Running out of options
At the end of August, Federal Reserve Chairman Ben Bernanke gave a much-anticipated speech on the state of the economy and the Federal Reserve's approach towards dealing with the current crisis. Our tightly-wound markets reacted with glee at the prospect that further quantitative easing (aka printing money) would reignite the two-decade financial delusion we have just been through. I was left a little bewildered, as should everyone that has an understanding that our current pattern of development is not financially sustainable, regardless of how the economy is functioning.
The NY Times covered the event with the headline, "Policy Options Dwindle as Economic Fears Grow". The article covered the essence of the speech, which was, "how do we get Americans spending again?"
Early this year, some economists declared that the cycle was finally righting itself. Businesses were restocking inventories, yielding modest job growth in factories. Hopes flowered that these new wages would be spent in ways that led to the hiring of more workers — a virtuous cycle.
But the hopes failed to account for how extensively spending power had dropped in the American economy, and how uneasy people were made by every snippet of data showing that houses were not selling, employers were not hiring, and stock prices were foundering.
We're trying to create a "virtuous cycle" - get people spending again so that shelves get restocked, thus leading to more hiring and more people with money to spend....and on and on and on.... The problem is that people are "uneasy". This is written as if the "uneasy" mood is not completely rational, that somehow people with underwater mortgages, huge amounts of consumer debt, complete loss of mobility and a tightening job market should not be uneasy.
The reality is that Americans are acting sane. Our consumer-spending-driven, consumption-based lifestyle hit a brick wall two decades ago. Our response was to dream up even more ways for people to access credit to keep things moving: interest only mortgages, home equity loans, credit cards for teenagers, etc...
Remember when we used to buy things on layaway? For those of you that don't, layaway is when the store owner would take the piece of merchandise, put it in the back in storage for you, and then you would pay for it over time. Once it was paid off, you could take it home. That just didn't drive the economy as fast as credit, which allowed you to take it home now and worry about paying for it later.
So it really should be no surprise - even if it is really depressing - that our country's policy makers think that the way to get things moving again is through even more credit.
The primary way to attack deflation is to inject credit into the economy, giving reluctant consumers the wherewithal to spend. The chief deflation fighter is the Federal Reserve, which traditionally adjusts a benchmark overnight rate for banks that influences rates on car loans, mortgages and other forms of credit. The Fed pulled this lever long ago, and has kept its target rate near zero since late 2008.
The Fed has also been more creative. During the worst of the financial crisis, the Fed relieved American banks of troubled investments, many linked to mortgages, to give the banks room to make new loans.
Make new loans? Is this what our future depends on; the ability of all of us to take on even more debt? We need developers to take on more debt to build housing subdivisions, cities to take on more debt to subsidize infrastructure and consumers to take on more debt to buy it all, along with all the trimmings from the local big box retailer.
This is what the smartest people in the country believe is our salvation? Are they insane? This Ponzi scheme is what got us here in the first place.
I feel like the American economy is a sick patient on the stretcher. We've just given multiple shots of adrenaline, shouted "clear" a few times while we defib'd the heart and now are all looking at each other in utter panic not knowing whether or not to just keep going with the only thing we know how to do or call in the priest to perform the last rites.
At least Bernanke seems to understand the end result if we do keep on going: inflation. Fighting inflation is his top mandate, after all.
“The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation,” [Federal Reserve Chairman Ben Bernanke] said. “We do.” Then he added: “The issue is instead whether, at any given juncture, the benefits of each tool, in terms of additional stimulus, outweigh the associated costs or risks of using the tool.”
Let me interpret that statement for you. The Chairman is saying that we can print enough money to make everyone's underwater loans solvent, give everyone enough money to spend on new cars and wash machines, and generally raise our Lazarus economy from the dead, but doing so will make that money near worthless. You might feel better about all the new equity you have in your home until you went to the grocery store and found out that a week's worth of food cost you $800. Or a tank of gas cost $250.
The dramatic expansion of the national debt — which began in the Bush administration, via hefty tax cuts and two wars — has ratcheted up fears that, one day, creditors like China and Japan might demand sharply higher interest rates to finance American spending. Those rates would spread through the economy and inflict the reverse of deflation: inflation, or rising prices, as merchants lose faith in the sanctity of the dollar and demand more dollars in exchange for oil, electronics and other items.
We have too much debt. And I'm not just talking about public debt (which is enormous), but private debt in particular. Private sector indebtedness dwarfs public debt.
Unfortunately, there is only one decent way out of this. It is not without pain, but it is much less painful than the alternative.
“The recession is the cure for the disease that affects the economy, but the politicians don’t have the stomach for it,” says Peter Schiff, president of Euro Pacific Capital, a Connecticut-based brokerage house. “They’re going to keep stimulating the economy until they kill it with an overdose. The hyper-inflation that results is going to be far worse than the cure.”
We need to stop trying to stimulate our way to prosperity and come to grips with the fact that the American Dream we have been sold over the past generation is not real. Towns and neighborhoods need to embrace a Strong Towns approach, our traditional way of building community alongside our balance sheet, to renew local prosperity, regardless of what crazy decisions are made in Washington.
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