You Can Make A Difference
columnist: Doug Eberhardt

Topic: Economics
If It Smells Like A Recession....

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The only thing that has kept this economy going is the housing run-up caused by the Fed?s manipulation of interest rates lower causing consumers to find new money via equity from their homes and now the only thing keeping it going is massive infusion of the money supply by the Fed which is propping up the stock market?again.

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by Doug Eberhardt
(Libertarian)
Wednesday, May 7, 2008

It is a recession, 79% of Americans say in a new poll.

Interesting comment buried in the article:

"The National Bureau of Economic Research defines a recession on its Web site as "a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.""

There are a few definitions of a recession, but this one was one of the first to confirm a belief I have had for a month or so now.

Specifically it defines a recession as "a significant decline in economic activity spread across the economy" rather than just "two consecutive quarters of negative GDP" like most other mainstream definitions. Then it goes on to say "normally visible in real GDP."

I've posted here before that Real GDP has declined for the last four years straight.

We all know the only thing keeping this "game" going is Fed intervention, so what has the Fed really been doing the last few years?

According to Shadow Government Statistics (SGS), the Fed was increasing M3 at double digit rates during the stock market exuberance of 1997-2001. As the stock market bubble dissipated, the Fed lowered interest rates and created the housing bubble. This allowed them to cut back on M3 as credit was available everywhere as consumers utilized their home equity to buy, buy, buy.

As the housing bubble began to pop in 2006, the Fed started to increase M3 again and reached the double digit range by the end of that year. By 2007 M3 hit the 15% range and we're currently over 17% (a rate never before seen) according to SGS. And guess what? The stock market is going higher!

So while real GDP is declining year after year since 2004, the DOW has climbed from 10,500 to 13,000, about a 25% return since that time. You've done pretty good in the stock market right? Wrong! The dollar has fallen about 20% since 2004, so technically you've earned a whopping 5% in 4 years or about 1.25% a year if you invested in the DOW. You'll never hear this type of analysis via the Mainstream Media. They only want you to hear the good news!

The "only" thing that has kept this economy going is the housing run-up caused by the Fed's manipulation of interest rates lower causing consumers to find new money via equity from their homes and now the only thing keeping it going is massive infusion of the money supply by the Fed which is propping up the stock market?again.

How long can the game continue is the only question?.

It's like driving a car 45 miles an hour in the fog, but like in Stephen Kings scary novels, the fog will never lift. The Fed is the fog! At some point there's going to be a crash. The smart driver pulls off at a rest stop or at least proceeds with caution at a much slower speed when there's fog on the horizon.

Can the average investor make the decision to proceed with caution on their own? Are their financial advisers telling them to?

Over the short term, the Fed's manipulations will make things seem like they're working. Over the long term, it's "Kady bar the door!"

Doug Eberhardt

www.youcanmakeadifference.org

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2008 Doug Eberhardt, all rights reserved.
Published: Wednesday, May 7, 2008
Last modified: Saturday, May 10, 2008

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