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Morphine-Injected Economy: Patient Remains Bed-Ridden
Position yourself properly for "a gigantic public disaster"
By Bob Stokes
Fri, 27 Jul 2012 16:45:00 ET
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Financial markets sometimes have a knee-jerk reaction to news.
 
The market action of July 27 is an example. This is from CNBC:
 
Stocks suddenly accelerated their gains across the board Friday...following reports that the Bundesbank President may be in talks with ECB President Mario Draghi.
 
July 24 provides another example. The Dow Industrials cut losses from a 185-point decline to close 104 points lower after the Federal Reserve said there could be more economic stimulus.
 
Fed Leaning Closer to New Stimulus if No Growth Is Seen
New York Times, July 24
 
But here's what a former Treasury Department senior official told CNBC on July 18:
 
QEs are like morphine. It makes you feel better, makes the headlines look better, pushes up risk asset prices but doesn’t translate into real economic growth.
 
Another round of quantitative easing will only delay the inevitable economic pain.
 
As Bob Prechter recently observed:
 
Since 2007, the Fed has monetized $2 trillion worth of debt; the federal government has borrowed another $7 trillion; and it has pumped out $1 trillion worth of student-loan credit.
 
In the long run you can’t fight a systemic debt overload by piling on more debt. The Fed and the government are shifting the burden of trillions of dollars’ worth of debt obligations from reckless creditors onto innocent savers and hapless taxpayers...Perhaps this policy temporarily prevented a series of big institutional disasters, but it was only at the ultimate price of a gigantic public disaster.
The Elliott Wave Theorist, July 2012
 
The evidence suggests that the previous QEs have failed and deflation is taking over.
 
So says the Washington Post on July 27:
 
US economic growth slowed to 1.5% in last 3 months
 
The article went on: 
 
American consumers cut back sharply on spending in recent months, slowing the nation's already sluggish rate of economic growth.
 
Many people do not realize how long U.S. economic growth has been slowing. Moreover, this slowdown has a parallel to the lead-up to the Great Depression:
 
 
 
Observe the dramatic slowing of the nominal economic growth rate in the 1920s as compared to the period from 1900 to 1920, despite a stock boom and a new all-time high in the Dow Jones Industrial Average. Now look at the slower nominal growth during the period from 1990 to the present as compared to the 1970s and 1980s, again despite a stock boom and a new all-time high in the DJIA. These conditions are parallel. The first period of slowing preceded the Great Depression. Its modern-day counterpart is already underway.
The Elliott Wave Theorist, January 2012
 
Chapter 14 of the second edition of Prechter's Conquer the Crash has the title:
 
Making Preparations and Taking Action
 
The text starts by saying:
 
The ultimate effect of deflation is to reduce the supply of money and credit. Your goal is to make sure that it doesn't reduce the supply of your money and credit. The ultimate effect of depression is financial ruin. Your goal is to make sure that it doesn't ruin you.
 
So how do you prepare to take the right actions before the worst of the deflationary depression sets in? 

Tags: Ben Bernanke, debt, deflation, economic depression, Federal Open Market Committee (FOMC), great depression, gross domestic product (GDP), Robert Prechter, U.S. Federal Reserve (the Fed)
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