We expect Christmas sales to be sluggish but still a bit better than most analysts are forecasting. Deep discounts will help move merchandise but do little to plump profits. Consumers are going to try to cut back some on their spending but old habits are tough to break and the bargains will be too good for most of us to refuse.
- Van Schaik
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October 22, 2008
On July 16th we wrote "Financial, stock and commodity markets are really nothing more than an endless series of over reactions to previous over reactions." Now we are about to witness another type of over reaction: Additional economic stimulus packages are being proposed by Congress. The experts who couldn't see the recession coming until we were in the middle of it are now screaming the end is near if we don't throw billions upon billions into the economy. They were wrong before and they are wrong now. This recession will run its course and come to an end with or without additional stimulus spending, bailout bundles, or rescue packages. As we said before, it is important to keep interest rates low and reserves high. It is important to resist slashing spending by the federal government. Sending additional checks to those with the lowest incomes won't hurt a lot and will reap additional benefits as the money is spent but sending tax money to those in the higher income brackets at this point is foolish and counterproductive in the longer run.
- Van Schaik
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October 19, 2008
As you can see in the chart below, our Business Cycle Indicator is still staying in positive territory which bodes well for the future of our economy. We still expect a recession of about 24 months so we're about at the mid-point of the downturn.
We don't expect a serious depression for two reasons: Federal spending isn't going to evaporate so there will still be some stimulation of the economy from the Federal Government. In spite of what some politicians say, this is no time for balanced budgets (see post of Octobet 16th concerning balanced budgets during the 1920's). Cutting back on Federal spending now would wreck the economy in a year or two.
The second reason we will avoid a depression is the central banks throughout the world seem dedicated to keeping interet rates low and reserves high. We are at risk of a deflationary depression. The fractional reserve banking system creates massive amounts of money as long as an economy is expanding, but during a contraction the opposite occurs- massive amounts of money vanishes forcing the banks to call in loans as reserves disappear. As long as the central banks dump reserves into the system the deflatonary spiral can be avoided.
For now, inflation is our friend. Inflation benefits those in debt and penalizes those who save. As a nation we are so deep in debt at every level we must inflate to survive. The Fed may pay lip service to fighting inflation but they won't be serious. As long as the monetary spigots are on happy days will be here again sooner than most expect.
- Van Schaik
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October 16, 2008
Want A Balanced Budget? Be Careful What You Wish For...
While we don't think we are currently heading for a depression similar to the depression of the 1930's, it is important to consider the greatest difference between the situation now and what our economy experienced prior to the Great Depression. The 1920's was one of the longest periods the Federal Government ran budget surpluses in the history of our nation. The public debt peaked in 1919 at $25,484,506,000. Over the next eleven years it fell, ending up at $16,185,310,000 in 1930. Every extended period of budget surpluses has led to a serious economic contraction. Federal spending stimulates our economy in the same way private spending does and the money spent by the Federal Government in recent years will keep us from tumbling into a depression.
Want A Balanced Budget? Be Careful What You Wish For...
While we don't think we are currently heading for a depression similar to the depression of the 1930's, it is important to consider the greatest difference between the situation now and what our economy experienced prior to the Great Depression. The 1920's was one of the longest periods the Federal Government ran budget surpluses in the history of our nation. The public debt peaked in 1919 at $25,484,506,000. Over the next eleven years it fell, ending up at $16,185,310,000 in 1930. Every extended period of budget surpluses has led to a serious economic contraction. Federal spending stimulates our economy in the same way private spending does and the money spent by the Federal Government in recent years will keep us from tumbling into a depression.
- Peter Van Schaik
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October 8, 2008
Beware the Hyperbole
During times like these we must be careful not to be sucked in by the doom and gloom hyperbole that is flooding our newspapers, evening news and talk shows. The experts who couldn’t see this recession looming mere months ago are now telling us it will be the worst downturn since the Great Depression. While that may be factually true, it may be the worst since the ‘30’s, this statement is misleading because in most people’s minds it equates this downturn with the depression of the 1930’s. This recession will most likely be far shorter and milder than the depression. The worst downturn since the Great Depression? Sure, that is probably true. As bad as the Great Depression? That is most likely not true.
Yesterday I heard pundits say the recent decline in the Dow-Jones Industrial Average already exceeds the loss the Dow suffered during the Thirties. Maybe true, but extremely misleading. It is more important to compare today’s loss with the loss in the Dow during the crash of 1929 to 1932. The Dow hit a high of 386.1on September 3, 1929. It crashed to a low of 40.56 by July 8, 1932. That is a loss in value of nearly 90%. You can’t even begin to compare the current downturn in the stock market to the Great Crash. On the 11th of October last year the Dow hit a high of 14,279.96. If it falls close to 1,400, then we can compare it to the crash of 1929. In reality, we have so far only lost the froth of irrational exuberance we would have avoided in the first place had the Federal Reserve met its responsibilities to society as a whole.
While recessions have economic and financial factors behind them, the psychological factors play a great role in the evolution of the recession. As unemployment rises, people put a tighter grip on their money fearing they may next in the unemployment line. Less spending means fewer jobs which means less spending which means fewer… and on it goes. This is especially true now when so much of our consumption is imported.
The Fed is doing what it can to keep liquidity in the credit markets, but that is only half the equation. It takes a borrower as well as a lender to complete a loan and banks are understandably jittery about making loans when the unemployment rate is rising and production is falling. All the excess reserves in the world won’t change that fact.
We face serious economic troubles: It just doesn’t have to be an end of life as we know it.
- Peter Van Schaik
