Tuesday, June 29, 2010

Where Is The Multiplier?

It appears we are nearing a critical juncture with respect to the fate of the “recovery”.

Was it really a recovery at all or just the combined effects of financial panic fatigue and a resurgence of speculative animal spirits mixed with a touch of retail therapy fueled by a giant government bamboozle of zero rate money and a trillion or two in stimulus?

Whether it was “cash for clunkers”, the housing tax credit, the massive purchase of mortgage securities, the never ending unemployment compensation, thousands of road projects and other government contracts, etc. etc… the government sought to force money through the system at a frenzied pace that can only be described as nearly comparable to the rate at which the economy collapsed during the worst of 2008.

But what was achieved for all the effort?

There was a notable jump up in stocks of course and a few transitory pops in auto sales and home sales with home prices feeling the effects of the increased buying activity.

The unemployment rate appeared to be in the process of forming a peak and consumer confidence improved resulting in some better than expected retail sales earlier in the year.

Something seems askew… Where is the multiplier?

The government embarks on a crusade of Keynesian monetary and fiscal stimulus the likes of which has never been seen before… a move that is sure to be judged by history to be outright recklessness and all we see is a pop in stocks, some additional auto and home sales, a peak in epically high unemployment and a tick up retail spending.

Worse yet, the stock market has been on the down low seemingly slumping into another “sell into the rally” bear trend since the near simultaneous end of the purchase of mortgage backed securities by the Fed, the end of the housing tax credit and the ramp up in financial regulation (Goldman debacle and Fin-Reg) back in April.

Is that it? Have we reached the end of the “shock and awe” simulative effects?

If so, what's next? What could the government possibly do next to sponsor the economy? Is there the political will to keep sponsoring the economy? Are we headed for another crisis in confidence?

This appears to be a tough situation indeed… one punctuated by the fact that all eyes now turn to China to look for signs of life in the global economy and a lead out of this epic mess.

Have we completely lost our marbles?