Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs

[girl gone mad]

Re-inflation Rally Part I: Falsehoods, fantasies, fabrications, and fake-outs
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Is the global stock market rally signaling the end of a worldwide race to the bottom via debt deflation or only making a pit stop? When 43 countries pour a combined $2.2 trillion of fiscal stimulus cash into their economies in six months, shoveling debt from private to public account like the desperate crew of a sinking ship bailing in shark infested waters, and the U.S. alone lending more than $10 trillion to banks and financial institutions to keep them solvent, how can the economy not stop contacting, if only until the 2010 Congressional elections?

The question from here is what happens to the economy after the public money is spent as the bailed out zombie banks that should have been allowed to fail instead stagger and stumble in a stupor? What future awaits the few remaining too-big-to-fail banks that are able to eek out a meager profit only after the government offers the raw product – debt – at a ridiculously discounted wholesale price, with a marketing campaign to retail debt buyers that includes the President of the United States, special mortgage programs, everything but a list of customers to call -- although for all we know they got that, too. For reasons that remain a mystery to us, market participants read this as a bullish sign for the economy.

In the case of the U.S. in 1938 and Japan in 1992, debt-laden economies struggling with over-capacity quickly slipped back into depression once the fiscal juice wore off. Without a shred of proof to support the theory that economy-wide price fixing of capital and under-pricing of debt by governments through manipulation of interest rates cures the economic ills caused by previous price fixing and debt subsidy schemes, global Keynesian stimulus as an alternative to debt cancellation is a triumph of ideology over evidence that will end in inflationary tears. Shall we as investors go all-in with the bulls to play the intermediate results of the fiscal fantasy plan in execution -- the stock market rallies and the price distortions in bonds and commodities -- or a solid position for the end game with the doomers, wait it out with bars of gold, a sidearm, and a case of Scotch? Is there a rational position to take between these extremes?

Before we delve into these questions, first we take note of revelations that have surfaced during the acute phase of the crisis before they are subsumed in the atmospherics of a “recovery” that only a few trillion in borrowed, un-repayable money can buy.

Foul waters

In the vast, raging deluge of falsehoods, fantasies, fabrications, and fake-outs that passes for news in the U.S., the river of informational sewage that collects in drips and spews from ducts and runoff of coin operated media outlets, occasional shimmering snippets of verified truth from immaculately credible sources bob improbably among torrential turd-waves of propaganda, hoopla, and fluff. From a perch at the shore they enter our field of vision and drift by like an immaculate flotilla of shimmering white swans on a river of shit, their incongruous beauty commanding our shocked attention.

We crane our necks to catch every detail, to savor the vision of purity and grace before it is washed down river to churn out into the deep, green sea of essential knowledge – after decades so polluted by deceit, deception, dishonesty, and distortion that we can no longer see the bottom. Lost and long forgotten, they will be dug up by historians of some future generation who will ask, “Do we never learn?”

Swans of truth, if you will, authentic and exact, flock in periods of crisis. The economics of the news business compels it. The sleepwalking masses awake demanding an explanation for what the hell happened, preferably short and not too far from perception, the shortest path from awareness to a return to civil slumber. Audiences swell. But do not mistake the temporary improvement in water quality as the result of a permanent installation of pollution controls. Historic revelations of fact can be lost like lint, as a car can be buried as well as a cat; it just takes more dirt.

Now that the “crisis has passed,” the “economy has bottomed” and a “recovery” is underway we see Jim Cramer return to lead the charge, laughing off a slap-down that optimists only weeks ago deemed fatal to his career as the lead carnival barker of the FIRE Economy. Such critiques are now delivered by the last serious journalists a corporatist state gives a national stage: comedians. Clare Booth Luce once said of news reporting, if it isn’t pissing someone off, it’s advertising; the only people Cramer maddens are those sad sacks among his audience who mistake his act for investment advice.

More than a year into the economic collapse, numb to financial disaster, news audiences clamor for the positive. The extended marketing and PR arm of the FIRE industry that is the national financial press is only too happy to fabricate it if no truthful evidence is handy. It comes in a flurry of fantasy reports of economic recovery without economic rehabilitation, of market bottoms without markets, and assertions that the worst is over as home foreclosures surge, industrial production collapses and retail sales, incomes, and consumption fall in the wake of the collapse of the FIRE Economy in Q4 2008.

Good news is delivered by the very same market and economic analysts who insisted before the crisis that none was imminent and claim to this day that our economic devastation, with its jaw dropping statistics, is not as bad as it looks. Financial news reporting is one of the few professions in America that allows its practitioners to enhance their reputations as experts by perfecting a record for failure.

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