Tuesday, March 18, 2008

where's the causation?

I am getting tired of economists and other bigwigs saying everything is going to be just hunky dory in the economy. one of the main lessons I learned from studying the sociologist max weber is that things have to be caused.. they don't just magically happen.

right now, I see few things lining up that are going to cause much of a recovery in the economy. everyone is hanging their hat on the idea of government stimulus -- almost like the government officials near the end of Atlas Shrugged, insisting that john galt will come to their rescue.

I prefer to borrow another weberian concept: that of unintended consequences. most economists and observers have generally said bailouts don't work. yes, the government can create a bubble, but I'm not aware of any instance in which politicians have managed to restore asset prices once they begin to collapse. at worst, I expect these various interventions will produce a series of negative unintended consequences. at best, they simply accomplish very little, but leave people with even less confidence.

house prices have begun a deflationary cycle. I think we should accelerated that process with swift interest rate increases that would bring the conclusion more rapidly. after all, it would flood the country with capital and slow the global economy. money would flee countries and assets that are attracting investor dollars. the long end of the yield curve would decline, restoring demand for spread-based instruments. it would also allow existing holdings to be repriced more quickly. this current hand-wringing about "nobody knows what anything is worth" only threatens to get worse the longer the government tries to prop things up. (of course raising rates would make some banks implode, but, of well.... )

even more important, it would slow the global economy. commodity prices would plunge and our knawing inflation problem would start to abate. that would make it easier for the Fed to lower interest rates later, triggering a completely new boom. and, it would be much more like the 1980s, based on low oil prices and solid confidence in the US currency and credit.

lawrence summers was just on charlie rose ... echoing things I heard all day on CNBC, he said the most important thing was to restore confidence in the market. I say: confidence needs to be earned. we earned the world's confidence by being the most transparent and honest economy in the world. we're not going to regain it by printing money, debasing the dollar or trying to prop up failing firms or home prices.

returning to causation, what's going to make the economy rebound? borrowing from a credit suisse report from neal soss, I see few things to cause such a change. let me cite a few things from soss, although to be fair, I must that his conclusions are more bullish than my own:

-only about 1/3 of the rebate checks will translate into consumer spending
-household discretionary purchases will be hurt by tighter credit conditions and falling real incomes (thanks to gasoline, etc prices)
-houses will continue to lose value

for the last 6-7 years, all we heard was that "the economy is great because consumers are spending"... now that they are going to spend a lot less, what's going to support the economy?

furthermore, this isn't the 1970s... one thing that definitely shouldn't worry us a wage-inflation cycle. in fact, times couldn't be more different from the 1970s. that decade followed a long process of increasing inclusion in the economic system, where more americans were draw into the workforce. the current system, coming after years of outsourcing and shifting jobs abroad, is the polar opposite of the 1970s. american companies have learned to grow without hiring americans. that's not going to just change. it's the new corporate culture.

also, no one is factoring in what a sad summer it's going to be for the millions of americans who will try to sell their homes starting in a few months when the key real estate season begins. last spring, conditions were weakening ... but this spring, we're going to be in full-scale collapse during the busiest time of the househunting season. this may cement into people's minds the bleakness of the housing problems and reduce people's ideas about their own permanent income, which would also be deleterious to consumer spending.

I see lots of things out there that can have causative effects.. but none are very positive:

-falling employment
-rising prices for food, energy and imports (stuff from china is going up 2-4% every month now)
-lower household wealth levels
-a corporate sector that's learned to grow without expanding in the USA

I also heard some worrying things from paul mcculley at pimco, who thinks the G-3 countries need to collaborate to "manage" the dollar's decline. this should worry any american with savings -- or, in fact, income ... he wants to see a nice, sane destruction of american's purchasing power and earnings. who cares if we wind up with unaffordable energy or food, as long as no feathers get ruffled in the process!?

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