Posted by
Andrews on Monday, September 14, 2009 2:46:50 PM
Is it just me, or does it seem that the "recovery" is running up against some serious resistance? I have been watching the market recently and ti seems that there is a ceiling around 9650 or 9700 above which the Dow just will not rise. We keep coming within sight of the barrier, but we fall back again and again. Not that I am complaining, as i have picked up some great discount stocks, but it does seem that the much ballyhooed recovery is not quite as close as the administration would have us believe.
Then again, is that a surprise? The market collapsed because of rampant inflation. Granted, it was sold as a collapse of the financial sector and the housing market, but the underlying cause was inflationary. Yet, we have not backed away from our inflationary financing. If anything, we have scaled up inflation thanks to Obama's unfunded trillion dollar stimulus. Even in the housing sector we continue to force artificially low interest rates, encourage non-viable mortgages for the poor and provide tax incentives for unnecessary mortgages. From time to time, we are even seeing the first stages of price escalation in housing, even as the rest of the market languishes. (Signs which the financial press absurdly considers positive, as if pricing housing out of the reach of anyone but investment buyers is a good sign and not a symptom of economic distortions.)
Besides the continued inflation, the economy itself is sluggish, still showing signs of attempting to recover from past inflations, but hampered from a deflationary correction by continued inflationary pressures and massive government spending. And so we see corrections, such as the closing down of enterprises viable only under inflationary conditions (that is, the clearing of poorly allocated resources), but without the matching correction of new, and viable, enterprises, as the government is absorbing the funds needed for new ventures, either directly in taxes and borrowing, or through indirect means, be it through inflation or price increases caused by government spending. And so we continue feeling the distortions of inflation, while gaining none of the dubious benefits. We have all the downsides of an overheated inflationary economy, with none of the inflation fueled misdirected growth.
In short, we are seeing once more the beginning of Carter-era "stagflation".
The only question that remains is what comes next. Will Obama inflate strongly, driving us into a hyperinflationary spiral, or will he approach inflation less dramatically (either intentionally, or because he cannot pass new spending bills), allowing us to sink into deflationary doldrums, and, hopefully, an eventual recovery? Or, most hopefully of all, will we vote in some mature adults who will force some limits on spending, stop massive open market operations, and force us to undergo the temporary pain of a deflation in order to set our economic house in order, as Reagan did in the early 80's?
Only time will tell.
POSTSCRIPT
There is one other possibility, and one which seems unfortunately likely. Both Obama and others, in both parties, will continue to try to solve the "crisis' through spending and inflation, in various doses, leading to a slow, grinding, destruction of the economy. We will see continued closures of firms not viable without inflationary exuberance, but with no matching new firms to absorb the resources freed. More and more of the economy will drift into the public sector as the resources of the private sector are taken away in taxes or eroded by inflation. Eventually, one would hope, some leader, or hopefully more than one, will see that the continued recourse to inflation is not working, and will allow the monetary correction to run its course, but if that does not come to pass, it is completely possible that a host of well meaning "solutions" could completely wreck our economy.
UPDATE 09/16/2009: It figures. As soon as I write this the Dow breaks 9700. Still, I stand by my analysis. As I said before, monetary figures can mislead. Though the fact that the market is rising, and the recession perhaps over makes me think inflation is ramping up once again.