You Can Fool...

"Dust-storm-Texas-1935". Licensed under Public domain via Wikimedia Commons 

"You can fool all the people some of the time, and some of the people all the time, but you cannot fool all the people all the time." - Abraham Lincoln.

Pumping the monetary system with liquidity doesn't create real wealth and trying to solve a problem with the root cause of that very problem isn't going to derive a solution either. High debt leveraging was the root cause of the previous financial crisis of 2008. “Easy money” fueled the sub-prime mortgage market, high risk lending to individuals with low credit ratings. These risky loans, where the probability of a default on payment is high, were then bundled together with less risky loans, thereby creating a new asset class known as Colatralised Mortgage Backed Securities (CMBS). Then to make the whole shebang look hot, lipstick was put on the security. Some of the major credit rating agencies granting the CMBS with the highest rating score of Aaa. With premium credit rating scores even the most conservative investors jumped on the CMBS bandwagon as far a field as Norway. We know how this all ended ,the sub-prime mortgage market collapsed with massive defaults, the CMBS bubble popped and the credit squeeze took hold, which affected many developed economies.

So perhaps the root cause of the problems leading to the 2008 financial crash and the great recession that ensued may have been a concoct of the following; credit rating agencies that were overoptimistic about the creditworthiness of debt and a financial regulatory body that looked the other way. Then throw into the mixer the main ingredient, easy credit, which led to excessive risk taking and you have the makings of a financial crisis.

But if high debt leveraging was the root cause of the last financial crisis, then why are the monetary authorities going down the same route of loose monetary policy this time round. Why are they expecting a different result, even though it’s becoming blatantly obvious to many of us that monetary policy is failing miserably to get the real economy out of the quagmire. “Insanity is doing the same thing over and over again and expecting different results,” Albert Einstein.

When you have central bankers and government officials banging on about how fine things are, that the “recovery” is taking hold and the economy is on the mend, perhaps it pays to be suspicious. If the economy is really improving and doing well people don't need erudite politicians and the monetary authorities telling them that. In a truly healthy economy people feel secure in their jobs, they receive regular pay rises, they spend money and consume goods and services, businesses invest and jobs are plentiful.

But that is not happening. Let's be frank, Europe is in a depression with most countries tinkering on the abyss. Eurozone unemployment is at 11.5 percent in August and it hasn't even dropped by a percentage since its peek in February last year.

If we look at youth unemployment (under 25s) in the eurozone the figure is both alarming and a disgrace. Greek youth unemployment is 51.5 percent. But that is now second to Spain which comes at 53.7 percent. Admittedly, not every state in euro is the same. Germany's youth unemployment is at 7.6 percent and Austria 7.8 percent, however, this figure is growing every month.

A nation's youth is its future lifeblood, they are the next generation and if they’re not working, not saving and not consuming then retail sales will be poor, home sales will be weak and less cars will be bought. That all translates to less revenue into the government coffers to pay for all this debt which has been accumulating over the last six years.

Last year the eurozone officials were screaming out that everything was fine, that the bloc was in a recovery and they were heading out of the recession and all was ticking over nicely.

Today we know that is not the case. Moreover, we are now seeing European numbers being fabricated. Recently, Euro Stat admitted publicly that the inflation date was wrong, they apologised and said that they would redo all the numbers. Incidentally, this type of “error” also occurred with recent Canadian unemployment statistics while in the US these “errors” in data frequently occur. Why are the statistics offices muddling up the data? Could it be that the government statistics don't match up with what is happening in the economy.

Despite the improving Gross Domestic Product (GDP) figures many people in the US, Germany and the UK don't feel better off. People are starting to feel that something is wrong, that things are not right and that the outlook doesn't look so good.

US consumer confidence has plunged to a record low of 86.0 it missed expectation of 92.5 biggest drop since January 2012, manufacturing output is starting to decline along with a drop in house prices. When people have part-time work with precarious conditions, they can't get credit and making it to the next month is challenging enough. In this environment, people are not looking at buying a new car, or taking on a mortgage to buy a new home.

But the mainstream, the Government and Central bankers won't come out and tell you it’s failing. In fact, it might not even be an exaggeration to say that loose monetary policy, pursued by the central banks may have just delayed the inevitable and added to the problem. The monetary authorities might have created an even bigger bubble this time, in equities, properties and bonds.

So what happens during the end game? The usual, the insiders get out of the market and the retailers get in. Typically, that happens when they realise that they can't fool all the people some of the time and some of the people all the time.