Boring Economic Stuff

Most people, when conversation turns to economics, find their eyes glazing over and rolling up into their heads. It just isn't rivetingly interesting. But for some reason, probably warped and twisted reasons, I find it fascinating. The “cause and effect” principles that are behind arcane economic equations are like the song we learned as kids..''the ankle bone's connected to the...shin bone, the shin bone's connected to the...knee bone. Only in economics it's...''the money supply's connected to the...inflation, the inflation's connected to the ... dollar, the dollar's connected to... the price of oil, the price of oil's connected to the.... consumer,...and so on. I can watch the babbling heads on CNBC theorize about currency valuations, the fed's M1 and M2 money supply numbers, and LIBOR rates for hours, although admittedly, I understand about the same percentage of the conversations as when I watch the Spanish channel.
Unfortunately, real, pure, unspun economic information, these days is rare. So much of what masquerades as economics, especially the ''pop'', sound byte economics of TV, has a political or business agenda hidden in it. Knowing full well that most folks are oblivious to, or simply not interested in how the decisions of politicians and business leaders echo through society, affecting the wealth and well being of all of us, they typically recite only lopsided, skewed, half-truth statistics. The televised hearings when fed chairman Bernanke testifies before Congress, are like a tug of war between an economic theory purist, and the partisan bloviates who try with every question to score points, and corner poor Ben into saying something that supports their ideology, or undermines their opponents'.
The real thing, though, observations and forecasts based on unbiased data is like a lie detector test for the practices and policies of governments and business. Perhaps the rarest of the rare, in terms of TV talkers, are the apolitical, PhD level of economic knowledge types who also have the ability to communicate and illustrate their understanding in accessible ways so empty skulls like me can grasp it.
There seems to be a common thread emerging among these impartial observers, that the U. S.of A, in terms of economics, is on a dangerous trajectory. There is considerable debate, a daily point-counter point, between pundits as to whether the recovery underway in our country, and, in fact, most of the world, is real and sustainable. On the extremes of this debate, and the most vocal, are those with a horse of some sort in the race-bankers, stock brokers, fund managers, and elected officials. These positions aren't based on dispassioned observations, but on selfish motivations. The purists, though, seem to be aligning with the “things ain't as they oughta be” side, and that is cause for alarm.
Recently, I heard an economist make an analogy between the Cash for Clunkers program, and the economy as a whole. The very weak-pulse auto business roared back to vitality for about two months while the government subsidized retail sales with up to $4500 per transaction. But now that the program is over, the car business is back in a coma. The entire U.S. economy is currently the beneficiary of, literally, trillions in subsidy. Besides the controversial ''stimulus'' package, which was near a trillion alone, the federal government has made giant investments in banks and financial services companies like Goldman Sachs, Wells Fargo, Bank of America, AIG, and dozens of smaller regional banks. The government has invested about $81 billion in GM and Chrysler. The federal reserve has been pumping newly printed money-over a trillion dollars-into the economy, in an effort to lower borrowing costs and stimulate activity, by buying Treasury Bonds and mortgage backed securities. Think about that previous sentence a moment or two. The United States government is financing a big chunk of its operations-it's deficit-by borrowing money from Bond buyers. That's not new. But they are buying the bonds themselves-through the Fed, with printed, not gold backed, ''good faith'' dollars. This is the same thing as paying one of your credit cards with a cash advance from a different card, then paying the bill on the second card with an IOU. Just like Cash for Clunkers, all these ''stimulative'' programs are temporary. They have to be. Every time the government adds a new dollar to circulation, the ones in your wallet decrease in real, purchasing power value, by some tiny increment (…the ankle bones connected to the....knee bone...) A trillion printed here, a trillion printed there, and soon we're talking real money! Soon, people around the globe who have, for a long time, stored their wealth in dollars-oil sheiks, foreign governments, corporations-watch their $100 bills become $98 bills, then $92 bills, then $85 bills. They defensively begin to trade their dollars for Euros, or gold, further pressuring the dollars decline in purchasing power as demand for them fades. Doomsday thinking? Hardly. Drink enough coffee to watch some CNBC, or read just the headlines of the Wall Street Journal and you'll notice this vicious cycle is well underway. Why is a gallon of gas 60 cents higher than the end of '08? Because oil is back from a low of about $30 to a current $78 per barrel. Why? Because, the people who sell us oil must receive $78 per barrel to have received the same real value for their oil as when the more valuable dollar could buy a barrel for $30-35-40. (….the knee bone's connected to the...thigh bone...) Many smart people believe the collapse of the real estate market began when marginless, financed to the eyeballs consumers, became unable to keep their house of cards standing when fuel prices hit their peaks in mid 2008. The tiny bit of slack over-financed homeowners had in their personal budgets was more than absorbed by the cost of filling their tanks, and heating their homes. Debt defaults spiked, and down came the national, global even, house of cards.
So, there are several elements that could collide, or are colliding now, to form a perfect storm. The fragile, debatable, largely jobless recovery underway, weak as it is, is propped upped by a giant Cash for a Clunker Economy stimulus program that someday, somehow, will end. The ''recovering'' institutions, the ''too big to fail'' financial firms like Goldman and Wells Fargo are profitable now, but that is in an environment of an artificial, temporary zero percent federal funds rate. You don't have to be a very skilled banker to be profitable when the government has relieved you of bad loans, lends you money at 0%, and you lend those funds at 5 or 6 or 7 percent. How will they fare in a normal, market environment of a 3 or 4 percent fed rate? And, nearly every talking head on the business networks, says the key to real recovery is the consumer. In other words, we need Americans to return to spending like drunken sailors on cars, homes, and appliances again. While Americans have notoriously short memories, it could be a long, long time until conspicuous consumption is fashionable again. Even if it were, 10% of the American consumer is jobless. Many more are drowning in credit card and other debt. It is inevitable that inflation creep back into the formula to some degree, perhaps severely, as the dollar declines and food, fuel, and health care costs increase. Don't expect the American consumer to rescue the automakers, the home builders, or the refrigerator sellers anytime soon.
It is not, of course, a done deal that the American economy will implode while Europe, India, and China take center stage as the new economic dynamos of the world. There are very smart people, economists, who have the understanding and vision to suggest the necessary course adjustments and correct fiscal policies. But as long as our economic planning and strategy look no further than the next election, and respond to the desires of narrow, self-serving special interests, wisdom will be ignored, political expedience will guide decisions, and we, as a country, will stagger towards our demise. But at least we can watch it on CNBC.