Daily Investment Interpretations

July 7, 2010

2010-7-7:  After mo  The NASDAQ Composite powered upward 65.59 points (0.313%) to finish at 2159.47. The Dow vaulted 274.66 points 2.82%) to close above 10,000 at 10,018.28, and the S&P 500 advanced 32.21 points (3.13%) to end at 1,060.27. Oil hopped $2.50 to $74.49 a barrel, while Gold ended at $1,204. The VIX fell 2.67 to 26.98.
    President Reagan's budget director, David Stockman, has written this cogent and insightful article about the Great Depression: Inconvenient facts about austerity. In the article, he takes to task Nobel Laureate Joseph Stieglitz for claiming that federal spending cutbacks caused the Great Depression, adding, "Perhaps you might want to copy Professor Krugman while you're at it." He observes that federal spending in 1929 was a mere 3% of the nation's GDP ($104 billion in 1929). Furthermore, rather than falling, federal spending increased from $3.1 billion in 1929 to $4.6 billion in 1932, shifting from a sizable surplus. Instead (the author argues), the total value of private-investment-plus-durables-consumption-plus-exports fell from $32 billion in 1929 to $7 billion in 1932. He states that the Fed's easy-money policies in the '20s spawned a bubble: "But by 1929, the Fed had created such a massive bubble on Wall Street that corporations could obtain both equity and debt capital virtually for free. Consequently, industry got massively overbuilt, speculative real estate development was rampant, and inventory accumulation reached precarious levels." He continues, "In short, the Great Depression had nothing to do with fiscal policy mistakes. Instead, it was the product of a classic boom and bust cycle that originated in the inflationary finance policies of central banks -- first to fund the carnage of World War I with printing-press money and then to layer on the speculative merriment of the Roaring Twenties." "Thus, the fact that the stock of money fell by nearly 25% during the same period wasn't due to a policy mistake by the Fed in its provision of reserves; rather, the Fed found itself 'pushing on a string' in the face of massive loan liquidation owing to defaults and working capital contraction -- the same headwinds thwarting the Fed's hyperactive money string pushing today.
    His conclusion is the same as Todd Harrison's: our current problems stem from the creation of an enormous debt bubble encouraged by the easy-money policy of Alan Greenspan's Fed. Now (he says) we have to take our medicine. 
    Workers' salaries lost ground in past decade