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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: RetiredNow who wrote (261106)	7/15/2010 12:44:46 PM
From: RetiredNow	Read Replies (1) \| Respond to of 306849

JPM: They're Still Doing It! No, really? market-ticker.denninger.net!.html JPMorgan reported a better than expected second-quarter profit earlier Thursday, but Bove said the figure was not good because it was partly boosted by the fact that it took money out of its reserves to put into earnings. "What you're going to see is that just about any bank that reports numbers… is going to do the same thing," he said. "That's something that banks have always done in recoveries." Except that it's not a "recovery" when the entire move was driven by The Federal Government borrowing eleven percent of GDP and spending it to replace final demand. Listen to Alistair Darling: market-ticker.denninger.net!.html His point (which I heard as I was drinking my morning coffee) is both misguided and spot-on. Huh? - you might ask... Yes. His point is that government "borrow and spend" has replaced final demand - and he asks where is final demand going to come from if (not when?) that government spending is removed? This is the problem with the faux Keynes adherents. They're false adherents, incidentally, because the Keynes' theories require that during boom times the Treasury must raise taxes, cut spending, and bank a surplus. This never happens, of course, and as such the supposed "balance" is never maintained. As a consequence all attempts to apply Keynes' theories to the economy in the real world wind up being a Ponzi Scheme. The government applies a "stimulus" during bad times and then finds itself unable to withdraw that stimulus during good times, having embedded a structural deficit. This in turn sends a false demand signal to the economy, which responds by filling the falsely-indicated demand. When the inevitable recognition of overcapacity occurs, you get another, deeper recession. Government in turn responds by doing the same thing it did the last time, building an even DEEPER structural deficit into the economy. Eventually you run out of suckers, er, Ponzi Participants when the credit wall is hit in the broad economy. Government, being the foundation on which private credit is computed (that is, it's the allegedly risk-free return) typically can continue this cycle once or twice. But the premise of those who argue that government can expand its borrowing forever, and thus continue its "stimulative" policy forever, is incorrect. While it is true that a government can emit its own currency in some fashion to any degree it wishes, it cannot do so without consequence. Provided money is issued against debt (as is the case in all modern economies where Treasuries sell bonds to finance themselves, even if those sales are made to their central banks) the ultimate unintended consequence is that borrowing costs skyrocket and political pressure becomes intolerable for the central bank to monetize. But the monetization of debt destroys the lenders of capital, including the Central Bank's patrons/owners - the very banks that it serves the clearing function for! They will thus resist or refuse outright, and that in turn ultimately sets up the "Battle Royale" when the legislature and/or executive is forced to decide between living within tax revenues and dissolving said bank and emitting unbacked currency. The latter, if chosen, has always led to the destruction of the currency emitted. This path is either abandoned quickly (e.g. Lincoln's Greenbacks) or it results in a hyperinflationary destruction of the currency (and usually political system) - aka Weimar Germany or Zimbabwe. The former brings the "avoided" deflation (which isn't really deflation at all - rather, it is the unwinding of the naked short on the currency that unbridled and unsound credit creation represented) on the economy more-or-less "all at once." FDR thought he could "avoid" the damage by "revaluation" (possible only in a specie-backed monetary world.) He was wrong; the Depression was not exited until the excess productive capacity worldwide was destroyed by war. On the other side Harding, in 1920 was counseled by Hoover (who at the time was Secretary of Commerce) to do exactly as FDR did and both Bush and Obama (plus Bernanke) have done this time around: spend like crazy, protect the banks from their own foibles and borrow whatever was necessary to do so. Unemployment had risen to 12% by 1920 and GDP slumped 17% - a nasty depression. He refused and the Depression of 1920 was over by the end of 1921, with all the bad credit being cleared out of the system the capitalist way - those who had made and taken bad loans went bust! By 1923 unemployment had fallen to 2.4% - a level that, other than in wartime, we have never seen since. You're not going to see this happen in the 201x years because our government continues to allow the games to be played. The banks are still holding and hiding their bad debt, they have been protected from failure, spending has skyrocketed and now we're headed for the wall - the decision between forced austerity and destruction of both the currency and our political system. There is still time to force the banks (and others) to do the right thing, but not to avoid the pain. We are now arguing only over whether that pain will occur voluntarily or via the cold, hard hand of the market - the famous "invisible hand" that listens to nobody and, while sometimes evaded temporarily, is never truly avoided.