We faced up to the reality that we had built a fraud based economy in September 2008 with the Lehman crash. People may be wondering how on Earth can that still be relevent 2 years later but it is the poster child of what our economy had become. What many traders have not realized is that in 2008 the Lehman collapse was the equivalent of pressing the reset button the markets and the economy. The phantom housing market economy literally evaporated and has only been propped up via repeated government stimulus. Even the historically low interest rates were not able to re-start the housing market engine.
Governments Have Limited Tools to Stimulate Growth
Sadly the reaction of politicians and bureaucrats has been to sweep the bad news under the rug and continue to stimulate the economy with spending. When the problems get bigger, they simply buy a bigger rug. The point is not criticize the policies of one party, country, or institution – but instead to shed light on the game of chicken they are all playing with the world economy with us as pawns.
I think everyone would agree that at least some inflation is better than the alternative – and hence the desperate approach regarding stimulus and rate policy. Yet the economy has been unable to generate self-sustaining inflation since the Lehman collapse. Why? The bottom line is that inflation principally comes from wage pressure – either in the form of increased labor force utilization or direct wage rate increases. It is by looking here we find the adversaries of government bureaucracies: corporations and small businesses. Simply put – they aren’t hiring enough people to create wage inflation pressure.
This Is Not the Time to Blame Business Either
Similarly to the discussion of government agencies, the point of this discussion isn’t to blame business for what ails the economy. It is again to shed light on the opposing forces and perspectives of the players. Business has an obligation to their owners to make as much profit as they possibly can. Recent statistics have shown that corporate profitability has rebounded nicely off the lows seen in late 2008/early 2009. Unfortunately digging a little deeper into those numbers reveals that the bulk of corporate profits are coming from financials – beneficiaries of a “look the other way” policy of not being required to “mark to market” distressed assets. This is a critically important point – not marking to market distressed properties may fool the average American, but not any traders.
So there you have the players: governments printing money and throwing money at markets via stimulus and record low rates – and on the other hand businesses making “profits” with phantom accounting standards.
It’s up to Businesses to Use Stimulus to Drive Growth
The result is that businesses and governments aren’t being forced to face the problems of the economy and deal with the two opposing forces: We need to either stop stimulus and face the reality of price deflation – or businesses need to sacrifice the artificial “profits” and use the suspension of “mark to market” rules to significantly increase hiring and create real inflation.
Unless and until corporations blink and start substantial hiring/spending (spending to support small business hiring) programs of their own – we are staring at massive deflation when the government gravy train stops.
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