Please don't believe the hype that the American economy is healing. While it is true that some data is showing improvement, the true fundamentals of the economy continue to erode.
America's trade deficit hit $52.6 billion in January. That's the highest level since October of 2008 and is clear evidence that we have fully reverted back to our under production, under saving and overconsumption habits with alacrity.
The nation's debt has now eclipsed 100% of our GDP, after 13 straight quarters of paying down debt households have now started to re-leverage their balance sheets and total non-financial debt is at a record 250% of GDP. The sad truth is that the U.S. economy is more addicted to debt than at any other time in history.
But most importantly, please don't believe the lie that the Fed's money printing is laying fallow at the central bank and that inflation isn't harming the American middle class and the economy. Consumer prices rose 0.4% in the month of February alone and year over year increases in food and gas prices are 5% and 12% respectively. Money supply growth is up 10% in the past 12 months and banks are now buying U.S. Treasuries with reckless abandon.
Commercial banks have purchased $78.2 billion in Treasury and agency debt in January and February of 2012. That's already more than the entire amount of purchases made in all of 2011 and is on track to add nearly a half-trillion dollars of government debt to commercial banks' balance sheets. The Fed buys these Treasuries from banks and that enables them to buy more debt from the government. Using that process, the Fed is able to monetize both existing and newly issued Treasury debt. Since the government gets the money first and distributes it into the economy, the money supply increases without any direct benefit of capital goods creation.
Making this situation even worse is the Fed's promise to keep interest rates on hold for another three years. Banks can either keep their newly created credit at the Fed earning 0.25% or give a three year loan to the government and earn 0.57% at the current interest rate. Since Bernanke has assured them that there is little risk of rates going up on the short end of the yield curve for at least the next 36 months, banks have made the intelligent choice to earn the extra yield and buy three-year notes.
That is a big win for the banks because they can earn an extra 32 basis points on their money. And it's a major score for the government because they have a ready buyer for their debt. However, it's a big loss for the middle class, as they see their cost of living soar due to the relentless increase in money supply.
So there you have it! The American economy isn't healing at all. What we have accomplished is to further cement our addictions to debt, over consumption and inflation. Those very same conditions were the progenitors of the Great Recession beginning in December of 2007. Oil prices are soaring above $100 a barrel, inflation is rising and households are still soaked in debt... sound familiar? Only now the nation's sovereign debt is at a record level and the country is careening towards insolvency. The only thing holding the economy together is the Fed's promise of free money forever. That shouldn't be misconstrued as a viable and healthy economy.
Michael Pento is the president of Pento Portfolio Strategies
Follow Michael Pento on Twitter: www.twitter.com/michaelpento1
"There's no free lunch."
Ending this boondoggle will cost us much now or much more later.
Workers' share of national income has been declining at least since 2001, per this 2006 article:
http://www.nytimes.com/2006/08/28/business/28wages.html
Real Wages Fail to Match a Rise in Productivity - New York Times
"...In another recent report on the boom in profits, economists at Goldman Sachs wrote, “The most important contributor to higher profit margins over the past five years has been a decline in labor’s share of national income.” ..."
Now U.S. workers' share of national income is at an all-time low:
http://research.stlouisfed.org/fred2/series/PRS85006173
FRED« Nonfarm Business Sector: Labor Share
While corporate profits are increasing:
http://research.stlouisfed.org/fred2/series/CP
FRED« Corporate Profits After Tax
Mainly because of reduced wages and benefits:
"JPMorgan’s July 11 “Eye on the Market” newsletter put it, “Reductions in wages and benefits explain the majority of the net improvement in [profit] margins… US labor compensation is now at a 50-year low relative to both company sales and US GDP.”
It's hard to save under those conditions.
With #1, if we are not earning more, and gas, food, and other prices are rising... obviously we are not going to have money to spend to stimulate the economy. Ditto for #2, if our homes are continuing to fall in value, then more of us fall under water every month, meaning that our long term outlook for finances looks bleak. If we feel unsure about our financial future... we will not spend!
Please correct me if I am wrong.
Put another way, the gravitas that allows him to post articles on HufPo is the same that means he is worth listening to ---- he is good at what he does.
Now, let's talk about you. :-)
Why do you object to his spot-on analysis? Could it be that partisanship is more important to you than the economy? Would you prefer that your politics "win", even if the economy (and Main Street) lose?
Just askin'.......
There are many good articles that show Hedge Funds can be useful but the Managers really do make out better than the investors much of the time.
And since there is so much money to be made these kind of articles are in effect Advertising and should be treated as such.
We are seeing that with our economy, as the article illustrates. Whatever savings people have are being seriously eroded by the covert inflation, and any personal wealth is being eclipsed by accumulating national debt. At some point, we go the way of Greece, and that day is not far off.
We are seeing that with global warming. The inexorable buildup of CO2 in the atmosphere is producing higher sea levels, higher average temperatures, more extreme weather, and by 2015, the arctic summer sea ice is projected to be gone. Once that happens, the methane release in the arctic region will be triggered, and we will have passed the point of no return in global climate destruction.
We are seeing that with non-ionizing radiation from many sources, including wireless communications. Hardell has documented a fivefold increase in brain cancer among child cell phone users over a decade, and this is based on gross underestimates using old data.
We are experiencing the 'cancer development syndrome' across many fronts in this country, and when the symptoms finally appear, forget about a cure. It will be too late.
But I do like how you tried to pin that WBush policy on the current admin.
Way to go Con!
I'm not sure how you pin that on President Bush.
A more accurate statement would be that both parties are borrow-and-spend. The only difference is what they want to spend on. Democrats want to spend on corporate welfare, war, and entitlements. Republicans want to spend on corporate welfare, war, and entitlements.
Wait a minute now...