I have been worrying lately about the state of the economy, and posting about the dollar, debt, and employment. Establishment economists and pundits have been talking about “V” shaped recoveries, green shoots, retail sales, earnings, and what not, to justify their view of recovery. Fed Chairman Bernanke joined the chorus in September.
Martin Wolf of London’s Financial Times has a great article about why we may not be on the road to recovery. He hits on many of the things I see as major impediments to recovery especially that traditional Keynsian multipliers will not work this time around. Evidence is starting to emerge, for instance, that the multiplier for the stimulus bill last spring is 1:1 rather than the estimated 1:1.5 or better that was hoped for.
The great depression was aggravated by fear and uncertainty. People pulled their money out of the banks for fear of bank failure. People were uncertain about the future so they did not borrow, even where credit was available. We are seeing fear and uncertainty now, hence the media campaign for recovery to banish fear. Fighting fear is good, but there are also good reasons to be cautious about where we are on the economic cycle. One should keep one’s eyes open and move with caution lest the frying pan becomes the fire.
In addition, there is the tax and dollar situation that Wolf does not touch on. We are looking at higher taxes for all taxpayers. We can argue about semantics, that they are just fees, but the net result is the same. Taxes are a drag on the economy, and that burden by all indications except for the promise of politicians is going to increase. Many taxpayer part with over half of their earnings in taxes, and ‘fees.’ In other words they work more than half their time for government.
We are also looking at a tanking Dollar. Both of these are serious negatives for consumers and hence the economy. We have not seen a currency panic in the west since the Weimar Republic. The Zimbabwe situation is a warning to heed. Imagine your paycheck declining in purchasing power by the day, while prices rocket upward.
Remember, Wall Street is by definition bullish as that is their business. No one is looking out for you but you.
