Short and Simple!

Two days ago may we have experienced the quietest major financial earthquake since, oh, last fall. I'll keep it short and simple. Where before they were just creeping up, rates at the long end of "the curve" are heading back up with a vengeance. Why? Too damn much supply being offered by Uncle Sam. As you know, when supply and demand don't meet, price moves, and in this case, prices on bonds came down and yields went through the roof. Tuesday played absolute havoc with the mortgage and refi markets in a way that bodes serious ill for the housing market specifically and the banking industry and economy in general.

Ben Bernanke's quantitative easing is clearly backfiring. How could it not? After all, with all those government IOUs being issued and and tax receipts simultaneously plummeting, what bond investor wouldn't ask for, nay, demand higher rates of return. Remember those green shoots the economy was said to be sprouting? Yes, the ones that are really weeds. Tuesday's action was the equivalent of learning that those weeds are, in fact, kudzu, and someone just sprinkled some world class fertilizer on it.

Friday morning addendum. The economic news this morning was bleak with the Chicago Purchasing Managers Index falling to 34.9 from 40.1 over the most recent period of review.

Wretched Governance.

The credit card industry, nothing more than an arm of the banking business, is set to do the nation, particularly folks who pay off their cards in full and on time, a great disservice. In an act of awe inspiring stupidity and unfairness, legislation is pending in the halls of Congress that would essentially penalize responsible credit card holders on behalf of deadbeats. Legions of the financially responsible will not simply cancel their cards when the terms change, they will almost certainly spend less money as well, since, let's face it, credit cards grease the skids of U.S. consumerism like nothing else. Personally, I think a great winding down of the consumer economy has more than a little to recommend it, but, equally, consumer spending is the engine of the U.S. economy. The fall out from the credit card operators getting rid of grace periods, reward programs, and charging user fees, will be fearsome. The phrase killing the goose that laid the golden egg comes to mind.

Here in my home state, The Commonwealth of Massachusetts, the political mountebanks have decided to raise the sales tax, a not so brilliant move that will see locals running across the border in droves to buy their microwaves, computers, and lawn furniture, etc. etc. And yet, Massachusetts pols still think they will raise more revenue as a result of upping the sales tax by 25 percent. We shall see. At least the shameless boobs who skulk through the depressing halls of government on Beacon Hill managed to not raise the income tax, which is only barely justifiable in flush times, let alone desperate times like these.

So what am I really talking about here? I am talking about the inability or the unwillingness of governments to adapt to the unpleasant present reality. In the aggregate, the slope of our standard of living is decidedly down, but the authorities, having utterly failed to see what they themselves helped engineer, namely a financial and economic catastrophe, are still thrashing about, employing any and all outdated tricks to keep, not you, but themselves alive.

This is happening at the national level in spades, where the Federal legislature, essentially bought and paid for by the banking industry, is about to facilitate the credit card industry's pillaging of the last redoubt of fiscal responsibility. At the local and federal level, governments simply can not conceive of reducing themselves as a means to deal with their chronic fiscal shortfalls. The lifeboat is too full, a crime in and of itself, and your elected officials are compounding that sin by conspiring to toss those of us they are meant to serve into the drink with nary a life preserver. Don't let them!

Green Shoots vs. Eye of The Hurricane

Right about now, denizens of the United States are faced with a choice very much like the choice Neo faced when Morpheus presented him with taking either the red pill or the blue pill. We can accept the false but comforting narrative embodied in the line "the economy is sprouting green shoots", or we can look more closely at the official data and wonder if perhaps the last few months, and perhaps one or two more, are merely a respite of sorts, and that we are actually in the eye of a hurricane. I choose the latter, not because I may have some penchant for bad news, or for any other perverse reasons, but because as near as this non-economist can tell, the evidence is simply not there to support the "green shoots narrative." In fact, the green shoots line seems to have only slightly more plausibility than the single bullet theory.

The best one can say about the cooked data coming from the BLS is that there appears to be a de-acceleration in the rate of economic contraction that began a bit less than two years ago. A bit of ebbing, a very modest bit, in the rate of unemployment, for example, does not equate with the beginning of a recovery in the economy. But, but what of the behavior of the stock market some might ask? The stock market is the arena for the stupidest money in the realm of finance, and right now the share market's rise can be attributed to the need to believe that everything is okay, that every contraction is followed by a robust recovery that makes the previous decline seem tame by comparison, that the PTB simply will not allow the unthinkable, which is a that a long term/ irreversible deterioration takes hold.

Unfortunately, that is exactly what we are in the midst of. A long term structural decline that the authorities aided and abetted and are now compounding with their profligate schemes that are, because they attempt to defy implacable mathematical realities, doomed to failure.

Krugman's Folly.

One of the great Keynesian sophists of our time, perhaps the greatest, is Nobel Laureate, Paul Krugman. At the very least, Mr. Krugman's eminent status-he seems, among other things, to be the New York Times house economist-proves nothing less than the following: One should not be overawed by Nobel prize winners.

In the bizarre calculus of Herr Krugman, savers, as per his latest bloviation in the New York Times, represent a problem. They aren't a problem much less THE problem. The problem that devotees of deficit spending nonsense like Krugman have presently is that they are in absolute denial about the marginal productive capacity of debt, which, as of 2003, approached zero. As a result, deficit spending now amounts to a suicide mission. More debt at this stage simply means a bigger hole to dig oneself out of, but with exactly the same defective shovel one had before in which to do so. All the points Mr. Krugman makes in his latest piece, valid though they may be, are as nothing when stacked up against that single, simple, yet not simplistic, fact.

The immense debt that is presently in the system has all along needed to be cleared from the aforesaid system. Insolvent banks should have been allowed, nay, compelled to fail and be folded into solvent institutions. Anything short of that is doomed to failure and (even though by now it's probably too late) nuanced arguments about the exact nature of government spending and its prospective impact on interest rates can't evade that reality.


http://krugman.blogs.nytimes.com/2009/05/02/liquidity-preference-loanable-funds-and-niall-ferguson-wonkish/