U.S. Economy: Lies and Confusion

by: Economic Disconnect

Things That Make You Go Hmmm..
I am not an economist. I do not manage anyone else's money, just my own meager stash. I am not Harvard Business School trained or Yale economy educated. Thus I am easily confused. I find that there are many things respected economist types say that make no sense to me, but that is because I am of limited nuance for such things. I saw plenty of stories that made me say Hmmm over the past couple of days.

First up is a Robert Reich blog post at Talking Points Memo. Relevant confusing excerpt:

It's a Depression
Capital markets may or may not unfreeze under the combined heat of the Treasury and the Fed, but what happens to Wall Street is becoming less and less relevant to Main Street. Anxious Americans will not borrow even if credit is available to them. And ever fewer Americans are good credit risks anyway.

All this means that the real economy will need a larger stimulus than the $787 billion already enacted. To be sure, only a small fraction of the $787 billion has been turned into new jobs so far. The money is still moving out the door. But today's bleak jobs report shows that the economy is so far below its productive capacity that much more money will be needed.

This is still not the Great Depression of the 1930s, but it is a Depression. And the only way out is government spending on a very large scale. We should stop worrying about Wall Street. Worry about American workers. Use money to build up Main Street, and the future capacities of our workforce.

Mr. Reich correctly puts together the pieces that the US consumer is tapped out, and they are not taking out credit they do not need, at least for a while. Repair of personal balance sheets after a debt binge never seen before on earth sounds like a sound decision. Mr. Reich even acknowledges that the pool of "good credit risks" is getting more shallow every day. What's confusing? Nothing if he had stopped right there.

Mr. Reich then goes all Keynesian on us and makes the case that to support debt accumulation (it is not lending and borrowing, but debt assumption) close to the absolute peak the Government must jump in and spend whatever is needed to restore the old activity level.

Nowhere does Mr. Reich offer an opinion on whether this is a good idea. At no time does the writer cast any value at all on overconsumption and debt fueled asset bubbles.

As far as the note that the economy is "below its productive capacity", isn't it always? I mean if need be we could force into labor the entire able bodied population to make things like cars. Would anyone buy them? What is the point of activity for activities sake? Again, no mention of this.

So I am confused. The US citizen has outstripped their net worth in spending, and the government must come in and support spending at unsustainable levels otherwise the economy collapses. Let me know how that works out.

The second item comes from my favorite bond guru, Bill Gross of PIMCO. Regular readers are well aware of my long standing issues with Mr. Gross. In a small, almost blip of an CNBC video summary Mr. Gross makes the following observations:

Bill Gross: Job Cuts Will Get Worse Before They Improve
Bond guru Bill Gross sees the unemployment rate jumping to double digits before it improves, and even then the economy will evolve into something we haven't seen before.

We're going to have a positive quarter at some point in the second half," he predicted. "Those that would look for bottoms in the economy or the stock market, though, I think are really focusing on the wrong thing, because that implies that we're going to return to what is a normal stasis. We think that's incorrect. We think that unemployment will go to 10 percent before it returns to 8."
Instead of that "normal stasis," Gross said he sees something quite different.
"We're evolving into a 'post-levered' financial economy which will witness intense regulation, and a redistribution of profits and wealth, most importantly, to previously disadvantaged groups, and so that's the 'new normal' that in no way resembles past experience."

I have no idea what Mr. Gross means by a "redistribution of profits and wealth, most importantly, to previously disadvantaged groups". I am confused because the only redistribution I see going on is the distribution of taxpayer funds towards bailing out the fat cats like PIMCO. The only money I see going to disadvantaged groups is more bailout cash, lending programs, and bad asset scams serving those that should be disadvantaged; the idiots that wrote all that paper!

Again, I am confused.

The last item concerns Fed head Ben Bernanke's talk Friday at a Fed conference. Relevant excerpt:

Fed 'extremely uncomfortable' about bailouts
Bernanke: Fed 'extremely uncomfortable' about bailouts; but strategy to ease crisis is working
CHARLOTTE, N.C. (AP) -- While acknowledging that the Federal Reserve was "extremely uncomfortable" about last year's bailouts of big financial companies, Fed Chairman Ben Bernanke said Friday the central bank's strategy to ease the financial crisis is working.
In remarks during a Fed conference in Charlotte, N.C., Bernanke said the central bank was forced to take action because the collapse of those companies would have dealt a serious blow to the financial system and the national economy.
The situation underscores the need for new powers to allow the government to safely wind down such huge firms, he said. Bernanke and Treasury Secretary Timothy Geithner recently asked Congress for such powers.
During his speech, Bernanke also defended the Fed's decisions to revive the economy by plowing trillions of dollars into efforts to stabilize the banking system and to lower interest rates. Its program to buy mortgage-backed securities of Fannie Mae (FNM) and Freddie Mac (FRE) has helped drive down the rate on 30-year mortgages to record lows.
"These are extraordinary challenging times for our financial system and our economy," Bernanke said. "I am confident that we can meet these challenges, not least because I have great confidence in the underlying strengths of the American economy."
To brace the economy, the Fed has slashed a key interest rate to an all-time low of near zero. The central bank has turned to unconventional tools -- such as its recent decision to start buying government debt -- to pull down interest rates on a range of consumer loans. The goal: entice Americans to go out and spend again, which would help lift the economy out of recession.

This is not so much confusing as a collection of useless lies.

- Note the story uses the line "last years bailouts". There are no bailouts this year? Ongoing lending facilities, auto maker money, etc. Nice move.

- The FED is "uncomfortable"? When I am uncomfortable with something I do not do it. I went to the doctor and told him it was uncomfortable when I raised my left arm over my head and he said "Don't do that!". Little joke.

- Spare me the whole "wind down" talk. Bernanke had already said in quoted words that there will be no more bank failures so do not even pretend.

- If Bernanke had great faith in the strength of the US economy I would offer that the Fed would not have had to exhaust the alphabet in acronyms for all their lending facilities. Next up, Chinese alphabet acronyms (the Chinese ok'd this at the G20 meeting) for more lending programs.

It would seem to me a much better use of time and taxpayer money would be to develop industry and more robust economic machinery in the US rather than to try and prop up asset bubbles and keep the debt splurge pedal matted to the floor. Just my 2 cents, but then again I only went to state school.