There Is No Economic Recovery - Only Transition

It is important to know the difference!

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The definition of ‘recovery’: to get back; regain

The definition of ‘transition’: to change; passage from one form, state, style, or place to another

Is the economy in ‘recovery’ or ‘transition’? Our government, of course, has no alternative than to preach about ‘economic recovery’. That would imply a return to the past. That would imply that we will soon be back to a 5% unemployment rate, a frothy housing sector, and stock indices reaching for the moon. Happy days are here again. Everyone has a job, a new house, and a shiny new car. Heck, everyone even got a new wide-screen television just for applying for loans to buy all that stuff. World peace is even at hand! Bill Clinton is dictating a memo to Monica Lewinsky in a White House closet and Alan Greenspan is again a ‘maestro’. That’s ‘recovery’. Of course, if you believe any of that, then you would also be inclined to cheat off Nancy Pelosi’s test in a physics class. No, I would argue that we are not going to ‘recover’ or regain with regard to our economy. Rather, we are experiencing a ‘transformation’- a profound change - and the finished product will be ugly.

First, government is a bigger part of our lives and economy. Consider this. According to the BEA (Bureau of Economic Analysis), 2009 GDP for the US was $14.2 trillion. Manufacturing contributed $1.5 trillion and government spending (federal and state) contributed $1.9 trillion. In year 2000, the numbers were $1.4 trillion for manufacturing and $1.2 trillion for government spending. We can see very clearly that our government is becoming a bigger contributor to the nation’s GDP. Now, who keeps screaming about cutting back government spending? That’s our GDP you’re talking about! Our government now holds the single largest primary category contribution to GDP according to BEA. Back to 2009, real estate, financing, and insurance combined contributed another $3 trillion to GDP. Thus we are known as the ‘FIRE’ economy – Finance, Insurance, Real Estate. Maybe we should be known as the ‘FED’ economy (Fornicating with Economic Destruction). But here’s the problem. Manufacturing is a net positive to society. It supplies jobs that are paid for by the profits from the manufacturing company. Government is a net negative to society because it supplies jobs that are paid for only from the productive wages generated from the manufacturing part of the economy. Manufacturing grows assets. Government eats assets. Now the trend is clear and we cannot reverse course. We no longer have the guts to do so. What we are left with is an economy that is not based on asset production so much as transfer of payment siphoning.

Even more disturbing is according to the BLS (Bureau of Labor Statistics), the latest statistics available in 2008 showed the average federal employee enjoyed a salary 20% higher than that of a comparable private employ. It gets worse. That figure is just the salary. It seems that the federal employee also enjoyed a benefits package (health insurance, pension, etc…) valued at $40,785 compared to the private employee’s package valued at $9,882. If this weren’t pathetic enough, the fellow that sleeps in the White House is currently engaged in a comedy tour bashing the other political party with a line about driving a car in a ditch and wanting the keys back. He mockingly says, “They can’t have the keys back – they don’t know how to drive”. As the driver of government, let’s review his car. We have the post office, Amtrak, Fannie and Freddie, the student loan program, welfare, Medicare, Medicaid, and social security. Did I name even one that turns a profit? Did I name even one that is solvent? For all these insolvent, poorly run government programs, we taxpayers pay twice the payroll for federal workers than the private sector would pay. And, the government has been hiring. Their payrolls are up! Private payrolls are down. Whatever happened to government work being ‘public service’? Now it is ‘public enrichment’! Before my head explodes, my point is this. The government will continue to produce nothing and cost the country’s taxpayers more money for doing so. The result will be a less efficient country that doesn’t produce much because government doesn’t produce anything. Well, unless you count encyclopaedic volumes of bureaucratic heath care tax legislation. Forget the ‘republic. We are now an autocracy. Recovery would imply a return to capitalism. The transition is to a government controlled and subsidized economy characterized by the arbitrary imposition of corporate law and regulation for the sole purpose of central bank enrichment. The government no longer works for us. It only works to control us. War has been declared and we, the citizens, are enemy combatants. Government regulators stand ready to use their own form of waterboarding on any of us that step out of line. (As a point of clarity, the government regulators uses the term ‘audit’. I prefer the more accurate, ‘waterboarding’.)

