Fed Optimistic About U.S. Economy
By Staff News & Analysis - March 04, 2010

The economy continued to show modest signs of improvement in recent weeks, although growth was hindered somewhat by bad weather, according to the latest Federal Reserve snapshot of regional economic conditions. Economic activity improved in nine of the central bank's 12 districts, the Fed said Wednesday in the March edition of its Beige Book. But activity was hampered in several districts, most notably Richmond, due to severe snowstorms in early February. "The stabilization of the economy continues," said Doug Roberts, chief investment strategist for Channel Capital Research. "However, the recovery seems to be tenuous." – CNN

Dominant Social Theme: Tenuous green shoots seen once more …

Free-Market Analysis: We confess, we wonder what it is that CNN reporters – and the Fed itself – see as so encouraging about the economy. Americans have been down this weary road before. In the 20th century alone, especially since the implementation of the mercantilist quasi-public Federal Reserve, the US economy (and the world's) has sputtered like bad two-stroke engine. The yellow brick road is indeed riddled with potholes.

Take a deep breath and contemplate the 20th century and a smidgen of the 21st. In America alone there was the Great Depression, the gradually recovery of the 1940s, the setbacks in the early 1960s, the swoon of 1969, the endless busts of the 1970s coupled with price inflation leading to 20 percent interest rates, the horrible recession of the early 1980s, the crash of 1987, the recession of the late 1980s and the mild one in the early 1990s, the terrible one following the tech bubble in 2000, the slow growth of the early 2000s and real estate bubble of the mid 2000s – leading finally to the Greater Unraveling which persists today.

Americans are told, "the stabilization of the economy continues." But what an economy it is! America, according to statistics collected by, (ones we have reported previously but they are worth repeating) has one of the highest poverty rates in the industrialized world with up to 50 million citizens already living a lifestyle associated with poverty. This 50 million may have no formal health care coverage and "a stunning 50 percent of U.S. children will use food stamps to eat at some point in their childhoods." And some more:

Americans have lost $5 trillion from their pensions and savings since the economic crisis began and $13 trillion in the value of their homes. During the first full year of the crisis, workers between the age of 55 – 60, who have worked for 20 – 29 years, have lost an average of 25 percent off their 401k. "Personal debt has risen from 65 percent of income in 1980 to 125 percent today." Over five million U.S. families have already lost their homes, in total 13 million U.S. families are expected to lose their home by 2014, with 25 percent of current mortgages underwater. Deutsche Bank has an even grimmer prediction: "The percentage of 'underwater' loans may rise to 48 percent, or 25 million homes." … There are now over 3 million homeless Americans, the fastest-growing segment of the homeless population is single parents with children.

While these statistics are grim, there are plenty of informed observers in the US who yet predict a double-dip recession as commercial real estate faces resets. The sovereign debt crisis is said to be part of this larger credit crunch, and while it is already affecting European countries, it will doubtless affect more and more American states as well. California is already underwater and states such as Michigan are facing deficits of up to HALF of their annual budgets.

Fortunately, the Fed can point to such bright spots as the NYSE and its stocks, which have moved up smartly. Of course, from our point of view this is only to be expected given that the Fed has dumped something between US$1 and US$8 trillion into the marketplace over the past couple of years. All that money has to go somewhere. While some of it just sits in bank vaults, a certain amount has obviously found its way into US equities. But even here, there are observers who are not sure of equity's staying power. Gloom, Boom & Doom Report's Mark Faber had this to say about US equities recently, according to a MoneyNews report:

Faber: Stocks Can Fall 20 Percent if New High Hit … U.S. stocks may drop 20 percent if they top their January highs, says investment guru Mark Faber. The Standard & Poor's 500 Index reached a high of 1,150 Jan. 19. "I'm not sure we will make a new high," Faber told Bloomberg. "But if we do, I don't think it will be that far – maybe 1,200 – and then I wouldn't rule out a correction of at least 20 percent."

