It seems like the American public has been on a bit of a roller coaster lately when it comes to economic projections.
The week before last, after the overall jobless rate dropped slightly, the President said “the worst may be behind us” and “we are pointed in the right direction.” We also just heard that European countries’ economies are growing again, marking the official end of their recessions.
Good news, right?
Then last week we learned that retail sales in the U.S. dropped slightly in July, despite the fact that Cash for Clunkers fueled new car purchases. And we also learned that consumer confidence is down.
But today we hear that for the fourth month in a row a leading U.S. economic indicator has risen, leading to speculation that the worst is behind us.
But we also found out that the number of first-time jobless claims rose AGAIN last week, “surprising economists,” and not in a good way.
Is your head spinning? Just when we start to feel like this economic mess may be coming to an end, we hear stuff that makes us feel ... a teensy bit unsettled.
It’s confusing, so I decided to IM (even though he sits 20 feet away) a colleague at TheStreet.com for some help understanding.
Gregg Greenberg, a.k.a. Five Gs, writes the ridiculously popular column “5 Dumbest Things on Wall Street” and thinks about this kind of stuff a lot ... so we asked him if he could dumb it down for us a little:
Mike: Gregg, can you please explain to me what the hell is going on with our economy? It seems so hot and cold lately. Talk to me like I’m an idiot (which I’ve been told isn’t far from the truth).
Gregg: You are far from an idiot Mike. Most folks don’t know what is going on. All they know is that their house is worth far less than it was not too long ago and their job is a whole lot less secure. Even after the recovery in the stock market from the March lows, there is a general pervasive feeling like that Talking Heads video where David Byrne goes “How did I get here?” and starts whacking himself in the head.
Mike: That’s nice of you to say ... about me not being an idiot ... and sounds like you feel my pain. So what’s with the good news, bad news, good news, bad news? Are things getting better or are we burning down the house?
Gregg: Well, the news has been less bad lately, which an optimist would categorize as good news, or glass half-full. We still have job losses, but at a much slower rate. And corporate profits are improving, but it’s because of cost cutting. Not increased sales. So it depends on how you look at it. We have just under 10% unemployment – much higher in states like California and Michigan – so if you are among those nine people out of ten with a job, and health insurance, then things may be OK. Not great, but at least OK. But if you are in that 10% or may be joining it soon, then, well, things look grim and are maybe getting grimmer. Of course, the government is printing a whole lot of money and doing its best to keep things from getting worse. So there is some reason for optimism there. Whether government spending is a short term fix, or a long term solution which will cost our kids trillions…well…screw the next generation. That’s the American way.
Mike: Alright, so it’s a mixed bag. For the people who have jobs the economy is OK and maybe getting better, but for those who are jobless or will be soon, then the economy is in bad shape and maybe getting worse. That doesn’t make me feel much better, but what you wrote at the end kind of freaks me out. Are we going to be able to pay back all this money we’re borrowing and what’s that mean for regular people out there, both in the short and long term?
Gregg: Right now the Federal Reserve is doing everything it can to keep interest rates low. That’s enabling banks to lend and consumers to borrow and homeowners to refinance. But it’s artificial. The Fed can’t do this forever. And the Chinese are buying our Treasury bonds to keep rates low, help plug our budget gaps and keep American consumers afloat. Eventually the Chinese want a higher return for their bond holdings which will push rates higher. And the Fed can’t keep printing money and then buying Treasuries to keep rates low. So rates will rise, inflation will rise and we will be screwed. Unless of course, the economy grows and the Fed can yank the money out of the system. Sorry…lost track of your question…what does that mean for regular people? Watch out for inflation, so refinance now, buy gold or Treasury Inflation Protected Securities (TIPS), and pray a lot for Fed Chief Ben Bernanke.
Mike: So I guess the take-away is that all this talk about turning the corner and the worst is behind us is bologna. If and when inflation spikes then the economy would enter a new kind of hell. What will that be like?
Gregg: Well, I don’t think we are definitely destined for lunch meat status. A lot of good things can happen too. If the Fed can beat back the inflation bear then we will come through this OK. Right now, we are not seeing inflation. If anything, we are seeing prices fall. But if inflation does take off, then we will see things in America that we have not seen since the early 1980s. Very high interest rates and very high prices. The worst case situation is that prices take off and our currency is devalued like some third world South American country. By the way, a lot of those South American countries which have had currency crises in the past, like Brazil, are in better fiscal positions than us now. China and Brazil used to be debtor nations with weak currencies. Now America is the debtor nation. If we go from debtor to deadbeat…then it’s time to move to Sao Paolo.
Mike: Is there anything that people can do to make sure that the economy grows and inflation is held off?
Gregg: Either it’s pain now or pain later. Without the government pumping money into the economy now, then GDP will slow and unemployment will take off again. If the government – and governments around the world – keep on printing money and shoveling it into the system, then the threat of inflation will rise. On a personal level, the best thing you can do is prepare your portfolio by buying some gold or precious metals funds and TIPs. On a national level, you need to decide when you want to take your pain. That is, if you are not feeling the pain now.
Mike: Thanks. Now we know, and knowing is half the battle. Yo Joe, Gregg. Yo Joe.
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