Guest Post: The Final Con

Originally posted at Monty Pelerin's World blog,

The stock market has now been up for ten straight days. Many on Wall Street are singing “Happy Days Are Here Again.” For them, that is probably the case. They finally have something to sell that will bring the rubes back into the markets. We are not in Kansas anymore.

Fear is ebbing and greed is coming back. Those on the outside looking in are rounding up cash so that they don’t get left behind. The shills assist them with their pictures of economic recovery, new era crap and whatever other nonsense they can peddle successfully. So the cycle goes, as it has since the New York Stock Exchange came into existence. We are in another game of musical chairs where the music is playing joyfully. As in all such events, there are too few chairs to accommodate the participants when the music stops. And it always does!

There is no economic justification for the level of these markets, at least in the sense of improvements to the real economy. The economy is in worse shape than it was several years ago, made so via massive government interventions. Debt has been piled onto governments, corporations and individuals. It is not serviceable, certainly not at market-determined interest rates. Artificially low interest rates prolong the game, but do so by further corrupting economic decisions and the economy.

Michael Pento explains why markets have done so well recently:

When central bankers dedicate their existence to re-inflating asset bubbles, it shouldn’t at all be a surprise to investors that they eventually achieve success. Ben Bernanke has aggressively attempted to prop up the real estate and equity markets since 2008. His efforts to increase the broader money supply and create inflation have finally supported home prices, sent the Dow Jones Industrial average to a record nominal high and propelled the bond bubble to dizzying heights. The same nonsense that got us into the mess — bubble-blowing — is the strategy for getting us out of the mess.

That is all the Fed knows and it is all that is left for the government. This is not an economic strategy. No economist worth his salt would propose such a “solution.” This is a classic political solution — buy some time by making the problem appear to go away. Kicking the can is what politicians do best. Move the problem down the road and we’ll worry about it then (preferably after the next election). Never mind that the problem is made worse by doing so. Live for the now. Worry about tomorrow when tomorrow comes and then it will be today and repeat the same political fix.

Will this fix work? Of course not, at least on any basis but the short-term. The laws of economics cannot be repealed. Arrogant politicians may believe they can suppress them and they are correct, but only in the short-run. How will this turn out? Not well, according to Mr. Pento:

The ramifications for investors and the economy will be profound. Not only will the economy move gradually toward a pronounced condition of stagflation, but, more importantly, the bubbles being created by the Fed will be far greater and more devastating than any other in history. Equity and real estate prices are already stretched far beyond what their underlying fundamentals can support. But they are nothing compared with the distorted valuations being applied to U.S. sovereign debt. The bursting of the bond bubble will be exponential worse than the deflation brought on by the NASDAQ and real estate debacles. It is sad to conclude that the middle class is set up to get slaughtered even worse than they did when the previous two bubbles burst.


The economy is heading for unprecedented volatility between rampant inflation and deflation courtesy of Ben Bernanke’s sponsorship of the $7 trillion increase in new Federal debt since 2008. Investors need to plan now while they still have time before the economic chaos begins.

Better prepare! The tragedy that lies ahead is apt to make the Great Depression look like a walk in the park.