Independent News and Politics

In trying to explain why the incredibly expensive and blatantly corrupt bailouts & stimulus have failed to create jobs or inspire confidence, Bernanke has pulled out the old tired defense of blaming the critics. Except he’s taking it to the 20th century and singling out blogs and bloggers for “identifying … crises.”

Apparently, having people able to speak their mind and find faults in the system is a big problem for the way this guy thinks the economy is supposed to work.

This certainly wins my first annual “Blame someone else” award.

On the up side, he seems to have come to the conclusion that high finance should be treated like a utility, especially if we’re going to constantly be there to bail them out & regulate them like they can never fail.

The Federal Reserve has gone on another grand monetary experiment in hopes of jump starting the recovery and creating jobs.  Unfortunately, one of the consequences of this second round of quantitative easing (QE2), might hit your pockets at the grocery store and gas station.

When the Federal Reserve uses new money to buy bonds from the government, they’re pretty close to just printing up money from nowhere.  The intended effect is to spark economic activity and new investment in the kind of productive activity that pays the bills, but until and unless that money is then taken back out of the economy there is a risk of prices going up in relation to the growth of the money supply.

Workers in America will be hard hit since there are no raises in sight and most people are just glad to have a job, but the biggest critics of QE2 have been from the international scene.  Developing nations from Brazil to China have protested the effects of this, calling it exported inflation and an unfair trade advantage.  As we live in a world of fiat currencies, there is really nothing to stop these other nations from entering a new “race to the bottom” with undervalued currencies.  If two or more nations got in to such a game of monetary chicken, the ultimate effect might be both of them falling off the cliff together while the onlookers enjoy clearance-sale prices on the land and labor of the devalued nations.

For the last few years, we’ve been in the initial stage of a prolonged financial crisis, but its just now that many popular pundits are starting to recognize the fact that we’ve entered a new depression.  In particular, even Krugman is now saying that the depression has pretty much arrived despite the massive deficits and government spending (or perhaps because there wasn’t enough spending).

In the meantime, job growth isn’t exactly keeping up with demand and real estate shows no signs of recovery.  Financial and health-care reform bills in Congress don’t seem to really address the fundamental dysfunctions of our institutions, but there doesn’t seem to be much in the way of a legislative alternative…  At least not one that is politically viable.

Fears of a Greek default have set off an unfortunate chain reaction in financial markets around the world – and the massive Euro-zone bailout of the debts of troubled states seems to be doing little but ensuring that the bankrupt states are allowed to continue borrowing even more money at low interest rates.  Unfortunately, access to more debt isn’t going to solve the crisis brought on by over-consumption and excessive debt payment obligations – it is only going to delay the reckoning and ensure that the broke states are able to get even deeper in over their head & ability to someday pay back what is owed.

The current phase is starting to look like pure asset deflation coupled with still-high commodity prices.  So long as the quantitative easing policies of central banks promote liquidity, most of the new easy money is going to be tied up on the commercial bank’s asset sheets in one speculative form or another.  The primary strategy appears to be investing in raw materials – driving up the cost of living but strengthening the banks’ books to make them appear a bit more solvent.  The only commodities that have followed the broader deflation trend are wheat, soy, and corn.

Cheap bread, austerity, and a grand circus of reality & contest shows for distraction.  Welcome to the new global order!

By now, you’ve probably heard that the SEC has filed official charges of fraud against Goldman Sachs, but the little detail that might have escaped scrutiny is that the original SEC complaint is being followed up with a virtual flood of investigations, lawsuits, and even some criminal charges.

Not only are regulators across Europe looking for ways to get back at Goldman for its role in selling off toxic mortgages as AAA bonds (of course, the ratings agencies had to play along as well) because the German, French, and British banks that took the hit are now scrambling for enough funds to stay solvent in the face of debt crises in Spain, Greece, and Portugal.