A second major way the nation’s economy is transforming is the now constant manipulation from the Federal Reserve. True ‘markets’ depend upon the judgment of participants to set prices for assets traded. The sad truth is that ‘markets’ died with capitalism. While everyone bemoans the greedy Wall Streeters and rails about their outlandish executive bonuses so earned from cheating and stealing money from investors, let’s look at reality. There is neither question nor argument that banks, lenders, and Wall Streeters ran amuck with derivative and credit default swap leverage over the past 20 years. The economy slumped into a depression when banker earnings collapsed with the credit bubble default. All attention since has been directed at regulation. Supposedly there wasn’t enough of it. Now we need to impose more. But step back a moment. Capitalism is the great regulator. Wasn’t capitalism driving the stock price of GM to zero? Wasn’t capitalism driving the stock price of Bank of America to zero? WaMu? AIG? Bear Sterns? Lehman? Citi? Countrywide? Fannie? Freddie? I could go on but why were all these companies having their stock prices pummelled to zero. BECAUSE THEY WERE BROKE! THEIR BUSINESS MODELS NO LONGER WORKED! THAT’S WHAT CAPITALISM DOES!! All of these companies were being driven to bankruptcy court because they were being punished for poor corporate performance. Capitalism 101 – an efficient producer will always drive an inefficient producer out of business. That’s what keeps capitalism, well…, efficient! Why was capitalism circumvented? Why was it not allowed to do what it does best – purge the system of garbage? The reason is all these bankrupt companies are part of the con that the Federal Reserve runs to control the planet. They were all the shills. They all had to be saved or merged with other companies who were given substantial cash to play along. Well, except for Lehman. Apparently, they didn’t have enough derivatives to imperil the world to warrant a lifeline. Too big to fail my arse! Joshua brought down Jericho. David slew Goliath. Buford Pusser cleaned up McNairy County, Tennessee. But now, the government thinks it has all the answers. And ‘capitalism’ is not on the answer key.

Look at the Federal Reserve. Manipulation is their ‘MO’. When do they pump trillions into the market? Answer - whenever it is falling to painful levels. If investors buy or sell securities, they do so out of a motivation to produce a profit. But in August of 2010, the Fed began a ‘quantitative easing’ policy by buying intermediate maturity Treasuries. Why? Do they think Treasuries are underpriced and happen to be a ‘good buy’? No. They are doing so to simply manipulate the bond market and hopefully manipulate the stock market as well. The Fed also runs the Plunge Protection Team (PPT) for manipulation purposes. You know the drill. Whenever the Dow Jones Industrial Average is crumbling and new lows are at hand, the PPT steps in at 3PM to jolt the indexes higher with high dollar buy programs. Check out the following chart.

This is a 5-day, 30-minute bar, intraday look at the week ending May 21, 2010. For perspective, the Dow Jones Industrial Average had fallen over 600 points for the week as Friday’s trade opened. It dropped to about 9950 and you could almost hear the air raid sirens going off. The PPT normally likes to wait until 3PM for dramatic purposes but they couldn’t take the chance on this Friday. Pow! They let loose with both barrels. 6 million shares of the ETF, DIA (that mirrors the Dow), were traded in the first 30 minutes immediately snatching the index from its opening gap lower. That got buyers interested as we all like to trade with the PPT blowing hot air into our sails. But in the afternoon, the indices faded and the DIA turned negative again. All that hard work for nothing. Then, POW!! In the final 30 minutes of trading, there was another enormous surge of buying boosting the DIA and all other indices on the planet higher. Even the Antarctica Index went higher! And, all indices all over the world burst higher at precisely 3:30 PM. Well, actually there is no Antarctica Index. But if there was, it too would have been jolted higher by this incredible buy program. Did I mention this was the final half hour of Friday afternoon? Did I mention that average trading volume for the DIA was around 10 million shares per day? Did I mention that the first half hour of buying plus the final half hour of buying accounted for about 10 million shares of trading that made up the staggering total of 30 million total shares of DIA traded on this Friday? Yes, more than 10% of the total shares were traded in the final half hour of trading. Why? At the time, concerns were focused on the Greece debt problem and the viability of the Euro. The ‘flash crash’ of May 6 was still in everyone’s psyche and US economic data were trending lower. And, the Dow breeched the Fed’s ‘line in the sand’ when it fell below 10,000. Presto! There’s the rally. There’s the manipulation. The Dow rallied some 250 points off its low of the day. And, most of that was again, in the final half hour of trading. This is just one example of the many intervention days of the PPT. It is clear that we are now in an era of covert and overt manipulation of all asset markets orchestrated by the central banks. After all, who else could have the power, money, and coordination to simultaneously goose all the asset classes of all the indices around the world at exactly the same time? Now when there is a selloff during the day, doesn’t every single trader on the planet anticipate a PPT savior rally in the last hour of trading? You can see it like the ‘January effect’. Now traders anticipate the PPT arrival by beginning their buying before 3PM. It’s like Christmas Eve and you know Santa is coming so you get the milk and cookies ready. The result is we no longer have real ‘markets’. What we have is casinos operated by the Fed and their shill banks that are manipulated for psychological purposes every day. Asset prices are no longer true. ‘Recovery’ would imply that market prices would be left up to market participants and those prices would balloon back to the stratosphere. The ‘transition’ is to a system in which the government (owned by the Federal Reserve) manipulates asset prices as they act the part of a bear market trampoline. The ‘markets’ will likely never recover. Charts don’t lie!

