The Economy Is Worse than Advertised

For a long time I said things are not that bad. I thought stocks would generally rise as the economy deteriorated, which they did, and I was in the minority of gold bugs that didn’t think hyperinflation was likely. Well now I’m getting more and more bearish by the day. The MF Global fiasco has me very concerned: why Jon Corzine isn’t being prosecuted for essentially stealing $1 billion is beyond me. Is it perhaps because he is a major campaign contributor to President Obama? This is the kind of corruption I have trouble putting my head around.

We need structural reform to our system. Our education model is dead; we should hire and fire teachers based on merit and we should have incorporated technology long ago. Career politicians are corrupt and braindead. Our monetary system is outdated. The countless wars abroad have done nothing to further our national prosperity. We have become too accustomed to the status quo, and this is why only a major crisis will bring change.

Think about it: if a leader actually behaved sensibly 20 years ago to prevent the current debt crisis, he would have been voted out of office (unless his name is Ron Paul). He could have told his constituents that he prevented a huge crisis, but they would have given him a blank stare. If people now don’t see the coming crisis even though it’s so obvious, think about how ignorant people were 20 years ago. The political system just isn’t structured in a way to prevent these major crises from happening.

Our leaders live in a fish bowl, and their lack of common sense is amazing. Nothing happens in a vacuum. You cannot increase taxation without an attendant rise in production. You can’t just wave a wand and say “revenue rise!” without putting in the legislation that makes it happen. The economy is a dynamic beast and if you change one input it dramatically shifts outputs in unexpected ways. An increase in taxation will result in capital flight.

Our models are outdated and this is why the economic expansion economists were expecting has not materialized. We lowered interest rates and the textbooks told us this would increase demand from consumers. Well did these geniuses ever consider the possibility that consumers wouldn’t have the appetite to borrow because they are dead broke? Did they ever consider the amount of damage done to household balance sheets because of the housing crisis? Or were they too enamored with their mathematical models to think from a common sense perspective. Monetary policy does not work in all conditions, period.

The stock market was supposed to be a leading indicator, but that theory is out the window now. If the government supports failed banks at the expense of the public balance sheet, and if a large portion of the stock market is composed of financial stocks, then of course stocks will rise. But taken as a whole, our economy suffers because of the added debt. Corporate earnings can continue to be at record levels and the stock market can continue to rise, but our economy will not benefit as long as the interest payments on our debt rise in lockstep.

My greatest fear is that our economy is run by academics since they are among the most hardheaded people on the planet. If you trade real money, you have to be flexible and accept truths the market is telling you or you’ll find yourself broke. If you’re an academic, you can ignore reality and twist data to fit you preconceived conclusions. And if your brainded economic views jive with those of the government, you will probably get a position on Obama’s staff as an adviser. We are going to trigger a currency crisis worldwide with our actions, and this is going to be very painful. It appears that 2012 will be the year when volatility rises in anticipation of worldwide debt defaults.

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  • Salman

    excellent post.

  • Jf

    The US has a 15 trillion debt that reaches 100% of GDP. Still, dumb money continues to rush into the US 10 years bond that yields less than 2 % while many blue chip stocks yield more than 5 %. To me, this is really mind-boggling, just because T-bonds have low yields doesn’t mean the US debt is sustainable. I don’t know when, but one day or another this bubble is going to burst. That will be the short of this century, but I’m not a good trader and I want to sleep tight, so I’m just waiting the dumb money to rush into gold and equities.

  • lidya

    Happy new year Moses. Excellent post.  I could not understand if gold trend is bullish or bearish.  In other words if gold has been in correction or changed its trend to bearish.

    • http://www.expectedreturnsblog.com Moses

      Gold has been in a bearish trend; right now I’d say we’re neutral. 

  • John Spencer

    Well I think we are going to all wake to the fact that the world has never been run the way we thought.
    Check out David Icke it might give you some insight on what is REALLY going on.
    Anyway you insight are always appreciated.

  • Sam

    I think one of the main reasons why low interest rates have not stimulated the economy is because banks have tightened up their lending standards and loans that would have been easy for the average person to get 5 years ago is now very difficult to get.  Really the only people able to take advantage of these stupid low rates right now are the people with lots of capital, in other words the rich people.  Its a good way for rich people to get even richer.

    Gold definitely seems like its in a trading range right now between 1500 and 1800.

  • lidya

    The unemployment rate dropped to 8.5%, so US economy is recovering fast . They are bad news for gold.

    • http://www.expectedreturnsblog.com Moses

      I wouldn’t say that