The Great Hoax of 2009-2010
by
Martin D. Weiss, Ph.D.
Before he died, Dad warned me of false profits ... and
fake promises.
"Beware," he said, "of shaky gains hyped up by Wall
Street.
"Watch out," he insisted, "for unsustainable economic
recoveries trumpeted by Washington.
"And
no matter when or where you may be, don't be fooled by
illusions of wealth and prosperity.
"If
they're built on a foundation of shaky debt, they're
suspect. If they're driven by unbridled speculation,
they're pure fluff. And if they're bought and paid for by
Washington, they will certainly end in catastrophe."
Sure
enough, in the years that followed, millions of Americans
were fooled by illusions of wealth created by the Great
Tech Bubble of 1998-1999.
Millions more were fooled for a second time by
illusions of prosperity in the Great Housing Bubble of
2005-2006.
And
now, despite these blatant lessons of history, they are
being fooled again — this time, in ...
The Great Recovery Hoax of 2009-2010
There can be no debate that, in each of these episodes,
things did go up: The Nasdaq soared before it
crashed. The median price of U.S. homes skyrocketed before
it collapsed. And now, the U.S. economy has
reversed course — from four consecutive quarters of
contraction to at least one quarter of expansion.
There also can be no doubt that these trends do not end
overnight. They can continue for months — often plowing
over skeptics and even exceeding the expectations of
believers.
Most
important, however, there can be no question that all
three of these episodes have had one key element in
common that ultimately self-destructs: Massive
intervention, support, and free money from Washington.
To
get a solid sense of how that's unfolding this time
around, pay close attention to these three independent
economists:
Jim Grant, Founder and Editor,
Grant's Interest Rate Observer
Jim
Grant, originator of the "Current Yield" column in
Barron's and founder of
Grant's Interest Rate Observer, demonstrates not only
that today's recovery is bought and paid for by Washington
... but also that the relative size of Washington's
intervention is even larger than you might think.
-
In the ten prior U.S. postwar recessions, the government
responded, on average, with fiscal stimulus of 2.6
percent of GDP plus monetary stimulus of another 0.3
percent of GDP.
Combined stimulus: only
2.9 percent of GDP.
-
In contrast, during the current recession, the
government has counter-attacked with fiscal stimulus
amounting to an estimated 18 percent of GDP ... plus
monetary stimulus of an estimated 11.9 percent of GDP.
Combined stimulus: a whopping 29.9 percent of
GDP.
That's an unprecedented — and unimaginable —
ten times more than the average
stimulus of prior recessions.
Grant's comparison of today's government stimulus with
that of the Great Depression is even more striking:
-
He points out that, in the early 1930s, GDP fell 27
percent, while the government responded with monetary
and fiscal stimulus adding up to 8.3 percent of GDP.
Thus, using Grant's numbers, I calculate that, for each
percentage point our economy contracted, the U.S.
government came forward with 0.31 percentage
points of stimulus.
-
In contrast, in the current recession, U.S. GDP
contracted 1.8 percent (at the time of Grant's study)
... while, as we just noted, the government's stimulus
has amounted to 29.9 percent of GDP.
Thus, for each percentage point that our economy
contracted, the U.S. government has jumped in with
16.61 percentage points of stimulus.
Conclusion:
Relative to the disease, the government's "cure" for the
Great Recession today packs 54 times more
firepower than the government's response to the
Great Depression of the early 1930s. And this does not
even include trillions more in U.S. government
guarantees to shore up the financial system.
Proponents of the government's intervention may try to
convince you "this is what it takes to avoid another
depression: We've got to attack the contagion with big
guns!"
However, Grant worries, rightfully so, that the cure may
be far worse than the disease:
"If
it's taking this much to revive today's economy," he asks,
"what kind of jolt might be necessary to succor
tomorrow's? An even bigger shock, we surmise, if
tomorrow's economy is no less encumbered than today's. But
it's almost certain to be more encumbered, since the
active ingredient of the Bush-Obama palliative is credit
formation, the very hair of the dog that bit us. Skipping
down to the bottom line, we renew our doubts as to the
staying power of the paper currencies and to the
creditworthiness of the governments that print them."1
John Williams, Founder and Editor,
Shadow Government Statistics
John
Williams is the economist who has single-handedly and
repeatedly poked big holes in the government's data that
tracks price inflation, unemployment, money supply and the
economy as a whole.
In
his
Shadow Government Statistics alert of October 29, he
pokes an equally large hole in Washington's pitch that the
third-quarter rise in GDP announced last week is
"sustainable." His main points:
-
All U.S. recessions in the last four decades have had at
least one positive quarter-to-quarter GDP reading,
followed by a renewed downturn. This one could turn out
to be no different.
-
The estimate of 3.5 percent annualized real growth for
third-quarter GDP included a 1.7 percent gain from auto
sales, a 0.6 percent gain from new residential
construction, and a 0.9 percent gain from a
largely-involuntary inventory buildup (caused by sales
declines which are deeper than corporate planners
expect).
-
In sum, these one-time stimulus or inventory items
represented 92 percent of the reported
quarterly growth.2
Chris Edwards, Director of Tax Policy Studies
Cato Institute
Chris Edwards — formerly a senior economist on the
congressional Joint Economic Committee examining tax
issues and currently a Director at the Cato Institute —
exposes another gaping hole in the 3.5 percent growth
reported by the government last week:
While the government's share of the economy has grown
steadily ... the contribution from private investment has
fallen through the floor.
He
writes:
"The third quarter GDP numbers show that the economy is
only starting to 'recover' because of growing government
and expanding consumption, which has been artificially
inflated by large government transfers.
"Business investment continues to be in a deep
recession. Companies are simply not building factories
or buying new machines and equipment.
"Why not? I suspect that many firms are scared to death
of higher taxes, inflation, health care mandates,
increased labor regulation, and other profit-killers
coming down the road from Washington."3
Edwards goes on to say that it's too soon to speculate on
underlying causes. But I would add that an equally bloody
killer of private investment is the diversion of scarce
credit from small and medium-sized businesses to wild-and-wooly
Wall Street speculation, as Mike Larson has pointed out
here week after week.
It's
all part and parcel of the Great Recovery Hoax of
2009-2010.
Like
the great bubbles of recent memory, it could continue. But
it will ultimately end in disaster.
My Recommendations:
First, don't fall for the hoax. Instead
follow independent thinkers like Grant, Williams and
Edwards. You can
Second, don't expect Washington to back
off immediately.
In
fact, right now, the Fed Chairman Bernanke is doing
precisely the opposite. He's buying even more
mortgage-backed securities and boosting the monetary base
(currency and reserves at the nation's banks) to a record
high, reached just last week.
Third, don't wait around for the next
disaster before taking protective action. For several
weeks now, we've been warning you of a sharp stock market
correction, and with Friday's 250-point plunge in the Dow,
it's clear that correction is here.
Fortunately, Mike Larson, Claus Vogt and other Weiss
Research editors recognized the "Dow 10,000" euphoria this
month as a signal to take some profits off the table for
their subscribers — and even buy hedge positions for a
decline. If you haven't done so already, it's probably not
too late to follow their lead.
Fourth, no matter what your trading
approach may be, don't forget the importance of cash.
Even with a declining dollar and near-zero interest rates,
it's still prudent to keep a good chunk of your wealth
out of the market entirely.
Fifth, we will soon provide our forecasts
for 2010. But in the interim, please let me know what
you think the consequences of this great hoax will
be. Just
click here to go to my blog and post your comments
there.
Good
luck and God bless!
Martin
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