Ben Bernanke: Clueless on the Consumer Because His Housing Data Are Not Current

From his speech today to the Economic Club of Minnesota:

One striking aspect of the recovery is the unusual weakness in household spending. After contracting very sharply during the recession, consumer spending expanded moderately through 2010, only to decelerate in the first half of 2011. The temporary factors I mentioned earlier--the rise in commodity prices, which has hurt households' purchasing power, and the disruption in manufacturing following the Japanese disaster, which reduced auto availability and hence sales--are partial explanations for this deceleration. But households are struggling with other important headwinds as well, including the persistently high level of unemployment, slow gains in wages for those who remain employed, falling house prices, and debt burdens that remain high for many, notwithstanding that households, in the aggregate, have been saving more and borrowing less. Even taking into account the many financial pressures they face, households seem exceptionally cautious. Indeed, readings on consumer confidence have fallen substantially in recent months as people have become more pessimistic about both economic conditions and their own financial prospects.

Here's the Fed's House Price Index on 8/24/11, which shows prices at late 2004 levels:

The fact is, prices have fallen to 1999 levels and may continue to fall to 1997 levels and perhaps lower than that:

Bernanke doesn't understand the severity of the home equity massacre which the consumer has sustained since 2006. That was the primary source of wealth for the vast majority of Americans, and Bernanke doesn't get that a whole decade of gains has been wiped out. His own data are off by five years.

Everyone hangs on every word of the Fed. "Don't fight the Fed" they say. Too bad the Fed doesn't know what it's talking about.

The Dollar, Then and Now

In 1913, when the Federal Reserve came into being, the 1790 Dollar had lost little value over the preceding 123 years. You needed just $1.08 to buy what a 1790 Dollar could buy.

58 years on from 1913, however, when the Dollar and Gold were finally and completely de-linked from one another in 1971, that 1913 Dollar worth $1.08 had lost over 300 percent of its value. You needed $4.56 in 1971 to buy what $1.08 could buy in 1913. Much of the devaluation of the Dollar occurred in 1933 when FDR confiscated Gold and then reset the price per ounce at $35.00 from $20.67, a 70 percent devaluation almost overnight.

By 2010, just 39 years on from 1971, that $4.56 really went south. Completely unhinged from Gold, you now needed $24.50 in 2010 to buy what $4.56 could buy in 1971. That 1971 Dollar worth $4.56 had lost over another 400 percent of its value.

Carthago delenda est? Try: Down with the Fed!

Forget Ritholtz, Here's The Real Dollar Collapse

Ritholtz' so-called big picture since 2001:

Since 1913, the real big picture:

George Will Answers That Chirping Sectarian, Ron Paul

At Bernanke's recent confirmation hearing on his nomination for a second four-year term, Jim DeMint, a South Carolina Republican who is co-sponsoring a Senate version of Paul's bill, asked Bernanke: "Do you believe that employment should be a mission, a goal of the Federal Reserve?" Bernanke, who had already noted Congress' "mandate" that the Fed "achieve maximum employment and price stability," answered that the Fed "can assist keeping employment close to its maximum level through adroit policies."

That mandate was, however, improvidently given. Congress created the Fed and can control it, and eventually will do so if the Fed eagerly embraces the role of the economy's comprehensive manager. America's complex, dynamic economy cannot be both "managed" and efficient. Attempting to manage it is an inherently political undertaking and if the Fed undertakes it, the Fed will eventually bring upon itself minute supervision by Congress.

Rep. Paul Ryan, R-Wisc., has, as usual, a better idea: Repeal the Humphrey-Hawkins Full Employment Act of 1978 that, he says, "dangerously diverted the Fed from its most important job: price stability." For 65 years after its creation in 1913, the Fed's principal duty was to preserve the currency as a store of value by preventing inflation from undermining price stability. Humphrey-Hawkins gave it the second duty of superintending economic growth.

There's just one little problem with this line of reasoning from George Will. It is that the Federal Reserve didn't do its principal duty from 1913 to 1978, either, during which time the purchasing power of the dollar fell to fifteen cents.

For the complete article, go here.

"The Feds Have No Faith in Recovery"

Penetrating analysis here from the chief economist at Delta Global Advisors.

November 5, 2009

The Feds Have No Faith in Recovery

By Michael Pento

The stock market has enjoyed a significant rally since the end of the first quarter. The Bureau of Economic Analysis reported last week that the economy grew at a 3.5% annual rate in the third quarter--a figure they achieved by that claiming inflation was running at only a 0.8% annual rate, despite a sharp drop in the dollar, a spike in commodity prices and record highs for gold.

The cyclical bull market in stocks and positive print on GDP has caused some on Wall Street and in Washington to claim the recession has ended. Despite all the good economic news, an end to fiscal and monetary stimulus is nowhere in sight, precisely because policymakers know the happy news is artificially derived.

A closer look indicates that neither the administration nor the Federal Reserve believes its own recovery rhetoric. They understand that the economy will not prosper without continued life support.

I believe removing such artificial stimulus is needed so the country can immediately begin de-leveraging and to prevent the accumulation of yet more baneful debt. What is truly amazing is how many people on Wall Street are foolish enough to postulate that our problems have been solved. The stock market will not be so easily fooled for much longer.

