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Posts Tagged ‘QE2

Gold and silver: We were right – they were wrong

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by Brandon Smith of Alt Market
Posted July 25, 2011

ONLY NOW, AFTER THREE YEARS OF ROLLER COASTER MARKETS, EPIC DEBATES, and gnashing of teeth, are mainstream financial pundits finally starting to get it. At least some of them, anyway.

Precious metals have continued to perform relentlessly since 2008, crushing all naysayer predictions and defying all the musings of so called “experts”, while at the same time maintaining and protecting the investment savings of those people smart enough to jump on the train while prices were at historic lows (historic as in ‘the past 5000 years’).

Alternative analysts have pleaded with the public to take measures to secure their hard earned wealth by apportioning at least a small amount into physical gold and silver. Some economists, though, were silly enough to overlook this obvious strategy. Who can forget, for instance, Paul Krugman’s hilarious assertion back in 2009 that gold values reflect nothing of the overall market, and that rising gold prices were caused in large part by the devious plans of Glen Beck, and not legitimate demand resulting from oncoming economic collapse.

To this day, with gold at $1600 an ounce, Krugman refuses to apologize for his nonsense. To be fair to Krugman, though, his lack of insight on precious metals markets is most likely deliberate, and not due to stupidity, being that he has long been a lapdog of central banks and a rabid supporter of the great Keynesian con. [And he a Nobel Prize winner!] Some MSM economists are simply ignorant, while others are quite aware of the battle between fiat and gold, and have chosen to support the banking elites in their endeavors to dissuade the masses from ever seeking out an alternative to their fraudulent paper. The establishment controlled Washington Post made this clear with its vapid insinuation in 2010 that Ron Paul’s support of a new gold standard is purely motivated by his desire to increase the value of his personal gold holdings, and not because of his concern over the Federal Reserve’s destructive devaluing of the dollar!

So, if a public figure owns gold and supports the adaptation of precious metals to stave off dollar implosion, he is just trying to “artificially drive up his own profits”. If he supports precious metals but doesn’t own any, then he is “afraid to put his money where his mouth is”. The argument is an erroneous trap, not to mention, completely illogical.

Numerous MSM pundits have continued to call a top for gold and silver markets only to be jolted over and over by further rapid spikes. Frankly, it’s getting a little embarrassing for them. All analysts are wrong sometimes, but these analysts are wrong ALL the time. And, Americans are starting to notice. Who beyond a thin readership of mindless yuppies actually takes Krugman seriously anymore? It’s getting harder and harder to find fans of his brand of snake oil.

Those who instead listened to the alternative media from 2007 on have now tripled the value of their investments, and are likely to double them yet again in the coming months as PM’s and other commodities continue to outperform paper securities and stocks. After enduring so much hardship, criticism, and grief over our positions on gold and silver, it’s about time for us to say “we told you so”. Not to gloat (ok, maybe a little), but to solidify the necessity of metals investment for every American today. Yes, we were right, the skeptics were wrong, and they continue to be wrong. Even now, with gold surpassing the $1600 an ounce mark, and silver edging back towards its $50 per ounce highs, there is still time for those who missed the boat to shield their nest eggs from expanding economic insanity. The fact is, precious metals values are nowhere near their peak. Here are some reasons why…

Debt ceiling debate a final warning sign

If average Americans weren’t feeling the heat at the beginning of this year in terms of the economy, they certainly are now. Not long ago, the very idea of a U.S. debt default or credit downgrade was considered by many to be absurd. Today, every financial radio and television show in the country is obsessed with the possibility. Not surprisingly, unprepared subsections of the public (even conservatives) are crying out for a debt ceiling increase, while simultaneously turning up their noses at tax increases, hoping that we can kick the can just a little further down the road of fiscal Armageddon. The delusion that we can coast through this crisis unscathed is still pervasive.

Some common phrases I’ve heard lately: “I just don’t get it! They’re crazy for not compromising! Their political games are going to ruin the country! Why not just raise the ceiling?!”

What these people are lacking is a basic understanding of the bigger picture. Ultimately, this debate is not about raising or freezing the debt ceiling. This debate is not about saving our economy or our global credit standing. This debate is about choosing our method of poison, and nothing more. That is to say, the outcome of the current “political clash” is irrelevant. Our economy was set on the final leg of total destabilization back in 2008, and no amount of spending reform, higher taxes, or austerity measures, are going to change that eventuality.

