The Markets React to the Fed's Tired Response

“DJIA Plunges 225 Points in Global Sell-Off…”

“VIX Surges…”

“US Trade Deficit Unexpectedly Widens, Exports Decline…”

The news is neither good nor bad this morning. It just is. Fellow Reckoners are advised to interpret it accordingly.

To the cheers of some and the tears of others, stocks appear to be gripped in a downward spiral today. The Fed’s medicine went down like a bucket of KFC at a Miss Universe pageant, yesterday – which is to say temporarily, at best…and with immediate, violent regret.

Poor Mr. Bernanke…chewed up and spat right out. Markets, apparently, are fed up with “more of the same.”

In times of crisis, people tend to look for a single neck around which to fasten the noose of their collective irresponsibility. Their hands clench when they see Obama, Geithner, Summers, Bernanke, et al. yapping on the television. Lynch mobs practice their running bowlines, tarbucks and slipknots. Their anger and frustration is warranted, of course, but perhaps partially misdirected. To be sure, each of the above necks probably needs a good wringing. But doing so would likely provide only fleeting satisfaction, not lasting solution. After all, the meddlers are merely doing what meddlers do. They are pretending to be in control of the situation…and for a while, the markets were pretending to believe them. You can’t blame a weed for growing in the mulch.

But Mr. Bernanke, for all his fumbling foibles, is only one man; one cog in a machine programmed to march right off a cliff, whether it is he or some other lever-puller at the control panel. The Fed Head is doing his very best to delay the day of reckoning. Ultimately, however, he has only two choices: print or default. The rest – cutting, easing, extending, pretending – is simply bread and circuses for those who still hold out hope that the inexorable, untiring trend toward eventual collapse in the system is somehow reversible. It is not…but that’s not necessarily such a bad thing.

“America today looks like Russia in 1998,” Jochen Wermuth, Chief Investment Officer at Wermuth Asset Management, explained to CNBC today. “Consumers, companies and the government are all highly indebted. America as a result is a bankrupt Mickey Mouse economy.”

Wermuth went on to remind pundits that “Even before the (Troubled Asset Relief Program) and the expansion of the Fed’s balance sheet, total US public and private debt as a percentage of GDP…stood at 290 percent…”

Though that figure is much higher now, largely as a result of the meddlers’ aforementioned “fixes,” the trend has clearly been in place for some time. Now, it is simply accelerating. The lion’s share of the national debt burden comes in the form of various structural absurdities and unfunded liabilities – Medicare, Medicaid, Social Security – guarantees and promises the government can’t (and won’t) ever make good on. But it also comes from over-consuming and under-producing; from plain old living beyond one’s means. And that’s something Mr. Bernanke can not fix, no matter how hard he tries.

News across the wires this morning shows the US trade deficit widening at the quickest pace since October 2008. The shortfall jumped almost $50 billion from May to June, an 18.8% increase, as US exports declined across the board and imports rose to just over $200 billion. It doesn’t take a genius to work out that a country can’t export $3 for every $4 it imports forever. Eventually, debts must be made good or destroyed. They must be repaid, defaulted on or inflated away.

Speaking at this year’s Investment Symposium in Vancouver, perennial favorite, Doug Casey, suggested the government opt for the second choice. Defaulting on the debt, according to Doug, is about the only “honest, ethical thing” to do. “After all,” he continued, “We’re never going to pay it back. Or if we do, it’ll be with dollars that are utterly worthless.”

In all likelihood, Bernanke probably believes he has some degree of control over the situation. The poor fellow has the master-slave relationship entirely back-to-front. The trend is what it is. For his part, Bernanke can believe what he wants. We needn’t remind our Fellow Reckoners, however, that only the blind follow the gullible.

Joel Bowman
for The Daily Reckoning

The Daily Reckoning