Our Economy Has Been Doped

When I say "doped" I am referring to the kind of doping that goes on in sports. Athletes call the dope "performance enhancing" drugs.

Here is the analogy: The economy is the athlete, cheap credit and money are the performance enhancing drugs, and the FOMC at the Federal Reserve is the corrupt physician who keeps prescribing the dope.

The doping of our economy began with the creation of the Federal Reserve system in 1913. At first, it didn't take much dope to keep things running. At times, cooler heads prevailed and they kept the amount of dope in the system to a minimum to avoid side effects. Eventually though, addiction took hold, and they needed to add more and more dope to get the same high.

Natural economic downtrends became "problems" that could be fixed with a little more dope.

The new problem is that the dope isn't working anymore. The system is rejecting it. The FOMC's solution seems to be to up the dose.

Like a retired athlete suffering from crippling arthritis after years of stellar performance, our economy has entered a period of unavoidable decline.

It appears to many that excessive liquidity and cheap credit are helping. In fact, they are destroying value and slowly killing our economy.

The only way out of this mess is for our Government to become fiscally responsible and cut spending drastically. The budget must be balanced. Taxes should be held where they are for the time being and then, when the debt is paid down to a sustainable level, the whole tax system should be scrapped. We need a tax system supports savings and investment, not one that encourages debt and consumption.

All Federal subsidies in any form to financial institutions must be ended immediately. Only depositors should be made whole through FDIC when institutions fail, no money should go to "counterparties". Any TARP money that is left should be returned directly to the taxpayers, and divided equally among them in proportion to their prior year tax liability. If you had no tax liability in the years TARP was active, you should get nothing.

Our country can avoid so much pain and turmoil if we do this now, otherwise it will be a very painful bottom to endure.

Bernanke's Shoes

You couldn't pay me enough to be in Bernanke's shoes. He has such a mess on his hands that cleaning it up is impossible. He is going to oversee the biggest economic disaster in U. S. history and he will have no one to blame but his predecessors and the very institution he runs. On second thought, he could blame Keynes.

In the past, I have said Deflation is the biggest threat we are facing. I still believe this is true. However, I am becoming concerned about the dollar. We simply cannot afford QE 2 (a second round of quantitative easing), but the Fed seems hell bent on making it happen.

If the Fed pursues aggressive QE 2, instead of making financial institutions book their losses and forgive massive amounts of consumer debt, we are headed for a period of massive deflation in most asset classes (like real estate, stocks, & bonds), and hyperinflation in others (like food, fuel and medicine). This toxic combination will be deadly to our entire system.

There is no way out for Bernanke. He must allow the Depression he so greatly fears to happen, or the U.S. will end up like Argentina.

Another "Flash Crash" Coming?

If you read this blog at all you already know what I think. Obviously, I agree with this guy.

http://www.cnbc.com/id/39610987

By the way, those of you who think I should be presenting "both sides", that is not what this blog is about. I write it to present my point of view. If you want objectivity, look somewhere else.

Story Stocks Falling Apart

The so called "story stocks" that I talked about a few weeks back are falling apart. Today CRM is taking a big hit. This signals to me that correction isn't far away.

Also, take a look at PCLN, GMCR, NFLX, etc. They will lead the market down.

Win Some, Lose Some

I like the winning part. On September 15th I posted this:
http://econmom.blogspot.com/2010_09_12_archive.html

Today in the WSJ:
http://www.marketwatch.com/story/green-mountains-accounting-creates-a-stir-2010-10-01?pagenumber=1

Sweet.

GMCR!

Didn't I tell you something smelled at GMCR? I don't know for sure, but the chart felt all wrong. I own put options! Ha!
http://www.cnbc.com/id/39407087

Tepper Rally Temporary

I pointed out a few posts ago that I disagreed with Tepper's take on the markets and the economy.

http://econmom.blogspot.com/2010/09/still-in-range.html

Here are a few economists that agree:

http://www.cnbc.com/id/39384933/


http://globaleconomicanalysis.blogspot.com/2010/09/sure-thing.html