We are at a crossroads in the financial markets and the economy. Many are telling us that a recovery and new financial boom lie directly ahead of us. However unlike past recessions, the cleansing process inherent in a recession hasn't taken place. Debt hasn’t been paid off. It has actually increased. Savings haven’t been replenished. They’ve been depleted. Demand hasn’t retrenched. It has continued with the consumer still in a high state of consumption albeit through debt.
In reality, by inducing consumers to take on more debt and continue spending, the bubbles in stocks and real estate are being fed. So far, the bubble in stocks has failed to reinflate. All that has been accomplished is that a floor has been put underneath the financial markets, the so-called Greenspan Put. Real estate still remains in a bubble state with easy credit terms and low rates of interest.
The dollar still remains strong propped up by hot money from overseas. It is kept aloft by the illusion of new paradigm theories. Despite the drop in the financial markets and slippage of the economy into recession, adherence and belief in the “new paradigm” is still widely held.
We are living under illusions of economic and profit miracles. Any sign of an economic number that is improving is quickly seized upon as evidence supporting a recovery no matter how flimsy. On Thursday, GDP figures were revised upward; while on the same day, February auto sales dropped because of lower sales to rental car companies and a lack of interest by consumers. Also on Thursday, many companies warned of future profit shortfalls and a market rally was quickly routed.
This recession has seen the greatest drop in corporate profitability since the Great Depression. We continue to find new evidence of corporate duplicity. Enron may grab the headlines, but the practice of aggressive accounting and various shenanigans to deceive investors is still widespread. It may be one reason that the establishment has had problems with reinflating the market. At the moment, investors seem to be putting their faith in tangibles in the form of real estate.
This is what is behind the mammoth effort to keep hopes of the “new paradigm" alive. With the lack of literacy in economics and accounting, it is still possible to keep that hope alive. We are simply changing the benchmarks and standards by which we measure things. In that process, we distort and obfuscate reality. Investors are told to take comfort in the recession’s unusual brevity as evidence that today’s lofty stock prices are still justified.
We still live in a financial world that is surrounded by unsubstantiated, multiple bubbles. Excesses can be found everywhere throughout the financial system. All that is needed to deflate them is another shock to the system. I shudder to think how its failure and breakdown will be explained. With the public no longer economically literate, and with Congress completely oblivious to the perils that surround it, a scapegoat and simple explanation will be given for its failure.
Enron is the first of many that will be pilloried. With the death of literacy, the real reason for the system's failure will be conspicuously absent. It was the creation of economic and financial fiction made possible by the greatest monetary and credit boom in history.
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