Tuesday, June 19, 2012

Money Is Not Wealth

In our continuing analysis of the muddleheadedness that passes for conventional economic thinking, we look at this morning’s headline from USA Today, “Stocks rise as Fed meets to consider its next move.”   We see here once again the power of wishful thinking impacting investment decisions, as “traders hoped that the Federal Reserve will come up with a plan to jump-start the economy.”

The same article reports some concrete business news also influencing the market’s gains.  Microsoft and Oracle showed strength on the news of product releases and earnings growth.  Analysts are also reading housing data as “signs that the housing market is healing.”  These concrete data are the necessary and fundamental elements of stock valuation decisions.  But of course we cannot eliminate emotions or projections from decision-making, even in the stock and bond markets!

But this mixing of actual results from the real economy with the heart flutterings from the massive act of fiction called the financial markets is the problem.  And this problem stems from the collective misunderstanding of the relationship between money and wealth.

Wealth can be simply defined as “stuff one produces that other people want and are willing to pay for.”  Money, on the other hand, is simply the main, although not sole, method by which this buying and selling are accomplished.

We humans regularly produce wealth regardless of the health of the money system, although the money system can either suppress or encourage the production of wealth.  This is because our collective agreement through long-term historic habit to employ money as the most reliable and cost-effective instrument of exchange has subjected the productive sector to the vagaries of the currency system.

Monday, June 18, 2012

"Wall Street Falls on Euro Zone Contagion Fears"

This was eminently predictable.  No one in Europe believed that a New Democracy victory in yesterday's Greek elections would herald a new dawn of stability and growth.  So why did markets climb last week on news of the promise of Euro-printing by central banks in the event of a Syriza victory?

The stubborn facts on the ground remain the same, and the accession of Antonis Samaris to the prime ministry probably makes the problem worse, since he belongs to the delusional pro-EU faction that is refusing to face reality.  He and his PASOK allies will persist up until the last moment in the Sisyphean task of heading off Greece's return to the drachma.

President Barack Obama continues to chug the Kool-Aid, proclaiming with no basis in fact to back him up that yesterday's result "indicates a positive prospect for . . . the path of reform."  He is at the photo-op called the G20 summit in Los Cabos, Mexico, where he promises "to make sure that all of us do what's necessary to stabilize the world financial system, to avoid protectionism."

So while the tribune of hope and change continues to lead cheers for the unsustainable, the heat and sweat in the Eurobunker will keep on building up.  No one should take any solace from yesterday's results.  Clearly the markets have--at least for the moment--sobered up.

Saturday, June 16, 2012

Last Days in the Eurozone Bunker

Today, the last day of the Eurozone as we know it, the Recovering Bureaucrat takes on the phenomenon of the spreading mass insanity among our Advanced Sector elites.  From Athens to Madrid, from Brussels to Washington, from London to Sacramento, our leadership is increasingly unhinged from the fundamentals of political economy.

And it’s not just the political leadership; the stewards of our slowly disintegrating international financial system are equally unmoored from reality.  The price we are all going to pay for this will be frightening.

Thursday’s financial headlines screamed “Stocks Rally as Central Banks Reportedly Ready to Inject Cash,” thus confirming that financial “experts” maneuvering in the stock markets are as bonkers as the eco-loons jetting to Rio next week to halt, once again, the world’s aggregate CO2 emissions.

Writing at Forbes.com two days ago, Abram Brown provided the latest breathless upbeat news:
Stocks climbed higher today, following a report detailing central banks’ plans to stabilize markets after Greece’s parliamentary elections.

Central banks from major economies are prepared to keep money flowing if the elections again roil financial markets and tighten credit. “The central banks are preparing for a coordinated action to provide liquidity,” a senior G20 official familiar with the situation told Reuters.
American stocks continued their fantasy rally yesterday, even as some economists publicly warn that the global economy is de facto back in recession.  So why are investors still pretending that the latest reports trumpeting promises by central banks to “provide liquidity” if the Greek elections don’t go Brussels’ way tomorrow hold out any possibility of actually turning the recession around?

The Recovering Bureaucrat, who regularly admits he is no Nobel Prize-winning economist, has a simple question.  Where is all this money coming from?