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The Daily Reckoning | Thursday, September 1, 2011 The end of another month...and what the sound and the fury told us, Confidence plunges as Bernanke the magician readies his QE3 bunnies, Plus, Bill Bonner on flat earth morons and other professional, expert thinkers... ------------------------------------------------------- The Last Stock You’ll Ever Need... New video briefing reveals shocking, untold story. This could rival the great market stories in history. See for yourself, right here. But hurry! You must act before midnight Wednesday, September 14. Find out why, here. Morons and the Economic Elite Why the Feds Won’t Allow an Economic Correction Bill Bonner Reporting from Poitou, France... Who’s the moron? The month of August came and went. It was full of sound and fury — with big whipsaws in stocks — but what did it signify? Nothing? Yesterday, nothing happened. Stocks were as flat and placid as a democrat’s brain scan. But the activists aren’t dead. Fed governors. Newspapers. Economists. All are pushing for more intervention. It is just a matter of time; they’ll get it. As Dear Readers know, The Financial Times is the voice of the economic elite. If the FTdoesn’t tell you what they are thinking now, it tells you what they will be thinking, after they’ve had an opportunity to read the paper. And right now, they’re thinking that they need to find a way to get back on top of things. They need to get in control of the situation. In his latest remonstrance, Ben Bernanke practically recused himself. He said he wasn’t doing anything (he has members on his committee who are opposed to more Fed action). He passed the ball to the Obama Administration and Congress. The Fed is out of the game. At least temporarily. But here is The Financial Times: Waiting for QE3... Who’s waiting for QE3? The bankers. The economists. The speculators. And now, here’s Clive Crook, in The Financial Times of course, telling the Bernanke Fed team what morons they are. Revised figures show the sluggish US recovery has been even slower than previously believe, and this calls for fresh monetary stimulus. Right. More stimulus! More QE! More money! But the figures don’t show what Mr. Crook thinks. They don’t show a weak recovery. They show no recovery at all. This is not a recession from which an economy recovers. It’s a correction, which an economy suffers. If it is allowed to. Nor do the figures show that the feds haven’t intervened quite enough. They show that their trillion-dollar interventions have been worse than worthless. The problem, as we keep saying, is debt. The private sector is getting rid of it. Households paid down $50 billion worth of debt in the last quarter. Not much, but at least, they’re doing what they ought to do. The feds, meanwhile, added about $500 billion worth of deficits. What Mr. Crook, and most of the elite economics professoriat, asks for is government intervention to short-circuit the process of de- leveraging. Their view of an economy is as simpleminded as Thomas L. Friedman. (More below...) In their view, an economy is either growing at a healthy speed. Or it is not. If it is not, they have to do something. But what can you do when an economy needs to unload debt? Well, you could help it out. You could raise interest rates and push all those millions of Humpty debtors off the wall. You could raise taxes; those suicidal householders...now standing on the ledge...could be encouraged to jump. At least, those cures might help get de-leveraging over with faster. Or, you could declare a Debt Jubilee, as they did in ancient history...cancelling all debts...and re-starting everything at zero. Or, how about this... You could print up trillions of dollars and drop them from helicopters all over the country. That is the cure Mr. Bernanke himself, perhaps jokingly, suggested. In a few hours, debts would be worthless. Again, these ‘cures’ are focused on the real problem. Trouble is, they cause more problems than they solve. Why not just let nature take care of it? Withdraw all federal intervention. The markets will sort it out quickly. And without causing further distortions and economic grotesqueries. It’s not going to happen. Instead, after the economy and stock market sink...Bernanke and the feds will swing into action. The morons. Shattered Bank Vaults, Empty ATMs, and No Milk in the Store Do you know just how drastically your life could be set to change if the US gov’t can’t borrow another dollar? Services you take for granted today could disappear overnight. Don’t risk your future — watch this urgent briefing right now. There’s no time to lose...Don’t Wait, Watch Now. The Daily Reckoning Presents The "Good Fed" and Other Fairy Tales Eric Fry “World stock markets rallied on Wednesday,” the Associated Press explains, “as investors hoped that the Federal Reserve would respond to mounting signs of weakness in the global economy by providing more stimulus to the US economy.” In other words, the worse the outlook for the economy, the brighter the prospects for the stock market. Such is the tortured logic that has been powering the Dow’s 1,000- point advance over the last three weeks. Day after day, the Associated Press — along with every other financial news outlet — trots out some version of the “bad is good” storyline to explain the rallying stock market. But don’t blame the messengers for publishing and promulgating this popular fairy tale. The media outlets are merely parroting what the professional investors, professional economists, professional politicians and other professional storytellers are saying. The media are merely practicing the American folkloric tradition that brought us all those great stories about Paul Bunyan, Pecos Bill and Blackbeard. But those are just stories and everyone knows it. You won’t find too many investors placing their trust in Babe, the Blue Ox, to rescue the economy. To be fair, the professional storytellers would not continue telling the “bad is good” story if the investing public were not so eager to hear it. But like a little child at bedtime, most investors turn to the professionals and ask, “Please tell me that story again, Daddy. The one about the really terrible economy that gets rescued by that really good Federal Reserve Chairman... I love that one!” The professionals are only too eager to oblige, especially because the professionals have entrusted their entire careers to the notion that the Federal Reserve has the power to fix broken economies. But fairy tales are supposed to be fairy tales, not investment strategies. Earlier generations of professional investors would respect the Fed’s influence over the stock market, without making it a lifestyle. “Don’t fight the Fed,” they would say. But for most of today’s investors, the Fed is not merely one influence among many; it is the only influence that really matters...and it is always a positive influence for the stock market. “Don’t fight the Fed” has become “Always jump in bed with the Fed.”