|Where Do We Go From Here?|
The fact is we have created a "Government Centered Economy" and the newly elected Republicans controlled Congress will have power over the purse stings and government spending. It appears they now sit in the drivers seat and they should by all logic slam the brakes on the destructive policies that have distorted the economy and driven stocks to record highs, but why would they want to take on the hard task of bringing about painful reform? What a tangled web we weave, it is hard to deny that the economy is a manipulated mess propped up by government spending and artificially low interest rates that hurt savers. Politicians never want to be the ones to take away the punch bowl and be blamed for ruining the party, this means expect little help from Washington..
We should understand that demand is the true driver of economic growth and investment, it is not confidence. Lack of real growth is about lack of real demand, and much of the demand we see today comes from artificially low interest rates and QE that distorts the markets. Not only do low interest rates punish savers, but when rates are held at an artificially low level for too long capital is misallocated and flows into speculative investments. All growth is not created equal, quality does matter, we must differentiate the kinds of economic growth and understand that if you spend money but afterwards have little to show for it you have wasted it. Sadly, much of the money America "invests in itself" each year through government spending and programs falls into this category.
Several other acts are playing out on the economic stage adding to the confusion. World growth is slowing while countries remain mired in debt, this is making the dollar stronger in relation to the other major currencies. This will not help American exporters as month after month we suffer huge and unsustainable trade deficits. When coupled with huge government budget deficits the trade deficits move America in the direction of bankruptcy. It is a myth that we can "export" our way out of this mess, a myth spread by politicians preaching the "no pain" method of solving a problem. Another problem is that the good news to consumers of oil prices falling across the world are adding to destabilizing many countries and disrupting a major growth sector of the American economy. Energy production has been a big job creator for America but lower prices threaten to make drilling unprofitable and stop it dead in its tracks.
Adding to our woes job creation and wage growth has been weak compared to all other post recession periods. Recent Black Friday sales were dismal at best and unenthusiastic consumers suffering from years of poor wage growth and in a protracted state of weakness are unlikely to bail retailers out this season. We have seen a big shift in what consumers are buying, recently they have been spending more on autos and healthcare, but the Obamacare mandate may be guilty of creating stress in other sectors of the economy by redirecting spending away from them. Booming auto sales driven by low cost and sub-prime loans may do the same when payments come due. Many of these sales may be motivated because an automobile owner faced with a costly repair may be oping for this alternative verses putting money they do not have into their current ride. This allows someone in a weak financial position, such as those living on disability or student loans, to kick the can down the road while putting themselves into an ego boosting vehicle that they cannot really afford.
In many ways Bernanke and the Fed have put America on a path that mirrors the same unsuccessful path taken by Japan. A path that avoids real reform and bails out the very people that caused many of our problems. The Fed then upped the ante by setting the bailout and money printing machines on high and flooding America and the world with QE. By selling other central bankers on this solution the Fed now led by Janet Yellen has taken the lead in an experiment that is losing traction across the world. Real momentum seems to ebb shortly after each new wave of stimulus and another fix seems to constantly be needed. While they claim otherwise any thought that inflation is not higher has come from the false illusion brought from a very competitive retail environment and lower payments on auto loans and mortgages. This is a one off and will not continue.
Trouble lurks ahead because debt does matter and it will massively thwart growth going forward. If I'm correct, much of the idea of "so called pent up demand" in our economy is secondary and we are being pushed along by cheap money that is unsustainable. Interestingly, this is all occurring at a time the government continues to pour out billions of dollars each month in student loans, many of these loans will never be repaid. This is in a way its own "stimulus" package. It is hard to predict the future and often we are very surprised how events unfold, expect the unexpected. Remember that great forces are at work here and things are moving rapidly. The currency players and the carry trade is in constant flux. This is not a well rehearsed performance but rather a play it by the seat of your pants and this improvised effort to keep many balls in the air while the ground shifts under our feet. If these balls begin to drop things can go very badly in the blink of an eye.
Footnote; As always comments are welcome and encouraged. This article goes hand in hand with the article below that focuses on the destabilizing effects of falling oil prices.