The deflation time-bomb

We are to about see how much George Bush really believes the “supply side” mumbo-jumbo he's been spouting for the last 7 years. Last week's Labor Department report confirmed that unemployment is on the rise (5%) and that corrective action will be required to avoid a long and painful recession. There's a good chance that the Chameleon in Chief will jettison his “trickle down” doctrine for more conventional Keynesian remedies like slashing interest rates, government programs, and tax relief to middle and low income people. On Monday Bush announced that his team of economic advisors was patching together an “Economic Stimulus Package” that will be unveiled later this month in the State of the Union Speech. The goal is to rev-up sagging consumer spending and slow down business contraction. Ironically, the UK Telegraph dubbed the stimulus plan Bush's “New Deal”. It's a shocking about-face for a president that has been clobbering the middle class since he took office and who balks at even providing temporary shelter for disaster victims. Now Bush is going to have to give away the farm just to keep the economy from crashing. Good luck. Clearly, the prospect of a system-wide meltdown in banking, real estate and equities has become a "Road to Damascus" moment for lame-duck George.

The uptick in unemployment is just the final part of an otherwise bleak economic picture. Manufacturing is hurting too. Last Wednesday, the December ISM Manufacturing Index plunged to 47.7, its lowest level in five years. The news put the stock market into a 200-plus nosedive and sent gold soaring over $800 per ounce. Since then, the news has gotten progressively worse. The market fell another 200-plus points on the Labor Dept's report on Friday, followed by 238 point jolt on Tuesday on rumors of (potential) bankruptcy at mortgage lending giant, Countrywide Financial, and a 2.6% plunge in pending housing sales from the National Association of Realtors. By the time ATT announced its fears of “reduced consumer spending” the market was already barrel-rolling towards earth in a sheet of flames.

The Dow Jones is now 10% off its yearly high, the official sign of a correction. More important, equities blew through their support levels indicating a basic change in the market's trajectory. Its a primary bear market now and any rebound will be temporary. There's still a lot of fat to be trimmed before overvalued stocks return to the mean. No wonder Bush is nervous.

The constant rate cuts and geopolitical jitters have sent gold skyrocketing. Since August 2006, gold has gone from $650 per ounce to $887; a whopping $237 in just 5 months. If that is not a indictment of the Federal Reserve and their “loosey-goosey” monetary policy; then what is? According to the Wall Street Journal “gold and oil have run almost in perfect tandem. The price of gold has risen 239% since 2001, while the price of oil has risen 267%. That means if the dollar had remained as 'good as gold' since 2001, oil today would be selling at about $30 a barrel, not $99.” (WSJ; 1-4-08)

That's right; the price of gas today is attributable to war, tax cuts and the relentless expansion of credit by the Federal Reserve---NOT OIL SHORTAGES!

Escalating energy prices are increasing the cost of food production which creates a self-reinforcing inflationary cycle. Additional rate cuts will only weaken the dollar further and put an even greater burden on maxed-out consumers.

Before he left on his “Victory Tour” of the Middle East, Bush said:

"When Congress comes back, I look forward to working with them, to deal with the economic realities of the moment and to assure the American people that we will do everything we can to make sure we remain a prosperous country."

The economi