Beware of People Selling Snake Oil

by Jack

17 Jul 2013 Enterprise Record. CHICO — Economic indicators are pointing to a more positive Chico future, and a number of Chico business owners and managers have told Golden Valley Bank they are more confident about Chico’s future.

The above story sounds rosey, but if you are staying abreast of the real financial news you might have a different opinion, one that is more cautionary.  

What we should be aware of when evaluating small signs of recovery is the largest bond bubble in US history is about to implode, and if it does it could wreak havoc and set us back years.   Local bankers are taking a fairly limited view when they talk about consumer confidence on the rise.

The nation’s economy is in trouble because banks have been holding too much “excess liquidity” and it’s not going for loans to help grow jobs and business.   This is a little technical, so I hope you will allow me to explain.  Banks by law are required to keep 20% their monitary assets on hand, but anything above that is called excess liquidity and it’s deposited in the federal Reserve Bank as a credit.  While it’s there it earns interest and can be borrowed by other banks.   Banks are encouraged to leave this money on deposit because the fed is paying them a rate better than treasure notes.    The bailout money and QE’s to keep interest rates low were supposed to stimulate the economy, but the banks are simply sitting on the money!   “According to the Federal Reserve, they have $1.5 trillion in excess reserves. This is extraordinary. It is as if individuals took $1.5 trillion of their savings out of stocks, bonds and every other income-producing financial asset and put it all into non-interest-bearing checking accounts back in 2009, and just left it there.”   

http://economix.blogs.nytimes.com/2012/07/31/the-fed-should-stop-paying-banks-not-to-lend/

Next problem:   Bernanke has been pushing th Federal Reserve  to print up more money to buy about $85B of bonds and real estate notes every month and that new money is backed up by the ”full faith and credit of the US government” and that faith and credit is getting pretty shakey!  We’re headed south of 16 trillion in debt!  We owe as much as we are worth and that’s not good!   Whatever improvements we’ve been seeing in the economy is built on this credit card approach.    Borrowing our way to wealth is not creating a stable, reliable recovery and it never has!  All it’s done has been to prop up Wall Street and the big banks behind them and create some very well paid CEOs.     

We’ve got a false economy built on borrowed money once again.  We’re making some of the same mistake from previous burst bubbles like dot com bubble, the energy bubble and the last big real estate bubble and we’re making new mistakes.   We can’t keep buying up $85B in bonds and loans every month forever, there’s a limit and right now any pull back spells disaster for the stock market, so they keep on spending $85b a month and they can’t stop or pow…disaster.   It’s a huge Catch 22.  

Here’s what awaits:  When Bernanke merely hinted last month that this lavish spending and quantitative easing would be restrained just a little to maybe $80B a month, the stock market reacted with panic.   It plummeted hundreds of points in a selling frenzy.  What does that say about the stability of our economy?  Many of our stocks inflated beyond their actual value and the only thing keeping them up is Bernanke’s spending.   Its an illusionary economy that is doomed to collapse back to actual valuation.    

To compound this problem we have a large percentage of employers (around 35% that say they are looking at reducing the work week to around 30 hours to skirt around the costs of Obama care.     

Let me close with this,  it all goes back to Keynesian economic theory that Bernanke taught at Princeton.  But, it’s a failed theory that has not stood the test of time.  It didn’t work during the Great Depression and it doesn’t work now.   Bernanke has merely set us up with one more bubble and trillions in debt.  Perhaps the day of reckoning will come in 2014 or it could be 2015, but  it’s inevitable that it will come.   When this bond bubble goes it will be extremely damaging to our recovery.