Land Mines Pockmark Road to Recovery

(comments on an article by Tom Petruno in the LA Times in September)

What's missing from all these scenarios is a practical evaluation and analysis of the rudiments that drive the economy. In other words - why did we miss the meltdown and consequences of the housing bubble and subprime? Below are some things to consider:

A. What is going on with the average citizen (as in housing, prices can't exceed income growth forever)? How many people have lost their homes, their savings and have no job? What is the impact of both the reduction in the number of potential consumers and the mindset of those that are still capable?

B. What is the tax structure suggesting (i.e. with the hugely expanding debt, the stated objective of having the rich (read: more successful, business owner and risk takers) make up any shortfalls in revenue - along with vastly expanded and costly social programs - another big negative totally different from 1982!

C. What is suggested by the investment climate? In other words what happens when the existing structure of the protection of investor rights is undermined by government actions, as in the case of the Chrysler deal? Will support for unions at the expense of bondholders have an impact? -

D. What happens to the existing level of government expenditures that were already too high? (here one might consider the possible offset to the above of reducing government benefits, pensions and big savings from getting rid of the drug war, etc.). Here one would have an offset to a lot of negatives by getting government out of the way and big cost savings.

Under the Just Right Scenario:
"In such a sluggish recovery, the Fed can keep short-term interest rates low for longer without fearing inflation, even as commodity prices continue to rise."

Here the question begging for an answer is "where's the money" coming from to fund the US Government's huge borrowing needs?

> There's the US Savings rate (recall the numbers from the 1980's when the term "crowding out" was popular and the printing press at the Fed was an 'unused' last resort.

> Aren't there a lot more countries borrowing now than in earlier periods of heavy Gov't borrowing? And, weren't we worried a couple of years back about a 400 B deficit?

> If this was our own corporate budget or family budget, with our income down we'd be looking to cut back and save. But, here's the government spending like it just got a bunch of free credit cards (sort of like our recent housing bubble and consumer spending bubble.).

> And, it's not like the government is "investing this money". It's running up huge debts for consumption. Take a look at the Chrysler settlement. Is the funding going into product development or payments to UAW union retirees? It scares the bejesus out of me!

Too Hot Scenario:

"We're not inflating assets because of sound economic policy. We're inflating them by printing money," says David Joy, chief market strategist at RiverSource Investments in Minneapolis. "To some extent, it's an appropriate response because the private sector is flat on its back. But it's a dangerous path."

This would appear to be exactly right.

We are encouraging uneconomic jobs - look at the UAW agreement again. Due to union favoritism, the idea of retiring at age 50 and all the other UAW's uneconomic, counter-productive work rules are still there. And, who's paying for this - the remaining productive parts of the economy that are competing with Chinese and other workers not having these benefits or cost burdens on production.

The UAW was so afraid they might not get the last bit of milk out of the deal, they stopped GM from being able to import cars from China. Meanwhile, since auto dealers aren't UAW members, they get screwed. As always, the UAW (and the government) is trying to REDUCE competition and support high cost production. Does this read like inflation?

Meanwhile, its a money push job from Washington. The latest numbers in last week's papers showed analyses saying the government will be lucky to get $30 billion of the $50 billion its spending to save some UAW jobs. Again, it has to get this money from somewhere and it's likely the Fed's printing press.

Will the UAW bailout be an isolated incident or will the printing press have to keep printing.


Too Cold

"This pessimistic scenario is a recipe for retesting the stock market's March lows. In the longer run, it could also lead to deflation, in which prices tumble as consumers keep delaying purchases. Deflation can be long-lasting and have a chilling effect on stock markets."

Here one should consider Robert Mugabe's track record in Zimbabwe. In this case, the government kept taking assets (like maybe GM and Chrysler) and there was less and less production being chased by more and more dollars (Zim dollars for Mugabe). Thus, inflation rather than deflation.