Posts Tagged ‘recession’

Ben Bernanke and The Federal Reserve Money Factory

Thursday, December 3rd, 2009

golden-ticketOver the past few weeks Republican Congressman Ron Paul out of Texas has been making a noticeable push to get more transparency out of the Federal Reserve. The Federal Reserve members and its Chairman (Ben Bernanke) have been verbally opposed to the measures that the Congressman is attempting to have enacted. The proposal Congressman Ron Paul is pushing for would allow for an independent audit to be called for following any decisions on monetary policy by the Federal Reserve.

Currently the Federal Reserve keeps most of its dealings a secret. The Federal Reserve believes that by keeping politics and the public view out of monetary policy they will be able to act more prudently and timely without influence. They believe that this independence is crucial to maintaining their objectives.

Some believe that many of the problems today are caused by their objectives. The Federal Reserve’s deliberate reactions to economic events creates a relatively predictable cycle. When the economy contracts, the Federal Reserve lowers rates to expand credit to spur growth with cheap money. When the economy is growing too fast they raise interest rates to slow the growth. Unfortunately, it is much easier to indentify contraction than over expansion, which typically results in a late raising of rates which can result in a bubble.

For the past 25 years the Federal Reserve has lowered rates more than raising them and now is faced with a very troubling 0 to .25% Fed Funds Rate. Interest rates as a whole should be falling, but for credit that is not supported by the government, rates are rising. One can only assume that with banks profit margins so high that the rising rates are being caused by falling credit quality and defaults. The Federal Reserve has resorted to another avenue in attempts to promote lending with “quantitative easing”. Quantitative easing is essentially when the Federal Reserve becomes the lender of last resort. This form of injecting money into the economy can have adverse and unknown consequences, since much of the money is created out of thin air in the form of credit.

Who, what and how they are supporting these institutions seems to be behind Congressman Ron Paul’s motivation. Over this historical Financial Crisis the Federal Reserve’s political powers have been weakened. We will see if this weakness will lead to the Congressman getting his golden ticket.

Who Leads the Economy?

Tuesday, April 28th, 2009

The US economy is made up of two fundamental events which are expanding and contracting credit. While an economy is expanding credit typically it is a time of prosperity. When an economy is contracting usually it is a labeled a recession. The economic cycle of expansion and contraction describes an economy as a whole.

To best visualize this cycle you should imagine a wave. As you go up the wave credit is expanding which typically means more spending; when you go down the wave credit is contracting which leads to less spending. Since US consumer makes up about 70% of GDP, it is logical to imagine the consumer is the water that makes up the wave. As the old saying goes, “Life is full of ups and downs”. People are typically either going up or down the wave.


The world is made up of cycles. The sun comes up and then is goes down and seasons change. Peoples clothing and surroundings may change but history usually repeats itself.
Individuals have short and long cycles. Groups of people also share cycles. These groups could include 2 individuals to millions or even the entire world’s population.

Gustav Le Bon in his book “The Crowd” cited that individuals are smarter than the crowd. With this assumption one could argue that the larger the group included in a cycle the slower the cycles is to repeat itself since it will take the crowd longer to move to the next part of the cycle than an individual.

Individual’s private finances most of the time go through periods of expansion and contraction just like the economy as a whole. Actually if you believe that individuals are smarter than the crowd, then you should also believe that individual’s finances lead the broader economy, since they are more efficient at moving to the next part of the cycle.

With the current economic crisis the price of real estate skyrocketed to a point where more and more individuals no longer saw value and stopped buying. With less buyer and more sellers, real estate prices started to plummet. Once the first domino falls, the rest eventually do. Since the housing bubble was so widespread and included so many people, both in the USA and abroad, the cycle should take that much longer to progress.

The Fortune Telling Stock Market

Wednesday, April 8th, 2009

The stock market is typically 5 or 6 months ahead of the economy. That is what we are led to believe; actually many bear market rallies are predicated on this theory. Does it really?

We heard the declared bottom ring in November 2008 when the Dow Industrial Average hit 7552. So according to the Stock Market fortune teller the Dow Industrial Average should not have broken the 7552 level in February and economy should be on the rise by now. Unfortunately this prediction has been proved wrong this time.

