The market’s wild gyrations continue and not only from the effects of the earthquake. The surges up and down earlier in the week were attributed to the forthcoming words of wisdom from the man with the key to the printing press, Ben S. Bernanke, from Jackson Hole, WY where he is currently consulting with his Board Directors of the Federal Reserve.
The market has become so reliant on Ben’s largesse, a recent General Accounting Office audit showed the Fed had lent $16.115 trillion between Dec. 1, 2007 and July 21, 2010 to various entities around the world, that it cannot sustain any upward progress on its own but has to have the Fed’s actions support it. This support has put a huge bubble in the market that has to be continually reflated or the whole thing collapses and wipes out any hope of perpetrating the “Summer of Recovery” myth. It was a year ago from Jackson Hole when Bernanke announced QE2 but the boon from the $600 billion has run its course and another round of medication is necessary.
But while the market eagerly awaits Bernanke’s intonations, there is a word of caution: the markets will hear what they want to hear regardless of what he utters. His words will be parsed so throughly by so many no two people will understand the same thing from what he states. In advance I’ll contend if you use logic on Bernanke’s pronouncements you will find his statements full of useless qualifications, doublespeak, goo and drivel. If he didn’t have the power of the Fed behind him, he would not have any use at all because he says, and will say, nothing of substance! It is the power of the printing press that means something.
While the market stumbles waiting for Baby Ben, the economy continues to contract. While some analysts are dubbing the contraction “The Great Correction”, there is a simple explanation for it for this real factor. The consumer is afraid, very afraid or downright terrorized by the specter of debt. He is either paying his debt down as quickly as he can or ignoring it because he is so afraid. Both actions only accelerate the ineffectiveness of Bernanke, the market and our government leaders because they strangle the economy.
When you pay off debt, you are essentially taking dollars out of the economy because what would have been used to buy new things is going to items whose benefits have already been filtered through the system. When you ignore debt, someone has to eat that debt somewhere along the line. This action, leading to defaults or foreclosures also takes money out of the economy. Both actions cost the economy about $10 for every dollar repaid or defaulted upon.
Meanwhile Wall Street companies and banks, both relatively flush with cash reserves due to previous Fed action, are afraid to put any of that money to good use because they see the consumer no longer expanding his purchasing power in a positive way. Fear has paralyzed these entities into a contracting mode as they watch revenue streams flatten or decline when adjusted for inflation. Banks are holding massive reserves for loan purposes but, because of no-risk regulations introduced a year ago in the Finance Reform Bill, are prevented from taking any lending risks so that money is effectively removed from the economy as well.
This means all actions outside of the Reserve’s control are causing a contraction to the economy. So the market wants to fall but cannot from the bubble created by the Fed’s infernal tinkering since late 2007. But Bernanke knows no other way. His textbook, Ivy League training only shows him government intervention can prevent economic cycles from their normal course and he, de facto of course, is the government as Congress and Obama have abrograted their Constitutional authority in economic matters to the Fed.
Market managers watched Congress debate the debt ceiling with bated breath. But when the spineless weasels merely followed precedence by increasing the legal debt now while promising more austere budgets in the future, the market heaved a sigh of relief, knowing the bubble would stay intact for a while longer. Now it needs another influx of air as consumer fears pushed the market lower anyway.
But the bubble is going to burst simply because the economy is contracting in ways wholly controlled by the average, debt-weary consumer not Wall Street, not Washington and especially not Bernanke.
A telling contraction statistic comes from the second quarter of this year. In an average quarter, measured over the last 50 years, 11 of every 1000 home mortgages falls into delinquency with a missed payment. In the second quarter of 2011, 84 of every 1000 mortgages fell into delinquency, a 763% raise. This is a basis for economic recovery?
Based on the average mortgage value of $219,000, 80 million mortgages nationwide and a contraction rate of $10 for every dollar of value, the economy stands to have $14.7168 trillion dollars in contraction in the coming years or nearly a full measure counterbalance to the funds the Fed put into the economy in the GAO audit report.
According to Bernanke’s handbook, opening the printing presses is the only way out of this cycle. So that is what he’ll do to counter the inevitable onrushing contraction. That will strengthen the bubble and slow the contraction; but it is only a delaying action. Wall Street’s numbers are 30-50% higher than they should be. The housing market is still glutted with unsold properties caused by previous government meddling into economic realities. Bernanke’s impending delaying action will make the day of reckoning even more painful, just as raising the debt ceiling did, even though the market originally liked both notions.
America has lived beyond its means for too many years as it moved from a producing nation to a consumer nation. The piper is calling, demanding his payment more insistently than ever. And the rest of the world’s socialistic fiat currencies are in the same shape as ours. If you think the stock market ride has been interestingly chaotic thus far, wait until you feel the thrills from a global economic contraction.