My Two Cents - "Are you Hurting Yet?"

07/14/2006

Upon requesting clarification, I confirmed that he was indeed referring to the bludgeoning of the US equity markets. I pondered this question for several minutes, and a few things became obvious. People perceive pain in different ways, people have different tolerances for pain, and some people will act on pain right away, and others it takes a whole lot of it to get moving. I'm enclosing my response to illustrate one perspective on pain of the economic variety:

Hey there,
Ok, I see where you're going. The answer is not so easy. In one way we're not hurting, but in another way we are. Let me explain. Last year we made some cutbacks in our expenses. Basically looking for fat and trimming it. We refinanced the house and shaved .75% off the fixed rate and saved $150/month. And no, I didn't take cash out on the refi! The second cutback was cell phones (please feel free to continue reading after you pick yourself off the floor). I got rid of $75/month in cell expenses by getting two prepaid phones which runs us about $15/month. So the aggregate amount of our cutbacks was around $200/month give or take. That money has been absorbed by rising costs on all fronts. So while those cutbacks didn't necessarily detract from our standard of living, the savings didn't last long. Now let's look forward. Costs are still rising. I'll get a 3.4% raise this year. What cutbacks will I find this year to keep even? We're still saving about the same amount as last year, but next year, unless we're willing to take a chunk out of our standard of living, the savings rate is going to begin to fall. Maybe we can turn the thermostat a few degrees or cut out cable TV(which we're probably going to do anyway), but pretty soon we'll be at a floor. The simple fact is that incomes are stagnant in the face of rising costs. I have taken some steps to protect our purchasing power, but there is still considerable exposure. I guess eventually we'll have no choice but to join the long list of consumers who are on the credit dole. It seems to be the American way.
Andy

For all you central bankers out there, the above situation is called stagflation. You should familiarize yourselves with the term.

After I sent the above reply, I got to thinking about something an economics professor of mine said. He said the more mouthpieces that you see telling you how great something is, the bigger the underlying fraud. Relating that to our economy, it makes total sense. Helicopter Ben, Printing Paulson and any other bureaucrat within 10 miles of a TV camera will tell you how great this economy is. If that were really the case, it would speak for itself, would it not? Why then does it act like a used car salesman with a severe case of laryngitis and say nothing in its own defense? The good news is that at least some people have this figured out. They are the ones listening to the mouthpieces and looking at their bank accounts and saying something just isn't quite right. How can this economy be so great when more and more families are taking on debt just to maintain a standard of living or in some cases keep food on the table? And why is it that the mouthpieces say there is no inflation and yet they don't even bother to count food and energy? Who does that? These folks know its bull. Unfortunately, they are few and far between.

As always though, there are two sides to every coin. While half of America is sitting stupefied watching from behind a pile of credit card bills as this parade of imbeciles tells them they are doing great, the other half of America is singing the virtues of Bernanke (who the heck is he anyway they ask?) and sucking down every drop of the nonsense. They are way too busy for prudence. They are in spending mode. Buy buy buy like there is no tomorrow. Waving credit cards like a ninja on steroids, they assault the shopping centers, the malls and eBay. Yes, things are great. Their job is secure, their house is going to appreciate in value by 20% every year for infinity. Stupidity in perpetuity, ad infinitum. And if things don't work out, they just know that someone's got their back. Yes, the 1955 Yankees, George Washington (and his horse), Napoleon, and God himself will step in to prevent them from getting what they've got coming.

There are definitely two sides to every coin. So let me ask - "Are you hurting yet?"

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.