For What It’s Worth…Gaining Economic Perspective
“There’s somethin’ happenin’ here
What it is ain’t exactly clear…
I think it’s time we stop, hey, what’s that sound?
Everybody look what’s going down.”
– For What It’s Worth, by Buffalo Springfield
The stock market is making new highs, interest rates are at lows, unemployment percentages are dropping, the current Washington Administration is confident of economic recovery – what a wonderful economic environment we now enjoy here in the USA. What’s that I hear some of you whispering about? You’re not too sure? You have a rather uneasy deep-seated feeling about all of this? Well, I’m with you.
Let me be clear from the very beginning, there are many brighter and more highly educated experts in economics and personal finance than me. But having spent most of my adult life around the stock market and having worked for 25 years on the floor of the New York Stock Exchange (the so-called “belly of the beast”) with one of the principal investment firms on Wall Street, perhaps I can share some worthwhile insights with our readers. Or at least pose some worthwhile considerations for those who may have different perspectives. I must also disclose that an important part of my perspective comes from a spiritual realm that I believe many good and trustworthy Christians around the globe share. As the world delves deeper into darkness, something of great significance seems about to unfold. It is in this light that I have greatly appreciated the writings and broadcasts of my friend Steve Wood, who for well over a decade has had his finger very much on “what is happening here.” Let’s see if we can help provide some insight into making things a little more “clear.”
The world has a deep-seated spending problem. In America it seems despite what money we may make as a nation, we spend more. It is never enough. Our national deficit alone is now over 16 trillion dollars. Is this really a problem? Well, do we really think that continued borrowing will eventually bring us out of debt and back into prosperity? In a recent article by Van Hoisington and Larry Hunt, they put the situation quite succinctly: “Borrowing to finance consumption does not generate a productive income stream nor does it create the resources to repay the borrowed funds. Consequently, velocity (velocity of money is defined as the average frequency with which a unit of money is spent on new goods and services produced domestically in a specific period of time) has collapsed and now stands at a six decade low.”(1)
They then go on to indicate that although money is being printed in unparalleled fashion, it is not having the impact on our economy one would imagine. “Our present economic situation is nearly unparalleled in American history. An examination of the real economic growth rate of each decade in the United States from 1790 to 2012 reveals the unprecedented sluggishness of our present economic environment. The 1.8% average rise in the thirteen years of this century is less than half of the 3.8% growth rate since 1790. The only decade that witnessed worse economic conditions was, of course, the 1930s.” (2)
Where does this money come from? Well it comes from the US Treasury issuing bonds to finance our debt. And who is buying this debt? Despite large amounts of buying from foreign investors (especially China and Japan) this is not enough to exhaust the large supply of bonds issued. Normally, this would mean a respective rise in interest rates until demand could offset supply (that is, bond yields would rise to become attractive enough for investors to buy them). However, there is another source of buying that has soaked up this US Treasury bond supply and kept interest rates at historic lows. The Federal Reserve is now buying $85 billion of longer dated US Treasury and mortgage backed bonds every month.
This appears to be quite a game. Our government needs money, so it issues bonds (through the Treasury Department) and then buys a large chunk of the bonds themselves (through the Federal Reserve). This is how the government is able to go about “printing money.” The results are artificially low interest rates and a surge of money into the equity markets. But the effects on our economic growth seem quite muted at best. Van Hoisington and Hunt go on to point out: “In other words, there is no evidence that the massive security purchases by the Fed have resulted in a sustained acceleration in monetary growth; nor is there evidence that economic conditions have improved.” Additionally, the extreme level of indebtedness is a force entirely independent of the Fed, and it is restraining aggregate demand and serving to neutralize what minimal influence the Fed has on the economy.” (3)
How long can this last? Of course no one can determine a date (although a great many are guessing) but suffice it to say that when it does, things may end very badly indeed. Artificial bubbles usually do, and this may be a whopper.
My future articles will explore this economic perspective more fully as it relates to such issues as inflation, deflation, banking, college loans and most importantly how all of this could affect your family finances. All the while, it will be framed within the spiritual realm that seems to be calling to “those who have ears” to “stop” and take the time to understand “what’s that sound.”
1) Van R. Hoisington and Lacy H. Hunt, Hoisington Asset Management-Quarterly Review and Outlook, 13 April 2013.