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. www.prairie2.com