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.
Although the Fed for its part has shown unusual resolve to go the distance, the stimulative activities of the private sector, disconcertingly led as they are by a handful of big banks, are mostly focused on overseas "opportunities" in the emerging markets and not stimulative activities here at home. This combination of "cheap" dollars and cheap emerging market prices has of course enabled the financial sector to do quite well, despite increased risk. Meanwhile even those regulators not previously captured by special interests find themselves increasingly hobbled by a complex matrix of old, new and proposed regulations interlaced with a variety of deregulation schemes, which together dilute the likelihood of effective action -- and maintains the regulatory environment for "rogue Wall Street firms to kill small American businesses for profit."
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
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%.
Big Trouble Ahead for State and Local Budgets?
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.