The Great Depression Online

Great Depression Online Archive Issue:

Do You Feel the Magic?

Great Depression Online
Long Beach, CA
January 28, 2011

Inside This Issue You Will Discover…

*** A Soft Housing Market for Years to Come
*** DOW Rendezvous with 12,000
*** Do You Feel the Magic?
*** And More

A Soft Housing Market for Years to Come

What a week.  On Tuesday President Obama said “This is our generation’s Sputnik moment.”  We think we know what he means by this.  That we should think big, work hard, and achieve the unthinkable. 

Nonetheless, his vision failed to inspire us.  Thus we won’t spill any more ink on it.  For there are much more important things to consider than a state of the union address delivered by a clown.  So let’s get to it…

Hope and optimism for a robust housing recovery were dashed this week.  On Tuesday it was announced that home prices on the Standard & Poor’s/Case-Shiller index fell in November in all but one of 20 cities.

Then, on Wednesday, Reuters reported “an 8.7 percent drop in applications for new home loans last week.”  What gives?

“The story remains the same.  Until we see a stronger recovery in the labor market with a sustained drop in the unemployment rate, I would expect home sales to remain on a lower trajectory,” said Michelle Meyer, an economist at Bank of America Merrill Lynch in New York.

~~~~~~The $300 Trillion Crisis~~~~~~

Let’s face it.  It’s really hard to get a straight answer from anyone anymore.

Our leaders keep talking about change and growth, but all around us, people are losing their life’s savings to corrupt corporations, losing their careers to unemployment, and losing their lives and families to non-stop work just to make ends meet.

It didn’t used to be like this.  Just a few decades ago, families had time to spend together, and a high school diploma was sufficient to get you a job that would allow you to live on your own.

So what happened? 


But don’t count on the unemployment rate dropping anytime soon.  According to the Congressional Budget Office, the national unemployment rate will remain above 9 percent this year and above 8 percent next year.  Not until 2016 does the CBO estimate unemployment will reach a more “natural rate” of 5.3 percent.

So if the housing market must wait for the labor market to improve…then it looks like the housing market will be soft for years to come.

Sill, that didn’t stop the stock market from pushing above an old, but familiar, mile marker…

DOW Rendezvous with 12,000

The DOW topped 12,000 on Wednesday for the first time since June 19, 2008.  Here’s a brief review of DOW rendezvous with this level…

“The DOW made its first pass at 12,000 in 2006,” reported the Wall Street Journal website, “as credit expansion fueled a home-buying binge that eventually ended in the 2007-2008 housing bust.  From a peak of 14198.10 in October 2007, the market tumbled to a March 2009 low of 6469.95, wiping out more than half of the blue-chip index’s market capitalization.

“However, a combination of fiscal and in particular monetary stimulus helped fuel optimism in the market.  Since the Federal Reserve made clear its plans to embark on a second massive wave of asset buying last August, the market has climbed nearly 20%.

“On Wednesday, the latest statement from the Federal Open Market Committee showed the central bank’s commitment to stimulating the economy, with the committee arriving at a consensus decision after a shuffling of the voting membership.”

That’s right.  On Wednesday the Federal Reserve stated it won’t be scaling back the $600 billion Treasury bond-buying program.  Fed Chairman Ben Bernanke cited the elevated unemployment rate as justification for continuing with QE2.

So, who knows, it sure seems that as long as the Federal Reserve juices the money supply the stock market goes up.  What about when the labor market improves, and the Federal Reserve stops pumping the funny money?  Will the stock market then crash?

Do You Feel the Magic?

The leg bone’s connected to the knee bone.  The knee bone’s connected to the thigh bone.  The thigh bone’s connected to the hip bone.  The hip bone’s connected to the back bone.  The back bone’s connected to the neck bone.  And the neck bone’s connected to the head bone.

Do you see how it works?  Do you get it…yet?

Federal Reserve induced credit expansions fuel asset bubbles.  The asset bubbles eventually pop.  The collateral damage extends into the real economy.  The unemployment rate rises.

So the Federal Reserve pumps money into the financial markets.  The credit expansion produces an asset bubble.  The asset bubble pops.  The economy tanks.  And, before you know it, there’s a new round of liquidity courtesy of the Federal Reserve.

The irrational exuberance of the late 90’s, the dot com crackup, the housing bust…the Federal Reserve’s finger prints are on all of it.  Do you feel the magic?


M.N. Gordon
Great Depression Online

P.S.  Over the years, I’ve watched as our lifestyle as Americans has deteriorated.  Yes, we have more stuff, but our quality of life has continued to diminish.  More and more of our time is spent working longer and harder for declining wages. Yes, we have more entertainment, more technology, and better cars, but we have poorer, more desperate lives.  It’s almost as if something has been slowly crushing the life out of our economy.

The $300 Trillion Crisis

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