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Five Things: The Economic Crisis Takes a Virulent Turn


Unfortunately, the cure is worse than the disease itself.


1. The Economic Crisis Takes a Virulent Turn

The word credit comes from the Latin "credere" which means "to believe, or to trust." That's really all you need to know about the modern financial system. When the "credere" is gone, the whole thing unravels, and it works both ways, from lender to borrower, and from borrower to lender.

Now we've arrived at the point where that belief, "credere" -- stretched to its limits by policies of endless credit expansion over the past two decades -- has been weakened to such an extent that it has developed what may be likened to an autoimmune disorder; a condition where the immune system mistakenly attacks itself, destroying even healthy tissue in the process.

I was reminded of that comparison this morning when reading the text of Federal Reserve Chairman Ben Bernanke's economic outlook speech delivered to the Economic Club of New York today. Bernanke didn't make it through the first sentence without referring to the financial crisis as a virus.

"When I last spoke at the Economic Club of New York a little more than a year ago, the financial crisis had just taken a much more virulent turn," Bernanke said. The comparison isn't at all far-fetched, and understanding how a virus operates, and how doctors treat it, is helpful in grasping the nature of our own economic autoimmune disorder.

Under normal circumstances, say, without excessive credit expansion policies, the system's immunity defenses would attack and destroy toxic substances -- such as subprime mortgages -- and leave the healthy tissue alone. Unfortunately, an autoimmune disorder often results in the destruction of the body itself (the financial system), or abnormal growth of an organ (government and regulation), and/or changes in an organ's function (the banking system).

As government bureaucrats trapped within the framework of their fiat currency-based operating systems, central bankers have little choice but to focus on the symptoms our virus presents, a virus that was unleashed on the patient by their own doing, without recourse to either irony or shame. And so they attempt to cure the symptoms of the virus over and over again without recognizing that the cure is worse than the disease itself; it only suppresses the symptoms for a brief time before they return with greater severity.

Bernanke sounds more like a physician than a central banker when he says the following:

The flow of credit remains constrained, economic activity weak, and unemployment much too high. Future setbacks are possible. Nevertheless, I think it is fair to say that policymakers' forceful actions last fall, and others that followed, were instrumental in bringing our financial system and our economy back from the brink.

After all, he's talking about a circulatory system -- one in which credit functions as the blood flow -- where the flow remains restricted, the body weak, fever high. Unfortunately, while the severity of the symptoms has temporarily passed, the virus lingers, building up strength for the next attack. Judging by retail sales, that attack may begin sooner than Bernanke and other optimists think.

2. The Entrails of Retail Sales

Optimists were out in full force after retail sales were reported this morning, citing the fact that headline retail sales rose more than expected in October. Sure, the usual caveats -- "mostly due largely to a big rebound in auto sales" -- were present, but the headlines were largely positive ... and with the market itself quickly tacking on more than 1.5 %, it was hard not to think maybe they were correct.

The reality, however, is that when you look inside the report, it is clear that broader consumer spending remains under pressure. Excluding auto sales, retail demand rose 0.2%, half of the expected 0.4% rise. The main sticking point, however, is that the government revised the September performance down to show a 2.3% decline, from the 1.5% drop initially reported. Ooops.

The 0.2% increase in retail sales excluding autos was down from a 0.4% rise in September and was the weakest showing since a 0.5% drop in July. Sales also fell 0.8% at furniture stores and 0.6% at electronics and appliance stores, Associated Press reported.

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