We have two paths left as far as the mainstream economy is concerned; default leading to dollar devaluation, or, dollar devaluation leading to default. That’s it folks! Smoke em’ if you got em’! This train went careening off a cliff a long time ago.

If the U.S. defaults after August 2, a couple of things will happen. First, our Treasury Bonds will immediately come into question. We may, like Greece, drag out the situation and fool some international investors into thinking the risk will lead to a considerable payout when “everything goes back to normal”. However, those who continued to hold Greek bonds up until that country’s official announcement of default know that holding the debt of a country with disintegrating credit standing is for suckers. Private creditors in Greek debt stand to lose at minimum 21% of their original holdings because of default. What some of us call a “21% haircut”.

With the pervasiveness of U.S. bonds around the globe, a similar default deal could lead to trillions of dollars in losses for holders. This threat will result in the immediate push towards an international treasury dump.

Next, austerity measures WILL be instituted, while taxes WILL be raised considerably, and quickly. The federal government is not going to shut down. They will instead bleed the American people dry of all remaining savings in order to continue functioning, whether through higher charges on licensing and other government controlled paperwork, or through confiscation of pension funds, or by cutting entitlement programs like social security completely.

Finally, the dollar’s world reserve status is most assuredly going to be placed in jeopardy. If a country is unable to sustain its own liabilities, then its currency is going to lose favor. Period. The loss of reserve status carries with it a plethora of very disturbing consequences, foremost being devaluation leading to extreme inflation.

If the debt ceiling is raised yet again, we may prolong the above mentioned problems for a short time, but, there are no guarantees. Ratings agency S&P in a recent statement warned of a U.S. credit downgrade REGARDLESS of whether the ceiling was raised or not, if America’s overall economic situation did not soon improve. The Obama Administration has resorted to harassing (or pretending to harass) S&P over its accurate assessment of the situation, rather than working to solve the dilemma. Ratings company Egan-Jones has already cut America’s credit rating from AAA to AA+.

Many countries are moving to distance themselves from the U.S. dollar. China’s bilateral trade agreement with Russia last year completely cuts out the use of the greenback, and China is also exploring a “barter deal” with Iran, completely removing the need for dollars in the purchase of Iranian oil (which also helps in bypassing U.S. sanctions).

So, even with increased spending room, we will still see effects similar to default, not to mention, even more fiat printing by the Fed, higher probability of another QE announcement, and higher inflation all around.

This period of debate over the debt ceiling is liable to be the last clear warning we will receive from government before the collapse moves towards endgame. All of the sordid conundrums listed above are triggers for skyrocketing gold and silver prices, and anyone not holding precious metals now should make changes over the course of the next month.

What has been the reaction of markets to the threat of default? Increased purchasing of precious metals! What has been the reaction of markets to greater spending and Fed inflation? Increased purchasing of precious metals! The advantages of gold and silver are clear…

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Too big to fail? Ten banks own 77% of all U.S. banking assets

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from The Economic Collapse
Posted July 18, 2011 

BACK DURING THE FINANCIAL CRISIS OF 2008, the American people were told that the largest banks in the United States were “too big to fail” and that was why it was necessary for the federal government to step in and bail them out. The idea was that if several of our biggest banks collapsed at the same time the financial system would not be strong enough to keep things going and economic activity all across America would simply come to a standstill. Congress was told that if the “too big to fail” banks did not receive bailouts that there would be chaos in the streets and this country would plunge into another Great Depression.  Since that time, however, essentially no efforts have been made to decentralize the U.S. banking system.

Instead, the “too big to fail” banks just keep getting larger and larger and larger. Back in 2002, the top 10 banks controlled 55 percent of all U.S. banking assets.  Today, the top 10 banks control 77 percent of all U.S. banking assets.  Unfortunately, these giant banks are also colossal mountains of risk, debt and leverage. They are incredibly unstable and they could start coming apart again at any time. None of the major problems that caused the crash of 2008 have been fixed. In fact, the U.S. banking system is more centralized and more vulnerable today than it ever has been before.

