Worthy Opinions » Downtime: False Prophet of False Profits

©2009 by David Haggith

Sometimes you have to take off the gloves in order to knock the empty air out of someone. In his February 6th column, National Review Online’s Economics Editor, Larry Kudlow, pointed out that stocks were trading high that Friday, in spite of a massive plunge in jobs. As one of the gurus of the old economy, Larry explained this disconnect: “The stock market is telling us the economy’s future is a lot brighter than its past. The stock market looks ahead; the employment report looks behind.”

Whatever hallucinogen Larry’s taking must be only available to those who bathe in Perrier because I’ve never found any drug that can make me as delirious as Larry is over the predictive wisdom of the stock market. National economies all over the world just reported their worst contraction in decades, but Larry thinks the second-coming of the economy is here because the stock market went up on Friday. This is what happens when false prophets run up against the reality that the religion they preached has failed. The false prophets of religion look for different scriptures to adjust their dates. The false prophets of false profit look toward any indicator that provides the news they want to hear.

READING PORK BELLIES

The stock market’s incongruity with the job market is best explained, according to Larry, because “mustard seeds planted awhile back are now pointing toward recovery. The huge energy tax cut is one such mustard seed. The related inflation collapse is another…. With zero inflation, that’s a real increase in worker purchasing power.”

You might as well state, Larry, that the thing that profits geese is that elephants don’t eat them. While Larry trips into euphoria over the silver that still lines a darkening purse, he should perhaps preach his dogma to employees at Woolworths in the U.K. Woolworths just locked the doors on the last of its 807 brick-and-mortar stores, ending a hundred-year retail history. The weak go first, so the loss of those jobs and similar jobs among so many other retailers around the world is a shudder the economy hasn’t even felt yet. Tell those newly unemployed that the good news is their purchasing power has increased due to lack of inflation. I’m sure they’ll run right out and buy a drink with the power of their zero paycheck. I don’t think they’ll be raising cheers to the stock market’s wisdom, however; but expect inflation on the price of Guinness in the U.K. as consumption grows faster than yeast. I’d say, go long on beer stock.

Obviously, denial reigns supreme. Who cares that the stock market is in the same drug-induced euphoria as Larry? Since when has it been the oracle of wisdom? If it had been, it would have bet against this economy before the housing collapse. After all, it looks ahead — remember? In its superior wisdom, the stock market has done nothing but lurch downhill after the banks like Jill after Jack. Nevertheless, Wall Street is a religion for some, and people like Kudlow are still believers in its divine wisdom.

OUR FAITH-BASED MONETARY SYSTEM

Larry was also thrilled because “the Federal Reserve has been pumping in money to offset credit and asset deflation.” Credit and asset deflation is exactly the thing that needs to happen, Larry, to a false economy built on nothing but skyward debt. He’s right, of course, that the Fed has been creating lots of money — it’s self-administered narcotic of choice. In just the last few months, the Fed has mainlined $300 billion into the U.S. money supply, meaning it has injected $300,000,000,000 (it helps to see the zeros) more into banks than it has received from the Treasury in revenue. In fact, this figure doesn’t come close to telling the whole story. The Fed stopped publishing its M3 measure of money supply because it tells a horror story. M3 was a count that included money that is tied up in long-term institutional deposits. Those long-term institutional deposits that are not included in the current money count are the kinds banks use to hold their money. That, of course, is where all new money is being hoarded right now. So, inflation is not being felt because most of the new money is not even included in the count and is not flowing through the system … yet.

Most money is not currency. It exists on balance sheets and is as vapid as numbers, but the presses do tend do have to catch up later as the money flows to consumers in the form of credit, and some eventually converts to currency. When the Federal Reserve moves money to the balance sheets of its member banks, the U.S. Treasury usually issues bonds for the same amount as the source of that money, which creates a liability against the supply. That balances the equation. Right now, the Fed is just manufacturing money out of thin air. It’s doing this because it wants to create inflationary forces to prevent further deflation of prices in the housing market. Yet, if prices do not deflate on homes, the only way people can buy them will be to continue to take out far more credit than they can afford, meaning credit must stay deregulated so that it can remain ridiculously perilous.