On the currency front, Faber says the euro is very oversold, trading at about $1.35. "The news has been horrible for the euro zone," he said. "I think the euro can rebound to $1.40 before it goes lower." Fundamentals are weak for both the dollar and the euro, Faber maintains. "What you have in Europe is indirect monetization of the debt."

As for the greenback, "When investors realize fiscal deficits aren't going to come down, that one state after another is going bust and that monetization is inevitable, at that point the dollar will be weak," Faber said. But it won't slip against the euro, he says. "Both currencies are sick." Gold and Asian currencies will benefit as a result, Faber says.

In the past, the power elite has been able to maintain its central-bank driven economy by pouring torrents of debt-based money into Western economies whenever they lagged. But there comes a time when the nag will not rise up no matter how she is flogged. This may be one of those times. Western economies have been so thoroughly distorted by the over-production of fiat money that the world basically needs a reset – and a rest. Not only that but the biggest bubble that central banks have tried to re-inflate is the banking bubble itself.

What good is such a system, one is tempted to ask. In America the official unemployment figures hover around ten percent, but the reality is far higher. Some speculate it is at 20 percent. We figure it may be as high as 30 percent – especially if one includes people who can only find part-time or occasional work. The numbers are staggering, actually. 20 percent unemployment is something like 30-40 million adults. 30 percent unemployment would put up to 40-50 million or more Americans out to pasture. No wonder there is a tea-party movement in the US.

A fiat money economy is not a real economy as we have pointed out before. It inevitably creates jobs that cannot be counted on to survive the next "bust." Unlike past downturns, this one is different not just because of the magnitude but because so many more people are likely doubtful about the system itself – in America and increasingly in Europe. In this downturn, unlike others, the Fed itself has come in for scathing criticism. The Internet of course is the change-maker in all this. It has educated many about free-market economics, central banking and fiat money.

We are not so optimistic as the Fed about a rebound in America and generally in the West. How does the Fed, in fact, anticipate an American recovery with Europe unraveling as quickly as it is? And even were Europe to avoid a major downdraft, the amount of unemployed, the commercial real-estate overhang and the foundering of state-sovereign debt itself would all seem to mediate against the kind of fiat-recovery that central banks have been able to put into place in the past.

So many know the pattern by now. Pound billions into the stock market and trust the mainstream media to "talk up" a recovery until one finally occurs at least to some degree. In the meantime, ignore the larger collapse of industry and the increased polarization of jobs and wages. Eventually you arrive at a South American style recovery in which even people with advanced degrees are driving taxis because that's the only solid work available.

We've traveled in these places. Inevitably, they are overbanked and a handful of wealthy families and individuals own most of the industrial and financial services that count. Everybody else is on the street selling phones, operating cabs or hustling short-order food. These are not pleasant economies to live in for the most part. As they spiral downwards, as they do sooner or later, politics inevitably takes an ugly turn toward populism. A new growth industry emerges: security and military affairs.

As a newspaper covering dominant social themes of the power elite we are in the business of pointing out to our readers that they will have to make decisions about the viability of elite promotions as the 21st century matures. Investing is innate to humankind, or at least to certain humans, but there is nothing in our opinion that mandates the continuation of the insanely complex and highly regulated world of modern stock investing, or investing in general for that matter.

After Thoughts

Many investors may throw up their hands and buy commodities or precious metals as they are latest sectors to have done well. But no matter what individuals choose to do in the 21st century, they are faced with the collapsing memes of the elite and will have the increasingly difficult task of determining what promotions are viable – and therefore significant – and what are so badly damaged that they have little impact for the foreseeable future (global warming and green industry). The collision of the Internet with the power elite is going to cause increasing complications in many areas of investment life. It already has. The current (predicted) recovery may be one of them. If you believe in it, you are apt to take actions that will be far different than ones you'll take if you don't.

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