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Tuesday, June 29, 2010

Dow Futures Down: Progressive Economics Feared

The DJIA will test four digits again as its hovering near 10000 again today. The Eurozone is again worried that everyone will be bankrupt soon.

Two days of little movement for U.S. stocks is likely to end Tuesday, with renewed worries over euro zone debt pushing overseas markets lower, as well as U.S. stock index futures.

The Dow, the S&P 500 and the Nasdaq all registered single-digit moves both Friday and Monday, but this morning's worries likely mean a sharply lower opening, and those worries have also sent many investors to U.S. Treasuries. The 2-year yield hit a record low in overnight trading, while the benchmark 10-year note's yield hit a 14-month low.

Let's all remember that the president attended the G20 and demanded that everyone else continue to spend.

Yet, the entire rest of the G20 rejected this idea wholesale. The only person at this point that thinks that Obama should continue to borrow and spend, besides Obama, is Paul Krugman.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.

And this third depression will be primarily a failure of policy. Around the world — most recently at last weekend’s deeply discouraging G-20 meeting — governments are obsessing about inflation when the real threat is deflation, preaching the need for belt-tightening when the real problem is inadequate spending.

The rest of the world has realized that endless spending of money the government doesn't have is not only inefficient but leads to borrowing and/or taxation and both of those are contractionary. As such, the rest of the world gave Obamanomics a chance and now it's being rejected entirely.


AG said...

So then who is being "blamed" here? Obama for spending too much, leading to inflation, or Merkel et. al. for not spending enough, leading to a collapse in demand?

If the market were worried about inflation, wouldn't stocks be going up? After all, stocks are statistically the best hedge against inflation. Instead people are pouring into treasuries, a flight to safety move implying lack of growth is feared.

Besides, how do you credibly expect people to believe "progressive economics feared" when in the past 5 days Congress killed both a second stimulus and Wall Street reform?

mike volpe said...

I think the markets are worried about bankruptcy contagion. That may or may not lead to inflation but at this point, the market reads it as contractionary.

You are worried about nonsense. The bottom line is that no one is buying what Obama is selling on anything, the economy included.

AG said...

I can understand if you think the market hasn't very much confidence in the Obama Administration to resolve the economic crisis, but are you seriously trying to get me to believe that investors are reacting to fear of bankruptcy purchasing more government debt?

mike volpe said...

I think the bond markets are responding to the policy makers acknowledgement that current policies will lead to debt contagion and their willingness to reverse course.

Mike said...

There is absolutely no choice but to go through deflation, but it will be because the entire world has reached its debt limit. The debt has to be written off or repaid before we can expand again. It will take a very long time for this to happen unless absolute disaster strikes and the entire monetary system collapses.

We cannot solve a debt deflation problem by going into more debt because the cause will not go away. Too much debt!