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October 3, 2011 / Michael E Picray

The Fatal Flaw in the Current Collective Analyses of the Economy

The fatal flaw in the analyses being done on the US Economy now is that this is a “recession,” while the truth is that there are recessions, and then there are RECESSIONS.

The former being what I call “business cycle” recessions – which only affect one principle industry and that industry’s collateral industries and businesses. Business Cycle recessions are the result of temporary imbalances in supply and demand. Business Cycle recessions are limited in scope, and are self-limiting in time – ie they tend to fix themselves without intervention as supply and demand levels self-adjust to the market. This is NOT a business cycle recession.

The other RECESSION is what I call a “Financial Recession”. Financial Recessions are caused by an inappropriate or inadequate regulatory environment governing the financial industry. Financial recessions affect the ENTIRE economy, and do NOT go away until the regulatory environment is corrected. (I believe another difference between them is that with one, the unemployment rates lead the downturn, and in the other they lag)

IN the 1930s, the main “fix” for the regulatory environment was the Glass-Steagall act that split investment banks from depository banks, and did a number of other things. The last bits of Glass-Steagall were repealed under President Bill Clinton towards the end of his term, and the newly formed mega-banks have been running amok ever since.

One of the main problems that I see is the use of fiat currency controlled by the FED. Now, what is the FED? It’s an “independent” bank that controls the issuance of US currency, and gets paid for doing so. (Looks like a conflict of interest there.) If you understand that inflation is a tax, then you understand that the FED’s policy of maintaining a 1% to 2% inflation rate as a MINIMUM, means that the FED BANK is making at least that much profit…and if the FED wants to increase its profits, all it has to do is “see” deflation and increase the amount of currency in the economy to hike the inflation rate. And lately they’ve been making a whole lot more that 1%.

For example: The major banks could not list the Toxic Assets on their balance sheets because since no one was buying them, they had no certain value. So the FED “purchased” the Toxic Asset Securities from the banks, thus giving them a value.

It is my suspicion that although the FED “bought” those TAs, they didn’t give the banks any money for them. Since the FED had the Congress pass a new law allowing them to pay interest on “excess contributions”, I think the FED is paying the banks a minimum amount of interest (thus making the TAs into “interest bearing deposits”, aka “cash equivalents” for stress test purposes), and keeping the purchase price of the TAs, while collecting the mortgage payments (which I expect are at a minimum of 4% and higher) for the MOSTLY AAA rated mortgages. So the FED is making a fortune on the TAs, and the banks who had to leave the Purchase Price on deposit with the Fed STILL have no money to lend. But hey – they can now pass the “stress tests” administered by who???

And while the Fed is keeping the money they’re printing up by the basket full out of the US economy lest it cause inflation, they’re creating 100% inflation by handing out an amount greater than the US annual GDP to European and other world banks as “bail-outs” and through “currency swaps”. (>$16 TN). (Currency swaps also insulate the FED from the effects of the US inflation that the FED causes.)

It is my opinion that now that the fat’s in the fire, until the US Government realizes that most of the problems that caused the financial RECESSION we are now suffering through were caused by the FED and by the mega-banks that were unleashed by repeal of Glass-Steagal, and until the government does something about these problems, we have NO HOPE (that’s ZERO HOPE) of seeing a recovery.

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