Reports of Our Recovery Are Greatly Exaggerated

By: John Browne | Sun, Apr 25, 2010
Print Email

From all outward appearances, it seems that a grim chapter in U.S. economic history has come to an end. Newsweek magazine declares that "America is Back," government statistics indicate revival, and our stock market has put in a rally for the record books (by rate of ascent, not highs - we are still more than 25% below the 2007 peak).

And yet, despite massive federal stimuli and subsidies, American unemployment clings stubbornly to the 10 per cent level, with the "underemployment" rate closer to 20 per cent. The IMF does not appear to buy into Washington's optimism; it projects a "double dip" contraction by the second half of this year. With so much conflicting sentiment, it is difficult for investors to know whether the cup is half-empty or half-full.

On a technical basis, stock market gains of 50 per cent or more in a twelve month period should indicate dangerous downside potential. On the other hand, the markets of early 2009 had priced in the likelihood of financial Armageddon. The meltdown did not happen, so traders and brave investors have been quickly buying up the deeply discounted equities.

However, many remain suspicious, believing that the catastrophe had been postponed rather than overcome. The vast bulk of investment funds are sitting on the sidelines, invested in fixed income despite historically low interest rates. Investors have also sought safety in gold, driving its price to above $1,000 an ounce or about half its inflation-adjusted peak price in 1980.

But as the stock market rally beginning in March '09 has extended through the summer, fall, winter and now spring, more and more investors are being drawn into the optimism. The carnage of October '08 may now seem to many like a distant memory -- or maybe just a bad dream.

Admittedly, the earnings of some American bellwether companies, such as IBM, Apple, and Yahoo, have come through far better than expected. More recently, the earnings of financial giants like Citigroup and Goldman Sachs (despite its ethical lapses and pending legal problems) have dazzled on the upside. The strong earnings are creating a drumbeat in the markets with a steady march higher. The results are buoyed by a strong surge of underlying consumer spending and government stimuli. However, no one seems to spend much thought on how the forces came about and how likely they are to remain.

Without doubt, some of the trillions of dollars thrown into the economy by the federal government are filtering through to consumer spending. In addition, an ever greater percentage of mortgage holders have decided to ignore their mortgage payments and condo maintenance obligations. The sudden windfall of extra cash has pumped up spending. But is this a measure of real economic recovery?

Fed Chairman Ben Bernanke says the economy is stable. Many people believe him. But, at the same time as he advertises economic recovery, Bernanke tells us that short-term Fed rates will be kept at zero "for an extended period." Why would he risk runaway inflation by holding interest rates down if the economy were truly rebounding?

Furthermore, despite creating and spending these trillions of new dollars, the Fed continues to resist heavy Congressional pressure to show the public where the money has gone. Rumor has it that some of the money went to institutions outside America. In today's world, can we trust the central bank?

Government pronouncements and the Wall Street media have been castigating Greece for prolific spending and false accounting. Other nations such as Ireland, Spain and Portugal are considered pending dangers to the international monetary system. The fact is that, based on deficit to GDP ratios, the UK (12.6%) lies third behind Iceland (15.7%) and Greece (12.7%)! The United States (10.6%) lies sixth behind Ireland (12.2%) and Spain (11.4%)! The risk of an international meltdown is no longer restricted to banks. It now threatens entire nations, including the great powers. The price of gold reflects just a part of this risk.

Unfortunately, the economic position of the United States and the member states of the European Union, excluding Germany, is not as healthy as our media and politicians would have us believe. The danger is even greater when measured against the relative security and economic success of China, India, Brazil, Australia, Canada and New Zealand (BIC-CAN). In such countries, economic growth and financial responsibility are real. At home, I'm afraid the reports of our recovery are greatly exaggerated.

For in-depth analysis of this and other investment topics, subscribe to The Global Investor, Peter Schiff's free online newsletter. Click here for more information.

 


 

John Browne

Author: John Browne

John Browne, Senior Market Strategist
Euro Pacific Capital, Inc.

John Browne

John Browne is the Senior Economic Consultant for Euro Pacific Capital, Inc. Mr. Brown is a distinguished former member of Britain's Parliament who served on the Treasury Select Committee, as Chairman of the Conservative Small Business Committee, and as a close associate of then-Prime Minister Margaret Thatcher. Among his many notable assignments, John served as a principal advisor to Mrs. Thatcher's government on issues related to the Soviet Union, and was the first to convince Thatcher of the growing stature of then Agriculture Minister Mikhail Gorbachev. As a partial result of Brown's advocacy, Thatcher famously pronounced that Gorbachev was a man the West "could do business with." A graduate of the Royal Military Academy Sandhurst, Britain's version of West Point and retired British army major, John served as a pilot, parachutist, and communications specialist in the elite Grenadiers of the Royal Guard.

In addition to careers in British politics and the military, John has a significant background, spanning some 37 years, in finance and business. After graduating from the Harvard Business School, John joined the New York firm of Morgan Stanley & Co as an investment banker. He has also worked with such firms as Barclays Bank and Citigroup. During his career he has served on the boards of numerous banks and international corporations, with a special interest in venture capital. He is a frequent guest on CNBC's Kudlow & Co. and the former editor of NewsMax Media's Financial Intelligence Report and Moneynews.com. He holds FINRA series 7 & 63 licenses.

Copyright © 2008-2014 Euro Pacific Capital, Inc.

All Images, XHTML Renderings, and Source Code Copyright © Safehaven.com

SEARCH





TRUE MONEY SUPPLY

Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
austrian-money-supply/