The Economy
America’s Forgotten Terror
April 1, 2002
Dreamland...
So you think this Recession has ended? Just hang onto your assets because there will be economic bloodshed long after the last Taliban is forgotten!
This writer penned an article “Economic Suicide” a little over a year ago. In that article, the reader was presented with two choices: (1) pay now or (2) pay more later. The article’s central thesis was that the overheated economy had created a situation that mandated a recession in its quest for equilibrium and that, in lieu of a recession in 2001 – 2002, the government could forestall the unpleasantness by allowing the fire of inflation to rear its ugly head.
With greater inflation tolerated, the consumer could continue its delusion of a free lunch into a short-term future with an end point shrouded by the dark clouds of an inevitable correction (spelled recession). A Future Recession that would be more severe and painful than the 2001 – 2002 version.
Score another victory for the supremacy of duplicitous behavior and naiveté…both on the part of this country’s leadership and the inability of the public to swallow the medicine of truth.
Look At The Facts...
The rate of unemployment hit its low in October 2000 at 3.9%. Then, as escalating energy prices and failed investments in “Sugar Plum Fairy” companies started to suck the growth out of the economy, unemployment started to increase as the economy started to slow. From a rate of 4.2% in January 2001 to a high of 5.8% in December of 2001, unemployment acted in a very normal sequence.
As the Gross Domestic Product (GDP) cooled from its 5+% growth rates to an actual contraction of a –1.3% for September 2001, unemployment had to increase. Unless, of course, in this era of “new” economies, “new” wars and “new” everythings some child prodigy has discovered the secret ring which keeps people producing products that nobody is purchasing and, simultaneously, granting pay increases to keep consumption growing when billions are being lost to increased energy prices and disappearing stock market wealth.
So Blame It All On 9-11...
Despite all the facts to the contrary, all of the economic ills of this country have become the direct result of terrorist guided airplanes falling from the sky.
Wrong!
The U.S. economy was heading into the “pooper” long before 9-11. Growth was slowing, unemployment was increasing and paper wealth was disappearing in white-hot fires of a stock market meltdown.
The problems that caused the bankruptcy of Enron, Kmart, Global Crossing, etc. were not the result of 9-11. They were the result of various combinations of bad management, bad investment analysis, bad accounting, crackpot investment ideas and childish greed. At best, 9-11 accelerated the doomsday time clocks for these companies.
But, in a few hours, that fateful day of 9-11 stood reality on its head.
The President had a war to fight and carte blanche access to the cash box. The Democrats almost gleefully started to relive the George Bush the Father political dream with visions of a brilliantly executed military campaign rapidly receding into the pains of a darkening economy.
Fool Me Once Shame On You, Fool Me Twice Shame On Me...
Contrary to all Democratic hopes and expectations, President Bush the Son is no idiot. Quite to the contrary, George W. has sent chills down the spines of the nonbelievers with his presidential and leadership skills.
And, not being a fool, means that George W. will not step into the same political trap that decapitated the presidential crown from his father. By Election Day 2004 there will be a successfully waged war and a happy economy to usher in George W’s reelection.
The Democrats have almost guaranteed this by working overtime to find an issue to discredit the President and take some of the luster off of George W’s stratospheric approval ratings. By trying so hard to muck up this economy and create an election year issue, the Democrats have pushed George W. into spending his way around the economic landmines the Daschles of this country have been hoping to detonate.
And In Steps Merlin The Magician...
With a few waves of the magic presidential wand, George W. has not only made the recession go away, he made it never happen.
From its paltry high of 5.8% in December 2001, unemployment has successively decreased to 5.6% in January 2002 and 5.5% in February 2002.
This writer would love to meet the little elf that can find a recession with less than 6% unemployment in this country’s historical data vault. It just does not happen. If a recession, by definition is two to three quarters of negative GDP growth, one is hard-pressed to find that occurring simultaneously with unemployment at less than the normal rate of 6%.
By what slight of hand has George W. vaporized the so-called recession? Just read the New York Times, “Sharp Rise in Federal Spending May Have Helped Ease Recession.” (NYT 23 March 2002):
When a bitterly divided Congress failed to pass an economic stimulus bill last fall, many predicted the recession would only worsen. But while few were paying attention, government spending surpassed the amounts envisioned in the stimulus measure, exceeding what even the most vociferous advocates wanted.
The unexpected surge along with the remarkable strength in consumer spending helps to explain why the recession, to nearly everyone’s surprise, has been so mild and may be ending.
Alas, as predicted in “Economic Suicide”, we are spending our way around the unpleasantness of recession.
But At What Cost?
A little birdie is whispering bad things into this writer’s ear. Once again, Joe & Josephine average American are going to be unexpectedly caught in the economic wilderness.
Everybody is getting relatively happy…the specter of recession is rapidly receding like a bad dream. But don’t get too giddy yet. The pleasure you are feeling is like the effect of a narcotic pain medication…when it wears off the affliction will still be present, only much worse.
As the public whistles the recession away, the “Smart Money” is preparing for the inflationary storm. Gold stocks like Newmont Mining are hovering around their 52-week highs. This was not a reaction to unrest in the world; it is a hedge against the growing tide of inflation. The gains in inflation hedges are corresponding with the whispers of inflationary indicators in the news.
From Reuters, “Fears the U.S. Federal Reserve (news - web sites) may soon raise interest rates lingered after the latest economic data showed some consumer prices rising more than expected in February”.
From the Associated Press, “Stocks slipped early Thursday after the latest consumer price report showed a slight increase, raising fears of possible inflation and higher interest rates”… “The gain of 0.3 percent in the core rate says that you’re not seeing weakening in core inflation. That means the Fed may have to be tougher in its tightening cycle” which will be seen as a negative for stocks, said Bill O’Neill, a strategist for JP Morgan Fleming Asset Management, which oversees $600 billion”.
Best Guess...
If this writer could gaze into Merlin’s crystal ball the best bet is that there is not a pretty picture.
Upward pressure will be on wages and commodities (including energy). More money will be buying less product and the economy will be a pot-hole strewn path.
Political pressures will mandate the continued priming of the economic pump into the mid-term Congressional elections. Even idiots know that elections are not won by being the perceived cause of a festering recession.
Once the mid-term elections are over, the 2004 Presidential race begins. Maybe there will be some upward pressure on interest rates for cosmetic reasons but that can be blamed on the autonomy of the Federal Reserve and its “maverick” chairman, Mr. Greenspan.
Sometime in the forth quarter of 2004 the Federal Reserve will get serious about the need to slow the economy down and seriously start pushing interest rates up. By then, the fires of inflationary pressure will be burning brightly.
By the first quarter of 2005 a deep-V recession will be induced which hopefully will only last 18 months just like President Reagan achieved with Federal reserve Chairman Paul Volcker in 1981 and 1982.
By the third quarter of 2006, as a result of a rather deep recession, equilibrium will be restored to the economy, inflation will be under control and the stage will be set for renewed priming and future real growth.
But…there is a long path between the present and mid-2006! Do not buy into the illusions of the Sugar Plum Fairy and keep both eyes on the inflationary ball.
Most importantly…remember that these are just the musings of a writer giddy from the laughing gas in the EtherZone. If this was the truth wouldn’t the “experts” be the ones telling you about it?
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