The weakest link

Yesterday, the Dow lost 119 points. Gold continued its progress back to where it was when the last dip began.

And we continued looking for the weak link.

A chain of deception, humbug, and larceny has corrupted the entire US economy. From top to bottom, every financial decision has been twisted in one direction or another. From student loans, to payday loans, to corporate bond offerings, to stock buybacks, from link to link – money from nowhere leads to somewhere people want to go. Especially, to higher asset prices.

At the lower end, it doesn’t look so good. Students who graduate this year, and who took out government-backed loans, are saddled with an average of $33,000 in debt, reports the Wall Street Journal. They’ll spend decades paying it off, at best.

Homebuyers, too, find themselves not so much benefiting from cheap money as competing with it. Private equity firms with billions in super-low cost capital have bid up the cost of housing in key markets. The average buyer pays higher prices as a result, and then finds himself indentured to the lenders for most of his life.

The typical household also finds itself with a major headache. Rising real prices press from the right (about which more in a minute). Falling real wages squeeze hard on the left. And its debt burden, though slightly smaller than it was in 2007, seems heavier than ever.

But at the upper end people are delighted. The Fed – with the happy connivance of the banks – creates new money. Corporations use it to buy their own shares. Central banks buy stocks too. What else are they going to do with all the money they create? Besides, buying stocks seems to please everyone who matters. Investors are happy. Economists are happy. Politicians are happy.

After all, a rising stock market means the economy is getting better, doesn’t it?

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Meanwhile, the financiers end up owning more of the real businesses, the real enterprises, the real houses, the real output of the real economy. Wall Street firms own more houses. And more stocks. All are bought with money that they – or their cronies – created themselves.

Imagine that you were a well-connected Wall Street insider. You had borrowed at the beginning of last year and simply bought the S&P. What a genius you were, with a 30% gain in the stock market, and a cost of money at only, say, 4%. You’re 26% ahead, on money you never earned or saved!

What a hoot! ‘Print’ more money. Buy more assets. Keep at it until you own the whole shebang, no?

And what’s to stop you? Who complains? Who even notices?

But there has to be weak link in this chain somewhere.

Yesterday, we looked at the inflation numbers. The Fed says consumer prices are rising at 2%. MIT says they’re going up twice as fast. And John Williams calculates that if you figured the CPI according to the formula used by the US government as recently as 1990 (it’s been changed since), you’d have an inflation reading of 6%.

In other words, if the most correct inflation rate really is 6%, actual GDP is collapsing. The nominal GDP growth in the first quarter was only about 1%. Reduced by 2% of CPI, it left the real GDP growth for the quarter at minus 1%. Adjust for 6% inflation, on the other hand, and you get growth at minus 5%.

Six percent inflation also cuts deeply into the rest of the economic numbers. Hourly wages, for example, may be back to 1968 levels when adjusted by official inflation numbers. Adjust them using John Williams’ calculations, and wages, too, are collapsing.

We saw yesterday, that the official numbers show consumer prices up 39% since 2000. The Fed’s favourite PCE Deflation measure shows them up only 31%. But taking an average of food, energy, transportation and housing – the things that really matter – prices are up about 50%.

Where’s the weak link? It is probably in the money itself… the stuff the links are made of. This is not money that was forged in real commerce, tempered by beads of real sweat, and hammered with the sledge of savings.

No, this money lacks tensile strength.

Put it to the test. What will it do?

Our guess is that it will break.

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