Archive for August, 2009
August 22nd, 2009
The way I see it, there are three fairly significant hurdles in the path of any real economic recovery, which is why I’m truly puzzled over the joyous proclamations that we’re well on our way.
As I’ve said before, there are reasons for optimism in the wake of some better-than-expected reports in the past few months.
But here’s what I don’t get: How can we be well on our way to economic Elysium with three unpredictable wild cards still floating around out there?
In a nutshell, and in no particular order, call them crude, credit and consumers.
Start with crude. To paraphrase Leon Uris’s “Exodus,” if the kingdom of heaven runs on righteousness, the kingdoms of Earth runs on oil.
It’s been the most volatile global commodity in the past year, spiking to $140 a barrel last summer, dropping to $40 or so by December and settling lately around $70. If it spikes again, fearful consumers will pull back.
The culprit, of course, was supply and demand. Emerging markets, such as China and India, began their explosive growth in the boom years, all of which required a steady supply of crude oil.
When the bottom fell out of the global economy, growth fizzled, as did the demand for oil.
But that growth will begin again. And when it does, those developing nations will recover their thirst for oil.
Even if the growth is only a steady swing, oil prices are going to rise again. And they will keep rising. It will have a significant effect on the U.S. economy, which consumes a quarter of world production every year.
Then there’s credit. Or rather, there isn’t. Much.
Certainly, financial institutions no longer are in the full-scale lending retreat that struck in October and froze the world’s economies for months.
But for all practical purposes, lending remains stunted. And credit is to businesses what gasoline is to your car: It’s the business community’s lifeblood. It can run on its reserves for a while. But at some point, you have to fill it up again.
It’s going to have substantial consequences for any sort of recovery.
And consumers? Surely by now you’re aware that consumer spending has made up 70 percent of the economy.
To put it another way, the national economy is an engine running at 30 percent power without it.
There have been few signs of growth in consumer spending. And still-rising unemployment numbers don’t inspire a lot of confidence, anyway.
Rockford stores suffered worse than most in May, with revenues dropping 13.7 percent compared with May 2008. That marked the largest year-over-year decline for Rockford.
Stillman Valley, Polo and Oregon posted declines of more than 20 percent, Mount Morris’s revenue was off 36 percent, and South Beloit’s was down a drastic 41 percent.
The government’s stimulus spending and consumers buying necessities might boost the engine’s overall output to 60 percent. But to me, that’s not recovery. It’s more of a refurbishment.
Without those three factors added to the equation, I don’t see a recovery anytime soon.
And given how unpredictable they are, I don’t see how anyone else can, either.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
August 15th, 2009
The central bank of the U.S. is walking a real tightrope these days. And some folks already are betting against it.
The specter of inflation, or worse, hovers ominously on the horizon, and if the Federal Reserve can’t rein it in judiciously, it stands to significantly impede any progress we make toward an economic recovery.
Since global finance fell apart last September, the Fed has pumped literally billions of crisp new dollar bills into circulation. Sort of.
They’ve printed these new bills, certainly. But many of them aren’t technically “in circulation” at the moment because the financial institutions to which they were given aren’t spending them.
Then there are the billions more paying for the Obama administration’s stimulus projects, all of it designed to force the economy to right itself. And when it does, those dollars will start trickling into general circulation.
Therein lies the tightrope on which the Fed must delicately balance: When do they start decreasing the money supply, which is much, much greater than market demand?
Used correctly, inflation and increased government spending are useful tools in a recession. Increase the money supply and lower interest rates and, bingo, lending goes up and the economy gets a jolt. Use the government’s money to put people to work and, bingo, spending goes up, the economy gets a jolt.
The downside, of course, is the resultant decline in the value of a dollar.
And the amount of money available is enough to trigger hyperinflation, which, as you can probably guess, is just like inflation except worse.
As I said, a few have established hedge funds betting on hyperinflation, which seems a little too pessimistic, even for me. Still, the Fed didn’t have much of a choice. The alternative, to let the markets figure it out themselves, would have almost certainly led to a depression to rival the first. In fact, the lack of government intervention is one of the primary reasons the Great Depression came about in the first place.
Fed chief Ben Bernanke, a student of the Great Depression, knew that if the government didn’t start a massive infusion of cash into the marketplace, the entire system would fall apart.
But now comes the tricky part: pulling that cash back into Fed coffers before it gets loose and sends the system careening out of control again, this time in the other direction.
But history — in fact, pre-Depression history — has left Bernanke another road map to follow, even if it’s a good example of what not to do.
After World War I, when Germany was saddled with debt it couldn’t pay, its central bank started printing money.
Within a matter of months, goods shot to stratospheric levels. In the time it took to enjoy a cup of coffee, the price of the cup doubled. Restaurant waiters had to reset prices on menus several times a day. Workers were given a half-hour after they were paid — in thousands upon thousands in currency notes, which they carted around in wheelbarrows — so they could spend the money before it became worthless.
