Thursday, December 16, 2010

The real Armageddon

New consumer price index numbers are out and core inflation continues to drop, now getting precariously close to zero. This is the most troubling of economic news in a world largely consumed with troubling news. The Fed is printing money like they got a 2 for 1 deal at the copy shop. However investors and corporations continue to behave like we are entering a deflationary slump with bond prices continuing to fall and the Fed’s QE2 having no apparent effect.

The average consumer isn’t concerned that prices are falling, he just likes the deal he got on the new flat screen for Christmas. Never mind that his wages are continuing to fall and that he may lose his job tomorrow. Once we tip over into a deflationary spiral it becomes nearly impossible to stop. Consider that two years ago when things were really falling apart we weren’t experiencing actual deflation but rather what economists call disinflation or a lessening of inflation. We are really in far worse condition now, in case you wondering why there are no new jobs.

Obama had the captains of industry over to the White House this week to find out how to get them to spend the 1.7 trillion in cash they are sitting on. Obama would like them to create a few million jobs but they are barely operating a 80% capacity and inventories are high. Contrary to Reagonomics, supply side simply doesn’t work.

We don’t know if they asked Obama for a tax holiday on repatriating foreign profits as Bush did for them but you can bet it’s on their Christmas wish list. You see over a trillion of this corporate cash is overseas and they don’t want to pay taxes on it to bring it back. On the other hand maybe they would rather keep there.

You see in reality American corporations are not in good shape at all. They have trillions in junk bonds on the books that they were able to sell at a fraction of percent interest thanks to the Federal Reserve lending money at nearly zero interest rates. So this cash is really just borrowed money, they haven’t paid their taxes on the profits they did make and instead they spent the money on executive compensation.

Really these companies, like the big banks are just zombies. GM wasn’t the only big company bailed out the last time because of all this Federal Reserve money. If deflation strangles demand and slashes corporate revenue then a lot of these companies will collapse in a matter of weeks once the panic starts.

This could be all unraveled by strong government intervention but you have a perfect storm brewing for inactivity. The Obama administration is still plagued with a lack of leadership by having hundreds of his appointments being held up by the Republicans in the Senate. Congress is now going to be hamstrung by tea baggers who believe there should be no government. If things start to unravel then the collapse of the USD as an international currency is a very real possibility and we are completely dependent on imports that we will have no way to pay for.

No wonder they are talking about “duck and cover”, they don’t want to talk about the real Armageddon that’s coming.


Anonymous said...

"The Obama administration is still plagued with a lack of leadership by having hundreds of his appointments being held up by the Republicans in the Senate."

And yet throughout this, Obama has refused to use the Recess Appointment to fill these positions. Republicans know that Obama will avoid a conflict at all costs and they are making him pay for it. Worse is that Republicans are making us all pay for Obama's penchant for conflict avoidance.

Anonymous said...

I'm no Republican fan, but if the "world's most powerful man" refuses to use ALL the powers at his disposal then America's resulting loss is primarily HIS responsibility.

John Puma

prairie2 said...

Why would you expect Wen Jiabao to use all his powers to help America? :)

Anonymous said...


Imperial attitude apparently doesn't evaporate as quickly as imperial power!!

John Puma

Anonymous said... your work. Thanks for getting the real info out into the public. What is a good economics discussion forum to talk about issues like these?

Anonymous said...

The painful truth quote of the day:

"We hard-hearted, small-government guys are often damned as selfish types who care nothing for the general welfare. But, as the Greek protests make plain, nothing makes an individual more selfish than the socially equitable communitarianism of big government. Once a chap’s enjoying the fruits of government health care, government-paid vacation, government-funded early retirement, and all the rest, he couldn’t give a hoot about the general societal interest. He’s got his, and to hell with everyone else. People’s sense of entitlement endures long after the entitlement has ceased to make sense."

--M. Steyn

prairie2 said...

How is it "I've got mine" when it is for everybody? "Small government"? read that government by, for and only to benefit the rich. Greece wouldn't be in trouble without Wall Street bankers. All the countries that are failing bought into Reagan/Thatcher economics and an economy based on financial services. The "socialist" countries with the "nanny state" are all still doing well. Greece was not one of the them, Greece was dragged under by crony capitalists who got in bed with Wall Street. Right wing talking points are no longer hypothetical, we have seen the results.

SanMigMike said...

I've felt for years that Republicans hate socialism...for it for business (or in other people).

Funny how we were sold a bill of goods in 401k's and other "retirements" that only really existed to let companies get out of having a real retirement (note that a lot our political leaders had sense enough not to buy into such junk for their own retirement) and to let Wall Street have yet another way to rip people off. I can recall arguing with guys I flew with that their beloved stock broker didn't get paid for making them money...they got paid for making them buy and sell stock...if you made money...okay, if you lost money that was okay too...but they got paid when you bought or sold stock.

Some people also accuse Thatcher and Ronnie using 401K's and other retirement investment programs that involved the stock market to get workers (that is most of us) to support things against our best bring the stock prices up making us feel better about our retirement. Thoughts on that?

I know I have felt for years that what is good for Wall Street isn't good for America and most Americans and I think the proof can be seen around the world. The countries that bought into it have the same type of problems we do and the ones that had sense to run away are doing much better.