S&P Downgrade and the Second Recession

 

Wall Street facade.

Friends,
The day following the historic Down Jones Industrial drop of -512.76, was a mathematical yo-yo of ups and downs on the charts. Stocks plummeted at the opening nearly to 200 points, then soared a few hundred points in the plus upon news that EU Central Bankers will buy bonds of Italian and Spanish debt. A lift in points was surged by a US July job market report was not as pathetic as anticipated at around 100,000 new jobs. (Must have been a run on lifeguard positions at holiday beaches.)

Then the bear market pounced. It chewed on the head of that gain down to the bone at around +60 plus points by the closing claxon. Astrologically speaking, the stocks are down and up Uranus squared Pluto surpassing, manic-depressive jumps out the limb lows to rebound in resurrection high pies in the sky to then collapse at the end of the day like a soufflé.

What happened?

Perhaps some market reflection buzz-killed the Italian job when investors and bankers and CNBC talking heads started calling the EU bond buyouts of Spanish and Italian ballooning debts – source of the volatility — another version of printing money without actually printing money. This farce is better known at QE1 and QE2, the acronyms for two tries in America of Quantitative Easing of debt practiced by the US Federal Reserve.

Poster for Fractured Flickers. This early 1960s show took silent films and added silly dialogue to make social and political satire. Jay Ward created this show. He also gave us comedic icons Rocky an d Bullwinkle, Fractured Fairytales, Roger Ramjet, Underdog and George of the Jungle.

The Fed had manufactured credit out of thin air the first half of 2011 to the tune of $600 billion by June. The flush of funny money goes out into the open market and buys securities, government bonds from all and sundry offering these on regular bond markets. Credit is thus created and that voodoo money enters the economy because our system uses fractured flickered fractional reserve banking. That means for every voodoo dollar worth of credit the Fed conjures out of thin air it multiplies credit value times ten.

This is Mickey Mouse economics 101. The sorcerer’s apprentice in a Fantasia Federal Reserve, Mr. Ben Bernanke, waves his wand and the broomstick carrying buckets of water multiplies by ten. That means if Ben flashes his wand around publicly, conjuring $600 over the first six months of 2011 it creates a money supply of $6 Trillion.

Since the trillions given by Bush and Obama to bail them out did not reform banks, they are not lending but sitting on the cash. Time, therefore, for this Mickey Mousing Fed to put on its purple cone wizard hat with stars, crank up a little Paul Dukas symphonic thunder and start multiplying those broom sticks to flood the market with credited cash as real as a cartoon.

As long as everyone is captivated by the movie, it kinda works. That is, until Mickey gets the boot and the magic credit buying ends, like it did in America this June. Soon after the economy started to decline again as the QE2 sank behind the smoke and Mickey Mouse mirrors.

Ciao! Bella Italia!

The EU banks are going Bernanke on you and Spain. That had some part in deflating the soufflé on Wall Street, Friday. This voodoo stimulus is only a temporary fix like just about everything leaders and economist do around the world about the systemic problems undermining this global economy.

Something else might have unleavened the bread and buttered numbers in the plus. A rumor rat holing around Wall Street that credit rater Standard and Poor’s (S&P) was going to cut down the US credit a peg or two this weekend from a triple to double star rating. Rumor became soon fact. The downgrade will be explained as a lack of confidence in the US political leadership, both president and US congress, as the fundamental cause. Kicking the problem down the road to November when a committee will report actual cuts suggested is anticipated to be just as acrimonious and politically charged as the farce of financial bickering we saw this summer. Yet, the S&P by committing itself to this downgrading path whilst other important credit rating bodies are not puts their credibility into doubt and confusion. Moreover, the S&P mathematical mistake of calculating debt off by 2.5 trillion dollars… The result: more leadership crisis in the judged as well as the S&P judges.

My oracle presented this future when I set down to write Predictions for 2011 in October, publishing the following findings on 21 December 2010.

