Posted by Michael A. Kamperman on June 24, 2009
Yesterday, President Obama acknowledged the unemployment rate is likely to exceed 10%. He was asked at his press conference if more action was necessary to boost the economy. He said the stimulus plan still had a ways to run and he wanted to wait and see if the actions taken so far are enough to restore the economy. The Congress is bogged down in energy reform, healthcare reform, and financial regulatory reform and has simply taken its eye off of the economic ball. That has left the Fed as the last line of defense to battle the economic depression. But the Fed has yielded to the bond vigilantes worried about renewed inflation from quantitative easing. The Fed has decided to take no further action at this time and will wait and see how the economy and the markets respond. What is significant about the Fed’s lack of action is their own reading of the economy is inflation is not a threat in the near future and they expect commodity prices to moderate and respond to supply and demand imbalances. Additionally, the Fed does not see an economic recovery taking hold yet. It only sees the rate of economic decline slowing. My biggest complaint is the Fed has gone on hold because it is confused by the trading actions of speculators, not because it anticipates a potential V-shaped recovery and a resurgence of inflation. Washington has now officially signaled this week that they are on the sidelines and are willing to wait and watch before taking further action. Since the President already anticipates a 10% unemployment rate, it is reasonable to assume that a significant impetus for further economic action will have to wait until the unemployment approaches 11%.
If one looks back at the severe U.S. recessions of 1973-1974, 1980-1982, or the milder recessions of 1991 or 2001, then one would see that a V-shaped economic recovery did occur. So my take is Washington doesn’t think it’ different this time. They have bought in to the rhetoric that the risk of a deflationary depression is now off the table. Why? The economic collapse can be traced directly to a crash in the non-government asset-backed securities market that relied upon the credit rating agencies. This market fueled the shadow banking system that was responsible for providing over 70% of the credit needs of the U.S. in recent times. This market remains broken and the commercial banks have not increased lending despite the TARP and the increase of reserves provided by the Federal Reserve.
Perhaps if they got out of Washington and talked to small business people rather than think tank economists they would actually hear what is happening on the ground in this economy. The consumer accounts for 70% of U.S. economic activity. The consumer is facing rising unemployment and still further tightening credit standards. Reports from realtors are that strict new guidelines for appraisals from Fannie Mae and Freddie Mac are killing multiple potential sales transactions. Unfortunately, Washington seems to believe that our economy should rely much more on manufacturing, exports, and consumer savings. The only problem is they have yet to answer the question increase exports to whom? Today, the Swiss government intervened in the currency markets to drive down the value of their currency against the dollar. The world doesn’t want to lose export market share to the U.S. The Fed should have upped its program of quantitative easing today. The President and the Congress should be focused on fixing the broken credit markets before they try to tackle long-term issues such as healthcare reform, energy reform, or financial regulatory reform. Because a lack of further needed action from Washington the possibility of a 1930’s deflationary depression is not only still on the table, it is the probable outcome.
Posted by Michael A. Kamperman on June 5, 2009
My Letter to the Editor in the June 5, 2009 WSJ:
http://online.wsj.com/article/SB124416582412987641.html
Regarding Mary Anastasia O’Grady’s “The Weekend Interview with Richard Fisher: Don’t Monetize the Debt” (May 23): Texas went through a debt-induced, asset bubble-popping in the late 1980s and lived to tell about it. But that happened because Texas had vibrant businesses that had growing customer bases outside of Texas. Also, people flocked to Texas from California and New York to scoop up cheap real estate. Texas received a lifeline of growing trade and out-of-state investors that wasn’t available to the U.S. in the 1930s. I know this because I was a banker in Texas in the 1980s and witnessed nine of the 10 largest banks go out of business. Similarly, Japan has received a lifeline of global trade from growing economies in the U.S. and China that wasn’t available to the U.S. in the 1930s, either.
Mr. Fisher, where is our lifeline going to come from? The German and Japanese economies are in worse shape than ours is. Mexico is in a serious depression. We cannot export our way out of this crisis, and massive amounts of foreign money will not be coming to our shores to snap up bargains. Other countries have bargains in their own backyards. In short, the only way out of this crisis is to monetize the debt. We need massive quantitative easing, and we need it now.
If we don’t monetize the debt, the federal government will have to reduce spending. If that happens, we could see asset prices in aggregate fall below the amount of the total outstanding private-sector debt. At that point our economy will not enter a phase of “creative destruction”; it will simply enter a phase of destruction.
Michael A. Kamperman
Waco, Texas
Posted by Michael A. Kamperman on June 3, 2009
If you can’t handle the heat, get out of the kitchen. Carping and criticism come with the territory of leadership. Geithner says “we have a strong independent central bank” and “the U.S. does not intend to monetize the debt.” This message for the Fed comes after Geithner got chewed on in China for U.S. policies that are perceived by some Chinese not to be in the best interests of their large quantity of U.S. Treasury holdings. Then, Bernanke says “Even as we take steps to address the recession and threats to financial stability, maintaining the confidence of the financial markets requires that we, as a nation, begin planning now for the restoration of fiscal balance.” Pressure and protests from China, bond vigilantes, followers of the Austrian School of Economics, and other worry warts should be ignored. Unfortunately, it appears Geithner and Bernanke may be doing something more than throwing these misinformed groups a bone. It appears there could be a change in U.S. policy to ease off of both quantitative easing and significant further stimulative spending by the federal government. I pray this is not so.
We are in a debt-induced asset bubble popping deflationary depression akin to the one in the 1930’s. The New Deal eased some of the pain during the Great Depression, but it certainly did not come close to ending it. World War II ended the Great Depression. To country decided that winning the war was more important than anything, and no consideration would be put in front of the war effort. To fight the war, the U.S. government spent the equivalent in today’s dollars of $8 trillion per year for four years in a row. The current hodge-podge stimulus plan of $789 billion is spread out over two years. Furthermore, much of the direct spending is simply plugging holes in state budgets that cannot meet basic unemployment and Medicaid expenditures. The U.S. government entered World War II with a relatively low amount of debt compared to U.S. GDP. It also had a nation with a strong savings ethic and not many goods to spend money on. Hence, it was able to internally fund most of its cash needs. Today, the U.S. has a much higher debt to GDP ratio and we are just in the process of being forced to relearning our savings ethic.
China would benefit much more from a resurgent U.S. economy than it would from a country that took on austerity measures to keep its currency high. Besides, China is the biggest currency manipulator in the world and doesn’t even allow the yuan to float freely. And China doesn’t have enough money to lend us to solve our problems anyway. We need to go down a different path whether they approve or not. The bond vigilantes are worried about a coming surge in inflation. With unemployment rates soaring and capacity utilization rates plummeting, exactly what inflation are they talking about? For those worried about a collapse in the dollar, the question is collapse against what, the yen, the pound, the euro? Those societies face bigger challenges than we do. And we face huge challenges. The next major bailout will probably be the State of California. We need much more in the way of quantitative easing and we need much more in the way of stimulus spending. Without it we will repeat the experience of the Great Depression of the 1930’s. It only ended when unrestrained spending to win the war started after Pearl Harbor. We are facing an economic Pearl Harbor and this is no time for leaders that don’t have the stomach and the intestinal fortitude to lead.