. Don’t believe it, dear reader. The “Good Fed” is a fairy tale. And the Good Fed’s activities are mere magic tricks. Ben Bernanke may be able to pull a monetary rabbit out of a hat from time to time, but he can’t pull a sick economy out of a recession, especially not when that sick economy is in the midst of a massive de-leveraging cycle. He keeps trying anyway. He keeps reaching up his sleeve to pull out lower and lower interest rates. The audience giddily applauds and squeals with delight, “Wow, that’s amazing! Negative T-bill yields! How does he do it?!” And yet, no one in the audience ever seems to budge from his seat and ask, “Hey can I have one of those rates? I’d like to borrow some money to expand my business or buy a house.” No one asks, because no one wants to borrow. The US economy is in the midst of a credit contraction, not a credit expansion. Most folks are in re-payment or default mode, not in borrowing mode. As a result, Bernanke’s magic works no magic at all. The Fed’s wand works no wonders... The stock market may rally for a while in the hope that a QE3 can accomplish what QEs 1 and 2 both failed to do. Ben Bernanke and his magic quantitative easing cannot make jobs appear out of thin air, nor can it “Poof!” into existence an economy that grows or a Congress that cuts spending. If you want an economy that grows, you need entrepreneurs, and if you want a Congress that cuts spending, you need a spaceship that can accommodate 100 senators and 435 representatives. Things are running a bit bassackwards here in the US. The job market is shrinking and the government is growing. The nearby charts illustrate two very dismal effects of these trends. First, as Investor’s Business Daily reported recently, the US government’s safety-net spending now exceeds every dollar of tax revenue from personal income taxes and payroll taxes. “The federal government will spend about $100 billion more this year on social benefit programs than it will collect in personal income and payroll taxes,” IBD explains. “Back in 2000, the government had $720 billion left over from personal tax receipts — more than 7% of GDP — after fulfilling its safety net obligations. This reversal highlights how much the government is supporting household demand amid high unemployment, and helps explain why cutting deficits will be a grind unless growth picks up.” This reversal also highlights the tyranny of “wealth re- distribution.” The rich pay directly in the form of higher taxation. The poor pay indirectly in the form of diminishing opportunity. Governments that tax production to excess tend to foster less productivity. Such is the trend that has been accelerating for several months, if not several years. As a result, opportunity is on hiatus and the entire citizenry feels the effects, especially that portion of the citizenry that struggles to find work. As the chart below shows, the Bloomberg Consumer Comfort Index is languishing near all-time lows. “The index has been stuck below minus 40, the level associated with recessions or their aftermath, since the end of February,” Bloomberg News explains. “The overall gauge, which began December 1985, has averaged minus 45.2 this year, compared with minus 45.7 for all of 2010 and minus 47.9 in 2009, the year the last recession ended.” At the same time, the index reading just plummeted to an all-time low of minus 90.6 for those individuals in the index who earn less than $15,000, the worst reading for any group since record-keeping began in 1990. “Other measures of sentiment have also shown Americans are downbeat,” Bloomberg continues. “The Thomson Reuters/University of Michigan final index of consumer sentiment plummeted in August to the lowest level since November 2008. The Conference Board’s index of confidence last month plunged to the lowest level in more than two years.” At some point, the stock market will notice that economies don’t do so well when the public sector is expanding, as the private sector is contracting. At some point too, the stock market will realize that Ben Bernanke is not a miracle-worker, he is merely a magician who can perform some pretty cool tricks...like creating dollars out of thin air. If you need a magician for a birthday party, call Bernanke. But if you need someone to fix your broken economy, call an entrepreneur...if you can find one. Regards, Eric J. Fry, for The Daily Reckoning The Secret Financial “Timebomb” Nobody’s Talking About Forget the D.C. debt circus... this secret Saudi event could double your cost of living, in more ways than one, starting as early as the end of this year. Nobody wants to talk about it... and not Obama or Congress have any idea what to do, once this event starts to unfold. Once it does, get ready to kiss your savings goodbye. Hear our shocking new warning in this special report... Bill Bonner The Illusion of Control Bill Bonner Since we’re discussing morons this morning, we will focus on one of our favorites: Thomas L. Friedman. The common mistake made by all world-improving jackasses is to think that the world is so simple that they can make it better. In economics, it’s obvious to anyone who has ever thought about it that there are no knee-bones that aren’t connected to anklebones...and to foot-bones. You can move them around, but you’ll get kicked in the derriere. “It’s either control...or money,” says our friend John Henry. You can control an economy — to some extent — but it’s going to cost you. Every manipulation, every jury-rig, every fix...slows it down, imposing additional friction and costs. But to Friedman life is a series of challenges, to which he must come up with a solution. Hardly a column with Friedman’s photo appears but that it does not include another gimcrack solution to one of the problems he imagines. Poor Friedman now sees big problems. He has to put his thinking cap on. The world is cracking apart — China, Europe, the Mideast...all are breaking up, he says. That’s why it’s vitally important, to paraphrase the sage himself, that we keep America strong! How do we do so? “...the only way to dig out [of our deep hole] is with new, hybrid politics that mixes spending cuts, tax increases, tax reform and investments in infrastructure, education, research and production.” Hey. That sounds pretty easy. Our representatives just have to get together on the right mix of ‘hybrid politics.’ A little education...a little infrastructure....a little this...a little that. What does Friedman really want? Control, of course. He wants to hold onto the illusion that half-bright hustlers can actually control events...and that they can get the outcome that they want, rather than the outcome they deserve. Regards, Bill Bonner for The Daily Reckoning