Over two trillion dollars have been pumped into the sagging financial sector over the past few months. Some of it has been injected quietly by the Federal Reserve and some has been voted by Congress and parceled out by an obviously uncertain and ambivalent administration.
And the result has only seemed to highlight the need for more funds, considerably more. Everyone appears to be getting in line, from the auto industry to Starbucks.
At the same time, unemployment is now nearing 10 million with over 500 thousand new applicants having filed last week, and foreclosures are approaching 10,000 per day. Yesterday, Wall Street greeted the unemployment news with a robust performance, but its tendency to ignore the travails on Main Street may be short-lived - for the statistics represent people who are not likely to be contributing to the bottom line of corporate America anytime soon.
On Wednesday, the CEO of Best Buy Co. put it this way: "Rapid seismic changes in consumer behavior have created the most difficult climate we have ever seen." Days earlier, Best Buy's rival, Circuit City, had joined with many other retail chains by filing for bankruptcy protection in the face of rapidly declining sales.
The significance here is that all of this represents the likelihood of more government outlays. While most attention has been focused on the amounts of the annual federal deficits lately, a more realistic measure of our red ink is represented by the increase in the national debt.
In this respect, it may surprise some to know that the national debt increased by over $1 trillion in fiscal 2008, which ended on September 30th - that's one trillion dollars of new debt in one year. And that, alone, equates to over $9,000 per U.S. household.
Given the seemingly acceptable concept these days that the national treasury is everyone's piggy bank, one wonders just how far this will go. How many more trillions will be added to the debt before the financial crisis, the real estate collapse and the economic downturn are all brought under control?
In this world of uncertainties, however, at least two things are fairly sure. One is that an immense amount of money is being created, and the other is that the recession and the attendant falling prices are causing the production of goods and services to be severely constricted. We are seeing this as business inventories that are losing value are being trimmed to the bone, and as purchases by consumers are being deferred in anticipation of lower prices.
The result, at some point down the road, would appear to be too much money chasing too few goods. And that - in capsule form - is the classic definition of inflation.
So is that what will be in store for us, eventually? During the ‘80's, in what would have to be described as a more stable climate, but still one with some similarities to today, the inflation rate hit double figures.
By comparison, we see a much higher national debt today, a much more out-of-control business climate and a much greater need for more and more bailouts.
What if - on the other side of this seemingly bottomless chasm we are looking into - inflation should get completely out of hand?
After all, it happened in Germany in the twenties. And during the seventies, inflation rose into double digit territory in Israel and then burst into triple digits in the eighties.
Hey, maybe that's not so bad.
If something like that were to happen here, the spiraling national debt that we are currently fretting over would melt away like a snowman on an Indian summer day.
Furthermore, all those fat, sub-prime mortgages would suddenly seem cheap in relation to the soaring real estate values and the incomes of the owners.
All debt would shrink and the value of all equities would rise. The financial sector would be in hog heaven. Prices would soar and they would carry with them the bottom line of corporate America.
Of course, inflation may not occur to the extreme degree occasionally seen in history and it should be noted that rampant inflation can have a very dark side as well.
The point is, however, that there are self correcting mechanisms in that gargantuan machinery known as the economy.
And when fiscal and monetary controls tend to fail, as they have clearly done recently, those built-in mechanisms will take over and shape a much different world from the one we have come to know.
In politics, the president-elect has promised change. In the world of business, the economic machinery will guarantee it.
Dave McGill, News Correspondent
Dave's column, "The Contrarian," generally published every Friday to Gather Essential News will sometimes present a contrary view to various aspects of the news, or an alternate take on the conventional wisdom of the day. Also, it will often appear on other days of the week.
Dave has been a senior officer of an eastern insurance company, involved in economic projections and investment strategy, president of a Midwest 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 go to 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.
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Comments: 33
The mechanisms of an economy that has gone out of control is very scary to me but I hope the new president can restore confidence.
I, like many others, pray every day that someone steps up to the plate, brings OUR jobs home, and we can once again be leaders in technology, and assure that all Ameridans can survive a winter, WARM and Fed.... Ellen B
Good article and covering a number of pertinent and timely points. A major consideration right now is just how far will it go before we see a reversal. Back in the thirties we had 25% unemployment, is that where we are headed? I certainly would hope not! But the uncertainty is there and the potential is there. I only hope that our new president has some ideas and that they are successful.
Like Same said, if you happen to have any money left after the incredible shrinking 401K and other shrinking investments, and if you can figure which stocks are actually going to be viable a year or two from now, you can really invest in some major corporations very cheaply right now, paving the way for fantastic returns later.
Inflation could well become a problem in the future and needs to be watched carefully by the Fed, which will need to adjust the interest rates carefully.
I’m sure that you are aware of the company bonds, as the stocks and bonds are both in the investors tool box. Currently IBM bonds pay a bit over 7.5% interest. The bonds are a separate thing and not tied to the IBM stock at all which is just going down and down.
Maybe they're finally figuring out that what matters is whether Main Street has any money - not how many billions CEOs and Wall Street financiers are making.
Completely agree with James, and others who note that if one is fortunate enough to have some ready cash on hand, the ground can be prepared to reap very substantial profits in a few years. As Buffet says, the time to invest is when there is blood in the streets. We're awash.
