brianoh

Recent Policy Decisions and a Greater Depression

The problem as I see it is one of fundamental direction. It is rather like the question in 2001 – should I buy the Dow or is it way-overpriced? It was overpriced. If one gets the overall strategy wrong, then the medium and long-term results are going to be wrong. Needless to say that with the Dow, many traders still made money during the 2001-2008 period even though the Dow was overpriced. These people were not the long-term holders however.

The analogy is similar with the economy. The overall strategy is wrong (Keynesian), however some of the results may still be favorable on a short-term basis. Quite simply, we have the wrong people running the economy – Cheap-Credit Academics.

Greenspan is a perfect example of this. In his recent speech to the NY Economics Club he was basically saying (in part) that we need high stock prices so that we can get credit creation. This I presume explains his moves to prop-up the Dow bubble in 2001 and created the problem that brought us here. Even I can see that it is ludicrous to pump-up the Dow in order to provide the mechanism for credit. The Dow has to earn the level that it has, not be pushed there by Greenspan. We now have a Greenspan protégé as Treasury Secretary.

There are many negative consequences from this “Keynesianism God Mad”. One of the main problems is an imbalance in the economy that was caused by fictitious wealth. There are many, many businesses that need to down-size, and this will not happen overnight.

While the US has the wrong people charting the course, the long-term results will be negative. To generalize the problem – the problems caused by cheap credit cannot be solved by more of the same. The economy requires restructuring and that will not happen until the NORMAL supply-demand dynamics are allowed to play-out. Prop-ups, bailouts, mailouts, rate drops, stimulant measures, and deficit spending all create a wrong-sized economy that is unsustainable long term. In addition, the losses in the financial system that resulted from the misguided policies need to be written off, not propped-up.

It is extremely difficult to make economic decisions knowing that the policymakers are manipulating the free market at unprecedented levels. Time to let the chips lie where they fall and let industries survive or fail as a result of their own decisions.

Saab May Be GM's Best Hope for the Future

Very interesting that GM et al had no business plan for recovery. Trouble is, we live in changing times – “which way is the consumer heading?”. They run the risk of ditching the old model based on “yank tanks”, only to see it revived again. The structural problems are so great that it almost looks worthwhile to go chapter 7 and disappear. The old business model is unworkable in the present market – hourly rates, pensions, healthcare, products. On the other hand, the politicians will not want to see these status symbols of capitalism prove to be a failed concept. How these problems came to be is difficult to comprehend. However, the US (Treasury, Congress, Fed Reserve) appear to have abandoned conservative economic management and simply rely on the fact that the USD is the reserve currency. Productivity has been replaced by asset-inflation. Now that that has proven to have failed, they now pursue it again to attempt to prop up prices. This begs the question of: “who benefits from these policies?”

Are Subsistence Wages Killing the US?

The point I was making is that current legislation allows the 3rd world worker to replace the 1st world worker. These goods are then sold in the 1st world at 1st world prices. The jobs of creative people in the 1st world are being lost. Big companies are the only ones on this side to benefit. Only time will tell where this will lead, however based on current experiences it will lead to destruction of the US economy. The trade deficit, the budget deficit, the loss in value of the USD, the bursting of the housing bubble, the bursting of the dotcom bubble, REAL CPI-inflation over 10%. Don't all of these things spell out an economy that is ruined? The only thing that has kept it going is that all the bubbles have not burst. The Fed is fighting like mad to ensure that the last domino, Wall Street stays high. That itself was a bubble from 1990 to 2000 and was about to burst in 2001. Now Bernanke is holding it up in much the same way as Greenspan did in 2001. This time however there is no housing bubble to absorb the liquidity, there is only stocks. Bernanke has the misguided notion that lessons learnt from the 1930s will solve everything and flooding the economy with cheap liquidity will fix everything. The point he misses is that the way to stop the bursting of bubbles is to stop them forming. They do not do this because their Wall Street cronies would not like it (IMO). The US woke the Asian monsters and now they are about to beat the US at it's own game - consumption. US consumption is on the decline because real wages have declined for over 10 years. The housing bubble replaced those wages, and now that has withered. Companies like GM and Ford have the wrong products that consumers can no longer afford. So what we have is an economy that can no longer afford products manufactered by it's own companies and must import products to survive. Standards of living are declining and will continue to do so inversely to standards in China. To aid that process, the US govt sends out tax rebates for people to spend on cheap imports, further helping the foreign economies. Obviously the US has the wrong people in power and making decisions that shape the future of the US over the next century. Look at the start of this century as a guide.

Are Subsistence Wages Killing the US?

Some very interesting comments. What it all boils down to is a class structure designed to benefit the very wealthy and multiply their wealth. Globalization - read: cheap offshore labor, Cheap money - read: don't let the Dow fall, Fed loans on rubbish loans - read: look after your mates. Bankers running the economy with disregard of trade deficits and USD loss-of-value - read: madness. A private central bank - read: madness. Subsistence wages - read: the rich benefit. I totally disagree with the concept that it was inevitable that globalization has to force down wages and thereby productivity is replaced by service industries. It is happening because the powers-that-be let it happen to satisfy Wall Street.