This economy thing really has me torn—borderline obsessive, in fact. I’m looking at fundamentals vs. recent claims (similar to the never-to-appear “green shoots” claims of this last spring/summer) and it simply cannot possibly add up. We have some gross contradictions, which is causing my present angst. Taking a look at a top article at Bloomberg this morning, we see some of this.
Since August, stocks have climbed 17%, says this article. This is near the time Bernanke hinted the Fed will print an undisclosed amount (truck-loads) of dollars to prime the economy. So the stock growth is interpreted as signs of investor confidence, and therefore things have already turned around. Great news, right?
Or another possibility is that the markets are reflecting a significant inflationary bubble, since it’s impossible to print huge amounts of money (a la Bernanke’s second round of Quantitative Easing) without some decline in the dollar’s value. And the same stock market measured in weak dollars will appear to be worth more dollars, but not necessarily worth more intrinsically, right? The result is that we would expect real inflation to boost the numbers of all the markets by some degree, since those markets are measured in dollars.
Or perhaps another explanation is that money is fleeing cash held in banks and the markets are being used as an inflationary hedge to avoid the sharp plummet that must necessarily result in printing all this money.
Or perhaps both these theories act in concert to arrive at this staggering 17% gain. After all, does anyone really believe the true worth of the markets has grown by 17% so quickly? When measured by something objective, such as gold, how does it fare? We then see gold has climbed ~12% – 15% within that same period, when measured in dollars, lending credence to the concept that maybe we’re simply seeing a very high rate of inflation expressed in the markets.
Oil, natural gas, cotton, wheat, soybeans, corn, beef, sugar, coffee, iron, steel, aluminum, copper, silver, plastics, etc. have enjoyed double-digit rises in recent months! Or maybe another, more proper, way of looking at these things is that the value of the dollar has simply dropped. Inflation is the same thing as a drop in the value of the dollar. How might high grocery prices affect consumers experiencing falling wages? Do we think they’ll go purchase big-screen TVs, computers, cars, houses, refrigerators, and clothes? Or will they stop spending and further drive down the apparent rises in our economy?
That’s another thing not measured properly by our market indicators—value of purchases. We look and see retail purchases are up, but this measures total spending amount, not total units of what is purchased.
For instance, go into a grocery store and you’ll see many items have the same price tags, but for new package sizes that actually contain less product (coffee, chocolate, etc.). The value—or quantity of goods per dollar—is hidden in these calculations. Gasoline is a similar example, since gasoline is part of the increased retail spending numbers, but the cost per gallon is also higher than only a few months ago. We cannot merely look at higher retail numbers and conclude that consumers are spending more because they are confident enough to do so. Many are forced to do so because the number of miles to their job hasn’t decreased any (higher gas spending for the same miles driven) or the baby is going through the same number of diapers (less diapers per same-priced package).
Another Bloomberg article indicates the new tax bill has been agreed upon, but with significant costs. How, exactly, does extending current tax rates end up costing taxpayers an additional $858 billion in tax liability? Whether it’s an estimate of loss in taxes collected or an additional amount of spending (in pork payoffs, new program funding, whatever), this new burden works out to nearly $3,000 for every man, woman, and child of the U.S. in future tax burden, not including the necessary interest payments on the borrowing! Or perhaps all this will simply be “printed” as well, adding to the true inflation numbers?
We cannot keep adding to our debt and deficits and simply assume we’ll grow our way out of it as we’ve done in the past. Unemployment is just under 10%, businesses I know simply aren’t hiring, and overall output (and future prospects of output) from the U.S. isn’t sufficient to sustain this level of spending. In fact, our current level of debt obligations is now so large, I see no possible means of paying it other than by severely debasing the currency (printing money) or defaulting. What, exactly, does the U.S. really sell on the global market anymore? Is it anywhere near enough to reclaim (pay for) what we spend? Do the prospects look any better in the near or distant future?
I don’t think so.
I’d love to take the optimistic view on this, but I cannot honestly reconcile the fundamentals of high government spending (tax), high unemployment (inability to pay tax), and record-breaking deficit spending (additional tax) with what is being spun on the news or financial outlets. It makes no sense, and something’s got to give. Yes, we might see some legitimate upward motion in business in the near-term, but might it be that this is based on false confidence gained from false numbers and other economic indicators (or their interpretations)? I think it may be. Because from my view it would seem 2011 is set to be very ugly, knowing our foundation is built upon crumbling fundamentals.