As food for thought for what follows, here are two fundamentally contradicting outlooks for the future of the US economy. Both are worth reading, for very different reasons. The first as an example of the current starry-eyed outlook pervading financial markets and Wall Street. The second throws ice-cold water over the "exuberance" of the first and is notable for its excellent research and well-reasoned conclusions. Which makes more sense? You be the judge:
Why The Economy Is A Lot Stronger Than You Think - Yahoo Business
"Neff Said" - ContraryInvestor.com
It was Vice President Dick Cheney who said early in the first term of George Bush's Presidency that deficits don't matter. When he said it, he was merely saying in words what the Western world had accepted (to judge from their actions) for the previous decade. As The Privateer first pointed out in the early 1990s, and as the "Neff Said" article (link above) makes crystal clear through its research, ALL sectors of the US economy threw all caution towards debt to the far winds in the early 1990s and have been doing so ever since.
The most telling sector of all is the dramatic increase in individual debts - and the consequent fall to "negative levels" in individual savings - in the last 10 to 15 years in the US. Please note that while Treasury debt has approximately doubled since 1992 to $US 8.2 TRILLION, US household liabilities have all but tripled to over $US 11 TRILLION (since Alan Greenspan became Head Fed in August 1987 they have quadrupled - see the Early February Privateer - #545 - published on February 5).
The reason for this explosion in household debt is threefold.
First, by the early 1990s, the American people had watched their government raise its funded debt by a factor of TEN (from $US 400 Billion to $US 4,000 Billion) in the preceding 20 years. They had noticed no ill effects on the markets - except for the 1987 crash - and by the early 1990s those losses had been regained. They figured if it was good enough for the government it was good enough for them.
The second reason is an acceleration of a phenomenon which had been going on since the early 1970s. It became harder and harder to make ends meet even on two salaries for the average American family. The "solution" was to finance the lifestyle through debt - an attitude which got a huge boost from the stock market blow-off of the late 1990s and has been sustained and acclerated by the real estate bubble of the 21st century - so far.
The third reason is that under Alan Greenspan, the Fed never met a low interest rate they didn't like. Since March 8, 1991, the Fed Funds rate has only been above the 6.0% level in the eleven months between March 2000 and February 2001. The Fed Funds rate was fixed at 3.0% between September 1992 and February 1994. That, with about a year's lag, ignited the stock market bubble. And, of course, the Fed Funds was dragged down from 6.50% to 1.75% in the YEAR of 2001. That ignited the housing bubble. But at no time since 1992 has the Fed Funds rate, or the rest of US interest rates, remotely reflected the REAL inflation (the increase in the total stock of money) going on in the US economy.
In the US, the government has been living beyond its means for four decades, and Americans themselves have been living beyond their means for approaching two decades. William McChesney Martin, the Fed Chairman from 1951 to 1970, was famous for his remark that it was the function of the Fed "to take the punch bowl away just when the party was getting started". His successors, last but by no means least amongst whom was Alan Greenspan, have laced the punch bowl to the extent that a whiff of its contents would fell a herd of oxen.
Ever increasing streams of new money pumped into any financial system will push prices up and valuations up faster - AS LONG AS THE DEBT INCURRED IN THE PROCESS OF PUMPING OUT THIS NEW MONEY CAN BE SERVICED. When it can no longer be serviced, both prices and valuations plummet. In liquid markets, they plummet together, and the result is a "crash". In illiquid markets, like housing markets, transactions slow drastically as the chasm between prices and valuations widens. The problem with the real estate market is that one house actually sold for a lower price devastates the valuations of every house on the block, or even in the neighbourhood.
Both the US government and millions of individual Americans are living in a dream world. The government thinks that they can swap Treasury IOU's for the real goods of the rest of the world forever. The millions of Americans think that their paper assets and the houses they live in are perpetual ATM machines which will continue to spit out the money they need to live on forever. Why should it not be true? it has been true for decades now. And besides, all the best "economic brains" tell them that this is actually the way the economic world works.
The tulip buyers in seventeenth century Holland and John Law's clients in eighteenth century France thought along very similar lines. Those episodes were comparatively short-lived, partly because the methods used to perpetuate them were much cruder and partly because the nations in which they occurred did not have the literal military might to cow the rest of the world into going along with them.
But as it always has, and always will, the current global financial episode with the US in the centre is crumbling fast. The $US Gold price is only one symptom of this and so far, it is nowhere near "measuring" the extent of what is coming. The murderous bufoonery which masquerades as US "foreign policy" is another. In rapidly multiplying ways, the US government is finding that yelling at the top of ones lungs while carrying a piece of limp spaghetti is NOT the way to "win friends and influence people".
The Treasury is, of course, right up against its ($US 8,184 Billion) debt ceiling yet again. This has more or less become an annual event - the present debt ceiling was put into place on November 19, 2004. It has also "revised" its first quarter of 2006 borrowing requirements up $US 17 Billion from $US 171 Billion to $US 188 Billion. Annualise THAT - we dare you.
Then there is the yield curve on Treasury debt paper which is inexorably inverting. Right now, ten-year yields are 4 basis points lower than two-year yields and 9 basis points lower than six-month yields.
To imagine that the US economy is "A Lot Stronger Than You Think" is to have turned off one's thinking processes altogether. It is a result of concluding that no matter how much "money" is pumped into the system, it will retain its integrity as money and, even more preposterous, will retain its purchasing power. It is a result of concluding that the production of money is a viable economic alternative to the production of economic goods. It is a result of concluding, as many have concluded in the past to their great cost, that we can have our cake and eat it too.
People who write about the "hidden strength" of the economy do so when any signs of VISIBLE strength in the economy are swiftly ebbing away. This is obviously the case in the US (and many other nations) today. They do a great disservice to the gullible and "afraid to look" crowd. But for those who have the determination and the courage to see, they are invaluable. They are a signpost on the road. They are the last of the admirers of the naked emperor's clothing. They should never be taken seriously, but their REAL message certainly should.
ollars and Pounds and Yen and Yuan and Francs and Pesos and Dinars and everything else going DOWN.