortunately so far Bloomberg has not made the clip available. I have asked them to reconsider. Hopefully they will and I will be able to post a link shortly.
Meanwhile real people should continue to be extremely defensive of their capital in these crazy market conditions.