American consumers still have debt coming out of their ears, and they’ll be working it off for years. House prices are still falling. Retirement savings have been crushed. Americans need to increase their savings rate from today’s 5% (a vast improvement from the 0% rate of two years ago) to the 10% long-term average. Consumers don’t have room to take on more debt, even if the banks are willing to give it to them.Via Hot Air, where the one-day "Geithnermania" bounce is examined from several points of view. My own point of view is that last week's Fed buy-up of Treasury notes represents the fateful step into the fiscal/monetary abyss of Weimar America. We are so f****d now that the only question is what kind of financial rubble we will find most useful in rebuilding the shattered wreck of an economy that will be left desolated by the remorselessly descending spiral of inflation/stagnation that now begins in earnest.
How bad will it get? Nobody knows. A friend of mine remarked to me last week . . . well, I won't repeat it. Bad. Very bad.
Look: The Geithner bounce caused Citigroup to close over $3, but for most of the past few weeks, you could buy a share of Citigroup for less than the fee you pay every time you use your ATM card. And my hunch, although only a hunch, is that Citigroup will be down around $2 again by next week. (Richard Bernstein: SELL!)
What's going on? Let Alex Knapp and Andrew Sullivan encourage others to sneer at the "Going Galt" phenomenon, but the simple facts are (a) we entered 2009 facing a severe capital shortage, (b) the Obama administration's moves seem calculated to scare capital to death, and (c) without capital, capitalism doesn't work. (Of course, without capital, socialism doesn't work either, but I don't have time to explain that right now.)
More than a month ago, when the Dow had just dipped under 8,000, I noted that UC-Irvine Professor of Economics and Public Policy Peter Navarro was predicting the DJIA to fall to 6,000. It closed Monday at 7,775.86, which means . . .? If you're in a position to short the financials, do it. But that's just an economics professor talking. What does he know?
What Sully and the other economic ignorati don't seem to see is how Obamanomics is leading us into the deadly fiscal/monetary pincers:
- There is a market for debt. At any given time, there is a finite amount of capital liquidity in the world. When the U.S. government goes on a massive deficit spending spree, this represents . . .? Increased demand for capital via the debt (bond) market. Very good, class. But the increased capital demand created by Uncle Sam's deficit spree results in greater scarcity of capital for other purposes, including investment in private industry (stocks). And as Uncle Sam's demand is piled onto his already ginormous stack of unpaid debt, the natural workings of the debt market would cause interest rates to rise, but . . .
- The Fed is rigging the game. By ginning up phantom dollars to purchase Uncle Sam's debt, Bernanke is engaged in legalized counterfeiting. The inflationary effect is not immediately reflected in consumer prices because we're in a deflationary cycle where nobody's buying anything anyway. The effect of Bernanke's phantom-dollar swindle, therefore, is to devalue investment dollars. Even if your 401K got a miniscule bounce Monday, your real net worth has been diminished by Bernanke's devaluing of the dollar. And finally . . .
- Unfunded liabilities are coming due. The first Baby Boomers, born in 1946, will begin turning 65 in 2011 -- just 21 months from now -- and Uncle Sam's got no legit way to meet the senior-citizen entitlement obligations that will continue to escalate through 2029. With no legit means to meet the looming entitlement crisis, Uncle Sam will therefore resort to illegitimate ways (including still more inflation) to swindle the old folks out of what they've been promised.
When that disaster finally hits -- when capital freaks the hell out and the bond market goes sideways -- the lone sanctuary of sanity and calm will be Galt's Gulch.
People who are seriously talking about "Going Galt" are not parroting partisan political rhetoric. They are not engaged in a symbolic "protest" tantrum. They are talking about doing what savvy, affluent people have been doing for many months: Attempting to put their economic assets beyond the reach of government policy.
For people who don't have seven-figure bank accounts, their primary asset is their earning ability. Ergo, the fellow with a day job at JiffyLube or Aamco is putting in fewer hours there, and more hours working at home as a "shade-tree mechanic," doing simple repairs on a cash basis for his friends and neighbors. (Call this the "Don't Ask, Don't Tell" economy.) And that's a smart investment of time for many workers, since there are millions of Americans now working full-time jobs who will be unemployed a year from now.
Go with what you know. Invest in yourself. You have skills that have real dollar value. If you're looking at a 401K or mutual fund that's worth 40% of what it was worth at Christmas 2005, ask yourself what you could do with what you've got left. Think of the long-term picture.
If Professor Navarro is right about the Dow eventually falling to 6,000 -- and frankly, I think he's probably being too optimistic -- then the DJIA is currently almost 30% above where it will be when it hits bottom. What would the tax penalty be if you zeroed out your 401K? Less than 30%? And considering the inflationary effects of the Bernanke/Geithner strategy, what would be the real value of that 70% you'd have left in your 401K when the market finally bottoms out? So if you cashed out and bought gold now . . .
Well, I'm not an economics professor or a financial advisor, so pay no attention to the mere speculative hypotheticals of a damn blogger. But if what I'm saying makes more sense to you than what you're hearing on CNN or reading in the Wall Street Journal, please listen to our good friend, Gunnery Sgt. Hartman.
UPDATE: Dan Riehl is of a similar attitude, while Mary Katharine Ham discusses the idiotic details of the latest idiocy from the Idiot-in-Chief and his idiot henchmen. This ongoing Carnival of Idiocy in D.C. is starting to remind me of that scene in "Blazing Saddles" where Mel Brooks as Gov. LePetomaine says, "I didn't get a 'harumph' out of that guy!"
UPDATE II: Professor William Jacobson and Professor Donald Douglas both have more. Hmmm. When will Professor Cthulhu weigh in on this meme?
UPDATE III: Welcome, Instapundit readers! (See: Rule 1.) Please remember that it's almost Our Favorite Day of the Week.
P.S.: Be sure to check out MELTDOWN, Professor Thomas Wood's new bestseller about the financial crash and why Obamanomics won't work.