Economics Without The B.S.**: Deflation Ahead?
[** Double entendre intended.]
IS
A DEFLATIONARY SPIRAL AHEAD?
[This
is not a prediction. I have absolutely
no qualifications, and a spotty past performance, when it comes to making
predictions. This is just a general
interest discussion.]
It has been six years since the Financial Crisis of 2008
and the Great Recession which started at the last three months of 2007, the
most serious economic downturn since the Great Depression of the 1930s. Our Federal Reserve and the Central Banks
from the major economies around the world have taken extraordinary coordinated
actions to avoid a deflationary spiral like we had in the 1930s. They are limited to monetary policy; but, the
fiscal policy of the various governments from around the world have been
anything but coordinated. While the
monetary policy has been positive for abating the negative effects of the Great
Recession, the fiscal policy measures have been quite lacking for any sustained
positive effect and have even been negative in some circumstances. We have spent the last six years muddling
through with positive but sluggish economic performance.
So, the question is:
With the negative reaction of the financial markets these past several
weeks for stocks, bonds, some commodities, and gold, are we headed for more
economic distress with the Fed and Central Banks out of ammo for more monetary
stimulus and fiscal policy changes that would be too late and too weak to have
any immediate positive effect?
Let’s take a look at
the picture:
1. GROWTH:
Growth in China, Japan, Brazil, and Europe are slipping. In the U.S. growth has been tepid – around 2
percent when most economic recoveries are around 4 percent or better. Only in India has growth been good during
this year. The poor growth is the result of weak
demand. How will poor growth around the
world affect the U.S. economy?
2. EMPLOYMENT:
There is some growth in employment in the U.S.; but, nowhere near full
employment. And there are still many who
have dropped out of the labor force participation in a stagnant economy. Europe is still plagued by high unemployment –
even Germany has not been anywhere near a full employment economy and Germany
has been one of the better economies.
3. INCOME:
In the U.S., while there has been some growth in employment, income for
hourly and salaried workers has been mostly flat (no increase) for several
years. This is why demand is weak – it has
been positive, but not robust like you would expect during a recovery from an
economic set-back.
4. STILL A CONSUMER ECONOMY: We are still a consumer economy – at least 50
percent of the overall economy. The industrial
and commercial sectors are still around 10 percent. Government (Fed, state, and local) are
running around 40 percent. The consumer
sector has a multiplier of about $.70 of output for each $1.00 of input. Manufacturing has the highest multiplier of $1.40;
Agriculture around $1.10; Info Tech around $1.00.
It is difficult to
stimulate the overall economy when such a large sector is made up of the lowest
payback. Plus, this sector requires the
lowest demand for educational performance with respect to technical skills. This affects young people coming out of
school and landing in a job where they can climb a career ladder. This is important to lower income families
because traditionally this has been the pathway to the middle class – jobs requiring
educated skills, paying well through time, and moving up in social status,
spending money accordingly and engaging in the community accordingly.
This is important
because the makeup of the economy will determine the social structure within
that society. What drives/determines
public policy? – quality of life, environment, security and stability,
opportunity and free choice, economic well-being? The investment dollar will be influenced by
public policy and flow to those sectors where the incentives and best payoffs
are, whether they are here at home or overseas.
All societies have income inequality; but, when income is
disproportionately distributed and you have concentrated wealth, that influence
enters into politics and affects public policy.
We have many counties in the U.S. that have at least 30 percent low
income to poor family households. Should
the economy reflect this or change this?
What investors do, makes a difference.
And what shape a society is in compared to other societies affects how
other investors react, including foreign investors who buy our treasury bonds.
5. TAX CUTS FOR STIMULUS: Cutting income taxes benefits upper income
Americans more than middle-to-low income Americans; and, will not be enough of
a boost to stimulate consumer spending and probably not boost investment in
capital equipment while demand is weak.
President Bush found this out with his massive tax cut in the early ‘00s. To stimulate consumer spending you have to
affect low-to-middle income Americans; and, because they pay so little in
income taxes, this is now done by payroll tax cuts, namely reducing Social
Security taxes that appear on the paycheck – since Social Security taxes (along
with MediCare) are usually larger than income tax withholdings on paychecks for
low-to-middle income Americans. This is
what Presidents Bush and Obama have had to do in 2008/2009 for a stimulus – but
I have no idea what figure they use for each percentage of reduced tax amounts
to how much more they get in consumer spending.
And I don’t think this will result in much of a stimulus – I would think
you would have to couple this with other fiscal measures.
6. CURRENCY MANIPULATION: Countries used to devalue their currency
during economic difficulties. The U.S.
did this when FDR first became president; and, Nixon did this also. But this is no longer available as a tool in
most cases. Currencies are not fixed
anymore – against Gold, or the Dollar – except in a few cases. Today, currencies float against one another –
the Dollar goes up, the Euro goes down, and the Yen and the Yuan act
accordingly. Actually, the Yuan is one
that still gets some manipulation by the Chinese. Commodities, like Gold and Oil, may be priced against the dollar; but, they adjust in the marketplace as the value of the
dollar goes up and down.
7. EXPERT PROJECTIONS: Let’s title this missing projected economic
targets. In the United States, Europe,
Japan, and China the experts who govern have set targets for economic
performance:
a. Growth – they over-estimated
b. Inflation – they over-estimated,
except in China where they vastly under-
estimated.
c. Deflation – they all
under-estimated
d. Recovery – they are
still at it six year later
NOW
WHAT?
Well who knows? But to be contrary, after all economists
always talk about the ‘on the other hand’:
the U.S. economy is still improving, slow but improving.
a. Consumers carry
less debt.
b. Corporate profits
have been good.
c. Employment is
improving.
d. By-and-large
inflationary fears are not realistic.
e. Housing and
construction, two of the sectors that were hit the hardest, have
been
improving.
So, what is the Stock
Market doing: selling off or taking a
little breather?
Time to take
profits? Take some money off of the
table? If you don’t have profits after
this run-up of the markets over the past several years, you haven’t been
playing the right game and don’t belong in the stadium at this time.
Will it be an orderly
retreat in stock prices to reflect realignment of future expectations; or, will
a pullout by a major investor or two be followed by a stampede to get out?
WAIT AND SEE!
