It’s The Economy, Stupid? No! It’s the Stupid Debt

The phrase. “It’s the economy, Stupid,” became famous in first Clinton campaign. And Wall Street has always wanted you to believe that indeed, it is the economy, Stupid.

But the game has changed radically in the past two weeks, so it no longer matters one iota what the economy is doing. Not that it ever did.


This post is excerpted from The US Economy No Longer Matters – It’s The Debt, Stupid!

Fed Restarts QE But It’s Not the Economy, Stupid

The Fed has restarted QE at a gargantuan level. But they dare not call it QE. They say that these emergency measures adding funds to Primary Dealer trading accounts by TOMO (Temporary Open Market Operations) Repos do not constitute a monetary policy change.

But what they call it does not matter. The system is in crisis because it can’t digest a constant flow of hundreds of billions of dollars in new Treasury supply month after month. The financial system is maxed out on repo borrowing, a fact that I’ve been reporting in Liquidity Trader banking reports for months.

It’s even doubtful that it can digest the expected average $100 billion per month as far as the eye can see.

The Fed Must Print or (We) Die

So the Fed is adding money to the system at a breakneck pace. The pace may be lower going forward. But nevertheless, whether by TOMO (Temporary Open Market Operations) or POMO (Permanent OMO) the Fed will print. They’ll print and pump money into Primary Dealer accounts. That will enable the dealers to absorb, or facilitate the absorption of all the Treasury supply.

In that past there’s always been plenty of cash left over from QE for the dealers and their big speculator fund customers to play games in other asset classes.

Whether that will work this time remains to be seen.

The Economy is Still Growing – Who TF Cares?

Meanwhile, Federal Tax Collections and Energy Department data suggest that the US economy is still humming along at a steady, if slow, rate of increase.

I won’t call it “growth,” because this is not about intrinsic growth. It’s about the stimulus provided by these massive, and growing, budget defecates, month after month. In short, the US government is buying and paying for shit without having the means to pay from current cash flow. So it borrows the cash from banks, dealers, investors and carry traders, expecting no problem repaying an ever growing debt, in the future, forever.

It’s an assumption, and a policy, that defies common sense. But central bankers, mainstream economists, and the Wall Street media crowd have a vested interest in ignoring the obvious until it’s too late. They were right until last week. Then the shit hit the fan, seemingly without warning.

They Acted Surprised – Shame on Them

Of course there was plenty of warning, for months and months and months. We saw it and kept raising the alarms.

But the Wall Street crowd had their heads up their asses as usual. So they will claim in self justification that no one saw this coming. And as things unravel, they’ll continue to downplay just how fucked up everything is.

Critical Mass Reached- Fed Prints, and Will Print and Print

Meanwhile, last week we apparently reached a point where the Fed realized that it must monetize the US government debt. It’s that or the financial system will collapse under the weight of repo borrowing credit it can no longer extend through the private market.

Thanks to massive spending, the Federal budget deficit is exploding. This provides ongoing economic stimulus. This economy is hooked on the amphetamines of deficits. Remove them and the addict would collapse.

The 12 month average deficit grew to $100 billion per month in August.

It's The Economy Stupid? No, It's the Debt

Until this trend reverses, growing deficits will mean that the market must absorb ever growing Federal debt issuance. Suddenly, this month, the Fed had to inject $165 billion to cope with a crash in the market’s funding ability.

And extend that credit it will, again, because the tidal wave of US Government debt would otherwise overwhelm the system. Interest rates would go to the moon.

What Will All This Stimulus Do?

I have to wonder if all this stimulus, both fiscal and monetary, won’t result in a massive blowoff in the economy, a boom so big and, finally, so inflationary for consumer prices, the Fed will have no choice but to relent and allow interest rates to find their own level.

Or maybe the system will just collapse of its own top heavy weight, right here, right now.

I don’t have the answer. Meanwhile, I’ll continue to watch, chart, and report the data to you, so that we might see the first sign of change together, ahead of the crowd.

The tax data, central bank and banking data, the Treasury supply and demand data might not be enough. I must emphasize that technical analysis of the stock market itself will play a pivotal role in these observations.

For example, massive central bank money printing should be bullish for stocks. If the market action as shown on the charts and indicators don’t conform to that expectation, we’ll know that something is broken. The stock charts don’t lie.

I’ll report on that every week as usual in the Technical Trader reports.

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Lee Adler

I’ve been publishing The Wall Street Examiner and its predecessor since October 2000. I also publish LiquidityTrader.com, and was lead analyst for Sure Money Investor. I developed David Stockman's Contra Corner for Mr. Stockman. I’ve had a wide variety of finance related jobs since 1972, including a stint on Wall Street in both analytical and sales capacities. Prior to starting the Wall Street Examiner I worked as a commercial real estate appraiser in Florida for 15 years. I also worked in the residential mortgage and real estate businesses in parts of the 1970s and 80s. I have been charting stocks and markets and doing analytical work since I was a teenager. My perspective is not of the Ivory Tower. It is from having my boots on the ground and in the trenches of the industries that I analyze and write about today. 

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