Larry, however, is excited that we’ve had no inflation because the Fed is doing all it can to create new money to avoid deflation; but, if printing money could save a failing economy, Zimbabwe would be a superpower. Currency in Zimbabwe reached such disastrous overprinting last month that one church received a check for 6,000,000,000,000 Zimbabwe dollars and did not even bother to cash it.

Larry points out that there is generally a lag between the increase in money supply and the actual loaning out of that money — a float of six to twelve months. “Through January,” he states, “we’ve had five months of money stimulus [creating money out of thin air]. So stocks may now be telling us that the gloom and doom crowd [like David Haggith] — and its pessimistic economic prognostications that cover all of 2009 and in some cases 2010 — is about to be proven wrong.”

Larry, Larry, Larry. The market does not tell us anything. The market IS us, all of acting in our own various crazy ways, including the doom-and-gloomers like myself. How the false prophets like to tickle our ears with good news. Larry believes that when banks start giving out loans on freer terms, people will start putting that money into circulation, but he misses the obvious: this same lag he speaks of is exactly why we have not yet seen inflation due to all the new money. It’s still choked at the top. So, if the money does go into circulation quickly, inflation will come quickly. There’s another possibility, though, which I think more likely: banks may start offering loans now that they’re floating on air, but few may be interested in buying. How many jobless consumers want to take on more debt? As for retail picking up so those jobs come back, it’s a long time till Christmas, Larry. Loans will mostly be limited to refinancing, not building new homes; so, they won’t have much stimulus effect.

If I were investing in manufacturing right now, it would be in the manufacturing of printing presses — the kind used by the U.S. mint — because those presses have a lot of catching up to do once that money enters circulation. That, or buy yeast because the unemployed may soon be buying a lot of beer at $300 a pint. Money supply right now is growing at about the same rate as yeast anyway, so yeast growth is probably a better indicator of where the present economy is going than Larry’s mustard seeds.

THE HALLELUJAH CHORUS

In his prophetic ecstasy, this false prophet of the old economy backs himself up with one of the now-renowned Wizards of Wall Street: “Meanwhile, Bank of America CEO Ken Lewis told CNBC on Friday that he can get out from under TARP in three years. There will be no nationalization!”

I had to put the exclamation point on there for you, Larry. I can just hear you saying, “Whoopeee!” Is this the same Ken Lewis who a very short time ago bought Merrill Lynch for lunch and then said he never saw the financial problems Merrill really had? Is this the same beggar who ran to the government with his hand out for another $20,000,000,000 to buy himself a pair of glasses? Is it the same Ken Lewis whose share prices fell over 80% from the time he first announced the acquisition or Merrill Lynch?

I guess it is because Larry adds, “Lewis also said his firm’s acquisition of Merrill Lynch will be successfully executed over time.” Well, hallelujah, Larry! I thought that was what Lewis said the first time. I suppose, with yet another ten to twenty billion in free government money printed from air, it might someday become true. You know the pundits of profits are hurting when they call in the rodeo clowns to prove their point.

“It’s no surprise,” Larry says, “that bank stocks were the leaders in Friday’s huge rally.” At last we agree, Larry. With the government printing so much free money to stuff in the bank coffers, it’s no surprise some people want to invest in the racket. But it won’t save the economy.

Larry believes the growth in money supply will be the dark horse that comes through and saves the economy within the next few months. I think Larry must have received his economic education from the University of Zimbabwe. It may well be that money growth will produce the biggest economic surprise of the year, as Larry says, but it won’t be the surprise Larry is hoping for. So, get out your stein.

At last, in true form, Larry believes the real stimulus will come from the lack of tax increases, as the stimulus package maintains previous tax decreases. Larry, if those tax decreases could save the economy, they would have done so last year when they came into being. They made no difference at all because they do not change the fact that the economy built on endless debt has failed. Keep dreaming, Larry. I think you’ve fallen asleep, counting golden parachutes.