My Two Cents - "We're Ice Cold"

2/1/2008

As kids we used to play a game where one person would hide something, and their counterpart would look for it. As the person searching looked around, usually with a blindfold on, the person doing the hiding would tell them ‘you’re getting warmer’ or ‘you’re getting colder’ depending on their proximity to the object. When the searcher would get really close, the hider would yell ‘you’re red-hot!’ and usually success was not far away at all.

Over the past month, it has been our leaders wearing the blindfold, plodding around in the dark looking for the hidden object. The biggest difference between the game and today’s reality is that our leaders are the ones who hid the object in the first place; now they can’t remember where it is and they’re plodding along in the dark. I’m not confident that they have either the capacity or desire to find it either.

What is completely amazing to me is that, save for most of the folks who pay attention to this sort of thing on a regular basis is what Americans will continue to accept as leadership at all levels of government and industry. In that regard, we do get what we ask for; and in the end we’ll likely get what we deserve as well.

Today featured the release of the December job numbers, which were downright awful. For the first time since 2003, we lost jobs even with the hedonically adjusted numbers and the ridiculous birth/death model. Very noteworthy I might add. I immediately received a couple of emails from people saying that the stats were once again timed to give the Federal Reserve cover for cutting interest rates even further. It is indeed quite interesting how the Fed is always behind the curve, but how the data (ex post) always seems to justify their actions even when they’re dead wrong.

It doesn’t really matter. We’re in a recession. A stalled GDP. Now a loss of jobs. I think it is time to call it for what it is. Certainly many of the actions that happen this year will be politically calculated as this is an election year. That is the LAST thing we need right now. Voters are going to demand all sorts of assistance, frozen interest rates and other accoutrements of an overstretched society and for now the politicians are bending over backwards to give it to them. I am actually hopeful that perhaps because we are in an election cycle that NOTHING gets done with regards to ‘fixing’ this. The last thing our economy needs right now is vote-hungry politicians turning the wrenches. If that happens, I guarantee the pain will be much more than it needs to be.

Today, President Bush pledged to help people stay in their homes. It is amazing to me how the home has become the epicenter of the political and economic universe. We aren’t worried about keeping people in their cars or out of debt. We’re worried about keeping them in their homes. Why is that? Surely many of these people would be better off renting an equivalent property for in some cases hundreds a month less than they’re paying now.  My guess here is that Mr. Bush, like most people on Wall Street realizes that if there are massive defaults that our entire economy will crumble. Consumer spending will collapse and with it goes 70% of GDP. This simply cannot be allowed to happen. Normally, people who lose their jobs would have savings to fall back on to fill the gap until another job could be found. However, we have no savings to fall back on. We have no emergency reserves if something bad happens. What used to be an isolated situation is now systemic. The understanding of this problem is why we are now hearing about a tax rebate: Cash directly into the hands of consumers. The hope is that the cash will keep them spending a little longer. I continue to have two questions, neither of which have been answered as yet:

1) Where is the money going to come from? An answer there would give me an idea of how much inflation to expect so I could plan accordingly.

2) What will the curtain call be when helicopter drop #1 doesn’t fix the problem? This isn’t 2001 anymore; things have changed dramatically. One shot of free money isn’t going to take care of it this time. I hope they are prepared for more rounds of rebates. If that is the method they’re going to use to solve this problem it’ll take much more than $600.

So people are looking to the government to help. Unfortunately, as I often mention, our government’s balance sheet looks even worse than the average homeowner’s right now. The only difference between the homeowner and the government is a printing press. Rest assured the government is and will continue using it.

We are, as a country, in search of the hidden object – the America of yesteryear. So far, our adversaries are calling out to us, “You’re ice cold”.

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.