Tuesday, May 19, 2009

Paper Printing Prosperity Defined

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I've been using a self coined term, Paper Printing Prosperity, for what the U.S. is "enjoying" now... basically its similar to the "rebate check prosperity" we enjoyed a year ago at this time when a quick hit of nearly $200B was tossed into the economy to cover up the degradation happening under the surface. Only this time we are making the Bush rebate look like child's play. As I've noted in multiple pieces we literally are running a parallel economy of backstops, Fed programs and federal stimulus alongside our own real economy of $13-$14 Trillion. [Mar 31, 2009: Financial Rescue Pledges Now $12.8 Trillion] We've reached the point where the federal government, which is essentially just another word for taxpayer money, is now the #1 revenue source for states [May 5, 2009: Federal Aid Surpasses Sales Taxes as Top Revenue Generator for States] I could go on, but I'll spare you - we've detailed the myriad programs in excruciating detail over the past 2 years.

Even before this implosion America has "solved" many of its problems by "kicking the can down the road" - this was the genesis of the housing bust; Alan Greenspan did not want the natural economic cycle to play out - Americans can't handle a recession, or as a blessed people should not be subject to one... so he flooded the world with 1% Fed fund rates and dollars came from the heavens. But once the dollars are out - you have no control where they go ... these bid up houses, they bid up commodities... we call that "prosperity" as "asset price inflation" is substituted for actual productive progress. But many in the country only look at one side of the bargain - the results side. The cost side is for "someone else" to worry about... or not to be thought of at all. The best way to describe it is to charge something on a credit card, and take it home ... look at the product and smile in glee at what you've acquired. Then rip up the credit card statement when it comes in... and go look at the item again, and smile once more at how wonderful it is. It came "free" - that's American prosperity in the paper printing era. Kick the Can. We see it in Social Security, in Medicare, in all these bailouts... and we clap like seals because hey... as long as our assets go up, who needs to have a savings rate? Who needs productive work? Heck, who needs jobs? More money (from the trees) solves it all. Pay for it? That's for grandkids to worry about. But simply it's better not to think about it at all, it might cause stress. Just enjoy the just rewards we 'earned'.

So coming full circle, I saw this article and until it was worded in this way one does not realize how egregious the paper printing prosperity is. Read these stats from Jim Grant (of Grant's Interest Rate Observer) to realize what a phony baloney "recovery" we're enjoying. As I've been saying Ben Bernanke's best case scenario is pushing us into stagflation [Apr 15, 2009: Federal Reserve Historian Allan Meltzer says Ben Bernanke Will Bring Us 1970s Type Inflation] ... which should be very enjoyable for the peasant class as their wages rise even slower than the pace of the 2000s decade [Apr 30, 2009: First Quarter Labor Costs Rise Least on Record]. Heck, I've been talking about stagflation since 2007; as does Greenspan - eventually people will demand higher rates from us for our drug (credit) addiction [Dec 17, 2007: Greenspan Jumping on my Stagflation Thesis] Sadly, I think "powers that be" believe they are doing the right thing and as long as they can keep juggling balls until some Asian inspired global recovery happens, this is "victory". The costs will be borne by someone else so why not take on all these obligations? Make the Romans happy with our gladiator games to distract them from reality! We're all winners here....just make sure to rip up the credit card statement.
  • In a recent issue of Grant's Interest Rate Observer, Jim Grant charted the stimulus money (both monetary policy and government spending) as a percentage of gross domestic product for this downturn, compared with the previous 13 recessions.
  • In those earlier recessions, if you added all the percentages, the cumulative monetary stimuli constituted about 6 percentage points, while thus far in this recession, the stimuli have clocked in at 18%.
  • Add in the 11.9% (of GDP) supplied by the government and you get 29.9% for the combined stimuli. That's compared with a total of 39.3 percentage points for the prior 13 recessions.
So to break that down in English, in this one recession we've thrown 30% of GDP of various 'stimuli', versus the previous 13 recession COMBINED 39%.
  • When the current recession is compared with the Great Depression, we find the relative amount of stimuli is almost four times as high today as during the 1930s collapse, even though GDP has dropped only 1.8% versus 27% back then.
  • This rally could indicate that times are getting better -- or just that massive liquidity is leaking into the stock market and that the real economy is going to see more inflation.
That folks, is paper printing prosperity. I see gas is $2.49 locally so I assume California must be quickly approaching $3.00. Joy to the (Main) streets and the American consumer... as long as asset prices are increasing all must be right in the world. As the folks who lived in the latter 70s and early 80s will tell you.

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On a related note - this news break from The Onion: Nation Ready to be Lied to About Economy Again
  • After nearly four months of frank, honest, and open dialogue about the failing economy, a weary U.S. populace announced this week that it is once again ready to be lied to about the current state of the financial system.
  • Tired of hearing the grim truth about their economic future, Americans demanded that the bald-faced lies resume immediately, particularly whenever politicians feel the need to divulge another terrifying problem with Wall Street, the housing market, or any one of a hundred other ticking time bombs everyone was better off not knowing about.
  • In addition, citizens are requesting that the phrase, "It will only get worse before it gets better," be permanently replaced with, "Things are going great. Enjoy yourselves."
  • "I thought I wanted a new era of transparency and accountability, but honestly, I just can't handle it," Ohio resident Nathan Pletcher said. "All I ever hear about now is how my retirement has been pushed back 15 years and how I won't be able to afford my daughter's tuition when she grows up." "Tell me my savings are okay, everybody has a job, and we're No. 1 again. Please, just lie to my face."
  • "I don't need to be constantly reminded that the lack of regulations on Wall Street compounded with failing institutions like AIG basically plunged the world economy into a global recession," said 32-year-old office manager Alexis Harrington. "What I want is for someone to tell me with a straight face that the GDP is through the roof so that I can feel better and instantly forget what all these terms even mean."
  • "For the first time in my life I know who the secretary of the treasury is," Harrington continued. "And I don't like it."
  • "I know when he's telling the truth, and it bothers me," recently laid-off schoolteacher Mary Hanover said of Obama. "He gets this serious expression on his face and says things like, 'This is the worst economic crisis since the Great Depression.' Who needs to hear that? For Christ's sake, smile a bit and say we just found a diamond mine under Montana that's going to pay for everything. I'll believe you."
  • "Please, treat me like a child. Treat me like a five-year-old," Sacramento resident David Cooke, 64, wrote in a letter to Congress. "I lost everything when the Dow tanked, and I'm too old to start working again, so why punish me further by explaining in detail the clever ways these investment firms ripped me off and how they're all going to get away with it?"
  • Thus far, many policymakers in Washington have responded favorably to their constituents' requests, saying they respect and understand the public's need for dishonesty. "I think we can accommodate the American people on this," Senate majority leader Harry Reid (D-NV) told reporters. Continued Reid, "Things are looking very, very bright."

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