Saturday, February 7, 2009

This government reminds me of 1974

The economy is different, but the government actions of the present remind me of the mess that came out of the oil embargo recession of 1973-1975. We are in an entirely different game here than then and the likelyhood of high inflation I believe is less, but the idea that its potential be ignored would be sticking your head in the ground and ignoring the obivious.

There were different pressures in the mid 1970's than there is today and I believe the economy went down for different reasons. In the 1970's we had a confluence of things all come together at once. We had the boomer generation moving into the workforce, the great society exerting its strangle on government expenditures, the debasement of the dollar, the end of the Viet Nam war, commodity cartels and massive world bank and third world nation loans by western banks. These all came together to hit the American economy at once. Plus, there was the Nixon impeachment, the crippling of the executive, which exposed the US as weak at the time.

I don't believe the financial position of the US government was any worse in the mid 1970's than it was going into this current mess. If anything, the trend growth of social expenditures has eased and even to some extent reversed from what it was then. There is more pressure on the government due to an aging boomer generation and its potential impact on Social Security and Medicare, but there is less present threat militarily than there was then, not that it will remain that way.

What happened in 1974 to 1978 left the US economy in shambles, at least on a fiscal basis and it had to be corrected. We had the swing of congress to the left from a more centrist position and the election of Jimmy Carter and government spending went from out of management to out of control. An inflation induced recession was met with an inflation inducing package of government stimulous that resulted in interest rates of over 20% for the prime rate. If the Volker legend is to be believed,it took 10 years to get over the mistakes of the 1970's.

There are simularities to the 1970's here, but there are also differences. What is hard to guage is the influence of the around the world indebtedness of the US. There really isn't any history to reference as to the driver of world demand being a debtor, contrary to thousands of professed expert opinions. This is one of the wildcards, but it is a wildcard that will come into play if the current administration acts as if this new debt is meaningless. This factor cannot be overlooked, but it can't be stared at through magnifying glasses as the only thing to watch either, as some are doing. The role of the dollar is more a role of collateral for trade than it would be if it wasn't the reserve currency and the biggest danger is if commodity producers, namely OPEC decides they are done with the dollar. For many reasons, this is also not likely except on philosophical grounds.

First of all, it is entirely possible that the finance games going on right now become self financing and the US balance of trade actually levels out, thus resulting in new demand for dollars internationally, demand that won't be supplied this time. There have been comparisions with Germany during the depression on a website I like to visit, but I don't believe they apply here. Germany was a defeated power, stripped of its capital with no capacity to finance itself internationally. The US is international finance in a nutshell to some degree and the unit of finance is the dollar. Also, there is not any gold to be swapped this time around, so this is going to be a wait and see situation. It appears the stimulous is going directly to domestic black hole projects, the eternal we need more money businesses of education and health care. The all economy consuming black holes at that. If this money goes back into buying US savings bonds and tax receipts, the cost will be borne domestically. But, this is beside the point.

The real simularities between now and 1974 are the level of emerging market and third world expansion and the bull markets in commodities. If these two games go on from here, we are going to a diminishing value of the US dollar on an international basis. Still, domestically we might see flat prices or even lower prices. The $64 billion component of this condition is if? I believe the international and commodity equations have more to do with dollar demand for foreign products than anything else and the rest of the world is going to need a sizable influx of dollars to continue their expansion. I believe that countries like China use US bonds as central bank collateral to issue their own currencies and thus forgo the expense that the US economy must face to support its own financing. This is foreign to most folks and it may not even be true, but I believe there is a lot more validity in it than most believe. A slow down in dollars means a slow down in the capacity to expand domestic credit for many of these countries on stable paper. This is a deeper subject than one might think.

Here is where today differs from 1974. The parents of boomers had saved money and few were burdened with much consumer debt. The boomers on the other hand not only have been poor savers, but their savings has taken the form of shortcuts like the use of home equity and the projection of absurd returns due to absurd academic studies out of the stock market, which cannot be mathematically true due to the divergence of compound rates. We are looking at trying to whip a dying horse to get up and run again. The horse has taken repeated shots of adrenalin, but his oat bucket has been empty for some time. It is going to be hard to inflate this economy for long or as far as that goes, get it to run for long. The horse needs a long rest and time to store up some food for the next trip.

I believe this study might be why we had the 1970's and the 1930's. The solutions of the 1930's were tried in the 1970's because they were believed to have worked in the 1930's. There was a preception in the 1930's that more inflation would fix the situation, but they deflated for a few years before this was even tried. The real problem was the degree of indebtedness the economy is under and it was naturally cleared out to some extent in the 30's, but it appear they are going to try to keep this debt intact today. This is another subject and soon to be the subject of a scathing post I am going to write, as there is something wrong with Enron and Worldcom stockholders and bondholders losing everything while the Wall street and NY banks along with a few others are accorded a free pass. I am stunned as to what is being done today, after seeing what was done to the Texas banking system in the 1980's, at a time when former Fed officials admit the NY banking system was defunct and insolvent, yet treated as solvent.

In any case, we are in a repeat of the mid 1970's in a lot of ways, but my idea is that the elevator is going in the opposite direction. The hyperinflation argument rides on the idea that dollars are printed without collateral, that the rest of the world monetary system doesn't rest on the dollar in some fashion and that without American demand there are going to be runaway prices for goods worldwide. The dollar had been artificially fixed going into the 1970's and convertable into gold, a change that had to throw the entire exchange game into orbit. This situation is 180 degrees reversed today. If the elevator is going the same direction as the 1970's, then we will see the excessive world demand and inflation, but with it much higher long term interest rates and financing problems for America. I believe it will be a boom America won't participate in, which means that it is highly unlikely to happen.

1 comment:

Ronduck said...

I believe that countries like China use US bonds as central bank collateral to issue their own currencies and thus forgo the expense that the US economy must face to support its own financing.

That would certainly give them a financing advantage for their exports.

This is another subject and soon to be the subject of a scathing post I am going to write, as there is something wrong with Enron and Worldcom stockholders and bondholders losing everything while the Wall street and NY banks along with a few others are accorded a free pass.I am stunned as to what is being done today, after seeing what was done to the Texas banking system in the 1980's, at a time when former Fed officials admit the NY banking system was defunct and insolvent, yet treated as solvent.

Our entire political system is based on the northeast being given a free pass for everything. The education cartel fails to produce any meaningful results for most people, and yet it gets a free pass because it is based in Boston. The media is composed of whores and Democratic party shills and yet gets a free pass because it is based in the northeast. The whole northeastern part of the United States is morally and financially bankrupt.