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A New Reflationary Environment

A little less than a year ago when we were really starting to feel the pain of the debt unraveling I stepped away from the market and thought, “Maybe this will be the final correction that puts the US on right footing…I know it will be long and painful, but at least we can start fresh”.  I was naive and wrong.  There have been 4 bubbles in the last decade that most economists would agree have easy money as the root.  In less than 10 years we have experienced the Internet Bubble, the Housing Bubble, the Debt Bubble, and the Commodity Bubble.  Whether Matt Taibi is right and Goldman has been creating and benefiting from these bubbles is irrelevant because our policy makers really hold the bag on this one.

I will not do an analysis on the United State’s balance sheet right now, because that is irrelevant to the argument.  We all know that the US government and its citizens are bursting with debt.  The balance sheets are broken and our current administration is fixated on making the current pain go away at all costs which is the equivalent of kicking the can down the street.  The can isn’t going away.

Contraction is a normal part of business cycles as companies and individuals make stupid investments, but the contractions that we have experienced have felt so terrible because the bad investments were so prolific due to the cheap credit (thank you federal reserve).  We are in a series of economic waves which are getting larger and more fierce in intensity.  Each crash has been an order of magnitude larger than the preceding in what has been coined the “US Debt Supercycle”.

Source: Boeckh Investments Inc

Source: Boeckh Investments Inc

The most frustrating aspect of our current debacle is the fact that it started after Volcker was able to tame the 14% inflation in the early 80’s.  Volcker’s reward for taming inflation and CPI was a continuous wave of inflationary monetary policy which has left the US people with unserviceable debt burdens.  How many destructive cycles does it take for the US government and the average american person to figure out that you cannot print or borrow your way to prosperity?

So as the dollar breaks to new lows and the American public is taxed by an invisible inflationary force,  is this really the direction that we want to go?  Fearful that the Chinese will stop buying our debt, a currency that is the laughing stock of the world, a 10% unemployment rate with little signs of improvement, stagnant income levels but increasing prices…

That looks like a strong breakout for a nicely depreciating dollar

That looks like a strong breakout for a nicely depreciating dollar

We need innovation to spark the fire again and climb our way back to prosperity, but first we need to live within our means as a nation.

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Posted in Economics, Markets, Politics.

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2 Responses

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  1. Travis says

    so where’s the top for the dow? 10k, 15k, 20k?

  2. SurlyTrader says

    Let me get out my tea leaves….
    The dow has made a 42% retracement and the S&P about a 50% retracement. I feel as if that is it. We might muddle around at this 1,000 level on the S&P 500 through August, but I have a difficult time seeing a sustained rally (though a lot of investment banks are saying just that). Summer doldrums often set in and we definitely saw that effect during the summer of 2008. I’m concerned about another large decline in the September/October time period. I’ll post some info about the Nikkei and S&P 500 after the depression for a historical perspective on subsequent market volatility.



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