Let us walk through some of these predictions followed by brief assessments:

The pundits of economy picked by the US president in early 2009 pontificated the tried and true dictum: recessions always see jobs return last. For the first time and during the worst economic crisis since the Great Depression, the people aren’t buying it. Watch American politics turn on its ear…

2011 will be the year of the politically foolhardy.

…Uncertainty reigns.

I’ve never encountered a year so murky as I plunged my “oracle” in a dive off the “divining” board.

…There are new kinds of wars coming. The “money wars.” Conflicts where weapons are decimal points: e-strikes on the airwaves in acts of e-terrorism between nations clashing with armies of ones and zeros.

Predictions for 2011
INTRODUCTION: The Year of Multiple Choices

… If [Obama] doesn’t fire and hire the right economic advisors to win his battles with the economy, Obama will fulfill my oracle’s initial warnings logged in a HogueProphecy Bulletin posted on 10 March 2007. [See Obama Nation] He will roll in to his destiny four years too soon as a potentially great president unripe for office.

…He’s now moved from bad Wall Street insiders (like Geithner) to worse: associates of secret plutocratic societies, such as Austan Goolsbey – a member of Skull and Bones.

I don’t foresee how Obama can win a second term on his own merits if he keeps picking such advisers.

Predictions for 2011
Chapter 4: The Second Coming of Change We can Believe in

ASSESSMENT
One of the worst and most unripe executive choices made by this professor of constitutional law who never had any executive experience in business or government until he started his on the job training in the oval office on 20 January 2009, was to hire Wall Street insider and co-bungler of the Bush bailout, Timothy Geithner, as Secretary of the Treasury.

With job creation flat and for the most part not on the table this summer added to the marginalizing of Geithner by an “Iago” closer to Othello’s ear about the economy, the Skull and Bonesman, Austan Goolsbey, rumor has it Geithner was about to resign.

Obama cites President Lincoln as his role model; yet, true to his un-Lincoln-like immaturity as a leader, he pledges for now to keep his “General McClellan” commanding the front in this financial war with the Right. Thus, Geithner will continue to lose the economic conflict for his president as 2011 drags on.

In my prophecies for 2011, I coined a new term for the Global Recession:

The year 2011 will bring a new understanding of what this decades-long Global Recession truly is: a Cold Depression.

It’s an economic version of a doomsday stand off between runaway deflation and inflation, armed, cocked and ready by deregulation of the banking and financial systems, waiting in mute threat in row after row of foreclosed houses, ranked down empty suburban streets like row after row of silent missiles in their silos on the Midwestern plains. We all wait for someone on any side of this economy to drop “the bomb” – the debt bomb.

Predictions for 2011
Chapter 8: A Cold Depression, Like a Cold War

ASSESSMENT
The debt bomb was nearly dropped on 2August 2011 in an artificial crisis when Congress and President nearly let the United States default on its debt. Cold Depression almost turned hot. Now we return to a kind of new normal, a jobless recovery, a stasis where economic growth of corporations, making historic profits, do so without hiring workers. This kind of stasis my oracle defined back in 2010:

World wars couldn’t spread in the Cold War climate, nor can a hyper-inflated balloon economy go “pop!” at the sudden thundering of an apocalyptic debt bomb, if the economy will remain static. This standoff stasis, if sustained, even if it means little GNP growth for a decade, means no sudden, thermal-economic collapse.

Predictions for 2011
Chapter 8: A Cold Depression, Like a Cold War

Mickey Mouse in the Sorcerer's Apprentice segment of the movie "Fantasia" to the music of Paul Dukas' tone poem "The Sorcerer's Apprentice".

The Dow Jones ballooning well beyond 12,000, the divided government and the leadership polarization that may lead to the US credit rating going down into deeper Recession was anticipated by my oracle in the following observations that sound more like they were written today – not in December of last year. Note the underlined:

In the name of freeing up the economy, the new Congress will begin pulling off the bandages of Bush’s TARP and other money wad bandages of Obama’s reforms. They’ll be playing with the wounds.

