Our Wonderful Bubble Economy

Posted: February 3, 2014 in Uncategorized
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I always had an inkling that Wall Street was not an accurate gauge of the real economy. I didn’t know for sure and couldn’t give you any discernible theory as to why but my gut told me this was the case. Turns out I was right. I am a pretty humble dude but am also one smart mother f€cker (I’m actually not that smart at all. This is stuff a 3rd grader could understand.) and was able to able to crack the code.

There have been several instances of real legitimate growth in America since our inception (and our sexy, sexy conception). Arguably the most explosive growth we’ve enjoyed was the period starting from roughly the end of the civil war through the 1913ish. Government was relatively nonintrusive, there was no income tax, we were innovating like nobody’s biz-nass, we got electric lights up in this piece, the telephone was invented, we were laying train tracks like mad, Henry Ford invented the assembly line, and so on…

Real wealth is having stuff we want and need. The more stuff that our economy produces, the more stuff there is for our citizens to enjoy (told you a third grader could get this). This is what happened during the aforementioned period of our history. We accumulated tons of stuff, i.e. wealth. However, modern day economists tell us that wealth is derived from spending, not production. Just spend. Spend borrowed money. Spend freshly printed money. Just spend and we’re good. Our GDP for example, a figure most economists use as a measure of our economic health, is based on spending. John Maynard Keynes, the godfather of modern economics, believed and preached this. Ben Bernanke, Janet Yellen, Timothy Geithner, and most politicians, republican and democrat (whether they know it or not) are Keynesians. It has become the dominant philosophy of economic and political thought in our country beginning in earnest with FDR and culminating today with the Bush, Obama, Greenspan, Bernanke fruit smoothie. It is no coincidence that government wants to spend (obviously spending secures votes) and so they adopt an economic philosophy that claims that spending = prosperity.

It’s a long sordid story beginning with Woodrow Wilson and the creation of the Federal Reserve and the income tax both in 1913 (sweet year), nurtured by FDR and his brain trust, mutated under Nixon and the severing of Bretton Woods, and incarnated in its current form under Greenspan. It was a subtle and insidious evolution. What we arrived at was an economy not based at all on production and real, actual growth, but rather on leverage, spending, and inflated asset prices… A Keynsian panacea.

In his wildest wet dreams, John Maynard Keynes could not have fathomed the world we live in. He and Bernanke and Krugman and all the Nobel prize winners got their dream scenario. So how’s it workin out?

Our economy is now based on bubbles. Economies based on real growth and real production don’t go ape sh*t for a few years and then drop off a cliff and then start over again. The way it works is our politicians and our central bankers provide cheap money to Wall Street bankers via insanely low interest rates (like 0%) and “open market operations” where they purchase assets, billions of dollars worth each month, by printing money. All of this cheap money benefits the fat cats and punishes the masses as discussed in a previous post. Speculators take the cheap money and make easy profits by purchasing higher yielding government debt and other securities, and companies engineer leveraged buyouts and stock buybacks to jack up their stock prices resulting in the Twitters of the world: companies that have little or no profits but who’s stock is through the roof. The stock market explodes and we are told the economy is strong.

If you pump money into something prices go up. Government often directs the money into the areas it deems appropriate thus inflating prices in these sectors, like real estate. Our all knowing leaders choose which sectors to pump up rather than letting the free market choose. They choose the winners and losers. Their goal is to create what they call “the wealth effect”. This basically means they pump up prices to make people feel better off than they actually are. If stocks and real estate are going up many people feel wealthier and some do profit. However, the boom is artificial and short-lived and is always accompanied by a punishing bust.

Our economy has been based on these repeated bubbles for many years now. Stock prices should go up based on the viability and the profitability of the company, not on its ability to buy back its own stock with cheap overnight money and artificially jack up its stock. As far as housing we have been conditioned to believe its good if prices go up. It’s true that you may profit if you sell your home in the midst of a boom. But wouldn’t it be great if houses were much cheaper? We never go to the store and say, “Gee, I hope the price of milk doubled.” I personally don’t like my crazy high mortgage payments and would prefer them to be lower. I’ll make my money the old fashioned way without an artificial government created housing boom. In a true and healthy economy prices fall as they did during the most prosperous periods of our history. Again, the definition of wealth is an abundance of goods. The more abundant they are, the more accessible and affordable they are. Our government, our economists, and our professors however preach that inflation is good and deflation is evil. They believe that the path to prosperity is through increasing prices so they inflate these gigantic bubbles to make us feel wealthy.

Through decades of recycled bubble monetary policy our real economy has been suffering. Unemployment has only dropped because millions have dropped out of the labor force. We don’t manufacture like we once did. We buy everything from Asia. Today’s manufacturing report bares this out. We used to be the world’s largest creditor nation, now we are history’s largest debtor nation. Holiday retail sales were disappointing. There is a slew of negative economic data that gets brushed over in the financial media. They only focus on the stock market and real estate and if both are up well then the economy is healthy. Just remember they all have skin in the game. They all want the rosy scenario and that is what they lean towards in their reporting.

It took me a lot of reading and learning to understand that my gut was right. The stock market is not always the measure of a healthy economy. In fact it may be the best contrarian indicator. If I am right and our economy’s fundamentals are not healthy, the markets will have to correct. Artificial bubbles are not sustainable. And unfortunately, our entire economy is based on bubbles. Until our leaders realize this we will continue this roller coaster ride of booms and busts. On the bright side, every time there is a crash people become more likely to ask questions. At some point maybe voters will figure this stuff out. Believe me, if I can figure this stuff out your average moron voter can too.


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