Run To the Hills!

Kevin Drum has not much optimism for the future.

1. This is a balance sheet recession, not a Fed-induced recession. Paul Volcker caused the 1981 recession by jacking up interest rates and he ended it by lowering them. That’s not going to happen this time.

2. In fact, there won’t be any further stimulus from lower interest rates. They’re already at zero, and Ben Bernanke has made it clear that he doesn’t plan to effectively lower them further by setting a higher inflation target.

3. Consumer debt is still way too high. There’s more deleveraging on the horizon, and that’s going to make consumer-led growth difficult.

4. The financial sector remains fragile and there could still be another serious shock somewhere in the world.

5. There are strong political pressures to reduce the budget deficit. That makes further fiscal stimulus unlikely.

6. Housing prices are still too high. They’re bound to fall further, especially given rising interest rates combined with the end of government support programs.

7. Our current account balance remains pretty far out of whack. Fixing this in the short term will hinder growth, while leaving it to the long term just kicks the can down the road.

8. The Fed still has to unwind its balance sheet. That has the potential to stall growth.

9. Oil prices are rising. This not only causes problems of its own, but also makes #7 worse.

10. Unemployment and long-term unemployment continue to look terrible. Yes, these are lagging indicators, but still.

Anyone with much of a brain is saying the Fed needs to set a higher inflation target. This is a much healthier form of stimulus than fiscal stimulus.

One thing to note: as you look through this list, can you think of anything the president can do within his power other than, perhaps, pressure the Fed?

There’s a lot of reason for pessimism for tomorrow but a lot of blame for today. Perhaps some should direct it in the direction it’s deserved: inflation hawks such as Bernanke.

Now consider what Gonzalo Lira wrote on Yves Smith’s blog as a guest blogger on the “extend and pretend” nature of the fixes since the Great Recession began:

The banks still have the holes in their balance sheets which caused the crisis in 2008.

But then, how have the banks made such staggering profits during the last year?

By trading. Instead of being banks, since March of ’09, the Big Six US banks have effectively become hedge funds. They have been trading themselves into profitability. Worst of all, these banks qua hedge funds have been making money by trading with each other. Price-to-earnings ratios bear this out—their general upward trend, across sectors and industries, even as the economy has been severely weakened, is indicative of a speculative bubble. A massive bubble—the kind that makes the Hindenburg look puny.

All of the markets have risen from their March ’09 lows because of what I would term musical chair trading—everyone makes money so long as the music doesn’t stop. The “music” of this metaphor is a combination of Uncle Ben’s easy money, relative calm in the world, and good ol’ “extend and pretend”, courtesy of FASB.

But when the music does stop, the banks are going to realize that it’s not that there’s one less chair in the circle. There are no chairs left.

That when the next crisis will hit—when the music stops, and everyone rushes to get out of their musical chair trading positions.

Therefore, once the era of Musical Chair Trading ends with some ridiculous non-event that will send everyone panicking, the banking sector will be right back where it was on Septmber [sic] 18, 2008—the only difference, of course, being that Bernanke has already shot his wad, and politically, it will be impossible to pass another TARP.

That’s when the world ends—the second crisis will be loads worse than the one in the fall of ’08. Loads worse, even, than ’29.

doomed

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