We are in a death spiral, economically speaking, and the economic "elites" know it. And they are scared. More scared then I have ever seen them in my lifetime. They have pushed things too far and the monster has broken free of its cage. When the credit crunch first hit, I thought that the hysterical cries from Wall Street to Bernanke to lower rates was simply motivated self interest, a microcosm of disaster capitalism (taking advantage of a real or perceived crisis to push for reform favorable to the corporatists) described by Naomi Klein in her book "The Shock Doctrine".
I did not agree with the calls to cut rates then and still don't as it does not address the underlying problems and will serve to only kick the can down the road all while adding to the problem in the form of inflation / dollar devaluation. If anything, the Fed should be raising rates at this point and protecting the dollar. A strong dollar would correspond to a lowering of oil prices, which would take some pressure off of our economy and would drive out some of the excesses and imbalances that have accrued in our financial system over the past decade or so. It would lead to an asset price correction for the most part and that would be painful for some in the shorter term but it would also set the stage for a stronger foundation upon which the economy could build going forward and give our policy makers more flexibility in dealing with future challenges.
It is obvious to all now that the sub prime mortgage woes have spread into other parts of our economy and therefore has started the process of the death spiral whereby lower consumption leads to economic contraction which leads to more unemployment which leads to even less consumption. This broader death spiral is running parallel to the housing death spiral already in full swing whereby home price depreciation and mortgage credit tightness leads to less people purchasing homes which leads to lower prices still. Our policy makers and those in the know are now aware that the death spiral has begun. The now frantic calls for a stimulus package is further evidence that the powers that be realize the trouble we are in and are looking for a way to stop the spiral. But any stimulus package is probably just spitting in the wind as it does nothing to address the underlying fundamental problem which is a lack of demand. A $1,000 or even $1,500 rebate per household will be spent and gone quickly and will serve to temporarily boost GDP but low and stagnant wages, increasing costs of living and too much debt will remain.
The elites are essentially playing a confidence game, hoping that the resulting GDP surge for a quarter or two will be enough to change perception and increase confidence in the system so that the death spiral, which is even now beginning to pick up steam, can be brought to a halt. If it succeeds, then we will have bought some time. Time, however, is only useful if you assume our policymakers (and us) will learn from their (and our) mistakes and change their (and our) collective behavior. If not, then we will be right back here in a few years time with an even bigger problem and the death spiral will then complete its work. If this confidence game fails, then when the dust has cleared from the ephemeral boost the death spiral will simply resume its downward course, only at a faster and more destructive pace as we will have piled the additional debt from the stimulus package onto the system for no gain.
I think part of the problem with the stimulus package is that the financial and political elite are not really aware of what the problem is. They have been approaching this in a classic way by cutting rates and increasing the money supply and now look set to start literally handing out checks via rebates to the "paycheck to paycheck" crowd which will certainly boost spending briefly.
But then what?
Once the money is spent, the average American family is still stuck working in a job whose pay is stagnant or declining in real terms and whose costs, especially costs for things that they need and that they purchase on a regular basis, continue to rise. They will still be stuck with a declining asset (their home) upon which further equity extraction will be hampered by tight credit markets and declining valuations. There will still be rampant offshoring of jobs which means that there will be no wage inflation to speak of anytime soon. And the top fraction of 1% will continue to capture more and more wealth and income as a percentage of the whole. The problem is one of demand but a one time check is not going to improve that situation.
We used to spend what one bread earner could make in this country. Then we started sending two earners out into the workforce to keep up with costs and to buy some extras. Then, when it got tight even with two earners plugging away we began to borrow to fuel consumption, first from credit cards and then from home equity spending. Now that our credit cards are maxed and the home equity gravy train has been severely compromised we are having to get by with what we can make again. And that has also been eaten away by significant increases in healthcare costs, fuel, food and utilities not to mention education costs. Combine all that with the fact that unions have been largely crushed and companies these days have the option of utilizing cheap emerging market laborers (both skilled and unskilled) the wage outlook for America has never been bleaker.
This is as close in my lifetime as we have ever been to a general economic collapse and the next six months will be extremely interesting to see if the confidence game being waged will buy us some time or if the death spiral will continue to expand outward in concentric circles, eventually consuming our system in a depression like event. But I do know for certain from the rhetoric being reported that the Fed and our policy makers have lost control of the system and they really do not know what to do. And that is a scary thought indeed.
Enjoy your weekend.