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Todd Harrison: The flaws in what we call a 'recovery'

amny

amny

It’s Freaky, it’s Friday and let’s face it; most of us already have cast one eye towards the weekend.  Here are a couple of things that will matter when we arrive back at our desks on Monday.

The debt ceiling: What’s the deal?

There’s a massive difference between a legitimate economic recovery and credit-fueled growth.  This has been the case since the back of the Y2K tech bubble and the effects have been cumulative, insofar as the debt ceiling — the total debt the government is allowed to issue — continually has been raised to accommodate policy.

With a presidential election on the horizon — and a decision on the debt ceiling due by Aug. 2 — this has turned into a dangerous game of chicken, with politicians posturing on both sides of the aisle.  There is more than profit or loss at stake here; credit of a different breed — that of credibility — is the issue at hand for markets at large.

If you ask me, we should swing the global debt guillotine, share the haircut and move forward as one, even if the sum of the parts won’t be as big as the whole once was, at least initially.  This could have profound consequences for the rest of the financial food chain but it’s an inevitable outcome; if policymakers don’t make the right decision, the market will make it for them.

Hot and bothered!

The stock market is the world’s largest thermometer and that isn’t lost on the boys in the Beltway.  Ten years ago, ex-Fed chairman Alan Greenspan assured us that the Federal Reserve didn’t target asset prices with its policy measures, but that mandate has shifted; make no mistake, in a finance-based interconnected global economy, the stock market has morphed into a matter of national security.

Despite Herculean efforts from central banks worldwide, there are fundamental flaws in the building blocks of our perceived economic recovery.  In particular, there’s too much capacity in housing (home prices are likely headed lower, further pressuring the indebted consumer) and labor markets have slack (underemployment is roughly 16%, or one in every six people you know).

For most folks, the friction between what we’re told and what we feel has been eating at us for years, creating a chasm of discord between the have’s and have not’s.  It’s long been my contention that social mood and risk appetites shape the market — not the other way around. Keep that in the back of your mind as you map your financial future.

Todd Harrison is the author of “The Other Side of Wall Street” and founder and CEO of Minyanville, an Emmy Award-winning financial media platform. Read him daily at www.minyanville.com.

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