24 November 2009

The Last Bubble

The purpose of monetary and fiscal stimulus in economics is similar to the use of anesthesia and antiseptics during an important surgical procedure to correct some systemic difficulty, some disease, some serious problem in a patient. They enable the procedure, help the patient get through it without excessive pain and death from infection or systemic shock.

To apply stimulus and the other monetization programs which the Treasury and the Fed and the Congress and the system of global trade settlements are now doing without enacting sigificant and serious systemic reform to correct the underlying problems, the disease itself, is like taking a patient with a life threatening condition, applying large amounts of anesthetic and antibiotics and antiseptics to keep them stable and quiet, but then refusing to perform the operation to correct the life threatening condition.

Because in this case the disease that is infecting the patient and consuming their life has bribed the physicians and hospital administrators and nurses to leave it alone. It wants to maintain the status quo as long as is possible.

The pulse of patient, their blood flow, is the dollar. And the dollar is laboring under serious difficulties. The disease is consuming it, and the Fed is adding clear plasma to replace it, but is unable to add vitality, the white and red blood cells. They cannot create life, only sustain its appearance.

The liquidationists, by the way, would simply take the patient off all medications, and see how well he can fight the disease while running on a treadmill, hoping his body can cure and correct itself on its own. If the patient is not too sick, this has worked in the past. But if the problem is systemic, if the disease is advanced, then the patient is likely to go critical and sustain a stroke, and a major loss of functionality, even death. Benign neglect might work, it might not. Sometimes the cure is worse than the disease when applied without a perceptive diagnosis.

The Obama Administration (the doctors) and the Congress of both parties (the hospital administrators) and banks (the hospital owners) and the mercantilist trade system most notably China and Japan (the medical suppliers) are failing to deal with the problems of the US economy at hand, merely applying the anesthetic and antiseptics, for which they are being paid handsomely as the hospital bills run higher and higher.

This may be the last bubble, the one that takes the patient to a hospice for long term care in a zombie like condition, or worse, to the morgue. It is the last bubble, malpractice of the highest order, the mother of all policy errors. Nothing is inevitable here except selective default most likely through inflation.

The banks must be restrained, and the financial system reformed, and balance restored to the economy before there can be any sustained recovery.

Associated Press
Third-Quarter U.S. Growth Revised Lower
November 24, 2009

WASHINGTON (AP) — The economy grew at a 2.8 percent pace last quarter, as the recovery got off to a slower start than first thought.

The government’s new reading on gross domestic product was not as energetic as the 3.5 percent growth rate for the July-September period estimated just a month ago.

The main factors behind the downgrade: consumers did not spend as much, commercial construction was weaker and the nation’s trade deficit was more of a drag on growth. Businesses also trimmed more of their stockpiles, another restraining factor.

The new reading on G.D.P., which measures the value of all goods and services produced in the United States — from machinery to manicures — was slightly weaker than the 2.9 percent growth rate economists surveyed by Thomson Reuters had expected.

Still, the good news is that the economy finally started to grow again, after a record four losing quarters. The bad news is that the rebound, now and in the months ahead, probably will be lethargic.

The worst recession since the 1930s is very likely over, but the economy’s return to good health will take time, Fed officials and economists say...