the contrarian - Economy Fishtails Out of Control

Economic conditions in America - if not the world - might be likened to a fish-tailing trailer hooked to a Volkswagen.

I learned about the science of fish-tailing the hard way one day as I sped down a freeway in Ohio. In the process, it quickly became apparent, that once the forces take hold they tend to increase to the point of dragging your vehicle back and forth across the highway and if you're lucky - as I was - it will eventually cause the trailer to separate and go on its own merry way.

This scary process usually begins as a result of reckless speed.  In my case, I was clearly breaking the speed limit.  In the case of the economy, you could say that there has been no speed limit.  The lack of regulatory control, induced by massive amounts of political donations, has provided the irresponsible segment of our capitalistic society with an unrestricted speedway to the land of greed.

The fish-tailing phenomenon, now taking place in the economy, is in its early stage. The current gyration is, by now, well known to all and, as news, deserves only brief mention.  What is significant is that the principle drivers of this economic vehicle, who might be identified today as Fed Chairman Bernanke and Treasury Secretary Paulson, have no choice but to deal with the immediate challenge - and that is to avoid a public panic.

And, in doing so, they must totally ignore what is likely to be the next wild gyration. They can't plan for it. They can't implement programs to deal with it. They know it's coming, but that is totally secondary to their one-dimensional, all consuming efforts right now. At this very moment they can only do their best to avoid the worst of all meltdowns, the ultimate crisis in confidence..

Yesterday, Secretary Paulson appeared on television and assured the viewers that their bank deposits (of under $100,000 in any one institution) were secure and fully guaranteed by the U.S. government. He didn't say, and no one asked, how long it might take - under extreme circumstances - for the government to make good on its guaranty.

Today, Sheila C. Bair, chairperson of the FDIC, said the situation was "safe and sound."

An editorial in the New York Times also stated that the Federal Reserve "has insured the soundness of the business situation."  Oh, but wait a minute, this was actually on 10/26/29, midway between "Black Thursday" and the ultimate crash on "Black Tuesday," five days later.

All of this brings to mind the rather surprising - (for its honesty) - warning issued by the Royal Bank of Scotland back on June 18, advising its clients to increase their liquidity immediately, adding that "cash (on hand) is the key safe haven."  If you take nothing else from this article, you would be well advised to have enough cash on hand at home to comfortably survive a period during which your deposits may not be available.

Anyway, the focus here is on what may be coming in the next gyration of the fish-tailing economy.  And this is not to imply that the current cycle is about to end.  It is not.

However, at some point in the future, the devastation that is now in its early stages will be largely behind us.  Between now and then, it will become clear that the principle economic characteristic of the current phase is deflation.  Falling prices and values will become the order of the day.  In the corporate world, the weak will be gobbled up by the strong at bargain-basement prices and the landscape will be far less crowded.

At the same time, the seeds of the next gyration will already have being sown. That cycle, the one that is yet to come, will likely be characterized by a sharp reversal, leading to a hyper-inflationary condition that will be equally difficult for the economy's drivers to control.

Nothing spurs inflation like massive governmental spending, particularly when the money isn't there. And this is precisely what we are seeing today.

The national debt in the U.S. is rapidly approaching $10 trillion, without counting the government's unfunded obligations for Social Security, Medicare and other programs. If these were counted, as they would be in our own balance sheets or in those of our corporations, the debt would soar to over $70 trillion, according to the Brookings Institution.

And the trend hasn't just been limited to our government or even to governments in general. An analyst on CNBC reported yesterday that, for every real dollar in the world today, there are at least 30 dollars of debt. This seems to suggest that only about 3% of all debt, on average, is secured.

But, getting back to just our own government, the amount of money rolling out the door these days is no less than historic. It was reported on September 10 that the federal deficit this year will exceed $400 billion and it is expected to be higher next year. Seven months ago, on February 20, Bill Gross, respected manager of the world's largest bond fund predicted that the U.S. federal deficit will widen to as much as $800 billion per year during the next presidential administration.

In October of 2007, Congressional Budget Office Director Peter Orszag reported to Congress that the costs of the wars in Iraq and Afghanistan would eventually exceed $2 trillion.

And lately the government checkbook has been constantly in use.  Dick Cheney dropped one billion dollars of taxpayers' money on the nation of Georgia earlier this month, but that‘s just chicken feed these days.

Every time a bank closes it costs the government considerable money, and 11 have been closed down so far this year. The cost of the Fannie Mae and Freddie Mac rescues is being capped at $200 billion, but is that realistic? Those two giants have guaranteed over $6 trillion in mortgages and the government is holding the bag now. The IndyMac Bank failure also cost billions of dollars.

Where is the Fed coming up with all the money it‘s been dishing out? Since last August it has pumped hundreds of billions of dollars into the banking system and has even helped shore up the central banks of other countries.

Bloomberg reported today that J.P. Morgan loaned Lehman $87 billion within the past week and the amount is now being repaid by the Federal Reserve Bank of New York.

In addition, the Fed injected $70 billion into the banking system yesterday and it added $50 billion to the money market today.

And then there is the expense of rising unemployment. Tens of thousands of jobs are currently going out the door, including 26,000 announced this week by Hewlett Packard alone. The costs associated with the unemployment program are destined to skyrocket.

The numbers are mind boggling and tend to numb one's reasoning. However, they all spell the same word, and that word is inflation.

Somewhere down the road the specter of escalating prices lurks in the shadows like a mugger in the night, and it is likely to strike just when the American taxpayers are finally forced to face up to the irresponsible and reckless financial mismanagement exercised by the George W. Bush administration and the Congress during the first decade of the twenty first century.

And, at that time, we may be reminded of Alan Greenspan's repeated warnings of a vicious cycle developing, wherein the high interest costs associated with inflation combined with the massive government debt could cause the payment of interest on that debt to become the largest category of expense in the national budget, begetting more debt, begetting more interest costs, begetting more debt...ad infinitum.

In the meantime, to all capitalists out there, especially those who have sucked up your billions and left the country with the problem of cleaning up after you, if you happen to run into an average taxpayer, please shake his hand and give him a big "thank you." If he's walking, give him a ride. If he looks hungry, buy him a meal.

And for goodness sakes, while you're at it, bring a job back from Asia and give it to him.  It's the least you can do.

Dave McGill, News Correspondent

Dave's column, "The Contrarian," generally published every Friday, to Gather Essentials: News will sometimes present a contrary view to various aspects of the news, or an alternate take on the conventional wisdom of the day, and will occasionally appear on another day of the week

Dave has been a senior officer of an eastern insurance company, involved in economic projections and investment strategy, president of a Midwestern mortgage banking company, and a financial consultant in Southern California, serving clients in the field of commercial real estate development.

You can find all of Dave's "The Contrarian" columns at: http://gather.com/thecontrarian...... Keep up with Dave's other postings and Gather activity by joining his Gather network - just click here: http://atadaskew.gather.com........ You'll find Dave and other News Correspondents, plus celebrity content and plenty of other News experts at News.gather.com.