The Great Depression Part II was narrowly averted last year by slashing interest rates to near zero. The Fed made money virtually free because the record level of indebtedness ($34 trillion) in the economy required such low rates so that borrowers could service their obligations. Otherwise a cataclysmic domino effect of defaults and bankruptcies would have occurred. To avoid that scenario, the public sector assumed some of the private sector's debt and then subsequently took on a significant amount more. The debt of the nation continues to increase at a 4.9% annual rate. All public debt is ultimately the responsibility of the private sector to pay off--either directly or through future taxes. As a result, the economy has never been more precarious than it is today.

In spite of this, the stock market appears to be doing quite well. We've seen a 57% rally off the March lows in the S&P 500. However, if you measure the market against other assets its performance is much less impressive. Since the beginning of 2000 the S&P is down about 50% measured in terms of a basket of currencies other than the falling U.S. dollar. The index is down nearly 80% against the real inflation hedge--gold!

The sad truth is that this recent market rally has been produced on the back of a weakening dollar and the slashing of corporate overhead. Cutting payrolls and research and product development projects are not a prescription for sustainable growth. As I like to say, you can't burn your furniture to keep your house warm forever. Eventually, top-line revenue growth must emerge or Wall Street's game of beat-the-expectations will be short lived.

It's also worth noting that a country cannot devalue itself to prosperity and that a bull market cannot survive an inflationary environment for long. In the short run, nominal gains in the averages can occur since everything priced in dollars tends to increase in value. However, the rally will be truncated unless the Fed provides consumers and corporations with a stable currency.

The ramifications of a crumbling currency are vastly misunderstood. A strong dollar is the cornerstone of a healthy economy. It is essential for balanced growth and healthy investment to occur. On the other hand a weak currency decimates the middle class and the corporate sector's ability to maintain earnings growth. Inflation lies behind all infirm currencies, and it is inflation that destroys the purchasing power of consumers. The diminished value of their wallets leaves them with the ability to buy only non-discretionary items. As a direct result, unemployment rates soar and economic output plunges.

I believe we will suffer from a protracted period of stagflation. Money supply, as measured by M2, has increased 5% Y.O.Y. Meanwhile the output of goods and services is falling. As long as the money supply is chasing a shrinking GDP pie, there will be upward pressure on prices.

Making the situation even worse is the manner in which the money supply is growing. The quality of growth is very low because the increase in supply is coming from commercial bank purchases of Treasury debt, rather from an issuance of credit to the private sector for capital goods creation. Total Loans and Leases at Commercial banks are down 8.2% from last year. Meanwhile, the amount of Treasuries held at all commercial banks is up 20% year-on-year.

That means money supply growth is emanating from government's misallocation and redirection of capital. It isn't being loaned out to build mines and factories; it is instead being loaned out to increase consumption and build even more consumer debt.

If the Treasury and Federal Reserve truly believed the economy and the stock market were on a sustainable recovery path, talk of extending and increasing the home buyer's tax credit would be off the table. The Fed would already be reducing the size of the monetary base. The truth, however, is that no one in government really believes in this recovery. If they did, they would be hiking interest rates and the deficit would be shrinking.

The government's realization of our precarious economic condition means its largess will continue. Near term, that may ease some pain. So did the artificial stimulus that gave rise to the housing boom. In the end, a protracted period of a near-zero interest rates, along with endless economic stimulus, will spawn another bubble and not a genuine recovery.

Michael Pento is chief economist at Delta Global Advisors and a contributor to greenfaucet.com.

War is the Father of Everything

From the very long term perspective, the spending on World War II which supposedly got us out of the Great Depression did nothing of the sort. It erected an enormous edifice which became the foundation for the present trouble, which is masked in the ever declining purchasing power of the dollar, the 1928 version of which is worth eight cents in 2008, the 1910 dollar, four pennies.

Instead of climbing out of that debt foxhole, we're digging it ever deeper, and the viccissitudes of a history of our own making are raining down upon us a torrent that will become a flood, collapsing the unsupported walls around us. The world knows a worthless currency when it sees it.

Heraclitus taught us that war is the father of everything. Consider the chart above. The very American nation was itself born of monies borrowed to finance its War of Independence. Mark the sudden upticks in expenditure as a percentage of gross domestic product which commence with the War of 1812, the War Between the States, World War I, the response to the crash of 1929 and World War II, the Peace Through Strength policy to defeat the Soviet threat begun under the Reagan administration, and the adventures in Afghanistan and Iraq since 2003. We've been paying for all that with the continuing slide of a fiat dollar.

Jesse thinks the day of reckoning fast approaches: "The States racked up some serious debt in keeping the world safe for democracy in the Second World War. On a percentage basis, it has recently spent a significant amount keeping its financial sector safe from productive effort and honest labour. They will raid the Treasury, take their fill, and then compel the government to confiscate the savings of a generation by defaulting on its obligations, its sovereign debt."

So does Sprott Asset Management, here:

In case you failed to catch it in our previous articles this year, we thought we’d state it outright for our readers this month: the United States Government is on a trajectory to default on their obligations. In its current financial condition, it will not be able to fund its forecasted budget deficits and unfunded Social Security and Medicare promises on top of its current debt obligations. This isn’t official yet, and we don’t know when the market will react to it, but there is no longer any doubt about the extent of their trajectory. There simply isn’t enough taxing power, value creation or outside capital willing to support its egregious spending.

The great imperative of our time is to bring spending to a halt, or as Jesse says, to need little, and want less. Willingly or no, little and less await us.

Yet Reason frowns on war's unequal game,

Where wasted nations raise a single name,

And mortgaged states their grandsires' wreaths regret,

From age to age in everlasting debt;

Wreaths which at last the dear-bought right convey

To rust on medals, or on stones decay.

Samuel Johnson