To The Barkers: Answer This Question

"The recession ended in June": Dennis Kneale

"The recession was definitely over in September": Any one of a number of people.

Ok.  Let's say that I accept all this at face value, even though while driving through my definitely-beach-oriented local town here this afternoon I noted even more closed-and-gone storefronts than there were a couple of weeks ago, and last night at the local open-air mall, although the evening was absolutely gorgeous, you could have fired a 155mm Howitzer down the "main drag" without killing anyone - because there was almost nobody there, and literally not one shopping bag was in evidence.

I simply have to ask the pundits and the carnival barkers, of which CNBC is the worst (but certainly not the only sinner) the following - why do we need any of these programs if in fact the economy is growing again:

• Zero interest rates from The Fed.  Isn't 2%, 3%, 4%, 5% more consistent with economic growth?  If indeed the economy is expanding, why do we need "funny money"?
  
  
• $8,000 home-buyer tax credits.  And not just first-time credits either - those were recently expanded, and the NAR has said quite clearly that "but for this program housing would collapse."  Is this consistent with an economic recovery?
  
  
• FHA underwriting mortgages at 3.5%, their default rate is going parabolic, their reserves are down to well under half of the mandatory minimum and there is no evidence in sight that their performance metrics are improving.  With the aforementioned $8,000 "credit" and the FHA's willingness to monetize it, you can once again buy a home with "zero down", just as we did in the bubble.  Is this consistent with an economic - and housing market - recovery?
  
  
• The dollar carry trade.  It's obvious and starting in June of this year the correlation between the dollar's move and the S&P 500 became nearly 100% on an inverse basis.  Consumer confidence numbers were far below expectations Friday, yet as soon as that hit the dollar, the market rose - into worsening economic data.  Again, is this consistent with an economic recovery?
  
  
• "Cash for clunkers" - and oh, by the way, what happened to auto sales when it ended?  Is the near-vertical drop-off in GM's sales as soon as the program ended consistent with an economic recovery?  Is a claimed 10m expected 2010 units consistent with economic recovery when in 2005 and 2006 the industry sold nearly 17 and 16 million vehicles, respectively?
  
  
• 29.9% interest rates on credit cards via "jack-up" letters and other outrageous actions.  Again, is this sort of gouging consistent with economic recovery?
  
  
• Declining consumer credit demand.  I've published the graph before and will reproduce it below.  Is this consistent with economic recovery?
  
  

The Carnies and other Barkers have their desire to make you think things are just peachy.  Then again, so did Japan after their debt-fueled property crash.  The Nikkei surged on the back of the carry trade, just as has the S&P 500.

But a huge part - perhaps even the ultimate cause of the meltdown that took our stock indices down some 60% from their highs from October 2007 to the spring of 2009 - was the unwinding of that very same Yen carry trade.

The dollar-based carry trade, when (not if) it unwinds, will do even more damage than the Yen-based carry did.  And unwind it will.

Remember that everyone was certain that the Yen would not unwind, because Japan was not going to raise rates "any time soon."  They in fact didn't raise rates but it didn't matter - as soon as the first person yelled "FIRE!" the entire game came apart, as the unwind was self-reinforcing and margin calls produced yet more margin calls.

PIMCO has talked about "sugar highs" boosting the stock market.  The problem with sugar highs is that they wear off, and worse, they're full of calories and thus make you fat, destroying your ability to be mean and lean - to run and change direction quickly - later on.

Consumers are having none of it.  Confidence came in dramatically below expectations, and the reason is simple: there are no good-paying jobs unless your idea of "employment" is playing games with other people's money by being an "investment banker."  Call centers are all over in India, manufacturing is all over in China, we've got Starbucks coffee-servers, McDonalds' burger flippers and WalMart "greeters" - all jobs that pay 1/4 what the old manufacturing jobs did.

The funny thing about all of this is that one of the chief barkers Tweeted me yesterday to ask if I was "still selin (sic) doom."

First and foremost, I don't sell anything.  I don't run other people's money, and The Ticker is free.  Unlike the barkers and their crowds, I don't depend on the advertising dollars of stockbrokers (just watch CNBC for an hour and catalog who butters their bread!) to survive.