As Liaquat Ahamed wrote in his excellent book “Lords of Finance,” it was “the single greatest destruction of monetary value in human history.”
Bernanke believes he can wind up that money before it does too much damage. And for the time being, I’m keeping my money on him.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
August 8th, 2009
A pair of columns I wrote nearly a year apart seem to be coming to a head these days.
A month or so ago, I wrote that it took nearly 70 years for Wall Street to unwind most of the regulations established by Franklin Delano Roosevelt’s administration in the throes of the Great Depression. It took fewer than 10 before the same bankers managed to bring the economy crashing down around us again.
More than a year ago, I wrote that Wall Street was inviting a hell of its own making by imploring the federal government for help before its vaunted institutions fell apart completely.
Uncle Sam did help, at which point many of its vaunted institutions fell apart completely. The government did succeed in propping up a select few.
From a Wall Street standpoint, that’s when the real problems began. Uncle Sam, you see, seems to share at least one characteristic of vampiric legend: Vampires can’t come into your house unless you invite them. But watch out if you do … they won’t leave until you’ve bled to death.
In the general panic of last year’s fourth quarter, inviting the demon inside seemed to make sense, especially considering the other monster stalking their halls: bankruptcy.
These days, however, safely tucked in the third quarter of 2009, with the financial waters calming, Wall Street has decided to thank its one-time benefactor politely and send it out of town. Fast.
Unfortunately, it can’t have it both ways — which is why the real hell for Wall Street is just beginning.
The Obama administration’s ambitious financial reform plans are irrefutably necessary. We’ve seen all too clearly what happens when financiers run amok, which is a fair representation of their behavior over the past decade or so.
And it’s a fair conclusion that government regulators, at the very least, didn’t take their jobs very seriously.
Granted, they may have been lulled into this position with the help of former Fed chief Alan Greenspan, who believed regulation of financial firms unnecessary because the firms would always act in their own best interests — which even I would assume doesn’t include outright failure.
So there is clearly a need to reinforce some of the regulations.
The heart of the reforms focuses on consumer protection, with a new agency providing oversight of credit, debit and gift cards, mortgages, overdraft protection, payday loans and a host of other consumer-focused instruments.
Banks and other financial firms will have to answer to stiffer rules, including the standards by which their capital is measured; some of the larger hedge-fund companies would be regulated; and the ratings agencies, which have undergone some intense scrutiny, would face more disclosure requirements and stricter standards.
I’ll admit, I share some of Wall Street’s “concerns” — a polite term that in this case means “frenzied panic” — over the proposed regulations. Anyone who saw bankers and financial types being grilled by various congressional committees this year knows what I mean.
But even vampires have to follow the rules. And the rest of us are safer for it.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
August 1st, 2009
Glimmers of economic hope have been dawning on the horizon, and they’ve prompted a flurry of news reports containing such words as “recovery,” “bottom,” “rebound” and “optimistic.”
Unquestionably, they’re a relief after nearly two years of unrelenting reports containing “plunged,” “plummeted,” “sales” and “stock market,” or “skyrocket,” “soar,” “unemployment” and “oil prices.”
Still, there are two important things to keep in mind when reading these reports:
1. Watch the clock.
2. They really don’t matter.
At least, as far as you and I are concerned.
If all politics is local, then the economy is more so. And such an elusive concept as economic recovery will only be recognized when we can actually see it — when the rising number of unemployed people in Winnebago and Boone counties head back to work, when the restaurants and retailers on East State Street or Illinois 251 are bustling again, when neighbors move in next door.
The word that must be included in those stories, of course, is “sustained.” And lately, it isn’t.
That’s why I remain bearish, despite the reports that retailers had stronger-than-expected sales gains in the late spring and early summer or that home sales saw a good month or two around the same time. Certainly it’s cheering news. But it’s also why watching the clock is important, for any number of reasons.
The time of year is a big factor, of course, because home and retail sales, even unemployment, tend to record improvements when the weather gets warmer: Consumers get out more, and companies take on seasonal workers.
Even more important, however, is that a month or two of increases does not signal any sort of recovery after such a prolonged contraction. It doesn’t even mean that the market has hit “a bottom.” It just means long-suffering retailers and Realtors may have seen a little — in some cases very little — relief.
Consider: Homebuilders in Belvidere and unincorporated Boone County saw the number of residential building permits grow 100 percent — 100 percent! — in June over the previous five months.
The number of building permits filed from January through May? Zero. The number in June? One.
Then again, it also was the first month that the number of building permits filed in Winnebago and Boone counties didn’t drop year over year.
Any signs of growth are hopeful. Just don’t fall into the trap of listening to economists who already insist that the economy is recovering.
In other words, we’ll know when the recession has ended. And it has nothing to do with the official “end” — remember, it was about this time last year that we learned we were actually in a recession, although most of us knew it well before any announcement was made.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