It really is difficult for ordinary Americans to get a handle on just how large these financial institutions are.  For example, the “big six” U.S. banks (Goldman Sachs, Morgan Stanley, JPMorgan Chase, Citigroup, Bank of America, and Wells Fargo) now possess assets equivalent to approximately 60 percent of America’s gross national product.

These huge banks are giant financial vacuum cleaners. Over the past couple of decades we have witnessed a financial consolidation in this country that is absolutely unprecedented. This trend accelerated during the recent financial crisis. While the big boys were receiving massive bailouts, the hundreds of small banks that were failing were either allowed to collapse or they were told that they should find a big bank that was willing to buy them.

As a group, Citigroup, JPMorgan Chase, Bank of America and Wells Fargo held approximately 22 percent of all banking deposits in FDIC-insured institutions back in 2000. By the middle of 2009 that figure was up to 39 percent.

That is not just a trend – that is a landslide. Sadly, smaller banks continue to fail in large numbers and the big banks just keep growing and getting more power. Today, there are more than 1,000 U.S. banks that are on the “unofficial list” of problem banking institutions. In the absence of fundamental changes, the consolidation of the banking industry is going to continue.

Meanwhile, the “too big to fail” banks are flush with cash and they are getting serious about expanding. The Federal Reserve has been extremely good to the big boys and they are eager to grow. For example, Citigroup is becoming extremely aggressive about expanding and has been hiring dozens of investment bankers, dialing up advertising and drawing up plans to add several hundred branches worldwide, including more than 200 in major cities across the United States.

Hopefully the big banks will start lending again. The whole idea behind the bailouts and all of the “quantitative easing” that the Federal Reserve did was to get money into the hands of the big banks so that they would lend it out to ordinary Americans and get the economy rolling again. Well, a funny thing happened.  The big banks just sat on a lot of that money. In particular, what they did was they deposited much of it at the Fed and drew interest on it. Since 2008, excess reserves parked at the Fed have grown by nearly 1.7 trillion dollars.  Just check out the chart posted below….

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Overdose: The Next Financial Crisis

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by Jeff Harding
Posted July 16th, 2011

THIS MOVIE, ON THE SUBJECT OF THE CAUSES OF THE FINANCIAL CRISIS, was produced in Sweden by Henrik Devell, directed by Martin Borgs, and narrated by Johan Norberg, a Senior Fellow at Cato Institute, and a prominent libertarian and frequent guest on Stossel. It is very professionally done and entertaining. You can see it right here on The Daily Capitalist Theater. Turn your video setting up to 720p. It is a feature length film, 46 minutes, so sit back and enjoy it.

Here is a description of from their web site:

In times of crisis people seek strong leaders and simple solutions. But what if their solutions are identical to the mistakes that caused the very crisis? This is the story of the greatest economic crisis of our age, the one that awaits us.

When the world’s financial bubble blew, the solution was to lower interest rates and pump trillions of dollars into the sick banking system. “The solution is the problem, that’s why we had a problem in the first place”. For Economics Nobel laureate Vernon Smith, the Catch 22 is self-evident. But interest rates have been at rock bottom for years, and governments are running out of fuel to feed the economy. “The governments can save the banks, but who can save the governments?” Forecasts predict all countries’ debt will reach 100% of GDP by next year. Greece and Iceland have already crumbled, who will be next?

The storm that would rock the world, began brewing in the US when congress pushed the idea of home ownership for all, propping up those who couldn’t make the down payments. The Market even coined a term, NINA loans: “No Income, No Assets, No Problem!” Enter FannieMae and FreddieMac, privately owned, government sponsored. “Want that vacation? Wanna buy some new clothes? Use your house as a piggie bank!” Why earn money to pay for your home when you can make money just living in it? With the government covering all losses, you’d have been a fool not to borrow.

The years of growth had been a continuous party. But when the punchbowl ran dry, instead of letting investors go home to nurse their hangovers as usual, the Federal Reserve just filled it up again with phoney money. For analyst Peter Schiff, the consequence of the spending binge was crystal clear: “we’re in so much trouble now because we got drunk on all that Fed alcohol”. Yet along with other worried experts, he was mocked and derided during the boom.

