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 is 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 hope of a second-half rebound. There were only 162k jobs created last month. What’s 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 was going to rebound from the pitiful 1.4% growth rate experienced in the first six months of this year.


General view taken from a container bridge shows the Container Terminal Burchardkai at Hamburg harbor in this January 14, 2008 file photo.

Photo: REUTERS/Christian Charisius/Files (GERMANY)

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 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. This would bring about real and lasting growth because it would not only ameliorate our debt burden but also; stabilize the dollar, keep interest rates low, reduce our tax burden, and eliminate the threat of runaway inflation. Those conditions are the only real progenitors of a healthy economy.

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Unfortunately, since this real solution would also include a short but nasty depression, politicians won’t allow it to occur. Instead, our government and Fed would rather continue to promulgate, to a Wall Street community that is more than willing to believe, that a recovery in GDP is just around the corner. And that it would be foolish to stop borrowing and printing money now that growth (in their opinion) is about to achieve “escape velocity”—whatever that means.

More debt and more inflation are constantly being shoved down our throats without our consent. Nevertheless, the market always trumps government interventions…and eventually it will eschew our debt and currency. This means investors must protect themselves by owning PMs from the inevitable economic chaos that is sure to come soon.

For more information go to Pento Portfolio Strategies