Oh Bama…could this really be the end?
To be stuck inside this mobile, with the Memphis Blues again…
– Bob Dylan, sort of
Who believes in the ‘recovery’ now?
Robert Reich (former Labor Secretary under Bill Clinton):
“The only reason the economy isn’t in a double-dip recession already is because of three temporary boosts: the federal stimulus (of which 75 percent has been spent), near-zero interest rates (which can’t continue much longer without igniting speculative bubbles), and replacements (consumers have had to replace worn-out cars and appliances, and businesses had to replace worn-down inventories). Oh, and, yes, all those Census workers (who will be out on their ears in a month or so).”
Yes, it’s the end of the road for the “quick recovery” crowd. Now, the whole world has the Memphis blues.
“The hastily assembled stimulus packages were a throwback to naïve Keynesianism,” adds Jeffrey Sachs. “The relevant fact was that the US, UK, Ireland, Spain, Greece and others had over-borrowed for a decade, so a decline in consumption after 2007 was not an anomaly to be fought but an adjustment to be welcomed.”
But nobody welcomed the Great Correction. Except us. The others all pretended that it was a recession…even a Great Recession. They treated it like an invasion of cockroaches or a stopped up toilet. They thought they could get rid of it.
But it wasn’t that easy. Nope. Now, we’re looking at a “double-dip recession,” says the mainstream press.
Once again, they’ve got it wrong. You can tell by reading their advice. If they knew what was really going on, they wouldn’t have any advice. As Mr. Sachs himself put it, this is an “adjustment to be welcomed,” not fought.
But even Mr. Sachs cannot resist a fight. Especially one that others will pay for. Like everyone else, he has a can of Raid in his hands. The government should do this… The government should do that… He thinks the government should do all sorts of mischief, including “insist that the rich pay more in income and wealth taxes – indeed a lot more.”
We don’t have any doubt that the feds are going to hit the rich hard; but what kind of economist would advocate it?
Mr. Reich has his own foolish prescriptions too – similar to those of Mr. Sachs:
“We need a new New Deal that will bolster America’s floundering middle class.
“We have to get to the core problem: a middle class that doesn’t have the dough to buy the goods and services the economy is capable of producing. Where to start? Expand the Earned Income Tax Credit and extend it up through the middle class. Finance that extension through higher marginal income taxes on the wealthy, who have never had it so good.”
Let’s see. Both men must imagine themselves as Robin Hood, stealing from the rich in order to subsidize the middle classes. They don’t seem to understand that the story of Robin Hood may make a good movie. It makes goofy economic policy. If taking money away from the rich could make a society more prosperous, how come Venezuela is broke? And Cuba?
Here in Baltimore, after you add in state and local taxes to the federal toll, your editor surrenders almost half of every dollar earned. How much more can they take? Even socialist France has a rule that a person cannot pay more than half his earnings in taxes.
But in the new America, things that were taken for absurd a few years ago are now taken for granted. Driving around the Capitol beltway, for example, we see a sign that says “Report Suspicious Activity.” This is not in an airport. This is on a major highway.
You want to see suspicious activity? Just follow Pennsylvania Avenue to the Capitol Building! A few years ago, urging people to rat out their fellow citizens would have been suspiciously un-American…more in keeping with life in East Germany or North Korea. But the world turns. And now, the snitchers are right here in the USA!
But returning to the economy… Even if you add a dip, this is still not a recession. It’s not caused by Europe. And it’s not go away if we tax the rich or spend more money we don’t have on ‘stimulus.’
We’ve now reached the end of the recovery fantasy. We need to realize that we are in a correction…one with an attitude and an agenda. Trouble is, we don’t yet, what’s on the agenda.
And more news…
The stock market continued its work yesterday. It took another 40 points off the Dow. Gold sold off $15 after hitting a new all-time high.
Markets work. They try to discover what things are worth. That’s what they’re for. And corrections have their uses too. When too many people make too many mistakes, the whole market needs to correct.
Most likely, there is still a large gap between current securities prices and the cash-flow needed to support them. A mortgage that the homeowner can’t pay, for example, is not worth face value. It’s worth less than that. And a company whose sales and profits are stalling is probably not worth 15 times earnings. Maybe it is worth 7 times earnings. And what about government bonds? How likely is it that the world’s biggest debtor – the US government – will be able to pay back off its 30-year bonds with money equal in value to today’s dollar?
That’s what the markets are supposed to figure out. And here is Henry Blodget…worrying that the news won’t be good:
In the past year, we’ve written a lot about the similarity between the rally of early 1930 and the one we had through April of this year.
The early 1930 rally came after the market had fallen nearly 50% in the fall of 1929. The spring 1930 rally took the market up nearly 50% again, to a level that was only about 20% below the previous peak.
That rally, of course, was also the biggest sucker’s rally in history. After the market peaked in April 1930, it crashed again, eventually ending up down 89% from the 1929 high and more than 80% from the 1930 high. The market did not reach the 1930 high again for another quarter of a century.
The rally that recently ended in April 2010 came after a crash that was actually slightly more severe than the 1929 crash (53% versus 48%). It took the market up nearly 80% from the low! The recent rally also lasted longer than the 1930 rally did – a year, as opposed to 6 months.
Importantly, we won’t know for sure what today’s market is until we look at it with the genius of 20/20 hindsight. As Peter Schiff pointed out yesterday, even as late as 1931, they didn’t know they were in a “Great Depression” yet. On the contrary, the promise from the White House was that “prosperity is just around the corner.”
“While the crash only took place six months ago, I am convinced we have now passed through the worst – and with continued unity of effort we shall rapidly recover. There has been no significant bank or industrial failure. That danger, too, is safely behind us.” – Herbert Hoover, President of the United States, May 1, 1930
“…by May or June the spring recovery forecast in our letters of last December and November should clearly be apparent…” – Harvard Economic Society (HES) May 17, 1930
“Gentleman, you have come sixty days too late. The depression is over.” – Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930
“…irregular and conflicting movements of business should soon give way to a sustained recovery…” – HES June 28, 1930
“…the present depression has about spent its force…” – HES, Aug 30, 1930
“We are now near the end of the declining phase of the depression.” – HES Nov 15, 1930
“Stabilization at [present] levels is clearly possible.” – HES Oct 31, 1931
“All safe deposit boxes in banks or financial institutions have been sealed…and may only be opened in the presence of an agent of the IRS.” – President F.D. Roosevelt, 1933
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