Archive for October 24th, 2014

by lizard

Six years ago, when the bursting of the housing bubble triggered a severe financial crisis, there were two options: deal with the core problems of an economy that had abandoned fundamentals for tricksy Wall Street speculative shenanigans, or paper over the issue with a flood of interest-free capital injections from the Fed. Under the Obama regime, the latter strategy was implemented, making the next iteration of financial crisis inevitable.

The Fed’s cheap money injections, known as quantitative easing, is akin to a junky dependent on the next fix to function. When the QE smack is even hinted at being taken away, the markets freak out. The end of October was suppose to also be the end QE3. Will that actually happen? Here is how Yahoo Finance describes the situation:

The end of an era of easy money is looming, and markets are becoming increasingly jittery.

As the Federal Reserve bought government bonds to juice the economy through lower borrowing costs, its balance sheet has ballooned from $995 billion in late 2008 to $4.5 trillion today. That’s helped propel the S&P 500 to nearly triple in value since hitting bottom in March 2009, as investors poured into better-yielding assets.

But the Fed has struggled to let a co-dependent market go. When the central bank ended QE1 in 2010 and QE2 in 2011, the S&P 500 faltered until policymakers stepped in with new, aggressive action.

The Fed once again stops buying bonds this month, and while it’s said repeatedly that a “considerable time” will pass before the first interest rate rises from zero, investors are mulling a slew of new headwinds. The S&P 500 has notched five sessions of 1% or greater moves in the last seven. And the VIX fear gauge has spiked to multimonth highs.

The economy is basically fucked once QE is taken away and we collectively begin economic detox. Much of the growth has been corporate stock buy-back, driven by interest-free capital. Michael Whitney wrote about this yesterday at Counterpunch:

Since the end of the recession in 2009, investors have borrowed a record amount of money to finance their stock acquisitions. According to the Financial Times, margin debt on the New York Stock Exchange (NYSE) peaked in February, 2014 at $466 billion and has only recently dipped slightly lower. That’s $85 billion more than 2007 at the peak of the bubble.

When stocks start see-sawing like they did last week, it’s usually a sign that over-extended investors are dumping their stocks to meet margin calls. The same thing happened in the run-up to the Crash of 1929. Stocks dropped sharply in late October which forced deeply-indebted investors to unload their holdings at firesale prices. The falling prices triggered a panic that sent stocks into freefall wiping out billions of dollars, crashing the markets, and paving the way for the Great Depression.

It’s not just the US economy in trouble. The European Union is inching toward recession as well, making the prospect of a global recession more plausible. From the link:

The very real prospect of a repeat of the 2008 meltdown is now widely accepted in the mainstream media, and the many possible factors that could trigger it are readily discussed in policy circles. As the International Monetary Fund makes plain in its latest World Economic Outlook report, for example, the risk of a worldwide recession is of particular concern – especially as the Holy Grail of achieving respectable levels of economic growth is becoming ever more elusive.

Of particular concern is the Eurozone where five countries, including Spain and Italy, are already experiencing economic deflation. All eyes are currently on Germany, which is teetering on the brink of recession as its economic activity continues to contract over consecutive months. The implications for the Eurozone as a whole if Germany enters a contractionary cycle will be far-reaching, since Germany is widely regarded as the main engine for growth in Europe and often props-up neighbouring states when they experience financial hardship. The overarching concern is that this entire currency block could soon succumb to a deflationary spiral, which would plunge it back into a full blown Euro crisis.

That article goes on to make the following assessment and poses the following question:

From any angle, the world financial outlook can only be regarded as rapidly deteriorating, and this starkly reflects how little policymakers have done to address the root causes of the 2008 crisis. Instead of dramatically overhauling the global economy and safeguarding the needs of the majority, governments have chosen to resuscitate a discredited economic ideology that preaches more of the same deregulatory, consumption-driven, austerity-backed neoliberalism. As the social and environmental impacts of the ongoing economic crisis become ever more apparent, how long will concerned citizens be willing to tolerate a political elite that is largely self-serving and neglects the needs of ordinary people?

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