by Ren Richardson
The only thing that I did not particularly like about Van Tharp’s article was his repeated use of anecdotes. “Someone told me the other day….,” “I was just informed that…,” “My understanding is…..” etc. All of these stories were used to convey an air of direness. Activity at the Port of Long Beach is 15% of normal (or so he’s heard) and that means we are in for food shortages. I don’t put the prospect of real food shortages and supply chain disruptions past this economic environment but those conjectures need a little more meat behind them. I think much of the data we saw from Mr. Zimmerman yesterday was enough information to persuade us to at least flip open the plastic cover of the red switch that sounds the 5 alarm economic warning.
However, I do agree with you that Zimmerman seemed to take a “kid gloves” approach with his presentation. I don’t know if that was just because it was a stock presentation or because he knew he was presenting to MBA students (we know they are capable of handling only so much information that doesn’t fit with a model or the past). I wanted to take him aside afterwards and say, “Here’s $100. So what’s the real deal?”
One of the things that worries me about the scale of Fed action is that we create some kind of economic creature that we have never seen before. An economic mutation that defies the typical relationships we think are supposed to hold. In the Depression we saw severe deflation and that is what economists expect when the GDP shrinks as much as it did. And strong growth correlates with increasing risks of higher inflation. But is it impossible that we could see slowing growth, rising unemployment and severe inflation? We witnessed it in the 1970′s and had to come up with a new name for the phenomenon. I think the ingredients are in the mixing bowl to make that look period tame by comparison.
Flushing the system with cash will not necessarily create jobs or spur growth. In my view, the risk is that IF the stimulus works, it has a high probability of fostering bubbles, perhaps multiples of them. From a fundamental perspective, a bubble is a phenomenon in which too much cash is chasing too few assets in too short a period of time. Real growth – i.e. real wealth creation – is a slow moving process because it is driven at the end of the day by increases in productivity, technology, or population. It is not driven by cash stimuli. That is the risk of success. But the bigger risk is the risk of failure. We flush the system with cash trying to get credit flowing, jobs created, and industry humming. Yet the economy doesn’t respond except in the form of drastically increasing prices. Companies continue to cut forces, banks continue to keep lending standards tight, consumers significantly cut back and cease investing, but inflation starts to ramp up out of control, driven by a number of dollars in the system that has 12 zeros after it (and the lack of a deliberate plan to know how or when to suck those dollars out). It would defy almost all economic relationships that we expect to hold. Then we would be in the real dilemma of not only facing a depressed economy, but having no idea what to do next.
Pump cash into the system? Did that to four orders of magnitude greater than ever before. Cut rates? They could be at zero here shortly. Tell people that all we have to fear is fear itself? Did that too but we still don’t realize that, when it comes to the economy, fear IS worth fearing more than anything else. It just baffles me that some of the smartest people on earth will absolutely max out the only available tools they have without any kind of plan for what happens if they don’t work.
The idea of a bankrupted US seems more possible every day. And here is the real kicker: more and more economists (including Richard Fisher of the Fed that I mentioned yesterday) are saying that Social Security and Medicare obligations are going to make the numbers of this crisis look paltry.