DIA – 5-day intraday chart, 30-minute bars, week ending 5/21/2010


Chart courtesy

A third major way we can see transformation in the economy is through US government data. In case you don’t know, it’s all a lie now. All data is contrived and sculpted to make the stock indices seem plausible and an economic ‘recovery’ seem inevitable. Personally, I can hardly read anything that the Commerce Department puts out because I double over in laughter when I see the department name. I think of the Commerce Department as the Government Department of Pathological Lying. In fairness, I love their disclaimer attached to housing numbers that says in essence that due to statistically inaccuracies, they are not sure whether or not housing was actually up or down. In other words, it’s just a number. The unemployment number is reported by the Labor Department and it is supposed to be about 9.7% as I write. However, there isn’t a single, solitary soul on planet Earth that believes that number. I mean there is no one that God ever created that is stupid enough to believe unemployment in the US is less than 15% - much less 10%. Well, there is the Pelosi. But why does the government feel compelled to lie about everything? It seems to me that the only reason we lie is to tell our listener a story that makes them feel better than if they heard the truth. If the government only tells lies, the truth must be horrible. The result is we have a government that cannot be trusted. We must invest money based on what we feel or on what truth we can extract on our own. Recovery would imply a growing respect for citizenry. Transformation will be disdain and contempt for citizenry driven by wilful intent to deceive and control by any means necessary.

Beyond the ‘big three’ economic transitions, there are many other instances of economic metamorphosis. In the interest of brevity, I will list a few that come to mind.

A) Higher taxes are inevitable to support bigger government.

B) High unemployment rates are the new norm. Manufacturing is vital as it supplies jobs of generalized skills. An economy with limited manufacturing activity is one of specialization that requires specialized education, experience and limited manpower requirements.

C) Inflation has pushed the price of education beyond the means of average Americans. Democracies and Republics require an educated populace. Autocracies don’t. A poorly educated society will be poorly employed.

D) Australia just held elections (August, 2010). Voting is required of Australian citizens. Those who don’t cast a vote are fined. Freedom mandates responsibility and education. America is now the land of the ‘entitled’. We want government to give us food, water, and cable TV. Can anyone imagine a fine imposed on US citizens that don’t participate in the voting process? Entitled people care not who rules them as long as they enjoy the fruits of their non-productivity.

E) War is inevitable and perpetual – big governments depend on public fear. As Thomas Jefferson told us: ‘When the government fears the people, you have liberty. When the people fear the government, you have tyranny.’ Big governments justify their size by requiring a big military. That gives the government a reason to spend a lot of money and grow government. Wars are fought with borrowed money. That is a profit center for the big banks.  

F) Banks control government with debt. How do they grow debt? See the previous statement. According to, US GDP is projected to rise to $15.2 trillion in 2011 and $16.2 trillion in 2012. Total federal debt in 2012 is estimated to be $16.3 trillion. America will then be spelled G-R-E-E-C-E. Debt is the ultimate enslaver. Of course, if we add the debts of our GSEs (Fannie and Freddie) and ‘off balance sheet’ entitlement programs like Social Security, the debt is triple digit trillions. That doesn’t even spell G-R-E-EC-E. It just spells B-R-O-K-E!

G) In 2007 – the housing sector contributed 15% to economy. I don’t know the current figures, but I can look around and guess that housing’s contribution is half of what it once was. Recovery implies we return to mania. Transition implies something else has to fill the void of that which no longer exists. In the land of entitlement and regulation, there is nothing to fill the void.

H) Interest rates will soon be zero forever. Why? The Federal Reserve likes it that way. They are in complete charge now. Their only threat is Andrew Jackson and he is not walking amongst us. His Father is buried in the same cemetery as most of my relatives. His spirit burns in veins of some of us. The Fed will choke the country breathless unless they are first choked out of existence by the spirit of Jackson. Stop and salute if you ever pass by Old Waxhaw Presbyterian Church in South Carolina. It is hallowed ground.

In closing, let’s look at currency’s role in economic transition. Why is every nation on the planet trying to devalue their currency? Think about it. As I write, the US has allowed the Federal Reserve to dissolve its currency and now cannot tolerate currency strength as that action mutes exports (needed to lend credence to GDP) and cripples the stock casino. A stronger currency also means that we repay $13.5 trillion in debt with more expensive dollars than were borrowed. The central bank of Japan is struggling to keep the value of their currency from advancing. Despite calls to the contrary, China has resisted allowing their currency to ‘freely float’ in value fearing its value could rise. China is easy. They need to export their way to prosperity. A strong currency would be a hindrance. Japan and the US are the two biggest debtor nations. Now, how do you sell the debt? Foreign nations that extend you credit can hold either your currency or your Treasury debt or both. If I were the Fed, and in charge of a hopelessly and perpetually indebted country, I’d try to make sure that the currency stayed weak and the Treasury price stayed strong.

Aren’t strong currencies a sign of economic strength? Ah, there is the admission. It seems we have transitioned to a weak economy. The transition to a debtor nation is just that. It is not economic recovery – just transition.

Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented.

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About Barry Ferguson