Tuesday, December 23, 2008

East Meets West, The Triumph of Communo-Capitalism

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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China lowered its interest rates last night for the fourth time since September. It's not yet close to zero interest rates like the U.S. and Japan, but will be be continuing to approach that level next year as will Great Britain. In China the government directly owns the banks and meddles in banking policy. While in the U.S. and Britain, it would be more appropriate to say that the banks own the government, or at least the central bank, and can directly meddle in the government policy that impacts them. In the end is there that much difference? The result is a financial system rife with corruption that engages in economically absurd behavior, which the government then has to bail out.

Final figures for third quarter GDP have just been released for the U.K. and the U.S. According to the official figures (take these with a big grain of salt and assume the reality is worse), the U.K. economy declined by 0.6% and the U.S. economy by 0.5% annualized last quarter. In the U.K. this is the biggest decline since the recession of the early 90s and in response the central bank has dropped interest rates to the lowest level since 1951. For the fourth quarter, a decline around 1.0% is expected in the U.K, while in the U.S. the consensus forecast is the economy will fall off a cliff with at least a 6.0% annualized drop - something worthy of a depression. As a reminder, both Federal Reserve chair Ben Bernanke and Treasury Secretary Paulson testified to congress in September that if the $700 billion Wall Street welfare bill, better known as TARP, wasn't passed, the U.S would face a severe recession. At the time, New York Investing said a severe recession was inevitable no matter what.

TARP is an example of fiscal profligacy, and while it is one of the worst examples, it is by no means the only one. Supporting all of the government's spending is the Fed's out of control money printing, which even mainstream economists are now starting to mention (better late than never I guess). Charts from the St. Louis Fed that New York Investing first showed in October are now getting some press attention. One of these charts, the U.S. Monetary Base shows an 86% increase during 2008, but around a 1000% increase annualized in the last 3 months. Another chart, Adjusted Reserves, shows this indicator exploding from $100 billion to $700 billion since mid-September. These charts (and around a dozen others) are so damaging that I am expecting they the numbers will either be 'adjusted' in the future or the Fed will stop making them available altogether as it did with M3 a few years ago.

While deflation is the headline issue today (based on very little reality), some economists are starting to point out that the Fed and the rest of the world's money printing central banks are going to have a lot of trouble draining all of this liquidity once there is economic recovery. History indicates that this indeed does not happen, but a hyperinflationary spiral is much more likely. This is just starting to dawn on some mainstream economists (but by no means all). The New York Investing meetup laid out this scenario in its September 2007 (yes, 2007) meeting -and so far events seem to be unfolding as predicted.

NEXT: Changes in Wall Street Firms That Led to the Credit Crisis

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.


steve said...

New York Investing Meetup is the best investment site that I know that tells the truth about investing and politics. Besides Jim Rogers, I would rate Darryl up there as the best investment advisor for truth seeking individuals.

Would like to make a suggestion to increase site's visibility. Keep a recommend stock/option portfolio for people to keep track of that are recommended by the meetup group.


Great and excellent.