|Is Getting Across Based On Hope And Prayer?|
The rate and ease at which traffic flows across a bridge can change dramatically if faith in the structure is lost or becomes an issue. Much of how society reacts is based on faith in its institutions. A very serious concern should be that many economist have lost or discounted the strong connection between savings and the important role it plays in society. This has skewed and undercut the core beliefs of many hard working people responsible for driving the economy. It is becoming apparent that higher interest rates produce a higher quality of growth. Low interest rates coupled with easy money policies increase risk and encourage a misallocation of funds by investors searching for higher yields.
How people tend to view the economy is based on the performance of prior years. This benchmark has become ingrained in us, and we always expect economic improvement. If last year was good but this year is no better the momentum is gone. Remember the quality of this growth is just as important as the quantity or the fact will come back to haunt us. We must not be distracted into thinking the long-term ramifications of an unsustainable economy built on debt and government deficit spending has much of a future. With a large number of people unemployed and living on government payouts the burden on society will become to heavy and much like the bridge it will eventually fail.
In recent years what have been considered economic norms have been altered and rules have been changed to shore up the crumbling financial foundations of countries across the world. In the past the cost of government normally included a reasonable market rate or carrying cost. This was also known as interest on the debt. As of late savers have been thrown under the bus. The free market has had less influence in determining the rates nations pay on their bonds and central banks have taken the lead. If this is not contained it leaches over into the real economy poisoning both growth and stability, and that is happening today.
Over past decades government's increased role in the economy almost guarantees that deflation will not become a major issue. I consider most of the major countries of the world to now have government centered economies and if you consider what a government employee receives as a salary as a "benchmark" wage it becomes difficult to envision a major drop in compensation to other workers. This would not be tolerated by society as non-government workers would simply stop working or seek more support from government and institutions to level the playing field. This seriously reduces the possibility of deflation, just yesterday the White House announced plans for another "stealth wage increase" in the form of a new law granting workers paid sick time.
It is important to remind ourselves it hasn't always been this way, but this can be difficult because when we look back at history the vision we see is always distorted by who tells the story. Currently, the media controlling and spreading information about the economy is linked at the hip and intertwined with the government. As we cross this bridge over troubled waters we should have no illusions that the path is sound or safe. After years of extraordinary intervention by both central banks and governments we have an unstable structure built in haste and untested. A structure built for their short term benefit and not for the people.
Today the economy of both America and the world is being forced to undergo a major transformation as mankind begins to mature. Over the last two hundred years we have filled the world with our ever growing population and shortened the distance between lands that were once far apart. These factors of change have stimulated economic growth in a positive way, but at some point devising an economic system that is sustainable long term has a great deal of merit. This would be much easier if governments stopped squandering and wasting the low hanging fruit. Optimism of this occurring should be contained to avoid major disappointment.
Footnote; Please feel free to explore the blog archives and as always comments are encouraged. This article ties together several post I have made over the last few months. More in the article below concerning how currency markets are beginning to show concern about the future.