There is no end in sight. Goodl uck to us all.
Does that seem to be an accurate summary?
Good article Dave, keep em' coming.
Can you send me some gasoline from your neighborhood? It's still $2.29 here!
When we have the two major economic figures on the age, Alan Greenspan, and Hank Paulsen, not to mention all the CEOs and others who have been talking up and defending the free enterprise no regulation system and we experience a crash like this, it is going to be a long time before people have any confidence in the system.
In fact I think that people will not regain confidence in any system that they do not feel the understand, cannot trust what is going on with, and does not in some way work in everyone's favor. The days of having a good ole boy's economy that rewards a select few have got to go.
To me the thing to do for the people would be to build an infrastructure of support for everyone in the country. Medical, dental, retirement, housing, education, internet, and government representation should be offered at a base level to good citizens who participate and keep out of trouble.
This should be funded by public ownership in the corporations that have let us down. The auto industry has not been doing its job. The energy industry has not been doing its job as well. Requiring corporations to only worry about making the most money is just like telling strategy to the enemy. Oil companies have found their most profit in manipulating oil prices, not in find alternative energy, so we have been paying them trillions for zero return.
Under this philosophy, the US must abolish class differences if we are to move forward. When we have been rewarding a class that has put our very existence in doubt because of their exclusive position of trust, we must get rid of that and get all those who can be involved in the system involved and take care of those who cannot be involved appropriately.
That's the way you do it. A reduction of consumer demand in the U.S. causes a significant drop in oil prices and the value of the U.S. Dollar rises and people who invest in oil futures lose their arses.
Cut production, drive the oil prices up and plunge the value of the U.S. Dollar down as well as the entire U.S. economy down the drain and the people who invest in oil futures make a killing.
The U.S. then defaults on its foreign debt as well as its sovereignty.
It really doesn't matter though. A handful of people get rich from the demise of the entire global economy while the Globalists who have advocated for all of this for years rejoice in a drunken stupor.
Let's see, we can restore faith in the government once we set everything right, or we can have a war and everyone will have to have faith to survive. Nevermind that Americans cannot stand each other much better than the Sunnis and the Shiites get along.
The one constant is people looking after themselves, and in America we seem to think that is dangerous and we call it unions, or communism, or socialism, or Liberalism, but Europe seems to weather its ups and downs and take care of their people in the process, why does America have to support a pointless arrogant and incompetent parasite class of lazy shiftless leaders born to their positions at the same time as we publicly whine and villify Americans working harder than ever for their so-called entitlement mentality?
What has happened in the financial sector and on Wall street has shaken everyone's faith. People don't know how much income they will have whether because their business is declining due to soft consumer demand or because their job may disappear. People don't know what they money will buy, or how much their goods will bring, because over the past year and half many things have inflated unrealistically and deflated wildly, especially energy costs which effect everything else.
So the faith is under attack. Until we all get some terra firma under us again, and can start to have faith in the system, the shocks will continue to reverberate.
The roller coaster ride ain't over yet and we don't even know if they've finished building the track!
I for one wish you'd put your silly crystal ball away. Your prognostications are ludicrous, just as your past insanity has proven all too flawed.
Last spring when I went on a trip to southwestern Washington, gas prices were $4.07. Now as I prepare to make the same trip, gas is $1.99. Proves to me the price was manipulated by the oil companies, not the market. Supply & demand didn't enter into the picture; maybe it's time we green-up our vehicles and stop demanding oil!
//You've been predicting "collapse" for the last year, at a minimum. Your Chicken Little perspective is little more than pablum for the masses...// Obviously you're "independently wealthy", or you wouldn't be so quick to ignore the FACT that the sky is indeed falling!
As long as America has the attitude that welfare for corporations is preferable to any such assistance to individuals, we will keep having these same discussions. What about investment in an individual's health and security is so bad? Especially since multiple studies have shown a 4:1 to 6:1 return on that investment?
What caught my attention the most was the words of Jeff and that followed by Bruce, then Judi, and Timothy ... then Rory made a great point !
Bottom line ... we ain't seen it yet ... !!!
Something is going on where the upper class only cares about cheap labor and not being regulated or taxed. If corporations were taking care of business but our corporations have been heading down this greed road so far that it has become parasitic. We do not produce in order to create shortages and up profits. We push bad behaviors that hurt lots of people that if everyone indulged in we would cease to exist, but want to refuse to help the people that do get caught in in them, be it, junk food, junk jobs, junk loans, junk medicine, junk information.
It is plain, we have an elite group of people who pray on the majority in some way.
We also have a majority who buys into this garbage.
Who is to blame? Who cares, just how do we get past it and move on?
AIG PR: American International Group is keeping the spin machine employed. The US insurance giant - which just received its fourth taxpayer bailout - has four public relations firms on its payroll.
Yes indeed...4 public relations firms.....the economic machinery is working.....
As for Bill Lawrence and some others of the premise that Dems balance budgets and Repubs don't, a couple of years under Clinton is pretty damn slim evidence for anyone to made that claim and call it supportable. Divided government is our only possible chance and I think it has to be with mutual hatreds like Clinton/the GOP congress to get anything done on the matter. A Repub president/Dem congress sure won't do it based on the last couple we've had. God knows single party control is a pure disaster.