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Archive for September, 2008

So how good is this economy? Really?

No one doubts that there are issues with the economy. Home equity has disappeared before people’s eyes. Credit availability has really only begun to dry up. Unemployment is trying to persistently increase. Company’s are reducing revenue forecasts going forward and most everyone is stretching out estimates of when recovery will occur. But in light of the bad news it isn’t just a case that the economy could be worse. It really should be worse. But it isn’t.

Unemployment is by no means anywhere near historic highs. Most people would like to see a new trend of jobs coming back to the US and it is sporadically happening. But the global economy is with us because it is possible to fabricate goods in country’s that will subsidize manufacturing or have much lower labor rates and then economically ship them to consuming countries, such as the United States. As country’s evolve, the subsidies become unsustainable and slowly but surely, labor rates increase, and energy costs are causing the economics of bringing goods manufactured in far away places to market to become less attractive. Unemployment is a definite concern and one that the Federal Reserve is watching closely. But the strengthening of the dollar, not due to anything the US did, is really due to the weakening of other currencies will put the brakes on fears of inflation. The effect is just as real as if the US did strengthen the dollar instead of just talking about it. And that effect is no where more visible than in energy prices. As energy has fallen, so has inflationary pressures. It might not last but the odds are that the Fed will most likely do precisely nothing for some time. Benny and the Feds are probably very happy at that turn of events. Unless unemployment and inflation make some significant move, very unlikely, or the economy gets either much stronger or much weaker, also not very likely, the Fed can just sit back with their interest rate popgun firmly in its holster.

Are there trouble signs? Of course. While the economy is doing surprisingly well, it is also more on the fragile side than would be desirable. Increases in federal spending and tax increases are ill advised. But that soon depends on an election and will simply play out as the voters wish. Energy prices may be in for further declines and settle at a sustainable lower level. Or not. The most oil revenue needy countries will scream the loudest for a production cuts, think Iran and Venezuela, but the cooler heads in OPEC (relatively speaking) will probably let it just go at getting back to the quotas that are technically in place. Chavez and the ayatollahs who quickly got used to those revenues at $145/barrel aren’t going to see them return. And they are going to whine long and loud. But having said that, OPEC would probably be very comfortable with a $100/barrel floor and will try to see if the world will support that without either more exploration, alternative development, or demand destruction. None of those results are in OPECs interests but the genie may be out of the bottle and energy price stability may be valued more than seeking a path of least resistance. It might take another 50% energy price increase cycle or two for the world to get serious or it may have already happened.

As we all found out, energy prices work their way through the entire economy but this year’s crunch came on top of the sub prime mess, housing price collapse, and credit tightening. And yet, the economy is not only not in recession, it continues to grow at a difficult to ignore pace. As I said, by all rights, it should be doing worse than it is. Housing will inevitably sort itself out. The market is taking care of that more than the government. It is difficult to see a return to the market of just a few years ago but with housing prices first leveling off and then slowly appreciating, the impact of energy and inflation will be far less than they were this year.

Recent history has taught us little other than when bubbles collapse, most people involved really want the bubble to reinflate. For the US it would mean the return of the unfettered American Consumer, savior of the worlds economies. Many countries exporting to the US are counting on it. But the US would be better served to learn its lesson and have the American Consumer take a more sober look at reality and learn lessons about credit and its uses. There are few more painful adjustments than realizing that one has been living beyond their means and realizing what their incomes can support. Of course politicians will point to increasing poverty levels and the need to redistribute wealth but with the US quickly getting to the point where over 50% of taxpayers will pay no taxes at all, taxing to redistribute wealth rapidly achieves diminishing returns and incentivizes tax avoidance. Increasing spending on education should create a more educated work force that will be able to move into better paying jobs but without the jobs here, the education is creating a more educated class of un- and underemployed. Reinflating the credit bubble more than likely won’t, and shouldn’t happen. That would mean more pain than Americans have been exposed to for quite a while.

I don’t mean to minimize the pain right now in the United States. Those auto workers and suppliers to the auto industry that are losing their jobs in the Midwest are feeling real pain right now. But decades of mismanagement and union pandering aren’t going to be undone overnight without real pain. It’s not like the US auto industry was on the brink of a spectacular recovery. For years they played games with product and incentives to keep the American Consumer in gas guzzling, barely competitive product. A real energy shock and the industry found itself producing product that nobody wanted at any price. The steps being taken now will not create or save jobs in the short run and it is even questionable how successful they will be in the longer run. Of course if you believed your path to fame and fortune, well at least fortune, was to be made by leaving your job at McDonald’s flipping burgers and then flipping houses on weekends, you’ve found out that the people putting those late night infomercials out didn’t have any insight. They just made their money 19.95 at a time on a CD or seminar to “share their secrets”. Here’s a clue, people who can make millions in anything don’t share their secrets 19.95 at a time doing infomercials. They don’t have to. And as people made deals that were to bring them quick wealth and got caught, what did they do? Why they ignored their contractual obligations, walked away from bad deals, and hope their fellow citizens will bail them out. Some were defrauded, the majority weren’t and were actually the ones perpetrating the fraud. Coming to grips with your true financial situation should match your assessment of your abilities to manage money in investments. If you don’t understand the deal you are getting into, you have no business getting into it. Contrary to popular belief, successful business people are not glib talkers who have “people” take care of everything and they are just the “idea” person with contacts and profit taker. Those who don’t honor commitments, contractual or otherwise, don’t find themselves in business very long. Regardless of what popular wisdoms are about self worth, knowing your own limitations is a good start for life. The hit being taken from getting into deals that were too good to be true is painful and it isn’t over. But it shouldn’t be swept under the rug, denied, and minimized. It should be a learning experience.

So there really are a lot of negatives in American society that brought about a tough economic situation. But the economy is still doing quite well, much better than it should. We waste billions in federal spending. We have exported more high paying jobs than we appreciate. We are at the wrong end of the stick on energy from the producers to the speculators. Federal government spending has infected state and local governments who no longer have tax bases to support spending plans and bankruptcies for those who can’t print money are real possibilities. Retirement plans have turned into fantasies including Social Security which remains the crazy aunt in the closet that everyone wants to ignore. And yet, the economy is not only not in recession but has positive growth. It is fragile and could easily get to a really bad state. But it hasn’t. And every month that goes by gets us closer to the end of many of the negative factors that are floating around out there. So, how good is this economy? Better than most people want to take the time to think about and admit.

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