Feds views are inconsistent with economic facts

May 2, 2011

Baltimore, Maryland

First, did you notice? Gold shot up $25 on Friday. At this rate, it will be at $1,600 by the end of this week. ----------------------------- Don't Miss! Best of The Daily Reckoning... -----------------------------

We are proud to present an exclusive publication - The Guide to Gold, a compilation of Bill's most popular articles on Gold.

Join Bill as he discusses the past, present and most importantly, the future of Gold as an investment opportunity. And find out if Gold is still the best bet for you...

Quick! Sign Up Right Away & Get this guide FREE!


Why? The smart money is betting that the feds will keep pushing inflation.
But today, let's ignore the feds and talk about what's happening in the economy.

You saw the latest GDP numbers last week. In the first quarter, the economy grew at a 1.8% annual rate, said the estimate. That is equivalent to the average real rate of growth for the US economy since 1925. The only trouble is, this growth isn't real. It's counterfeit. It's phony.

The feds blamed the decline in growth on the weather. Krugman blames the feds for being too timid. Bernanke said growth wasn't so bad. He said it was 'moderate.'

So, let's step back. What do you see?

Real estate is still going down. No doubt about that...

The unemployment rate is going down too...but most of the improvement has been made by taking people who can't find a job off the list! Sounds crazy. But that's what they do. If you don't find a job in a certain amount of time, they figure you've given up.

But does that mean you're no longer unemployed? Of course not. It means you're worse off than ever. You're one of the 'long-term' unemployed...out of work for so long that employers are reluctant to take you back. They think you've lost the habit of work...and your skills are out-of-date.

To give you an idea of how many people are looking for work, McDonald's just did a big nationwide hiring campaign. While it hired a few thousand new employees, it had to turn away 932,000 applicants!

Even those who have work are losing income. Wages are flat...and falling when you adjust them for inflation properly.

Consumer prices rose at a 7.4% annual rate in the first quarter, according to MIT's Billion Prices Project. Hmmm...how many people got a 7% + raise ?

GDP is going up at a 1.8% rate. Adjust that number for population growth...and a correct measure of inflation...and you see that the average person is getting poorer. "Moderate" growth? There's no growth at all.

These facts are NOT consistent with the feds' economic outlook. They ARE consistent with our Great Correction outlook.

The feds thought they could fight the slump in the usual way - with more EZ cash and credit. Now they find that none of their programs - TARP, TALF, QE 1 QE 2, and zero interest rates - has worked.

Why? Because EZ money is part of the problem, not part of the solution.

In our view, the economy (with the help of Mr. Market) is correcting a number of things...

...a half century of credit expansion (debt increases were mostly prudent and productive in the '50s and '60s...but not in the '90s and '00s)

...a bubble in housing and finance, caused largely by EZ money

...an overvalued stock market (the correction began in Jan. 2000...but the bottom still hasn't been found) - also caused by EZ money

...a 30-year bull market in bonds

...a foolish monetary system set up by Richard Nixon in 1971.

That seems like more than enough work even for a Great Correction.

But wait...there's more...

Nearly 10 years ago we wrote a book on the subject (with Addison Wiggin). We predicted that the US would follow Japan into a long bear market. It was more of an intuition than real analysis. And it was wrong...or so it appeared.

The feds intervened so aggressively in 2001 and after, it looked like our intuition was faulty. Stocks rebounded...and went on to greater glory. So did the US economy...which went into bubble-mode in '05-'07.

But now our intuition doesn't look so bad after all. Japan went into a slump in 1990. It has never come out. Employment is about the same today as it was 21 years ago. Stocks sell at a third of their 1990 prices. And real estate is still down 50% to 75%.

In the US, take out the government deficits...and unsustainable debt-financed consumption...and the US private sector economy has gone nowhere in the last decade. No more real jobs. No more real income. No more real GDP per capita.

And the stock market, adjusted for inflation, is lower than it was in January 2000.

It now looks like the Great Correction actually began at the very beginning of the 21st century, in Jan. 2000. For 10 years, it was disguised by the feds. Now, the phony beard is slipping off.

We been in a correction for more than a decade already. And if we follow the Japanese model...we'll still be in a Great Correction in 2021.

If the feds don't blow us up first...

*** On Friday night, leaving the office, we walked by a neglected apartment building. In front, three men were setting up a scaffold. On top of the scaffold, they had placed a ladder and were just tying a rope to the ladder as we walked by.

Something wasn't right. After 40 years of weekend projects, we have a 6th sense for handyman disasters.

We stopped. We stared. It took a minute to realize what was wrong. The workmen must have had a suspicion too. One was arguing with the other two.

"I'm not going up that m************ ladder. You go up the ladder."

"C'mon...get the hell up that ladder."

"No...you go up the ladder."

The scaffold rose about 20 feet above the sidewalk. But it was set up at an angle. They hadn't leveled it. It wouldn't matter if you were just going up 6 feet. But by the time the top level was put in place, it was no longer over the base...it was way off. And then, to make it worse, these clowns were setting up a ladder on top of the crooked scaffold. The ladder reached up another 20 feet or so. The foot of the ladder was sure to kick out to the downhill side...causing the whole structure to come down.

And the rope wouldn't help. It was tied in such a way as to keep it from falling over backwards; the risk was that it would fall to the side.

But what to do? It was none of our business. We don't like to meddle. If we saw you in a restaurant with your hair on fire, we wouldn't say anything; we wouldn't want to interrupt your dinner.

We felt like bringing out chairs and charging admission. Or maybe getting out a camera and recording the event for "1,000 ways to die."

But we couldn't just walk away. Finding no foreman on the job, we approached the men on the scaffold.

"I know this is none of my business, but could I offer a suggestion?"

"What's that?"

"You should level the scaffold. Otherwise, the more weight you put on at the top, the more likely it is to fall over."

"Thank you ....thank you...thank you....ha ha, ha ha...."

"Just trying to help..." We said as we walked on.

This weekend, we checked the paper. We thought we might find an article: "Workman killed in fall."

We found nothing. Maybe they took our advice. Or maybe they just got lucky.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

Recent Articles

A New Infrastructure Boom March 26, 2019
Selva Freigedo talks about the potential in 5G network and how it could transform the way we communicate.
A 40 Somethings Guide to YouTube Hits March 20, 2019
Vivek dwells into a new YouTube phenomenon.
As the Economy Slows Down, Maruti and Two-Wheeler Companies Cut Production March 19, 2019
The country's largest car maker has cut production by more than a fourth.
In Supporting Demonetisation, RBI Behaved Like an Old Uncle Not Willing to Take a Stand March 13, 2019
The minutes of the meeting of the RBI Board which happened before demonetisation have been released.

Equitymaster requests your view! Post a comment on "Feds views are inconsistent with economic facts". Click here!