Cuba
Gooding Jr. became an overnight sensation when his character, pro
football player Rod Tidwell, pithily directed his high-minded but
needy agent Jerry Macguire, played by Tom Cruise, to "Show me
the money!" Tidwell's terse directive is as practical as it is
memorable and luckily for Tidwell, Macguire delivers.
Whether
out of extraordinary resolve or sheer desperation, a "show me
the money" policy is exactly the course Fed Chair Ben Bernancke
is pursuing at full throttle. Faced with the unenviable task of
reflating a deflating and uncooperative economy, the Fed opted last
fall to take the "easy money" quotient a notch higher by
formally initiating a second round of quantitative easing, while
tacitly acknowledging the possibility of QE3, QE4, and so on into the
undefined future. With Fed Fund rates effectively at, or very near,
zero and a trillion dollars already in reserves, the Fed is doing all it can to get the "credit-as-money" spigot
flowing.
While
hardly a ringing endorsement for the Fed, the truth is the Fed
has few other "money spigot" tools at its disposal.[1] So, in an op-ed piece appearing in the November 4 issue of The Washington Post, the
beleaguered Bernancke reminded the nation that the Fed cannot, by
itself, solve all the problems rippling through the American economy. That process
said Bernancke "will take time and the combined effort of many
parties including the central bank, Congress, the administration,
regulators and the private sector."
That leaves Congress and the administration. While both are also arguably captured by special interests, they are clearly feeling the intense pressure of a cash-strapped public. Hence the recent tax-cut bill which will add nearly a trillion dollars to the federal debt but will do little to stimulate adequate money (as credit) creation where it is needed most -- not in the financial economy headquartered on Wall Street but in the real economy, here on Main Street. Now caught between the proverbial rock and a hard place, the Fed, by its own admission and despite its high minded goals, appears every bit as needy as the erstwhile Jerry Macguire.
Main Street's Woes Belie Wall Street's Gains
For
the moment, the Fed's "easy money" goal of raising asset
prices seems to be working, albeit not necessarily in sectors such as
real estate where it would do the home economy the most good.
Capitalizing on stockpiles of cash, good credit and "cheap
money" secured by uber-low interest loans and back-stopped by
TARP, the big banks and large corporations -- together with a small army
of investment funds -- have been having a field day. They are speculating in
potentially lucrative but nevertheless risky ventures, inflating as
they go various commodity prices such as wheat, corn, hogs and
similar commoditized foods, as well as health care, precious metals
and oil -- and raising the possibility of igniting dangerous currency
wars through revved up currency speculation.
Surging
prices for necessities such as food, oil and health care send mixed
signals to ordinary Americans because inflation in the U.S. economy
(after stripping out volatile food and energy prices) is actually at
the lowest
level it
has been since 1957. Clear evidence of this phenomenon appears in the
retail sector where for months retailers have been slashing prices on
a seemingly endless supply of goods. While bargain hunters and
incurable sentimentalists appear to have responded for the holidays
at least, one has to wonder how the slimmest of profit margins can
sustain not only retailers but their suppliers -- and in turn, the
myriad of producers and raw materials providers needed for finished
goods -- even if these are sourced from cheap-labor countries.
Ominously,
job
growth
(with
the exception of part-time jobs) is also going mostly nowhere, a fact
which -- however contra-indicative of an apparent holiday spending
spree -- does nothing to reverse the troublesome downward spiral in
prices and wages. Consensus also has it that higher-than-normal
unemployment will be with us for years to come. All of which affirms
Bernancke's preoccupation with stagflation and deflation,
and bodes poorly for the Main
Street economy inasmuch as "falling
prices often also mean falling wages, as businesses respond to
declines by cutting output and jobs."
Wall
Street gains make it clear that the banks and investor class are
doing very, VERY well, thank you very much. Another portion of the
population, perhaps as much as a third overall, is doing reasonably
well -- or at least well enough to keep up appearances. We have in
other words, two Americas
which, if understood, helps us make sense of conflicting economic
data. The top 20% of Americans are prospering and spending handsomely
despite carrying the major share of the tax burden, while the next
20% represents a fragile middle class that has become "mostly a
figment of nostalgia and/or political illusion." In real terms, the
bulk of Main Street, including drop-off portions of the shrinking
middle class, is bleeding profusely with one of every six Americans
unemployed and countless more chronically "under-employed."
Unfortunately
for those most severely affected, the level
of suffering is masked by the fact that there are "wide variations of hardship
in the 50 largest metropolitan areas," and official estimates do
not always paint accurate pictures. As but one example,
Detroit's mayor and local leaders maintain that Detroit's
unemployment rate actually hovers near 50%, a figure far above
official estimates of 30%.
Contributing
to the probability of an increase in Main Street woes is the
likelihood of a second dip in the housing recession, meaning home
prices have yet to hit bottom. This translates into progressively fewer Americans who will be able to tap into home equity as a means of getting themselves through tough times, and it could bring about another tsunami of foreclosures. In turn, local real estate and other tax
revenues will continue to decline even as demand for social services
increases. This spells additional trouble for state and local
governments, with states themselves collectively facing a $140-billion operating budget shortfall
next year alone.
Big Trouble Ahead for State and Local Budgets?
Indeed,
state and local operational budgetary problems are becoming serious
enough to threaten the inviolability of once "super safe"
municipal bonds -- which heretofore have been considered an attractive
investment that comes with the added benefit of providing state and
local government with funds for community improvements. Because bonds
are essentially loans which the issuer (be it corporate or
governmental entity) must pay back with interest, income streams of
the issuer must be adequate enough to satisfy the terms of the loan.
Unfortunately, low tax revenues and weak economic outlook are now
compromising the bond issuer's (borrower's) ability to meet the terms
of the loan -- so much so that municipal bond defaults have been
running triple the usual rate.
Economic
forecasts that are tepid at best lead anaylsts
to "fear that at some point, investors could balk at lending to
the weakest states, setting off a crisis that could spread to the
stronger ones."
Big
name financial analysts such as Meridith
Whitney
and bond experts such as Marilyn Cohen go so far as to pose the
possibility of widespread muni-bond defaults.
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