Have you taken out a mortgage, invested capital or bought shares? If you have, likelihood is you lost out in the latest bust. Governments promised decisive action, the biggest financial stimulus packages in history, gargantuan bailouts: but what crazed logic is this, propping up debt with…more debt? This documentary brings an entirely fresh voice to the hottest topic of today.

Feigning cluelessness, Helicopter Ben fools no one

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by Rick Ackerman
Posted ‘Rick’s Picks’ June 23, 2011

HELICOPTER BEN WAS DEEP IN DENIAL YESTERDAY FOLLOWING A TWO-DAY FED meeting, telling reporters [see below,article from SeattlePI] he’s puzzled by recent signs of deterioration in the economy.  “We don’t have a precise read on why this slower pace of growth is persisting.” Is this guy a hoot, or what?

Earth to Bernanke: The Great Recession never ended!  In fact, the term “Great Recession” itself is popularly used by plain folks to assert that economic hard times are very much with us, notwithstanding brazen statistical claims to the contrary. As anyone can see, many trillions of stimulus dollars have yet to improve a dismal employment picture one iota — only kept it from getting worse; nor have those “dollars” boosted household incomes or real estate prices. What they have boosted are bank profits and the prices of stocks, commodities and basic goods

Surprising no one, Mr. Bernanke also failed to mention the still-deflating housing market as a possible reason for the punk economy. Who but a Fed chairman could fail to connect the dots? It seems not to have occurred to him that consumers are no longer binging because their homes have continued to plummet in value – another 4.2% in the last quarter alone.

In a policy statement issued after the meeting, the Fed muckety-mucks blamed the usual suspects for the weakening economy: higher energy prices and the disaster in Japan. Perhaps Bernanke had second thoughts about trotting out such a lame explanation, however, and that’s why he deflected the matter by feigning cluelessness. Whatever the case, although he further widened the cognitive gap between the government’s spinmeisters and the working stiff, the Fed chief may have bought time to feign yet more cluelessness when he admitted that the ”sluggish recovery” could linger into next year.

We wonder what he sees for 2012 that could change things for the better, since even realtors and developers who are usually giddy with optimism seem to have accepted that there isn’t yet any light at the end of the tunnel – at least, none that can be discerned by the uncompromised eye. Unfortunately for Mr. Bernanke, no matter how little he tries to say, he’ll have to give away his game when QE2 sunsets at the end of the month. You can bet that whatever form QE3 takes, it will be called something else. Bernanke and Obama can count on the mainstream media to go along with the ruse and to tell us as often as needed that the Emperor is wearing a fine suit of clothes, but we’ll look to Europe’s editorialists to call the next phase of Fed monetization by its proper name.

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Growth in despair the only U.S. “growth”

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by Jeff Nielson
Posted originally June 9th, 2011

FOR TWO YEARS WE HAVE BEEN FORCED TO LISTEN TO THE DESPICABLE FICTION THAT THE U.S. ECONOMY is enjoying a “recovery”. I say “despicable” because if the U.S. government (and media talking-heads) hadn’t kept lying to the American people that “things are getting better” then the U.S. government would have been forced to actually engage in positive measures for the American people, and the overall U.S. economy.

Instead, Americans were subjected to “faux stimulus”, where the Obama regime sprayed $100’s of billions at the U.S. economy but where most of that money went into “food stamps”, unemployment benefits, or simply disappeared into the pockets of Wall Street bankers. There was virtually nothing done to directly “stimulate” employment growth – despite the worst unemployment problem in the U.S. since (at least) the Great Depression.

Now, as the U.S. economy is quite obviously turning lower again, Americans are finally shedding their “rose-coloured glasses” and beginning to view the U.S. economic nightmare for what it really is. That conclusion is strongly reinforced by a pair of statistics.

A CNN poll shows 48% of Americans predicting “another Great Depression in the next 12 months”. While that percentage might have been slightly worse during the worst of the 2008 crisis, this new (extremely pessimistic) number comes after more than two years of a supposed “economic recovery”. Obviously if there had been any real improvement in the economic fundamentals at the household level there couldn’t have possibly been such a serious erosion of public sentiment.

That first expression of despair is backed up a statistic at least as bleak, if not more so. A recent U.S. survey found that 85% of U.S. college graduates were forced to move back home to live with their parents. If there was one, single number which could shriek “no jobs” in the U.S. more clearly than any other, this is it.

