Jul 30 2006
Inevitabilities
With the latest economic data showing a rapid cool off – especially in housing and consumer spending, we are somewhat bemused at the puzzlement which abounds at still rising prices. Amid hopes of a “soft landing” and the Fed ending rate hikes, we wonder why the pundits don’t seem to “get” the underlying problem.
The fact of the matter is that prices are unlikely to ever go down. Why? Because amidst perhaps one of the most massive, continued increases of the money supply in history – prices can only go up! The only way for prices to go down meaningfully is to contract the money supply and credit – for real — which is something the Fed and Congress have noooooooooo intention of doing. Let alone the guts.
Why? Well for starters, with the savings rate of Americans below –1%, if that rate ever hit anywhere near the historic level of +10% — the economy would suffer a massive slowdown. So tied is our economy to borrowing – that if US citizens ever pulled 10% of their income out of it in a relatively short period of time – the results would be predictable. Even though Americans need to save far more – we will continue to be induced to borrow and spend. The key question is – how much more in debt are Americans willing to go?
On the comical/pathetic side, was the recent Bernanke testimony before Congress. In the same session, Congressman harangued the Fed Chairman for rising prices (in goods and services) – and declining prices (especially California real estate) and slowing real wages. As I listened to the demagoguery – the thought occurred to me that our representatives in Congress either do not understand our economic system, or they are choosing not to. For Americans – that is supremely sad.
Now it all gets really interesting. So wed is the American economy to debt – that any turn towards fiscal responsibility & savings will be extremely painful. We have also entered a period where costs are still rising, while the economy is slowing – and the dreaded word “stagflation” is being used more and more frequently. In our opinion, the most likely path chosen by the Fed and Congress will be the easiest one – with a primary focus on today, with getting elected – giving little weight to long term consequences and economically sound policies. Why do we think this? Because it has always been this way.
Knowing this – we prepare for the inevitabilities and plan to take advantage of them. You should too.
