The Recovery Isn't Adding Up

Big news this week: Bernanke is going to be staying where he is, at the head of the Federal Reserve. Of course, this is because he has ‘saved’ the United States from the near disaster of the Second Great Depression…or so every media outlet and financial ‘expert’ out there would like you to think.

But, as we’ve been pointing out, this ‘recovery’ isn’t adding up. Take this little tidbit: The FDIC reported on Thursday that the number of troubled banks rose to 416 at the end of June, up from 305 at the end of March. Says MarketWatch: “FDIC said this is the largest number of banks on its ‘problem list’ since June 30, 1994, when 434 banks were on the list. Assets at troubled banks totaled $299.8 billion, the highest level since Dec. 31, 1993, the agency said.”

If that doesn’t spell recovery, I don’t know what does.

In the Highlight of the Week, below, Bill Bonner points out the other pieces of the economic puzzle that doesn’t result in a picture of a healthy US economy. Read on…

Ben Bernanke was put up for another term as head of the Federal Reserve. And the Obama administration said the downturn was a little worse than it had thought, so it’s estimate for the 2010 budget deficit had to be updated – increased by 19% – to $1.5 trillion. The Congressional Budget Office did its own count and came up with $1.4 trillion. Either way, it’s a lot of money.

We have wondered where the money would come from. Yesterday, Goldman’s top economist, Jan Hatzius, said he thought much of it would be ‘monetized’ by the Fed…with the Fed’s balance sheet increasing as much as $2 trillion.

The Fed’s balance sheet is the monetary ballast for the whole economy. As it increases, so does the amount of sail the economy can put up. In theory, the potential for inflation increases geometrically; one dollar on the Fed’s balance sheet could be multiplied into $10 in the economy. Bernanke has already doubled the Fed’s balance sheet – buying up and additional $1 trillion worth of Wall Street’s failures and the feds’ debt. He might have to buy another $2 trillion worth – bringing the total to $4 trillion – before this crisis is behind us, said the Goldman fellow.

Home prices are still going down, says the latest report, but ‘less than forecast.’ Is that good news? Well, it could be worse.

The latest sales figures show an uptick. But careful analysis shows that homes sales figures are still terrible. People are buying $250,000 houses…but they’re the houses that sold for $500,000 in 2005. And the poor folks with $500,000 houses…and jumbo mortgages…are sinking. Almost half of them will be underwater by 2011, according to one estimate.

The feds now say that 10% unemployment is unavoidable. Naturally, when people lose their jobs they have a hard time keeping up with mortgage payments.

“Bay Area Delinquency Rates Soar,” says a headline.

Two years ago, when a homeowner was late on his mortgage payments, there was a 45% chance that he’d catch up. This is known as the “cure rate.” Well, now the cure rate is down to 6.6%. Homeowners never catch up…they fall further and further behind until the house is foreclosed.

Want some more news? In past recessions, the United States emerged first and pulled the rest of the world out of its funk. This time, the United States is still on its way down…so analysts look to China. The Peoples’ Republic says it is growing fast. It also says it will have an inflation rate of 2% this year. Currently, prices are falling at a 1.8% rate. China is in deflation, not inflation. What’s up in China? We won’t know for a while…but don’t count on it to pull the world out of a correction. China needs a correction as much as anyone.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety on The Daily Reckoning site – it’s an essay you don’t want to miss. See here.

With so much of the news revolving around the economic downturn and the happenings in the financial sectors, one would think that financial literacy would be a key part of your child or grandchild’s curriculum at school.

In fact, the exact opposite is true. A recent MarketWatch article points out that although most surveys show (and our personal experience reinforces this) many Americans have trouble with handling their credit and balancing checkbooks, financial literacy is very rarely on the curriculum in schools.

And it’s not just about personal financial literacy…when we interviewed the average ‘man on the street’ for the IOUSA documentary, we found that adults couldn’t explain the difference between debt and deficits, and had very little knowledge on how much the national debt was at that time. This is why we tried to make it very clear in the movie (and in the companion book) how all of these things that make up our economy are connected – and how the decisions they are making in Washington directly affect American citizens.

It’s becoming clear that we aren’t going to be out of this downturn today…or tomorrow…or even next year. Maybe it’s time to start rethinking that curriculum, eh?

Enjoy the rest of your weekend,

Kate Incontrera
The Daily Reckoning

The Daily Reckoning