At the other extreme in the realm of education, roughly ¼ of all young, adult Americans are high school drop-outs, with that number rising to about 50% in the under-funded school districts into which most of the U.S.’s ethnic minorities are funneled. Combining the two numbers, roughly half of all the young adults in the U.S. are unemployed college graduates forced to live at home, or high-school drop-outs whose best “hope” for the future would be some menial, minimum-wage job. Those numbers don’t tell us that a U.S. Great Depression is “coming in the next 12 months”, but instead echo what I have been writing all along: the U.S. entered a “Greater Depression” in 2008 – from which it has never emerged.

This conclusion is easily reinforced once people understand how easy it is for governments to fake “economic growth”. All it takes is for governments to deliberately underestimate inflation – and then each percentage-point by which inflation is understated instantly becomes a percentage-point of “GDP growth”. As I have explained many times previously, all GDP estimates must be fully “deflated” by the prevailing rate of inflation, otherwise price increases are transformed into “economic growth”.

With real U.S. inflation being (deliberately) “underestimated” by at least 6%, while the latest number for “GDP growth” was an anemic 1.8%, you don’t require a degree in mathematics to figure out that not only is there no “growth” in the U.S. economy, but it is once again shrinking rapidly.

Obviously the “future” of any/every economy is its next generation, and here the U.S. simply has no hope, at all. Compounding the massive, structural unemployment of U.S. college graduates, soaring eduction costs and ever-less government “assistance” mean that U.S. college-grads are now far more indebted than any other graduates in the history of our species.

The average debt-load for a U.S. college graduate is now $50,000. Indeed, U.S. student loans have been exploding upward with such ferocity that total U.S. student loan debt has exceeded total U.S. credit-card debt for the first time in history. If you’re an unemployed U.S. college graduate, living with your parents, and staring at a $50,000 ‘mortgage’ on your future, it doesn’t require much imagination to predict a “Great Depression” in the next 12 months.

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The Economic Death Spiral has been triggered

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by Gordon T. Long
Posted originally May 27, 2011 
This posting has been abbreviated slightly

For nearly 30 years we have had two Global Strategies working in a symbiotic fashion that has created a virtuous economic growth spiral. Unfortunately, the economic underpinnings were flawed and as a consequence, the virtuous cycle has ended.  It is now in the process of reversing and becoming a vicious downward economic spiral.

One of the strategies is the Asian Mercantile Strategy.  The other is the US Dollar Reserve Currency Strategy. These two strategies have worked in harmony because they fed off each other, each reinforcing the other. However, today the realities of debt saturation have brought the virtuous spiral to an end.

One of the two global strategies enabled the Asian Tigers to emerge and grow to the extent that they are now the manufacturing and potentially future economic engine of the world. The other allowed the US to live far beyond its means with massive fiscal deficits, chronic trade imbalances and more recently, current account imbalances. The US during this period has gone from being the richest country on the face of the globe to the biggest debtor nation in the world. First we need to explore each strategy, how they worked symbiotically, what has changed and then why the virtuous cycle is now accelerating into a vicious downward spiral.

ASIAN MERCANTILE STRATEGY

The Asian Mercantile Strategy started with the emergence of Japan in the early 1980s, expanded with the Asian Tigers in the 90s and then strategically dominated with China in the first decade of this century. Initially, Japan’s products were poor quality and limited to cheap consumer products. Japan as a nation had neither the raw materials, capital markets, nor domestic consumption market to compete with the giant size of the USA. To compensate for its disadvantages, Japan strategically targeted its manufacturing resources for the US market.  By doing this, the resource poor island nation took the first step in becoming an export economy – an economy centered on growth through exports versus an economy like the US, where an excessive 70% of GDP is dependent on domestic consumption.

The strategy began to work as Japan took full advantage of its labor differential that was critical in the low end consumer product segment, which it initially targeted. Gradually, as capital availability expanded, Japan broadened its manufacturing scope, moving into higher levels of consumption products requiring higher levels of quality and achieving brand recognition. Success soon became a problem as the Yen began to strengthen. To combat this the Japanese implemented the second critical component of what became the Asian Mercantile Strategy template. It began to manipulate its currency by aggressively intervening in the forex market to keep the yen weak.

