Monday, January 25, 2010

Shalom Also Means Goodbye

Dr. Steve Keen of Australia, one of the few economists who predicted the financial crisis, has a concise post out titled The Economic Case Against Bernanke. Mish has also posted on this. Please read this, as it is not lengthy. The focus is debt levels; Dr. Keen correlates the 1920s and Great Depression to the recent past and current situation.

In my very humble opinion, there has to be a reason why the current downturn has lasted so long and why in December, 24 months after the first official recession month, the better part of one million people are reported to have left the job force.

They did not leave because they had successfully played the stock market rally in 2009!

Large companies, which often have 90%+ gross margins on their products, can show rising profits without sales gains simply by cutting a variety of costs, but it is the continued decline in the labor force that argues that the downturn is not truly over. And this is occurring as government has taken on more debt than the private sector has shed.

It would appear that either governments at all levels of this country need to suddenly find very productive uses of their debt spending, or we are simply going to have to get serious about canceling a number of the debts.

Also, it is time that all financial institutions perform accurate accounting of their assets. If the companies have no equity with proper accounting, their stocks should go to or near zero and the bondholders need to engage in a debt-for-equity swap. If the companies are solvent, then the Fed can cease trying to create inflation by penalizing savers.

One of the relatively subtle Big Lies extant is that the steep yield curve is bullish. Actually, a zero short-term interest rate is bizarre. A 10-year Treasury yield of about 3.7% is hardly predictive of a booming economy.
It is this sort of financial situation along with a rising stock market that has played the dominant role in the economic models such as the Index of Leading Economic Indicators and ECRI's analysis.

At very high and very low temperatures, matter acts strangely. The same is true at extremes of interest rates.

Meanwhile, of course the same Establishment that let TARP pass only after the Senate got to lard it up with a large spending bill that was languishing there, that changed the focus at the last minute when it got back to the House, that predicted a Depression if TARP did not pass and has not explained why the economy promptly imploded, and that hid the final large AIG payout to counterparties at 100 cents on the dollar by the distraction of some relatively small bonuses to the remaining staff at AIGFP has rallied the troops and appears poised to push the second coming of the Maestro to a second term as chairman of the Fed, no matter how abysmal his performance has been as Sir Alan's lieutenant and then as chief enabler of the reckless boom.

I see no reason why gold and low-end retailers will not continue to thrive, given that the same people can be reasonably expected to follow the same policies that brought them to the power to which they tenaciously cling.

Ben Shalom Bernanke should in good conscience say thanks but no thanks and let someone with clean hands guide the Fed.

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