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Although Barack
Obama has refrained, at least for now, from delivering triumphant speeches in
a naval flight suit, there is nevertheless a strong tone of
accomplishment emanating from the President and his deputies. Over the
weekend, top White House economic adviser Lawrence Summers even
pronounced that the recession is now over. Without hedging his
bets, Summers declared that thanks to the Obama Administration's wise
stewardship, economic stimuli, and emergency bailouts,
another Great Depression, set up by the prior
Administration, had been narrowly averted. Summers saw no
impediments to the return of sustainable growth. He may as well have
delivered these remarks from the deck of an aircraft carrier.
I hate to shoot down these high-flying expectations, but the economy is not
improving. All that has changed is that we are now more indebted to
foreign creditors, with even less to show for it. Washington's current
policies have once again deferred the fundamental, market-driven
reforms needed to redirect us onto a sustainable path.
Instead, through aggressive monetary and fiscal stimuli, we are trying
to re-inflate a balloon that is full of holes. This was the Bush
Administration's exact response to the 2002 recession. It's shocking how few
observers note the repeating pattern, especially the fact that each crash is
worse than the last.
Obama's claim of success largely derives from the slowing tally of job
losses, the seemingly renewed strength in the financial system,
the pickup in home sales and home prices, and the positive
GDP figures. But these 'achievements' fall apart under close
examination.
First, a closer look at the jobs numbers shows that employment improved in
sectors that benefited most directly from monetary or fiscal
stimulus: government, healthcare, financial services, education and
retail sales. Meanwhile, sectors such as manufacturing continued to shed
jobs at an alarming rate. These dynamics actually exacerbate our
economic imbalances. Recent trade deficit figures (in which the
deficit-reduction trend of early 2009 has sharply reversed) show how this
employment growth is preventing needed rebalancing. Essentially, the
Administration is nurturing firms that cannot survive without subsidies and
support.
Once stimulus is removed, the "saved" jobs will be among the first
to go. If the President has not figured this out yet, I am sure Fed Chairman
Bernanke has. As a result, the market should discount as pure bluff any
claims from the Fed about an eventual "exit strategy" from
current stimuli. Such an "exit" would bring about Bernanke's
greatest fear - spiking unemployment.
Second, major investment and commercial banks are not back on their feet, but
remain fundamentally insolvent. Their current business model of
risk-free speculation depends upon the maintenance of government
backstops, the continued availability of cheap money from the Fed, and
the use of accounting gimmicks that allow them to
conceal losses behind phony assumptions.
Third, while it is true that home prices have stopped falling, this
represents failure, not victory. True success would be a drop in
home prices to a level that homebuyers could actually afford. Instead,
we have maintained artificially high prices with tax credits, subsidized
mortgage rates, low down payments, and foreclosure relief. With 96% of
new mortgages now insured by federal agencies, market forces have been
completely removed from the housing equation. With so many
government programs specifically designed to maintain artificially high home
prices, devastating long-term consequences for our economy are inevitable.
Finally, it is true that the GDP yardstick shows an economy returning to
growth. However, as I have often repeated, this measure has deep
flaws that render it almost useless for judging the soundness of an economy.
Currently, the figures are merely reporting increasing indebtedness as
growth. Using GDP as the main financial indicator is equivalent to
judging a man's success by the cost of his house, car, and
wristwatch. Rather than gauging income, these figures
merely indicate a level of spending and have nothing to do with
earning power.
Paul Volcker, the only independent voice in the Administration, has not been
deceived by his colleagues' sunny claims. He recently noted that our economy
still evidences "too much consumption, too much spending relative
to our capacity to invest and export" and that the problem is
"involved with the financial crisis but in a way [is] more difficult
than the financial crisis because it reflects the basic structure of the
economy." Yet, President Obama has chosen not to address these concerns.
As Summers and Obama like to point out, the vast majority of economists take
it on faith that, with the right finesse, the stimulus can be withdrawn
without pushing the economy back into recession. But based on the distortive
effects of stimuli and bailouts, our economy has adapted to a climate where
cheap credit is not only plentiful but critical.
Eventually, the cheap credit will dry up. Not because the Fed decides it
should, but because our foreign creditors stop lending. When that
happens, this Administration will look as clueless about economics as the
last one was about the pitfalls of nation-building.
But for now, the chattering classes believe strong government action has
delivered us from calamity. For them, at least, it's
"mission accomplished!"
For a
more in-depth analysis of our financial problems and the inherent dangers
they pose for the U.S. economy and U.S. dollar, read Peter Schiff's 2008
bestseller "The Little Book of Bull Moves in Bear Markets"
and his newest release "Crash Proof 2.0: How to Profit from the
Economic Collapse." Click here to learn more.
More importantly, don't let the great deals pass you by. Get an inside view
of Peter's playbook with his new Special Report, "Peter Schiff's Five
Favorite Investment Choices for the Next Five Years." Click here to download the
report for free. You can find more free services for
global investors, and learn about the Euro Pacific advantage, at www.europac.net.
Peter D. Schiff
President/Chief Global 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
pschiff@europac.net
Also
by Peter Schiff
For a more in depth analysis of the
tenuous position of the American economy, the housing and mortgage markets,
and U.S. dollar denominated investments, read my new book : The Little Book of Bull Moves in Bear Markets" (Wiley,
2008).
More importantly take action to protect
your wealth and preserve your purchasing power before it’s too late.
Protect your wealth and preserve your purchasing power before it’s too
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, download my free research report on the powerful case for investing in
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, and subscribe to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp
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