The US Economy Stumbles

In the last couple of weeks there have been a few discouraging reports on the US "recovery". But before we get to these, lets re-examine what The Fed and the US government have done since the Lehman crash. Shortly after the crash and the election of a new President, our government threw tons of money at the economy.. first was TARP (troubled asset relief program) which was an emergency $700 billion program designed to stop the banking system from collapsing. Shortly thereafter, as deflation was raging and the stock markets were sinking, the Fed initiated their "quantitative easing" program in November of 2008 which began the purchase of mortgage backed securities as well as US government debt as our government began borrowing vast sums of money, primarily the aforementioned TARP. Within six months, the Fed had purchased over $1.75 Trillion in MBS's and US Bonds. In addition, the Fed lowered the rate it charges banks to borrow money to essentially zero.

Then came President Obama's stimulus package, passed in Feb 2009, called the "American Recovery and Reinvestment Act". It was a $787 billion package (most of it debt added onto your children) that included tax incentives, an expansion of unemployment benefits and other social welfare provisions, and spending on domestic education, health care and infrastructure. By March of 2009, the stock market began to rise again, though unemployment remained stubbornly high.

By June of 2010, the Fed had purchased over $2.1 Trillion in MBS's and US Bonds. And still the economy was weak. In November 2010, the Fed announced that they were going to purchase another $600 billion in US Bonds. By early 2011, unemployment had stopped rising and there were signs of both job and economic growth, though prices of commodities began a serious rise. This new program, called "QE2", is set to end this summer. One of the problems of this program is that the Fed has essentially become the buyer of first and last resort for US Bonds.. they do it in the secondary markets instead of direct purchases, which is actually illegal. In early 2011, the Fed had essentially (re)purchased nearly 75% of all US Bonds issued. Their plan is to sell their MBS portfolios and keep up the purchase of US Bonds, which by one estimate should be able to fund the US Government's needs thru the end of this year anyways, though the US government will still have to find buyers for their short term Bonds and Bills when they need to be repurchased.

In summation, our government has thrown (well, printed really) about $3.8 Trillion between various QE's, stimulus packages and bailouts since the end of the Lehman disaster. This money did do some good.. it stopped a deflationary banking collapse in its tracks and has led to a rising stock market and a minimal growth in jobs. It's an indication of just how serious the situation really was in 2008 that it took so much money just to halt the decline.

But last week, two reports came out quantifying what we serfs already knew.. prices are rising for gas and food and there are still no jobs. First came the Initial Jobless Claims report, which had been on a downward slide for about six months.. most had come under 400,000. This one was different.. it came in at 434,000 for the week ending May 7th.. and it followed the previous week's very ugly one of 478,000. The talking heads were spinning these two weeks as best they can, but statistics don't lie. Second came the Producer Price Index, which measures the cost of various goods. Again the rise was ugly.. overall it came in at an annual adjusted rate of 6.8%, with food and gasoline leading the way. For us serfs, gasoline hit $4.00/gal, much to the grumbling of nearly everyone I see at gas stations. In a supremely surreal statement, the Finance Minister of Zimbabwe, which of late printed the ZD100 billion note, has today criticized the US Fed Chairman Bernanke for money printing and said that in light of this, Zimbabwe should should consider going to a gold standard.

For me, it seems to indicate that there is a limit to the amount of good that printing vast quantities of money can accomplish.. and it's my belief that we've arrived at this point. Both Obama and Bernanke were not pleased to say the least.. especially about the initial claims report. Two weeks in a row of bad employment reports is a bad portend. Lets hope it reverses. The Fed has said that fixing unemployment is part of it's mandate. While I dont think we'll see any more QE's for a while, I do believe that between the stumbling unemployment numbers and the need to finance the US Gov't, another round of it will become necessary; I look for it around the end of the year.

In other recent news. there has been a lot of talk recently about a Greek default, especially last Friday when an emergency meeting was apparently held and the German newspaper Der Spiegel ran a story suggesting that Greece was threatening to pull out of the Euro and go back to it's old currency, the drachma. This report was immediately denied by all involved. Make no mistake-- Greece is feeling the pain. Their unemployment rate hit 15.8% and their gas and food prices are rising-- a toxic mix. This weekend another meeting is being held to discuss changing the terms of Greece's bailout. Greek police are doing battle with strikers and protestors in many Greek cities. My hunch is that where there's smoke, there's fire-- I'd wager that there has been much talk from the Greeks about defaulting, and rightly so-- in the end, it's only a matter of when. In all honesty, the sooner the better.. but the EU and IMF seem intent on pushing the Greeks to honor the arrangement by continue to cut expenditures. If there were to be a negotiated default of some sort, the banks and other creditors would have a chance to better prepare and the default would not be a total one. If the people of Greece are pushed too far and the situation becomes desperate, the default will be both sudden and total-- and this risks another crisis. Unfortunately, Mssr Strauss-Khan of the IMF decided to attack a maid in a New York hotel room and now the leading candidate for the French Presidency and current head of the IMF is in the dock awaiting arraignment. This will undoubtedly stall any progress on the IMF's part.