Further success forced Japan to move to a more aggressive forex strategy to maintain a currency advantage. It was strategically decided that Japan’s large and growing foreign reserves were to be re-invested back into the US. By buying US Agency and US Treasury debt instruments it kept the dollar strong relative to the Yen. The more successful Japan became, the more critical this strategy became. In the 80s Japan dominated global expansion as it brought US automotive and consumer electronics’ manufacturing to its knees.

By the early 90s the Japanese labor advantage was quickly being lost to the Asian Tigers because the Yen versus the Asian Tiger currencies was too strong. The Asian Tigers were following the Japanese model. The Asian Crisis in 1997 re-enforced to all Asian players the importance of holding large US dollar denominated reserves. This further accelerated and reinforced the strategy of purchasing US Treasury and Agency debt. With China’s acceptance into the World Trade Organization (WTO),  China emerged on the scene in full force. Armed with the lessons of the last twenty years, China took the Asian Mercantile Strategy to another level in its ongoing evolution.

The results were one of the largest and fastest transfers of industrial power ever to occur in history.  In ten years, China assumed the role of the world’s undisputed industrial powerhouse in the world.

The virtuous cycle further accelerated as Asia became more dominant because its reserves, reinvested back in the US, began to have a larger and larger impact. The more Asia bought US Treasury and Agency debt, the lower US interest rates were forced, allowing Americans to finance more and more consumption. The more Asia bought US securities, the stronger the US dollar was against Asian currencies, and therefore the cheaper Asian products were relative to US manufactured products. It was a self reinforcing Virtuous Cycle. The result was a staggering 46,000 factories transferred from the US to Asia over the same ten year period. The transfer set the stage for chronic unemployment and public funding problems, but it was temporarily hidden by equally massive increases in debt spending.

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Market plummets, but has anything really changed?

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by Rick Ackerman
Originally posted June 2, 2011

WE SEARCHED IN VAIN FOR NEWS YESTERDAY that might have explained the nearly 300-point drop in the Dow Industrials.  Granted, there were reports of dramatic weakness in home prices and a downward revision in Goldman’s GDP forecast for Q2, to 3% from an earlier 3.5%. But that stuff is old hat, at least in a newsletter world that has always viewed the recovery story as an unpersuasive hoax. And what’s the big deal anyway about a 4.2% drop in home prices when it seems entirely likely they will fall by a further 50% before the crisis ends?

To expect a better outcome is folly when residential real estate has already fallen 35% despite a multi-trillion dollar “stimulus” by the central bank. As for the GDP figure that supposedly knocked investors for a loop, the numbers were never even remotely credible to begin with, extrapolated as they undoubtedly were from the same murky sources that the Labor Department uses to understate unemployment each month by more than half. Why worry about economic reports that nearly everyone except the editors of the Wall Street Journal and the New York Times know are completely made-up?  It beats us.

Nor can we fathom why the supposed termination of QE2 later this month keeps surfacing in the mainstream media as a source of angst.  Does anyone actually believe the government will not continue to monetize Treasury debt as though there will be no tomorrow? The Federal Reserve has become Treasury’s biggest “buyer” by far and will soon surpass China and Japan combined in that category. Does that sound like a good time to go cold turkey?  That’s what we thought – and we’ll lay odds on it.

Meanwhile, although some have argued that QE2 has been a bust, who besides Obama, Bernanke and a few benighted big-city newspapers would take the other side?  Perhaps in a world less enamored of bizarre ideas about the source of wealth and prosperity, we would expect investors to enthusiastically welcome an end to quantitative easing. Instead, economists who should know better – including a Nobelist who has asserted, apparently not in jest, that the stimulus was not large enough – continue to vest their hopes in Big Government to extricate us from this mess.

The news media have parroted and promoted such claptrap, but who even believes them any more?  Here’s the Wall Street Journal yesterday, soft-pedaling the recession-or-worse — and we can’t decide whether they were displaying cluelessness, or pure Goebbels: “The U.S. economy might be on a slower path to full health as manufacturing cools, the housing market struggles and consumers keep a close eye on spending.”  Talk about understatement.  If these guys are indeed shilling for Obama, Bernanke et al., at least they cannot be accused of not having their hearts in it.