The stock market has been hitting record highs recently. Is that making you feel wealthier? Before answering that question, consider the latest economic statistics (much of the following information and analysis comes from an organization and individual who is much smarter than me, The Project To Restore America, "Is An Artificial Economy Sustainable?" By Scott S. Powell Monday, April 08, 2013):
- The U.S. unemployment rate fell slightly to 7.6% in March and 88,000 jobs were created during the month.
- However, these are not reasons to celebrate since the 88,000 new jobs created represented the slowest job growth in almost a year.
- The drop in the unemployment rate was largely the result of roughly half a million people leaving the workforce.
- The European statistical agency said the Eurozone's 12% unemployment rate was the highest since record-keeping began in 1995.
- U.S. manufacturing grew more slowly in March with the Institute for Supply Management's (ISM) index falling almost 3 points to 51.3% (any figure above 50% indicates growth).
- The latest Commerce Department figures showed February factory orders up 3%, driven largely by orders for commercial aircraft; excluding transportation-related orders, new orders were up just 0.3%.
- The ISM's gauge also showed slowing growth in the services sector as the index fell from 56% to 54.4% in March.
- The business production and new orders components of the index fell even more, dropping 5.4% and 6.4% respectively.
- Construction spending continued to provide some of the only good news; the Commerce Department said construction spending was up 1.2% in February, with private construction responsible for most of the increase. February's figure also is nearly 8% higher than the previous February's but last February's level was at very low levels.
- The Bank of Japan under its new governor announced a massive expansion of its quantitative easing efforts to try to push that country’s comatose economy out of the deflation that has plagued it for years and toward a 2% annual inflation target.
- Higher exports helped shrink the U.S. trade deficit in February by 3.5%, but the deficit is still an atrocious to $43 billion PER MONTH.
- More than four years since the market bottom in March 2009, the U.S. economy as measured by the labor-force participation rate, which captures the percentage of working age people in the labor force, has just dropped to a new 34-year low at 63.3%.
- GDP growth from the market bottom has averaged 1.94% annually, the worst post-recession rebound in the last 70 years.
- This subpar economic performance has been achieved despite record stimulus spending by Washington and record low interest rates by the Fed.
- During the last four years, deficit spending has been averaging $1.24 trillion annually, while the Fed has been frantically injecting trillions of dollars into the banking system—the most aggressive monetary policy ever resulting in anemic economic growth, consistently high unemployment, record low employment rates, and crushing national debt.
- The economy has grown less than 8% in four years while national debt has grown by more than 50%.
- Every week, around 350,000 Americans have to file for first time unemployment benefits because of the lack of jobs.
- Prior to the 2008 crisis it was universally unacceptable for the Fed to monetize government debt because it would lead to inflation.
- It was also unfathomable for government deficit spending to exceed 5% of GDP or reach a trillion dollars in a year.
- Now, some deniers and economic ignoramuses in Washington say there's no problem because the deficit is falling, notwithstanding the likelihood of a fifth consecutive year of near trillion dollar deficits.
- While the Federal Reserve's balance sheet has grown to $3.2 trillion, few call it the debt monetization that it certainly is.
- Rather it's referred to as Quantitative Easing, or simply QE—a term that sounds both sophisticated and helpful but is still misleading since it creates artificial wealth out of thin air.
- The purpose of QE, we are told, is to lower interest rates and stimulate the economy.
- Or is it the political class and Fed conspiring to keep the cost of the Government's deficit spending artificially low, thus hiding the real cost of government's out of control spending.
- Most dangerously, the U.S. economy is now rigged and no longer operating as a free market system.
- When the most important price factor—the cost of credit—has been artificially depressed by the central planners at the Federal Reserve for more than four years, distortions and abnormalities impede the private sector investment and job creation that drive a normal recovery.
- Socialism fails because its politically driven central planning interferes with incentives, responsibility and the pricing system.
- Prices are essential carriers of information that facilitate the efficient allocation of resources, including risk capital for new technologies and new industries.
- When the market pricing system fails, inevitably there is a misallocation of resources.
- The best example has been the unequivocal disaster alternative energy investments by the Obama administration (Joe Biden actually called these "investments" bets).
- Of the 12 largest companies in the renewable energy sector that were collectively provided $6.5 billion in Federal loan guarantees by the Obama Energy Department, six have filed for bankruptcy and most, if not all, of the others are business fiascoes.
- Solyndra has proven to be more the rule than the exception of distorting the market's reality.
- Up until about five or six years ago, U.S. Treasury auctions were watched carefully and considered important carriers of information about the outlook for the economy.
- Now they are largely meaningless as the Federal Reserve effectively sets the prices and buys up some 60% the U.S. Treasuries debt issuance.
- Fed Chairman Bernanke has said that a primary purpose of QE is to lift stock prices so as to help people feel wealthier so they spend more.
- This is another way of saying that the Fed and Washington are basing the country's financial and economic future only on hope, hope that Americans will feel wealthier, and not solid economic principles.
- Corporate profits are being driven by government deficit spending and the stock market is discounting expected inflation, the QE "wealth effect" may be as illusory as it is risky since it is not based on solid market and economic fundamentals.
So, even if you are feeling wealthier, it also might be an illusion. The market indicators are out of control, skyrocketing debt will crush not only existing Americans but future generations of Americans, inflation will explode once the trillions of dollars of artificial Fed wealth breaks out into the economy, and the already high level of unemployment will jump substantially.
It is truly an artificial economy and like anything artificial, it will break much sooner than the real thing. All of the indicators of a ravaged and disintegrating economy are there, papered over by politicians and the Fed that have disconnected the economy from reality.
It is just a question of when it will break and how painful the breakage will be. Given the smoke and mirrors these folks have constructed, we will never see it coming until it hits us in the face. Those in charge are hoping their desperate measures will make things right. But hope is not a strategy, it is just wishful thinking with little basis in reality, an economic reality that is about to get very nasty.
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