"Socialism is the philosophy of failure, the creed of ignorance and the gospel
of envy," said Winston Churchill.
Although it inevitably lowers living standards, socialism feels good - at least
at the outset - as "free money" flows in great abundance. Keep this in mind as
we examine the "good news" about US consumer confidence.
Last week, it was reported that consumer confidence has seen an unexpected
lift. In response, the sluggish stock market saw a manic 196-point rally.
This mania overrode losses from the week's other big news. Great Britain was
put on negative credit watch by Standard & Poor's; the US markets tanked on
expectations of a similar downgrade
domestically; and, Case-Shiller reported an unrelenting slide in home prices.
In other words, the economic decline continues.
So, why are consumers so confident? They are being deceived by "free money"
into believing in the power of socialism.
Since the start of the crisis, the Fed Reserve has held interest rates to an
artificially low level, greatly helping borrowers who can obtain credit. Also,
the administration has made it clear that it will not allow a major bank
failure, even if accounting rules have to be changed to give the appearance of
solvency. Including guarantees, the entitlement-based stimulus packages have
sprayed trillions of dollars into the economy, with minimal oversight.
None of these policies aid recovery, nor do they allow resources to be
allocated more efficiently. Instead, they prolong economic dislocation,
increase the influence of the federal government, and drag America deeper into
debt.
It is true that the financial collapse that threatened does appear to have been
averted by "officially" hiding and avoiding the problem of toxic assets. But
the lesson from Japan, which did the same, is that avoidance is no cure and
will only allow the wounds to fester.
In other words, the government is forcing the bone to heal before it's been
reset, so that even if we're happy to be limping now, it will be that much
harder to ever correct our gait down the road.
Most of the evidence shows, with the damage done to debtor countries like
America, world trade is shrinking at an alarming pace. Socialists may argue
that any further economic decline will simply be met by additional government
spending. This raises a novel and alarming question: how much more can the
administration spend? Or, more critically, how much more can it borrow?
We are in an age of massive deleveraging. Cash is scarce and becoming more
scarce by the day. The recession is worldwide, and even creditor nations like
China are spending their reserves on internal economic stimulus. In aggregate,
major debtor governments have spending plans of some $5 trillion in the near
term. From where will such a substantial sum come in a world long of paper
debts but suddenly short of cash?
If the US Treasury fails to find buyers for its massive calendar of debt, the
Fed will have to raise interest rates. This will hit all borrowings, including
mortgages. It will likely drive consumer spending down, bankruptcies up, and
unemployment to Depression-era levels.
Already, with the securitization markets dead and some US$3.5 trillion of
underwater commercial real estate loans, America's economy looks set to take
another hammer blow - a blow that might be too big for daddy government to
handle.
Consumers may be confident that something is "being done" to solve the economic
crisis, but either do not understand or have misplaced faith in what the
corrective policies amount to - socialism. It may feel good now, but it is
neither wise nor sustainable.
All indicators are still negative, and the government's actions have merely
covered over that weakness. Indeed, it appears that the administration is
driving us deeper into recession. It is likely that, when reality dawns, the
rush from the US dollars, stocks, and bonds will be truly devastating.
So, ignore the vagaries of consumer confidence polling and stick to the
enduring laws of economics. Production leads to stocked shelves, but looting
leaves them bare.
John Browne is senior market strategist, Euro Pacific Capital. Euro
Pacific Capital commentary and market news is available at
http://www.europac.net. It has a free on-line investment newsletter.
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