Yesterday's release of the ADP and ISM data has most economists staring at the numbers in disbelief like they were deer in headlights. Their mantra had been that the U.S. was in a genuine recovery. But that notion is now being squelched by a thunderous cacophony of falling economic numbers. The ADP report showed that the private sector produced just 38k jobs in the month of May; while the all-important goods producing sector actually shed 10k from the payrolls. Meanwhile, the Institute of Supply Management reported the lowest number since September of 2009. The manufacturing Index fell to 53.5 in May from 60.4 in April.
Mainstream economists just can't figure out what happened to this so called recovery that has been underway for two years. They would rather cling to their meaningless mantras like "it's just a normal mid-cycle slowdown." And since the data has predictably and decidedly turned negative, they are now clamoring for QE III.
But since they have yet to recognize that borrowing and printing caused this past recession, they continue to cling to the belief that more of the same will be the cure. However, in truth recessions are caused by excessive borrowing and money printing. Too much borrowing necessitates that a period of deleveraging ensues, which temporarily reduces consumption and production. Likewise, inflation causes a steep decline in real wages and thus sharply reduces consumer discretionary purchases. The only real solution for an economy mired in debt and inflation is a period of balance sheet reparation and deflation.
Another iteration of government intervention will not be effective because we are now completely saturated in debt. And crumbling the currency further by creating more inflation isn't going to work either -- especially when oil is already in triple digits. During the heart of the Great Recession, oil prices were $33 a barrel and the dollar was soaring. Deflation was the predominant fear. Therefore, borrowing printed money to boost consumption didn't automatically drive prices higher. But today the dollar is dropping and inflation abounds everywhere. Producers and consumers are becoming less and less duped into believing their currency is maintaining its value -- so prices are just going up.
The best thing the citizens of this country can hope for is that politicians finally assent to the notion that they cannot and should not get in the way of the deleveraging process and now have the intelligence to lay their hubris aside. But unfortunately, I have my doubts. What will most likely occur is that the government will balk at significant spending cuts and the Fed will regret ever talking about the end of debt monetization. Bernanke will pine for the halcyon days of 2010 when QE II was steaming along full speed ahead. Bernanke, Geithner and Obama might ponder: "After all, the Ten year note is now trading under 3%...so why should we stop borrowing now? Besides, a much weaker dollar would really boost exports and help reduce the value of our existing debt."
If our government subscribes to the above train of thought, an inextinguishable fuse will have been lit on a bomb that is assured to devastate our bond market and our dollar. That is, if the fuse hasn't already been lit.
Michael Pento is the Senior Economist for Euro Pacific Capital
Now, if those Congress Critters are stupid enough to default on our debt, well that is another story.
Te failure of his model is what has caused the crisis.
So he uses his Austrian training to claim that this was all due to some government largesse and that it was such that now requires the Austerianism that the Austrians so love.
This is the hole that you dug, Mr. Pento.
What is true and where he is right is that the mainstream economists haven't got a clue as to what is happening, and that QE III will be just as ineffective as I and II - largely because you cannot push the string of economic recovery - it can only be pulled along by rising aggregate demand.
But rising aggregate demand is an accessible result to the real economy from a reform to our monetary policy actions where, rather than forcing hundreds of Billions onto the banks' balance sheets and expecting it to trickle down to Main Street, the policy initiative is to SPEND the extra $600 Billion into the M1 part of the money supply where we all live and work.
Nice work, Mr. Pento.
Go back to your leveraged speculation charade.
Thanks.
By the way, aggregate demand comes as a consequence of aggregate production. You have it exactly backwards. Consumers can't produce yet because they must first deleverage. But your heroes in D.C. won't let them.
Oh, and nothing helps a debt burden like deflation. Consider a debt of $1,000,000 now. Would you rather a $1,000,000 buy less in commodities (inflation) or more (deflation) as time moves forward? If you're a bank, you want the latter. If you have to pay that debt, you want the former.
Bankers got us into this shitstorm. Not really listening to how they think we can get out of it.
For many of us it means choosing between food, gasoline or medicine. Putting off doctor and definitely dentist visits.
Step out of your gated community for a while and see how real people are hunkering down.
Now, if you still believe that Government knows best and they know what to do with our money better than we do well I have good news for you: I just spoke to the US Treasury and they said they are more than happy to accept additonal funds from you ... they said they are more than happy for you to put your money where your mouth is and to give up more of your hard earned money to Mommy and Daddy Government.
You keep believing Government is the answer and i'll believe in our people and our corporations who hire our people.
I quit risking my after-taxed-to-death dollars on business ventures to employ people!!!!!! Why you ask my little liberal amigo? Because I'm sick of having darn near half my money taken from me! I'm tired of being demonized by you libs becasue I make money and I'm considered "rich".
So, I'll just let my money sit in the stock market and not contribute any longer.
I worked at UPS for 15 years and busted butt and saved all those years and risked my money to get somewhere. All the while, you were probably buying beer, going four wheeling, having a bunch of kids and living paycheck to paycheck and now you wanna cry.
The "rich" (like me lol) can only take so much regulation and taxes and demonization until we say "F" it!
There is no longer any incentive to risk your hard earned money.
Oh and I know MANY unemployed individuals who get free rent, free utilities, free food, free healthcare .... they aren't in a hurry to find a job.
Do we borrow for no reason?
Or, do we borrow because the root cause is a mismatch between spending and income?
Bush taxcuts dropped government revenue to ~14% of national income from the ~19% that had worked under Clinton. And, Tea-Publican war policies increased spending to an unprecedented rate - on unproductive wars. Also Tea-Publican economic policies caused us to subsidize big companies and accelerate offshoring of jobs - instead of creating policies that protected American jobs. For instance, the American Textile industry is no more.
Lower income. Higher spending on unproductive, wasteful wars that don't invest in America. Significant reductions in American investment because of policies that encourage overseas investments. Tax policies that radically cut the effective tax rates on big corporations. Tax policies that raise the effective tax rates on small companies - "where the jobs are." Uncontrolled banks that lent money for mortgages that would not be repaid. Bailout of banks and AIG.
Perhaps those have more to do with the need to borrow than anything else.
Discussing a symptom is not useful - unless it leads to fixing the root cause.