My Two Cents - "What you don't hear from the Media.."

6/1/2007

...will hurt you.

This is not going to come as a big shock to anyone, but it is now rather clear that the media is aiding and abetting the Federal Reserve (and others) in its do-nothing stance with regards to interest rates. Taking a look back throughout history, media complicity is a common occurrence and usually happens when government at some level needs 'cover' to execute a particular policy.

2007 is no different in this regard. We have an economy that is in recession. We have a housing market that is by any objective measure either on the precipice or already in a serious breakdown. On the other side of the equation we have a stumbling dollar that is also poised for a serious drop. It has become apparent that the Hankster wants a cheaper dollar, but this cannot happen overnight and by darn he needs the Fed's help to keep the peace in the meantime. And the Fed needs lots of help keeping the pressure off. Enter the Mainstream Media. The seesaw of daily economic 'reports' is creating an illusion that is enabling the Fed to do nothing and pray that nothing breaks. In fact, many of the articles will even say exactly that. It is obvious that what we are seeing is nothing more than the Wizard of Oz. They are hoping we don't see the man behind the curtain.

What you don't hear from the media will hurt you.

The facts are these:

1)Inflation is out of control on a global scale.

M3 growth (total money supply) in the US is around 13% y/y. Believe it or not, our monetary growth is SMALL compared to most countries. 18 of the top 20 central banks are growing their money supplies at double-digit annual rates with Russia leading the way at over 40% y/y.

Inflation in the US has been held down by the fact that we use relatively cheaper labor systems in Asia thereby keeping something of a lid on labor costs. Guess what folks? The falling dollar is making those imported goods more expensive here. For the average guy, costs are going up and today we see the first evidence of stagnating wage growth. The little guy gets squeezed a little more. The absolutely scary part of all of this is that it is now up to the squeezed American consumer to keep this thing going. Where oh where is all this money going to come from?

The media is now proclaiming that the core rate of inflation has now moved into the Fed's 'comfort zone'. Baloney. This core rate is such a dishonest measure that it should receive no attention whatsoever. Instead it is focused upon as gospel when in fact it removes two of the most important expenditures that consumers make: food and energy. I am often asked why I talk so much about the core CPI and the answer is a simple one: this disinformation campaign must be countered.

2)]Homes are no longer ATM's.

A significant source of money for consumption over the past 5 years has come from the appreciation in home prices. With that appreciation stalling in many areas, the ATM's are out of money. Spending will now have to find a place to fall back on. Credit cards are the obvious first choice as was evidenced by the 9+% annualized growth in consumer credit in March. Watch this trend closely. After the credit cards are maxed, where is the money going to come from? I'm going to leave that question open, but expect to see a plethora of new finance 'instruments' in the coming months. Anything to keep that 70% portion of the GDP intact. Maybe soon we'll see Portfolio Equity Loans where investors can borrow against the value of their 401/IRA's. We are limited only by the creativity of the bankers in this regard and they seldom fail to amaze us.

3)Ber-Hanky cannot afford a prolonged contraction of credit.

Big Ben got his nickname from a speech in which he denounced the lack of money/credit creation during the Great Depression saying that he would drop it from helicopters if necessary.

To that extent, I agree. We simply cannot afford deflation. Not with all the debt that exists. A true deflationary depression at this point would cause an outright default on the national debt, a loss of the US Government's AAA credit rating and a likely collapse of the world economy along with it. For sure, there are many countries that would like to see the dollar unwind as the world's reserve currency, but it is in no one's best interests to have this happen suddenly. Look for a prolonged depreciation of the dollar. In other words, your purchasing power will continue to erode, but it will happen slowly, and the hope is that enough credit can be supplied so that you will not notice.

4)Despite rampant money supply growth, GDP is STILL falling.

Perhaps the biggest question of all is where is all the money/credit created going? Money supply growth is at roughly 13%, yet GDP growth is only .6% Where is the all the money going? Certainly not into the hands of the average consumer to help offset increases in the cost of nearly everything.

The bottom line is simple: You won't hear this on the news. The media is interested in painting a rosy picture. This would be fine if the fundamentals were rosy. However, the fundamentals more closely represent a pile of skunk cabbage and even the talented man behind the curtain is having a hard time containing the stench.

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Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.