The Beginning of the End - Or the End of the Beginning

Sorry to steal from the mighty Winston C. but some facts are coming together that tell me that we are at the end of the beginning of a true recovery.

First, federal tax revenues are up (thank you tepid recovery) and federal spending is down, at least slightly (thank you Sequester!). This reduces what in the old days we called "Crowding Out" which I discussed here and here some time ago.

Second, bank loans to small businesses are up which I discussed here. (The Federal Reserve does not "print" money. It creates banking reserves and the banks then create money by making loans. Cullen Roche had a great comment on this when said that the government has privatized the creation of money.) This is a very powerful stimulant to the money supply in the real world, not in Federal Reserve Land.

Third, the market is noticing. This morning uber-investor David Tepper, being interviewed on CNBC noticed the falling rate of growth of the government's need for money while at the same time the Fed is still creating excess reserves (through QE) and the infamous money multiplier may be kicking in. In paraphrase I lifted from Seeking Alpha he said, 

The U.S. budget deficit over the next 6 months will only be $100B, while the Fed is scheduled to buy about $500B. That's $400B coming out of the bond market and going to investors who can buy more fixed-income, more real estate, more stocks.

 What does that mean? Less money in the hands of inefficient governments and more money in the hands of efficient businesses. What does that mean? Good old-fashioned growth.

Fourth, Obama is now embroiled in scandals. I'm not here to comment on the scandals or Obama. He is, though, seen as aggressively hostile to free markets and any political damage to him will be taken by market makers as a positive sign for markets.

I'm cautiously optimistic that this is the end of the beginning.

Is This the Beginning?

A problem with the Federal Reserve's policies of the last few years has been the lack of a multiplier effect of the easy money (aka Quantitative Easing). The Fed works with the monetary base and the rate at which banks load money in the base creates what's called the velocity of money. This velocity for a long time.

Money goes into the economy when banks in the Federal Reserve system lend against their reserves that make up the monetary base. The monetary velocity has been falling for years and is a key marker of why the Fed has been pushing ropes with quantitative easing.

So, is this changing now? Cullen Roche of Pragmatic Capitalism reports that loans have been growing recently.  If so, this means the money supply gas pedal may finally be pressed down. The recent swing in the financial markets from defensive to cyclical stocks is another confirming indicator.

On balance, this is very good news. Now let's watch for the first tickling signs of our old friend, inflation.

Because Tom Said So - Jefferson on Public Debt

I've posted this before but it bears repeating. Here's our third president on the topic of public debt. From this point on, his words speak for themselves.

“To preserve our independence, we must not let our rulers load us with perpetual debt. We must make our selection between economy and liberty or profusion and servitude.

If we run into such debts as that, we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are.

Our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses; and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account; but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers.

Our land-holders, too, like theirs, retaining, indeed, the title and stewardship of estates called theirs, but held really in trust for the treasury, must wander, like theirs, in foreign countries, and be contented with penury, obscurity, exile, and the glory of the nation.

This example reads to us the salutary lesson that private fortunes are destroyed by public, as well as by private extravagance. And this is the tendency of all human governments.

A departure from principle in one instance, becomes a precedent for a second, that second for a third, and so on, till the bulk of society is reduced to be mere automatons of misery, to have no sensibilities left but for sinning and suffering.

Then begins, indeed, the bellum omnium in omnia, which some philosophers, observing to be so general in the world, have mistaken it for the natural, instead of the abusive state of man.

And the forehorse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression.”

– Thomas Jefferson