Recently we have been getting mixed messages on the economy. On the downside, the burgeoning budget deficit is fueling the growth of our national debt at an alarming rate. The value of the U.S. dollar has been slipping as well. Unemployment broke the 10% barrier and no immediate turnaround is in sight. On the upside, stock prices have risen, replenishing the retirement accounts of many ordinary Americans. Retail sales seem to have stabilized, suggesting things might be getting better.
These positives and negatives appear contradictory at first glance, so let’s take a step back and consider the big picture. First, my guess is that unemployment is probably stabilizing. Unemployment shifts typically lag behind stock prices. Firms tend to delay layoffs as long as they can when the economy begins to slip, and they don’t hire back workers quickly when the economy begins to recover. The mixed signs of recovery suggest that employers might sit on the sidelines a little longer. If I’m correct, we could see an unemployment rate in the 10% range for a while.
Second, the stimulus package has had a modest short term effect, but one that cannot be sustained. Massive and irresponsible government spending has eroded confidence in the U.S. dollar, a problem whose long term effects will work against us when the economy attempts to recover. Countries like China, Korea, and Russia are heavily invested in the dollar and continue to buy enough of our debt to avoid a precipitous currency decline. These countries clearly want to diversify their currency holdings, so we can expect them to shift their holdings away from dollars when they have an opportunity in the future.
Third, the stock market’s recent climb is a welcome sign, but it’s probably demand driven. U.S. stocks are still relatively attractive when compared to those in other nations, but a key driver here is interest rates. In an effort to spur economic growth, the Fed is keeping interest rates artificially low, even below projected inflation. This might help borrowers, but these low interest rates translate into low returns for savers. Banks are offering 1-2% at best, which means that returns on “safe” investments won’t cover anticipated inflation. The only way to keep pace with inflation today is to put funds at risk, and the stock market is where investors typically do their gambling. However, the increased interest in gold and other commodities is evidence that many are skeptical about a sustained recovery.
What does this all mean? In my view we are experiencing a temporary and artificial recovery sparked by massive government expenditures that must be repaid and an easy money policy that encourages individual risk and overconsumption. Sooner or later this house of cards must tumble like the last one. Barney Frank and others are even talking about fortifying the Community Reinvestment Act as if its devastating effect on the economy over the last couple of decades wasn’t enough. The best case scenario is that Washington will come to its senses and pursue real economic change before it’s too late. A more realistic one is that we will experience a modest recovery of sorts for a season—possibly followed by slow growth or stagnation—and slip back into another recession thereafter. Sooner or later we must pay the piper. I’m hoping for the best, but preparing for a much more sober future.
i was kind of hoping that Moody’s or whoever does that stuff would downgrade its ratings of the U.S. credit worthiness….that would send a message to obama and nitwits in Congress…what would their reaction be – threaten Moody’s??
What happens if unemployment rises to 15%?
I agree with Parnell. I think the rate will hang around 10+ while Obama keeps throwing money at the problem and racks up the debt. But if it does hit 15, then the Dems can lose the House big time in 2010.