The Sarcasm Report v.122

August 5, 2011
What happens after the meltdown?

While it's almost over, price damage calls into question the 3-year-old bull market.

Does it also call into question the nearly 13-year-old stagnant market? I think not! The S&P 500 is now trading at December 1998 levels again (like it did in 2001, 2004, 2005, 2008, and 2010).

It boils down to this: Easy credit fuels an asset bubble, the asset bubble implodes into a banking crisis, the banking crisis spawns government bailouts and stimulus, and government largess results in a sovereign debt crisis and default.

1. Easy credit
2. Asset bubble
3. Asset bubble implodes
4. Banking crisis
5. Bailouts and stimulus
6. Sovereign debt crisis
7. Default

It didn't have to be this way. We had a nice tailwind in June and early July.

What tailwind?

St. Louis Fed: Real GDP Growth (YoY)

Click to enlarge.

We successfully completed step #1 (easy credit). We were doing so well on step #2 (asset bubble). Here we are at Step #3 (asset bubble implodes) again. Shocking!

The good news is: There is still a narrow path out of the darkness. And like last year, it could have everything to do with the Federal Reserve. The Fed wraps up a two-day policy meeting next Tuesday and will host a global powwow for central bankers in Jackson Hole, Wyo., later this month.

By all means let's rely on the Fed to clear a path out of the darkness. They've done it SO many times. What do we care if the path keeps looping back into the darkness with higher and higher debt loads?

Both will present an invaluable opportunity for Fed Chairman Bernanke to announce his ability and willingness to deploy creative new monetary policy measures to stave off another recession -- one that could devolve into a global, synchronized depression, given current sovereign debt problems.

When old monetary policy fails there can be only one solution. Let's experiment with creative new monetary policy!

I'm hearing chatter that Bernanke could announce a new policy initiative such as an interest rate cap or shifting the average maturity of the Fed's Treasury holdings to more forcefully bring down long-term interest rates -- rates that affect the price of mortgages, auto loans and other forms of consumer credit.

We need to be promised that long-term interest rates will become cheaper (you know, like Japan). The 20-year TIPS rate is 0.99%. As a potentially biased long-term TIPS investor, that's just not good enough. It needs to be lower, much lower. Mwuhahaha!



November 10, 2005
Four Thousand Years of Price Control

With the wave of a hand, or the flash of a legislative pen, they promise to make everything cheaper. And for more than four thousand years the results have been exactly the same: shortages, sometimes of catastrophic consequence; deterioration of product quality; the proliferation of black markets on which prices are actually higher and bribery is rampant; destruction of a nation's productive capacity in the industries where prices are controlled; gross distortions of markets; the creation of oppressive and tyrannical price control bureaucracies; and a dangerous concentration of political power in the hands of the price controllers.

I couldn't be bothered to read the entire paragraph but that first part sure sounds good. Sign me up. Let's make interest rates cheaper!

And oil too! And food! And health insurance! And tuition! And housing costs! The Fed needs to force everything to be cheaper!

Okay, maybe not everything. We don't want to grossly distort the markets and/or risk deflation. Let's concentrate all the power within the hands of the price controllers. They'll know what should be expensive and what should be cheap far better than we do. It's the only possible way our country can prosper.

All those in favor of oppressive and tyrannical price control bureaucracies? Let's see a show of hands. France! Please stop putting up both hands. This isn't a war! ;)

See Also:
The Economics of Price Controls