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Please don't
believe the hype that the American economy is healing. While it is true that
some data is showing improvement, the true fundamentals of the economy
continue to erode.
America's
trade deficit hit $52.6 billion in January. That's the highest level since
October of 2008 and is clear evidence that we have fully reverted back to our
under production, under saving and overconsumption habits with alacrity.
The nation's
debt has now eclipsed 100% of our GDP, after 13 straight quarters of paying
down debt households have now started to releverage
their balance sheets and total non-financial debt is at a record 250% of GDP.
The sad truth is that the U.S. economy is more addicted to debt than at any
other time in history.
But most
importantly, please don't believe the lie that the Fed's money printing is
laying fallow at the central bank and that inflation isn't harming the
American middle class and the economy. Consumer prices rose 0.4% in the month
of February alone and year over year increases in food and gas prices are 5%
and 12% respectively. Money supply growth is up 10% in the past 12 months and
banks are now buying U.S. Treasuries with reckless abandon.
Commercial
banks have purchased $78.2 billion in Treasury and Agency debt in January and
February of 2012. That's already more than the entire amount of purchases
made in all of 2011 and is on track to add nearly ½ trillion dollars
of government debt to commercial banks' balance sheets. The Fed buys these
Treasuries from banks and that enables them to buy more debt from the
government. Using that process, the Fed is able to monetize both existing and
newly issued Treasury debt. Since the government gets the money first and
distributes it into the economy, the money supply increases without any
direct benefit of capital goods creation.
Making this
situation even worse is the Fed's promise to keep interest rates on hold for
another three years. Banks can either keep their newly created credit at the
Fed earning .25% or give a three year loan to the government and earn .57% at
the current interest rate. Since Bernanke has assured them that there is
little risk of rates going up on the short end of the yield curve for at
least the next 36 months, banks have made the intelligent choice to earn the
extra yield and buy 3 year notes.
That is a big
win for the banks because they can earn an extra 32 basis points on their
money. And it's a major score for the government because they have a ready
buyer for their debt. However, it's a big loss for the middle class, as they
see their cost of living soar due to the relentless increase in money supply.
So there you
have it! The American economy isn't healing at all. What we have accomplished
is to further cement our addictions to debt, over consumption and inflation.
Those very same conditions were the progenitors of the Great Recession
beginning in December of 2007. Oil prices are soaring above $100 a barrel,
inflation is rising and households are still soaked
in debt...sound familiar? Only now the nation's sovereign debt is at a record
level and the country is careening towards insolvency. The only thing holding
the economy together is the Fed's promise of free money forever.
That shouldn't be misconstrued as a viable and healthy economy.
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