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I was asked to write a once-a-month Market Observation for Financial Sense.  Here’s the first one (posted today, Feb 10): 

From time to time, I think it’s a good idea to stop squinting at the short-term market wiggles and pull our heads back for a wide-angle view.  Now would be a good time, so that’s what we’re going to do.  For the record, I also happen to believe that close-up market analysis loses some of its potency during times of immense official intervention.  As with any subsidy program, prices become distorted and often fail to tell the real story, which is absolutely true with respect to interest rates and, by extension, the risk premium for stocks.

Back to the story.  Where the current crisis has been described using millions of words in thousands of articles packed with arcane acronyms (such as TALF, CDO, and CMBS), perplexing regulatory lapses and with a degree of complexity that dwarfs the Apollo moon mission, I can explain why the whole thing happened using just three words.

Too.  Much.  Debt.

At first I thought a recent Washington Post article regarding ‘earnings’ at the Federal Reserve was a joke.  But it appeared in the business section, and there weren’t any “gotcha!” retractions the next day, so I assume it was meant to be serious.

For those who understand the very simple idea that the Federal Reserve prints Federal Reserve Notes (or their electronic equivalent) out of thin air, the concept of ‘earnings’ on those same thin-air money units is intellectually challenging.

Here’s the article:

Well, now that the returns are in, we can declare this past decade, ‘the Aughts,’ to be a lost decade.  There’s an important story contained in the data from the Aughts, and it exposes the foundations of our current economic crisis.

Forget about subprime mortgages and regulatory failures; those were merely stage props in a very large theatrical production.  The plot line was the massive accumulation of credit across all sectors of society and an associated failure to save and invest.

Under the careless watch of Greenspan and then Bernanke, the total amount of debt in the US doubled from $26 trillion at the beginning of 2000 to $52 trillion at the end of 2009.

On Christmas Eve, while nobody was supposed to be watching, the Treasury Department lifted the bailout ceiling on Fannie and Freddie from an already appalling $400 billion to an unlimited amount.

In 2007, I denounced the entire bailout as little more than a looting operation.  I appreciate that some consider the bailouts as necessary to prevent a wholesale liquidation/collapse of the entire economy, and I even share some sympathy with that view.  However, I humbly submit that similar actions could have been taken without enormously enriching the very same parties that either caused the disaster or unwisely invested their money with the companies that did.  Both sets of participants deserved to learn a very expensive lesson, not get bailed out at enormous expense to future taxpayers and national prosperity.

In 2008, I warned that the Fannie and Freddie bailouts were going to cost a lot more money than was claimed by the government, despite the fact that the then-director of the Congressional Budget Office, Peter Orszag, firmly declared that there was only a 5% chance that taxpayers could lose more than $25 billion.

Note:  This is most of a recent Martenson Report that I am making public after numerous requests to do so.  Normally I reserve such reports for at least several months before general release. I’ve only left off my conclusions about what this all implies about the future. One member from Germany (thank you Michael!) has translated this piece into German and that appears as a downloadable attachment at the bottom of the article.

Preamble: I normally avoid writing on Global Warming/Climate Change as a topic for discussion because it tends to be a heated topic for many people on both sides, which can work against collaborative solutions. This article is not about global warming and/or the science behind it, and it is not my intention to discuss those ideas here.

I want to point out that a massive discrepancy exists between the official pronouncements emerging from Copenhagen on carbon emissions and recent government actions to spur economic growth.

Before and during Copenhagen (and after, too, we can be sure), politicians and central bankers across the globe have worked tirelessly to return the global economy to a path of growth.  We need more jobs, we are told; we need economic growth, we need more people consuming more things.  Growth is the ever-constant word on politicians’ lips.  Official actions amounting to tens of trillions of dollars speak to the fact that this is, in fact, our number-one global priority.

But the consensus coming out of Copenhagen is that carbon emissions have to be reduced by a vast amount over the next few decades. 

These two ideas are mutually exclusive.  You can’t have both.

There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

      Ludwig Von Mises

It’s time to face facts.  Washington DC is out of control.  Spending is breaking all records, the deficit is climbing higher and higher, and the general populace is voicing graver doubts about the deficit and mounting debts, even as politicians drag the country even deeper into a financial pit.

In 1981, the federal debt first crossed the $1 trillion dollar mark, never to look back.  And now, here in 2009, lawmakers are considering boosting it by as much as $1.9 trillion in one fell swoop, with the hope (fingers crossed) that nobody will notice if they do it over the holidays.  Their calculations in deriving the $1.9 trillion number appear to not involve any considerations about what is best for the long-term fiscal health of the country, but whether the amount will be sufficient to make it past the mid-term elections.