As we approach the pivotal moment of the 2012 Presidential Election, many are eager to know who will emerge victorious. However, given the ever-present possibility of a narrow outcome, we might find ourselves revisiting recount scenarios from the past. Such scenarios are not without precedent.
Yet, Bond King Bill Gross suggests that the election’s outcome may ultimately hold little significance…
“Obama/Romney, Romney/Obama – is this truly the most critical election of our lifetime? The reality is they’re all cut from the same cloth – funded by the same sources. Our nation operates under the influence of SuperPACs, with the people merely serving as election-day puppets. We pull a lever for either party, but the results remain unchanged every four years.”
Gross might be onto something… Regardless of our role as voters, we still desire to see our preferred candidate succeed. Frankly, we’re ready for a change from President Obama. We’ve grown weary of his quirks—from his big ears and March Madness predictions to the way he throws a baseball. And let’s not forget the other figures surrounding him, like Joe Biden and Jay Carney, who often amplify our frustrations.
We find ourselves willing to take a chance on Romney. Though it seems a tall order for him to win, as his promises of handouts haven’t been enticing enough to a key segment of voters. That said, we’re not here to delve into political debates; there are plenty of platforms dedicated to that already.
Policies of Asset Price Elevation
Our aim is to unpack the complexities of the economy, financial markets, and government policies that directly impact your financial wellbeing. With that context, let’s pivot back to Gross for insights on his area of expertise: financial markets.
“By lowering interest rates to near zero through Fed Funds policies and quantitative easing, Ben Bernanke and his fellow central bankers aim to compel us to spend,” states Gross.
“In the past three years of quantitative easing and financial repression, have we truly seen a genuine impact on investment compared to consumption? Is Bernanke’s model successful, or is this easy money being funneled into mere consumption? On initial observation, one might lean toward supporting Bernanke’s approach. The stock market has notably doubled in value over the past three-plus years, risk spreads have hit historical lows, and housing prices are up—10 percent higher in Southern California alone.
“However, the real economy seems unchanged. By now, if Bernanke’s model was as effective as claimed, we should expect to see an increase in investments relative to GDP and a shift toward saving for future needs rather than indulging in immediate pleasures.”
Sadly, Gross notes, “The influx of created money has inflated asset prices, but such elevations are not compelling corporations to invest in future production.”
Economic Dependency and Looming Disaster
For many investors, the surge in asset prices may feel promising. These increases might even create a sense of wealth, intelligence, and youthfulness. Nonetheless, if asset price growth isn’t paralleled by genuine economic advancement, a crisis could be on the horizon, leading to inevitable losses.
“Investors should understand that the sustainability of asset and currency values relies on the real economy’s capacity for growth. If monetary policy cannot stimulate growth and fiscal policy remains under the control of a plutocracy that prioritizes immediate profits over long-term stability, then no amount of intervention will change the trajectory. If real economic growth continues to falter in the U.S. and globally, investors should prepare for modest future returns and the increased likelihood of disruptions caused by misguided monetary and fiscal strategies.”
In essence, while it’s natural to savor the recent uptick in the stock market, prepare for the possibility of another downturn—it’s inevitable.
The overarching reality is that the extensive monetary policy experiment following the 2008 financial crisis has failed to foster genuine economic progress. Instead, it has rendered both the financial system and the broader economy dependent on the continuous expansion of the money supply. What would transpire if quantitative easing were abruptly halted?
“At this stage, there’s no turning back,” remarked Gross’s colleague at Pimco, Mohamed A. El-Erian. “The most we can hope for is to decelerate and manage the fallout. If we attempt to backtrack too hastily, the probability of plunging into recession increases significantly.”
At the Economic Prism, we anticipate a recession is unavoidable. Based on the experiences of many, it may be that we’re already in one.
Best regards,
MN Gordon
for Economic Prism
Return from Economic Dependency and Looming Disaster to Economic Prism
