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Despite the
full onslaught of Keynesian economic policies, including the injection of
unheard of sums of printed money into the financial system, state sanctioned
accounting tricks, negative real interest rates, massive deficit spending,
and debasement of the U.S. dollar, the American economy is slipping back fast
towards recession. This week's release of dismal employment figures, in which
the entire economy could only muster 54,000 new jobs, confirms that fact.
It is
certainly reasonable to assume that more jobs would have been lost in 2008
and 2009 if the government had not steeped in as aggressively as they had
with this Keynesian barrage. But if we had chosen the less interventionist
path our present reality may have been quite different. We had the
opportunity then to lay the ground work for a real recovery. This was a theme
that I continually stressed at the time. Instead, our leaders chose the
time worn strategy of inflation as an economic cure all. It hasn't worked,
and our economy is far worse now as a result.
But the price
for these massive injections of cash and the debasement of the currency will
be continued economic malaise. There is a word for the ugly combination of
recession and inflation: stagflation-the worst of all worlds and the most
difficult to cure. I suspect that we will hear this word mentioned much more
often as the decade wears on.
The Fed has
pumped trillions of synthetic dollars into the economy through purchases of
toxic assets from the balance sheets of failing banks. These moves have
permitted banks to camouflage other suspect assets under accounting gimmicks,
thereby perpetuating a zombie financial system. Not only have most of the
struggling banks survived, they are thriving. By dropping short-term interest
rates to below the level of inflation, and by receiving interest on the
deposits made at the Fed, the banking sector has been extremely profitable
over the last few years, especially for those institutions lucky enough to
have been designated as "too big to fail." It is not surprising
that Wall Street bonuses continue to flow generously. But these developments
hardly benefit the world beyond Wall Street.
By robbing
depositors of an economic return on bank deposits, the Fed sought to force
consumer demand. However, aware of their massive exposure to derivatives,
many related to real estate, the banks remain tight on consumer lending.
Further, the Administration has appeared unfriendly to business and has
caused great uncertainty over future taxes, regulations and health
expenditures. As a result, consumer confidence has plummeted, and rightly so.
As the price
of real estate continues to fall, it draws into question the backing of real
estate related derivatives, threatening the banks, making credit even
tighter, and driving recession even deeper amid rising unemployment. All the
while U.S. Government spending still veers out of control. To finance the
largesse, Treasury debt has exploded and the Fed has printed money as never
before. As a result, the U.S. dollar is approaching all time lows against the
many major currencies. If it were not for deep concerns over the continued existence
of the Euro, the U.S. currency would have fallen far further.
Some
short-sighted economists have lauded the fall of the dollar by arguing that a
weak greenback will help U.S. exports. While it's true that initial stages of
currency devaluation can have such an effect, over time a falling currency
proves to be both highly damaging to domestic businesses and inflationary for
the overall economy. Evidence increasingly shows that American businesses and
consumers are facing higher import costs. In other words, do not look for a
cheap dollar to provide any meaningful boost.
John Browne
Senior Market Strategist
Euro Pacific Capital, Inc.
20271 Acacia Street, #200 Newport Beach, CA 92660
Toll-free: 888-377-3722 / Direct: 203-972-9300 Fax:
949-863-7100
www.europac.net
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