Of course, mortgages aren’t the only part of the market that were manipulated in order to exaggerate sharp rises and falls in value – it has long been suspected that JP Morgan, Goldman, et al have been engaged in the aggressive ‘market-making’ speculation that has brought commodities, and especially precious metals, on a roller coaster over the last few years.  If this report is true, someone at the DoJ is getting ready to go after JPM for fraud in the silver markets.  When and if that happens, expect some immediate price instability – and possibly even investigations into the physical gold that is supposedly backing up all of the paper certificates sold in the last decade.

Keep an eye out for new lawsuits and complaints going public over the next few weeks.  Its going to be an interesting time…

Tax revenue collections have dropped by nearly 14% in California this year, despite massive increases on tax rates and fee amounts:

The state collected just over $101 billion in 2009, down $16.4 billion, even though the legislature and governor approved the largest tax increase in state history including hikes in sales, motor vehicle and income taxes.

Fears of a deflationary spiral may not be unfounded or hyperbolic after all.

Federal policy makers have been walking a fine line between allowing the nominal value of assets to deflate while trying to keep the entire economy running on borrowed cash and easy money policies.  If all of these interventions are unable to kick-start “business as usual,” the next temptation for the Federal Reserve may simply be to literally print up the money needed to pay down debts and create new jobs.  Unfortunately, the down side effects of that could include unintended levels of inflation, a drop in international confidence regarding the U.S. economy, and even the potential of widespread civil unrest as wages are unable to keep up with the price of food and other basic necessities.

There’s no rally in the stock market to commemorate the victory of Scott Brown in Massachusetts.  Between Obama’s newly found tough rhetoric against “too big to fail” banks and questions about whether or not Bernanke can muster enough votes to be confirmed, investors are feeling a bit shaky about the future value of American equities.

In three days, almost 600 points have vanished from the Dow – nearly a 5% drop.  Of course, a lot of this is just the natural result of continued deleveraging despite federal attempts to inflate housing and stock markets with access to cheap and freshly minted money.

As the Congress reveals itself to be increasingly paralyzed and more states fall into budget crises of their own, expect stock markets to stumble once again.

A lot of people (rightfully) blame the Federal Reserve and its member banks for causing and exacerbating the still unfolding financial crisis, and as a symbol of the Fed Bernanke has come under increasing fire from the grass roots, then media, and now from members of Congress themselves.

In a stunning revelation, it has been announced that Bernanke may not have the number of votes required to confirm his re-nomination by Obama.

Many liberals had blasted Obama for his decision to appoint Bernanke for a second term, and his party members in Congress are taking heed of this lesson in the wake of the unexpected Massachusetts Senate race.

The question then – if not Bernanke, who?

If you’ve got a bunch of money in the stock market, the rise in the Dow Jones Industrial Average might actually be good news for you.

For the rest of us, the technical movements behind this recent surge paint a much bleaker picture of what’s going on.

The primary mechanism driving equity prices at the moment is the continued fall of the dollar.  At this time, gold is testing prices near $1100 per ounce and oil is back up over $80 a barrel for the first time since the great crash first undid runaway inflation.

For workers, anything short of a huge payraise is actually turning out to be a pay cut.  As the cost of living continues to ramp up, people continue to lose jobs and the government continues to run up our debt.

In a few months, as the incentives and stimulus spending is exhausted, we will also face a new round of mortgage crisis as option-ARMs mature and commercial real estate continues in its downward spiral.

Hold on tight, this economic ride isn’t over yet.

The real reason our economy is so weak today is actually the same reason why it had been so strong over the last 20-30 years. A massive acceptance of debt spurred new jobs, new consumption, but very little in terms of long term investment in education, infrastructure, or really anything that can produce future wealth.

For a better sense of relative debt loads, notice the strong resemblance between our current debt bubble and the last massive debt bubble that kicked off the start of the Great Depression.  This second chart is in terms of GDP percentages, rather than nominal (inflation-distored) dollar amounts.

Unfortunately, we’ve got a tough ahead of us in terms of paying back debt relative to our GDP and income. With government borrowing and creating new debt, the responsibility will be left to private corporations and individuals. Some public debt may help cushion the fall, but at some level we’re going to have to deal with what we already spent and consumed and promised.