Great Depression Online Archive Issue:

The Three Legged Fire Eating Hunchback

Great Depression Online
Long Beach, CA
June 09, 2009

Inside This Issue You Will Discover…

*** What’s this Guy Talking About?
*** Remarkable Absurdity
*** The Three Legged Fire Eating Hunchback
*** And More

“I have a theory that the truth is never told during the nine-to-five hours.” – Hunter S. Thompson

What’s this Guy Talking About?

“Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth,” explained Federal Reserve Chairman Ben Bernanke to Congress last week.

Upon reading this we wondered just what it was that this guy is talking about.  Since taking over the helm of the nation’s central bank in early 2006, Bernanke’s more than doubled its balance sheet to over $2 trillion.  In other words, it took Bernanke less than three years to do what it took all other Federal Reserve Chairman – and 93 years – to accomplish.  Plus, for the first time ever, he’s soiled the balance sheet with risky toxic assets.

How’s that for a strong commitment to fiscal sustainability?

What’s more we have neither financial stability nor healthy economic growth already…those both disappeared sometime prior to December 1996 when Bernanke’s predecessor, Alan Greenspan, asked “How do we know when irrational exuberance has unduly escalated asset values, which then become subject to unexpected and prolonged contractions?”

~~~~~~Four Obama Boom Sectors~~~~~~

Our friends over at the ETF Authority have identified four “Obama boom sectors” that will be flooded with so much new cash, shares could climb 4 and 5 times higher.  Check it out and find out how to get your copies of four special reports free that feature the best investments for the American Recovery and Reinvestment Plan.  Learn all about the four “Obama Boom Sectors” here. 

~~~~~~~~~~~~~~~~~~~~~~~~~

The economy has functioned since then as a series of stock, housing, and commodity market asset bubbles and busts.  The bubbles, however, don’t start with irrational exuberance…if you follow the money, they start with easy credit from the Fed.  The easy money puffs up asset prices…irrational exuberance puffs them up some more…then they collapse when the world runs out of greater fools.

But rather than letting the chips fall where they may, the Fed pumps more money into the system to puff the whole misshapen economic shebang up again.  Yet instead of healthy economic growth the world gets a new, and even more fantastic, asset bubble.

Remarkable Absurdity

It was Alan Greenspan, if you don’t remember, who back in 2002 – after the implosion of the dot com bubble – insisted he wouldn’t know a bubble if it blew up right in front of him.  He would have to wait and check the mirror for bruises, because only after the fact could a bubble be detected.

We always found this claim to be of remarkable absurdity.  For was it not obvious in early 2000 to anyone outside the Silicon Valley or Wall Street hype that the NASDAQ at 5,000 was just a tad lofty?  Or in mid-2006, that 50-year old, 1,000 square foot bungalow homes in California at $750,000 were conceivably a rip-off?

Or what about government debt?  Was it not obvious in early 2009 when the 10-Year Treasury Note was yielding just 2.5 percent, while deficits were set to quadruple, that just maybe, perhaps, it was a market bubble?

Of course it was.  In fact, it was such an obvious elephant in the living room that even our dense skulls here at the GDO didn’t miss it…we even went so far as to call it The Mother of All Bubbles.  And while the bubble certainly hasn’t popped so far, price movements since mid-March seem to indicate it has sprung a leak.

Yet according to Greenspan we must wait and check the mirror for bruises for a confirmation.

The Three Legged Fire Eating Hunchback

Last Friday San Francisco Federal Reserve President Janet Yellen remarked at a central bank conference that the Federal Reserve should consider raising interest rates earlier to prevent asset bubbles from getting too big.

“In the current episode, higher short-term interest rates probably would have restrained the demand for housing by raising mortgage interest rates, and this might have slowed the pace of house price increases,” said Yellen.

Inherent to this statement, and contrary to Greenspan, is the notion that asset bubbles can be identified and that the Federal Reserve should consider taking action to contain them before they get too out of control.

“I would not advocate making it a regular practice to lean against asset price bubbles.  But, in my view,” said Yellen, “recent painful experience strengthens the case for using such policies, especially when a credit boom is the driving factor.”

We can hardly believe our eyes these days.  For what we see is so fantastic and fanciful our jaw drops and our eyes bug out like a school boy first peering into the circus freak show tent at the three legged fire eating hunchback.  We want to look away…but we can’t.  Rather we gawk in shock and awe at the public spectacle before us.

Whence does the credit for a credit boom come?  Yellen most certainly knows.  For it comes from the Federal Reserve…the very organization she helps direct.  The very organization who it just so happens is currently pricing money for their preferred customers for effectively free…the federal funds rate is currently somewhere between 0 and 0.25 percent.

The intended goal, no doubt, is to reinflate asset prices.

At the same time, and as we may find out this week, the government could have trouble finding lenders to fund this years massive $1.8 trillion deficit.  If that should happen, Washington will call on the Federal Reserve to print up the money to loan to them.

“The Federal Reserve will not monetize the debt,” said Bernanke to Congress.

We suspect he had his fingers crossed behind his back.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  All this deficit spending makes our blood boil.  For we know our children will inherit the bill for this burden.  And there’s nothing you can do to stop it.  But what you can do is capture massive investment profits from it so your kids will be better positioned to pay for all this nonsense.  Fortunately our friends over at the ETF Authority have identified four “Obama boom sectors” that will be flooded with so much new cash, shares could climb 4 and 5 times higher.  Check it out and find out how to get your copies of four special reports free that feature the best investments for the American Recovery and Reinvestment Plan.  Learn all about the four “Obama Boom Sectors” here.

 

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