Second, as I have repeatedly noted, I was an unabashed Bull from 2003-2007.  Why?  Because the economic numbers were there to back the advance.  Oh sure, it was a liquidity-driven move, but the fact remains that 2000-2001 wasn't even a recession from a consumer point of view - there was no over-levered consumer problem, there was no issue with debt defaults in housing or credit cards, and consumer credit y/o/y never went below zero on a rate-of-change basis. Indeed, even approaching zero has only happened during severe recessions, as the following chart shows:

There was reason to be bullish coming out of the 2001 time frame.  The Federal Reserve programs worked - they spurred economic activity - real economic activity by real people - as is evidenced by the above graph.  Consumer credit consumption spiked higher, then leveled off at the 5% growth run rate - exactly as intended by The Fed.

While the policies put in place sowed the seeds of our current disaster in the short term they were effective.  But those same policies - zero interest rates (nearly so in 2001, truly so today) have failed to send consumer credit consumption - and true economic activity - higher.

Why not?  Because in previous recessions we had a buffer between the carrying capacity of debt and the total amount outstanding in the consumer and business world.  This is evidenced by the fact that these previous busts were inventory-led, not credit led.  That is, they were a matter of oversupply in the market (e.g. the Nasdaq bubble, etc), not excessive leverage - that is, too much debt for the income available to service it.

In 2007 the latter situation asserted itself.  That made the tonic prescribed by Bernanke and pals ineffective.  They tried it anyway, and they continue to do so - even though there is no evidence that it has - or can - work.

The M1 "Money Multiplier", after appearing to stabilize just below 1.0, has resumed it's plunge.  The tonic that was allegedly going to restore credit creation in the economy - the raw printing of money via "Quantitative Easing" - has done no such thing:

China has woken up to the danger of the US Dollar Carry, as evidenced here:

“The continuous depreciation in the dollar, and the U.S. government’s indication, that in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” he told reporters in Beijing today at the International Finance Forum.

Liu said this has “seriously affected global asset prices, fuelled speculation in stock and property markets, and created new, real and insurmountable risks to the recovery of the global economy, especially emerging-market economies.”

His view echoes that of Donald Tsang, the chief executive of Hong Kong, who said the Federal Reserve’s policy of keeping interest rates near zero is fueling a wave of speculative capital that may cause the next global crisis.

“I’m scared and leaders should look out,” Tsang said in Singapore Nov. 13. “America is doing exactly what Japan did last time,” he said, adding that Japan’s zero interest rate policy contributed to the 1997 Asian financial crisis and U.S. mortgage meltdown.

Yep.  It did not work in Japan and it won't work here.  You cannot fix a drunk with a case of whiskey, and you cannot solve a credit-led problem with more credit - that is, more debt.

You can't replace consumer activity with government borrowing for very long.  You can try in the short term but it won't work in the intermediate and longer term. More proof is found in our trade balance, which despite massive dollar devaluation is now at the worst since January, while the dollar has plummeted.  Dollar devaluation was supposed to improve our balance of trade.  It failed to do so, just as the printing of money has not spurred credit creation and capital formation as we were told it would.

It would be nice if the policy prescriptions followed thus far could work, but in a saturated debt market they cannot.

All modern monetary systems are credit-based.

This is about mathematics, not "feelings" or "beliefs."

All we have now is the carnival barkers claiming that "prosperity is returning!" even while storefronts are darkening and debt is defaulting.

It hasn't worked this time, and the policymakers know it, just as they knew it in 1930. 

But policymakers didn't stop lying in the 1930s and it appears they're not going to now.

If any of the policymakers believed what they were selling neither the $8,000 homebuyers "tax credit" or the zero percent Fed Funds rate would still be in place.

More than two years into this mess with myself and a few others warning that the policy path elected was both futile and destructive, we are finally seeing foreign governments wake up as they realize that Japan's ZIRP was bad, leading to two bubbles and then crashes in the global equity markets and one in property markets that served up enormous pain. 

If we don't stop with our boozing on "free money" for the banksters (which is NOT filtering to the common man!) the resulting crash will have consequences for our nation and indeed the world akin to liver failure rather than a hangover.

Bernanke and the United States Government must stop their madness, and do so today.  We have done nothing but made the pain and "creative destruction" that must come worse than it would have been in 2007, and far worse than it would have been in 2000.

Those who made the bad loans cannot be protected from their foibles and the just consequences of their bad decisions.  We must ring-fence the Federal Government, withdraw the excess liquidity, and force rates high enough to kill the dollar carry - even if it hurts.

It is better to lose a limb than your life. 

In economic terms that's the choice folks; the gangrene is spreading and if we do not amputate it will reach our torso. 

If it does our economic and quite possibly our political system will die.