Why the Obama Bank Bailout continues to fail

Market forces June 29

The old monetary adage is, "You can't push on a string." It comes from the data that shows that during a severe recession or depression, reducing borrowing rates to zero does not seem to induce businesses to expand and people to buy homes. In fact that is exactly what is happening in America and around the world right now. That is why the massive federal money supply expansion is doing so little to stimulate the economy. Here we show that the failure to date of Obama's monetary expansion has been caused by some permanent effects but mostly by the transient effects of abruptly increasing US reserve requirements.

Many people are wrong when they simplistically say:
Money supply = money in circulation * velocity of money.

Here is a more complete definition, but we must realize each nation contributes to the equation and even underground economies and black markets can have effects in individual nations:

Money supply = money in circulation * velocity of money * money multiplier effect– actual reserves.

Now the "money multiplier effect" is inversely proportional to the leverage the FED allows financial institutions. Since OBAMA significantly de-leveraged the system the multiplier effect has shrunk causing the money supply to shrink sharply and that alone nullifies the recent monetary expansion. But there is also a much larger "money pit" that is currently swallowing up American cash faster than the treasury can possibly print $100 dollar bills. In fact the dollar is stronger, not weaker, because de-leveraging is accomplished by requiring banks to increase their reserves. That is a transient effect that literally puts cash in vaults faster than it can be printed until the reserve requirement is met. Only when the reserve requirements are met will the FED's monetary expansion have any beneficial effect on lending.

So you can see the problem is not caused by people unwilling to borrow even at low interest rates. The problem is that the banks are stashing the cash to raise the FED required liquidity. And if that were not bad enough for the economy, individuals too are saving money to raise their own liquidity.

Conclusion:
The Obama Administration's monetary policy has inadvertently been a contraction not the expansion of credit as his administration publicly pronounced. Expansion will not begin to work until the de-leveraging period is complete. This problem could have been avoided by increasing the reserve requirements in small steps. It means that the American economy could be violently jolted with inflation if the extreme 110% monetary expansion is permitted to continue after the reserve requirements are satisfied. Our more correct equation for the actual money supply expansion shows that the Obama administration has not been pushing on the fiscal string at all. It shows they have been contracting the money supply with Obama's abrupt increase in reserve requirements meant to de-leverage the financial institutions to provide more risk avoidance margin. In effect the Obama administration has unintentionally increase risk of a depression by moving too quickly to de-leverage banks.


Market Outlook

Market volume moved above average as the decline continued on Friday. It is possible the Obama administration will put us in a deeper recession and the market could drop 50% below the last bottom. We think that has a low probability but we are in the third week of a highly probable two month stock market decline.

The world is becoming politically and economically unstable under President Obama similar to the world in the 1930s when FDR was temporarily enamored with socialism and caused the Great Depression. When FDR abandoned socialism the USA recovered rapidly and defeated the enemies of liberty. We continue to have zero confidence in all socialist economies. The pact of communist China with Hong Kong to use the yuan as a settlement currency for trade is a step toward Beijing's long-term aim to use Chinese currency devaluation as a tool to shift risk to and expropriate more from foreign investors.

The dollar is strong now because the US printing press money is being absorbed by the America’s bank deleveraging process. But when deleveraging is complete and American wealth falls under heavy democrat-socialist Obama taxation next year... the dollar will likely fall in value.

"Cap and trade" is the biggest con of this decade. We can hardly wait for them to trade the derivatives of their hoax. The majority of world scientists have publicly signed petitions declaring the Al Gore theory that humans cause Global Warming is a farce and an economic hoax. It is intended to rip-off productive people on a massive scale. The cap and trade bill will prolong and exacerbate the recession and stifle any chance of a quick economic recovery. It will Squeeze state budgets, make US businesses less competitive, and is estimated to have a price tag of $175 Per Household. It will re-distribute American wealth to foreign nations. It is a form of coercive foreign aid where Obama will have Americans wrongly accused of killing the planet. Socialists typically wrongly accused their victims to justify the expropriation of wealth from their victims. Cap and Trade is a massive coercive American foreign aid program.

Last night most Asian markets were generally down: Taiwan down -1.1%, Japan down -1%, and South Korea down -0.4%.

Most European markets were up this morning in a range of -1% to + 1.2% half way through their session.

US futures are slightly higher (+0.3%), at the start today.

We are cherry picking into the market during what we expect to be about two months of market decline.