Economic Update

As a business traveler a/k/a “road warrior”, I am extremely sensitive to travel costs.  After all, the money is coming out of my pocket, not some corporate treasury in the sky.  Actual airfares and rental car costs are up substantially, much higher than government based inflation numbers.  I am paying 50% for auto rentals than the best priced rentals of 24 months’ ago.  Airfares are up roughly 20%.  In the meantime, savers are making 3/10 of 1% for savings.  What a disconnect!

Economic indicators are decelerating with housing tanking.  The economic stimulus package has run its course and did not produce a sustained recovery and a new stimulus is in the works.  Obama signed an extended unemployment benefits package this week.  You can be sure that incumbents will be funding anything that will convince voters that the current politicians should be retained.

The private sector is losing jobs whereas the government sector has been adding jobs.  Even though the net effect to unemployment reveals minor decreases, the private sector creates value, the government creates nothing but only consumes.  Welfare and warfare currently describes the government’s expenditures.  In the 30’s, government jobs built assets around the country and thus increased overall value to the economy.

The current politicians are delaying the budget numbers until after the election.  With a deficit expected to be over $1.5 Trillion, Washington is talking about a VAT tax.  When I visited England for the first time in the 1980’s. I discovered the VAT(Value Added Tax) tax.  When I went to pay for a souvenir, the cashier added about 15% to the total- the VAT.  What???  We’ve been hosed, Davey!  The VAT tax will be in addition to the income tax we already pay.  Did Main Street receive any of the bailout money?  Nope.  We simply keep funding the economic experiments and Wall Street shenanigans.

The stock market is confusing hedge funds which causes them to move toward a greater cash position, mostly in U.S. Dollars.  The Dollar is the “least bad” currency versus the Euro.  This is true for individuals as well.  The small investor has shifted out risk-based stocks and moved to bond funds which may be risky as well.  The bull market in bonds is 29 years old and the cycle normally does not last beyond 37 years.  When bonds head south, interest rates will rise and governments will fall.  The cost of borrowing will exceed their ability to repay.

The banking crisis is not over nor will be for some time.  Seven more banks failed on Friday bring the count to 270 since 2007.  The FDIC is selling the banks and guaranteeing asset purchases thus increasing its own liabilities substantially.  By digging down into the transactions, it appears that the bank’s’ assets were overvalued by 40% on their balance sheets.  Since I believe that these banks are not isolated cases, I would assume that other banks around the country are under the same plight.  It would be prudent to keep your balances under the FDIC insurance limit at any one financial institution.  They’re not going to broadcast their imminent failure to the average depositor.  With all of the government based guarantees in place, the Fed cannot allow deflation to take over for it would further erode the value of assets now guaranteed by the U.S. Government.

The complexity of the global system will reach a point of collapse.  As individuals, we need to move away from complexity and toward simplicity.  Can we do this in a day?  Most of us would have to say no, but the goal is to move in that direction.