Michael Pento - Expect Economic Chaos & Financial Collapse

Michael Pento - Expect Economic Chaos & Financial Collapse

Pento: “Each of the last five years Wall Street pundits have predicted, and our government has promised, that a second half recovery in the economy will occur.  Since 2009, they have come up with different reasons why GDP would boom in Q3 & Q4 of that year, and that this time a different and better outcome would be in store.  This year, the reason we are supposed to believe in a second half recovery is because the damage from the Sequester cuts will wear off starting in -- drum roll -- July.

But the truth is there hasn’t been any significant damage to the economy from the Sequester.  This is because cutting government spending leaves more money in the hands of the private sector.  Also, the Fed has continued to pump $85 billion into the economy, even though there has been a small contraction in the deficit.

“So there hasn’t been any drag on GDP from which we will rebound.  However, what is news is that there has been a surge in bond yields and oil prices, which will crimp consumers’ ability to spend.  But those cheerleaders choose to ignore these facts.

The release of the NFP report for July is already dashing the hopes of a second-half rebound.  There were only 162k jobs created last month.  What’s even worse is that more people left the workforce, aggregate hours worked fell, and average hourly earnings declined.  These aren’t numbers that would even hint that the economy is going to rebound from the pitiful 1.4% growth rate experienced in the first six months of this year. 

Of course the answer we get from government is to do more of the same thing that isn’t working.  More debt, more money printing, and a further extension of asset bubbles are the solutions they provide.  It doesn’t matter that five years of zero percent interest rates and QE have failed to spur real growth.  Their prescription only leads to a zombie economy that limps along because it is based on creating consumption through rising equity and home prices, and not through sustainable income growth. 

The strategy deployed by the government prevents the economy from undergoing a genuine healing.  Deflation, which has now become the archenemy of the Fed, is the real solution.  We must allow our total debt—which stands at 350% of GDP—to contract to a more sustainable level (somewhere well below 200% of our economy).  In order to bring aggregate debt levels down to size, we must first let the free market set interest rates, shrink the money supply, and allow asset prices to fall. 
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