Monday, August 10, 2009

The Smoking Gun of the Economic Recovery Scam

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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The Economic recovery that is supposedly taking place has been carefully arranged by the U.S. government. Unfortunately, the 'recovery' will be far more evident in the published statistics than in the economy itself. After all, it is a lot easier to change the numbers that to actually fix the economy. Apparently, the hope is that with enough cheer leading, businesses and the public will get on the bandwagon and start spending again. I can picture Bernanke, Geithner and Obama clicking their heels together and trying to wish hard enough to make it so.

The AIG earnings report came in as positive as expected on Friday. How did a company that is beyond bankrupt manage to show positive earnings? The key statement in the report about what happened was "resulting from the adoption of new accounting guidelines". These new guidelines were set by the U.S. government and probably benefited every big bank and brokerage house as well, most of which had surprisingly good earnings - even though their lending operations (the core business of any bank) were continuing to deteriorate during the quarter. So the mystery has been solved. If your earnings are disastrous, just change the accounting rules and like waving a magic wand, suddenly you're earning gobs of money. Happy days are here again!

If you want to know how well this approach works, you can take a look at Enron and GM. Enron's earnings were phony for years and then it imploded overnight. GM changed its accounting in the mid-2000s after the recession and suddenly one quarter it was earning big bucks instead of losing big bucks. To its credit, CNBC News actually reported that the big 'improvement' was merely an accounting gimmick. The stock still rallied strongly on the news (so much for the Efficient Market Hypothesis). Even though the government started pouring money into GM starting in 2007, it still went bankrupt in 2009. Now the government is supporting it to the tune of $4500 per car with the Cash for Clunkers program. Reports out today predict that autos are going to be the next big recovery area of the economy, improving both the industrial production numbers (which fell at a depression level 19% in the first quarter) and retail sales (which went up in May and June because of higher gas prices - they're not adjusted for inflation).

If the government pours huge amounts of money into any industry, the numbers will of course improve. This doesn't indicate economic recovery though, even though it is being sold that way. Will the government keep doing this every quarter? It may have to in order to keep the 'recovery' going. If you want to know how well that approach works, see Weimar Germany and Zimbabwe.

NEXT: Inconsistencies of the Economic 'Recovery'

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.

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