Saturday, April 11, 2009

What it is and why it ain't going to work

Let's face it, this isn't a normal recession. As such the Fed isn't going to be able to cure it with an expansion of credit.

What we are experiencing is the bursting of the largest credit bubble the world has ever seen. This would be bad enough all by itself. These are the conditions that led to the Great Depression after all.

However the Fed, in their misguided and fruitless attempts to stop the deflation last year, printed enough money to spike oil prices which only exacerbated the problem.

The problem is there is too much debt in the world. We've reached a point where we can't service this debt anymore. Trying to force more debt onto the world to keep the party going just isn't a valid approach anymore. The world needs to purge debt not create more.

Of course with the latest rally we are hearing the calls that the worst is over and the Fed's reflation attempts are finally working. Then again we heard that in Sept and Oct of 07, in Dec. 07, May of 08, July of 08 and Jan. of 09. See a pattern emerging?

I would warn investors not to get sucked into this nonsense. This market will bottom when we get to cheap valuations and when the economy bottoms and not until.

Throwing free money at banks isn't going to stop or even slow the economic collapse. Only purging debt and a return to growth based on productivity and not debt expansion will do that.

This time the Fed won't be able to manufacture a bottom for stocks just by expanding credit and printing money. What they may do is spike energy prices again if they aren't careful and intensify the economic collapse.