The Economy Guy

Stock rocketed forward as the economic news couldn’t have been worse.  Kind of confused?  That’s the way markets react – irrationally.  The very bad news was the Unemployment Rate going way up beyond where anyone had predicted.  And, it’s only been one month in 2009.

Bonds, the Dollar and Gold went sideways.

Oil and gasoline fell slightly.

In the news today…..

The Unemployment Rate hit 7.6% in January from the December level of 7.2%.  There were 598,000 jobs loss last month.

Let’s look at this number and ask the question “How bad is this?”  We’re told by the government that we MUST stimulate the economy or we will have a catastrophe.  Well, the unemployment rate under Carter was greater than 10% – much worse.  We’re probably on our way to 10% ourselves this time.  

However, the economy is much worse today than then.  We have zero interest rates from the FED.  Carter had high inflation – well over 10%/year – and high interest rates – the 30 Year Treasury Bond was over 14%.  Carter had the tool that he could stop the inflation by allowing the markets to stop the inflation by just allowing a major recession to occur.  Kind of a “do nothing” tool.  What about us?  We’ve decided that we must interfere with the market economy by “printing money” aka a stimulus package.  (BTW – one of my favorite items in the package is buying “insurance” for some of the animal raising industries.  Buying insurance wouldn’t stimulate anything.)

Printing money has a very nasty by-product.  It’s called inflation.

Another difference between the Carter era and ours is that today the people of the US are significantly reducing their spending and increasing their savings (currently as good as 6 years ago.) This means that 2/3’s of our economy (of the GDP calculation) is slowing way down.  In Carter’s era, people just didn’t have jobs; but, when they got a job they spent just like they did before they lost their job – in other words, it was the good old paycheck to paycheck spending pattern.  Today, we not only have less working people, and Americans are spending less/saving more; we also have stopped the pattern of pulling money out of our homes (REFI’s) to pay for our excess spending patterns.  

Question for you today…..

“What would happen if we didn’t have any stimulus package spending by the government?”

The theory behind the stimulus package is that the government must pick up the spending that has been lost.  Americans aren’t spending at least $1Trillion/year that they were before this mess began.  So, the $830B (?) Stimulus Package is a more-or-less direct substitute for that loss.  (BTW – has anyone else ever talked about the Stimulus Package this way to you??  I’ve never seen this type of logic anywhere else.  Welcome to economyguy.)

If we didn’t have any stimulus package, we wouldn’t have that $830B go into the economy (over 4 or 5 years – not immediately as you are expected to believe), so the recession we are in would deepen.  More people would lose their job.  The housing market would plunge deeper in value.  More businesses would go bankrupt.  More banks would go bankrupt.  Prices would continue to decline – as would wages – which is normal in a recession (or depression if it gets much worse.)  

So, that’s about it.  How bad is that picture?  Pretty bad in my opinion.  

So, you’re thinking that the Stimulus Package is a good thing.  It could avoid some of that pain.  Is that right????

An Alternative Future…..

Maybe not so “alternative.”

Here is the other side of that story.  As in physics, every action has an equal and opposite reaction.  The stimulus package action would have a reaction.  What reaction you ask???

The stimulus package is paid by borrowing money (selling Treasury Bonds to people, organizations and nations.)  Treasury Bonds are backed by the full faith of the American Government, and the American Government’s ability to pay these bonds is backed by YOU – YOUR ability to pay taxes.

By printing money (and by that I mean the selling of Treasury Bonds), we are flooding the world with additional dollar denominated assets.  The natural market says that the increased supply of these assets will result in a decrease in their value.  The decrease in value of US Treasury Bonds means an increase in US Treasury Bond INTEREST RATES.  US Treasury interest rates are used as a baseline for all other US interest rates (and strongly influence world interest rates).  Mortgage rates would rise, corporate bond rates would rise, corporate earning would fall as higher debt payments would reduce earnings, etc.

Maybe we are seeing the beginning of this right now.  We’ve seen the 10 Year Treasury Bond go from 2% to 2.95% over the past 6 weeks.  This is a major move in interest rates.

Where does this thought pattern lead?  Very simple.  At some point, buyers of US Treasuries would question the ability of the US Government to pay back all that interest – in other words, they would start to believe the economic solvency of the USA.  When (and not if) that begins, the US Dollar will collapse.  People will stop buying US Treasuries and interest rates will soar to levels NEVER seen before in the US.  Inflation begins for real.  Not HIGH inflation, but HYPERinflation – as the US government has MORE stimulus packages and more FED/Treasury bailouts.  Remember reading about buying a loaf of bread with a wheel barrel of Deutschmarks during 1920’s?  Yes, it could get that bad.  

And here is the rub, “What happens to the average American during this meltdown?”

Do you remember the scenario I painted (above) about how bad the recession would be without a stimulus package??  Well, it would be WORSE under this scenario.  There would be higher unemployment.  Housing prices would go even lower.  MORE banks and companies would go bankrupt.  But, here is the really bad part – everyone’s Dollars would become worthless (or at least significantly devalued).  You would truly be lighting your cigars with $10 bills. (Or, if you don’t smoke, you would be using paper money for toilet paper.)  Yes, this would be MUCH WORSE for Americans.

Is this scaremongering?????

That’s up to you to decide.  I believe this is the road we are moving down right now.

I’m putting my money where my mouth is.  I believe that the best way to protect yourself in this terrible scenario is to buy gold, have foreign currencies, and own “things.”  Money will be come devalued (worthless?).  “Things” will become valuable.  This is the world of inflation.  I feel sorry for the younger generation who hasn’t lived through inflationary times (thank you President Carter.)

The one thing I can promise you is that I will be watching this possibility closely as the US economy evolves.
 

Here are the last numbers:
Dow Jones 30 Industrial – 8281 (up 218 points)
10 Year Treasury Bond – 2.98% (up 0.08%)
Euro – $1.2942
Gold – $914 (no change)
Oil – $40.17 (down $1.00)
Gasoline – $1.25 (down $0.02)