One thing is for sure; eventually it will be right (assuming you believe the World’s economies will recover at one point, I do). One of the eventual lows will be preceded by growth.

Sounds kind of like a convenient statistic, where they fail to disclose the accuracy. Over the past year, how many times have you heard “bottom”, how many times has this fortune telling ability been right?

Lately the fortune telling ability of the stock market has been the reason “you can’t afford not to be in this market” according to the mass populous on Wall Street. It may eventually be true, but can you afford its accuracy?

Stop Fighting the Dollar

Tuesday, April 7th, 2009

The US Government in one breathe attempts to sink the Dollar in the next speaks of a commitment to a strong Dollar. Even with all of their “innovative” methods of sinking the Dollar, it just keeps getting back up. The Dollar of recent has the resilience of a “Rocky” opponent.

So what keeps the Dollar moving up even in the face of such dramatic attempts to keep it down? Probably the most obvious is that the rest of the world is in worse shape than the USA. The old saying goes “if the USA gets a cold, typically the rest of the world gets pneumonia”.


With the US Government printing money at a feverish pace, other countries that are dependent on exports to the USA must do the same to keep their currency in pace. This process seems to extend the financial pain and fuel social unrest.

The Dollar is the Ocean eroding the cost of goods and services in the US, the solutions so far are looking like poor conceived Jetties, which typically cause more harm than good.

Was it Real Growth or just Credit? The Last 30 Years

Sunday, March 29th, 2009

The following two charts are disturbingly similar side by side:


First is the Dow Industrial Average over the last from 1928 till 2006:

Dow Industrial Average 1928 till 2006

Dow Industrial Average 1928 till 2006

The second chart is total US debt as a percentage of GDP from 1923 till 2006:

Percentage of Total US debt to GDP

Percentage of Total US debt to GDP 1923 till 2006

In 1930 the total percentage of US debt to GDP was 270%. What this means that for every dollar of GDP there was $2.70 of debt. Notice the percentage soared as debt was accelerated and GDP was slowed in the early 30’s. This over expansion of credit was primarily responsible for the financial crisis of the 1930’s. It took many years for the population to forget about the dangers of too much credit.

In 2006 the total percentage of debt to US debt to GDP was 331%. So again this means that for every dollar of GDP there was $3.31 of debt. The overall consensus feels that we are again in process of deleveraging. The questions remains is where we stop.

The real question is what came first the credit or the growth? Was the United Sates at a standstill from the 1940’s till the mid to late 1970’s? If the country was not willing to assume more debt than about 150% (plus or minus say 10%) of GDP for some 30+ years and now we are assuming over 300%, was it that extra assumed risk what launched the economy over the past 30 years ?

I understand that over the past 30 years there has been great innovation, but let us not forget that in the previous 30+ years we went to the moon. It seems to me also that much of the technology over that past 30 years can greatly be attributed to the 30 years prior to that. Was the growth over that past 30 years attributed to Engineers and Scientists or some funny math created by financial institutions spurred by an increased appetite for risk?

Killing the World Economies with Money

Thursday, March 19th, 2009
Ben Bernanke US Federal Reserve Chairman

Ben Bernanke US Federal Reserve Chairman

Okay so our beloved fed reserve chairman has come up with a brilliant way of killing the rest of the world economies, at least until they catch up. So what happens when you are the largest consumer in the world and you try your hardest to kill the value of your currency? Well you manage to make the life of countries that live off you harder. I call this protectionism, devaluing your currency in the face of a world recession is a real low blow to those countries that depend on you for your consumption. Now the other side of the coin is that large USA companies will benefit in the short term (a little protectionism), but what happens when those foreign economies you’ve damaged find their recession deepening because of currency exchange. Well large US companies, who receive a significant source of their revenue from overseas, will start to suffer on softening foreign sales.

The actions the Federal Reserve took yesterday are intentioned to expand credit in the United States, but isn’t that what started the problem in the first place. To me it seems like our Government can’t give up the past to move onto the future where we you don’t need a new car every 2 years and 5 LCD televisions per household. We need to focus on letting the market go through the difficult process of price discovery and start saving real money instead of looking at credit as a safety net (i.e. credit cards). The US government should stop trying to fix it and maintain the laws instead of inventing new ones.

Just my opinion.