The bubble Obama let the financial banks and Wall Street start blowing up again will balloon rapidly under this new Congress. You could find stocks climbing well beyond 12,000 points on the Dow Jones Exchange.

Yes! You could see that, especially if Republican House and Senate legislators hold onto the panacea that cutting taxes cures all. They keep putting their blind ideological faith in mathematically implausible numbers rather than good old-time Republican business acumen.

…For a long time now, what is presently preached under the Republican brand isn’t the fiscally conservative, socially tolerant stalwart of moderation. A deep polarity is coming in political-economic discourse in 2011. The midterm elections split the Congress. Gridlock on economic reform is coming. If the Republicans let the right wing partisan cat jump out of the Tea Bag, they will precipitate the next worldwide financial crisis in US leadership confidence.

Predictions for 2011
Chapter 8: A Cold Depression, Like a Cold War

ASSESSMENT
Has all of this not happened, especially a worldwide loss of faith in US economic and political leadership? I have written at length in Predictions for 2010 and Predictions for 2008 that a two-year probation would follow the foreseen Great Recession of 2008. If systemic failures are not reformed and purged out of the banking, housing systems and Wall Street, then starting as early as October 2010 and no later than mid-2011, we would embark on a Second Recession.

A key trigger was an oncoming Euro banking crisis, to which the oracle presaged in December 2010:

Bernanke believes that the Federal Reserve printing yet again another 600 billion-dollar wad for 2011, will stave off deflation. (I forewarn you now; he’ll print more than a trillion before the end of 2011). For this new bubble of the buck to succeed, he and the United States fiscal policy will need monetary help from the Chinese and Russian governments inflating the value of their currencies. With economic currency nationalism on the rise in 2011, economic coordination won’t be forthcoming.

The contagion of a European bank crisis in 2011 could easily spread around the world infecting the interconnected US and Chinese banks. If Europe goes deeper into recession, it affects Chinese imports and US business. Wrestling with a zombie EU Bank crisis, European leaders will test the waters of austerity programs finding they make for a more shaky European banking system.

Predictions for 2011
Chapter 8: A Cold Depression, Like a Cold War

ASSESSMENT
Has all of this not happened, especially a worldwide loss of faith in US economic and political leadership? I have written at length in Predictions for 2010 and Predictions for 2008 that a two-year probation would follow the foreseen Great Recession of 2008. If systemic failures are not reformed and purged out of the banking, housing systems and Wall Street, then starting as early as October 2010 and no later than mid-2011, we would embark on a Second Recession.

A key trigger was an oncoming Euro banking crisis, to which the oracle presaged in December 2010:

Bernanke believes that the Federal Reserve printing yet again another 600 billion-dollar wad for 2011, will stave off deflation. (I forewarn you now; he’ll print more than a trillion before the end of 2011). For this new bubble of the buck to succeed, he and the United States fiscal policy will need monetary help from the Chinese and Russian governments inflating the value of their currencies. With economic currency nationalism on the rise in 2011, economic coordination won’t be forthcoming.

The contagion of a European bank crisis in 2011 could easily spread around the world infecting the interconnected US and Chinese banks. If Europe goes deeper into recession, it affects Chinese imports and US business. Wrestling with a zombie EU Bank crisis, European leaders will test the waters of austerity programs finding they make for a more shaky European banking system.

Predictions for 2011
Chapter 8: A Cold Depression, Like a Cold War

ASSESSMENT
China made some symbolic moves to increase the true value of its currency but not enough as of yet to have real impact. Half the year remains before us. Russia did nothing and is waiting on the fence so far. Spain and Italy will get their Mickey Mouse QE1 experimental bond credit boost of devalued Euros. The austerity to come may see riots in the streets, Greek style. It is initiating a Second Recession.

I asked my oracle to stop waxing like “Nostradamus the Pessimist” and give signs of positive solutions. They are here: Predictions for 2011.

John Hogue
(07 August 2011)

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