Apple and the Wall Street Journal

If I were to make a guess, I'd have to say that someone at the Wall Street Journal owns Apple stock,or at least has a vested interested in Apple.  It's really simple.  The front page of today's paper has an article about Apple's earnings release with the headline: "Rare Miss For Apple As iPhone Sales Cool."  And at the top of the page the description of what's in the Personal Journal section: "Why One Phone Isn't Enough."

On further reflection...

In my last post here, I proposed that the government should dramatically crank-up the borrowing and spending, while the fed began raising interest rates as a method to help straighten out the economy.  Of course, we'll never know if that would work, since no one will do that, at least not without the excuse of another world war, or something similar.

But, there is another possibility: the government goes ahead and drives our economy right of the "fiscal cliff" everyone is talking about, and... it turns out to be a good thing, instead of the cataclysm economists think it will be.  After all, economists thought that the end of World War II was going to turn out economically terrible, but it just didn't happen.  And if it does turn out good, I'm sure all the politicians will be patting themselves on the back for their inaction.

The economic fix

I read an article this morning, and I have to say, I've finally found someone that I somewhat agree with when it comes to the current state of the economy, and how the federal government should deal with it.

Let me begin by saying that I don't think there is any really quick fix for the economy.  We are in a situation that has been created over a long period of time, and I think we are looking at a long period of time to correct the situation.

The aforementioned article is actually an interview with Richard Duncan, author of  The New Depression, so my references to what the article states are, of course, statements made by Mr. Duncan.

The article states that the federal government "should borrow "massive" amounts of money at the current low interest rates to invest in new technologies like renewable energy and genetic engineering."  I actually don't understand why the government isn't borrowing more than they are.  Interest rates will likely not be this low again for a long time, so why worry over how much the government is borrowing?  It could be argued that the interest rates on government bonds is effectively zero, or even negative, which is a good thing for the government, if not for the investors.  Without going into specifics, I think the government should go on a huge buying and hiring spree, funded with money borrowed at ridiculously low rates.

I also think the Fed should have their mandate changed.  It has always puzzled me why the Fed should have the dual mandate of controlling inflation and encouraging growth.  The two goals are opposing; in order to increase growth, the Fed would lower interest rates, while controlling inflation requires raising interest rates.  And normally, this results in a situation where the Fed has to make a somewhat subjective judgement over which (inflation or growth) poses the greatest risk to the economy.  So, I propose that the Fed instead have the mandate of controlling the amount of outstanding private sector debt.  Growth and inflation would be the concern of the federal government, as it should be.  After all, we all blame the government when those are bad, and politicians are quick to take credit when those are good; let the government have sole responsibility for them.

The idea that I'm getting at here is to create a situation similar to the situation around the time of World War II.  When the U.S. entered the war, the government started a massive buying program.  Of course, at the time, who would complain?  The Japanese had just destroyed most of our Navy, and we needed to replace those ships.  We "hired" soldiers, and we limited the goods that consumers could buy, either through rationing or through direct control of the use of materials on the part of the government.  At the end of World War II, many economists claimed that we were destined for a huge recession due to the huge decrease in government spending, and the increase in unemployment resulting from the soldiers returning home.  While GDP did, in fact, decrease by approximately 11 percent in 1946, we were entering a period of great prosperity for the U.S., and depending on how you define "recession," it can be argued that there was no recession.  Certainly, all the gloom and doom that economists were forecasting didn't happen.

This same article quotes , "If this credit bubble pops, the depression could be so severe that I don't think our civilization could survive it."  I'm not sure what that is supposed to mean, but I think it sounds a whole lot more dire than what we are facing.  However, I do think that current circumstances, if not somehow controlled, could lead to another global conflict, which in the end would serve the same economic purpose as the actions I am proposing here.  My preference would be to attempt to create similar economic conditions as World War II did, without having to actually have a World War III.

In the end, I actually believe that the economy will work itself out, no matter how badly it is handled by our government.  And I'm sure that whoever the politicians are that happen to be in office at the time that this happens will be more than happy to pat themselves on the back for a job well done.  Unfortunately, I also think it will take a long time for the economy to work itself out, and I think the current actions of the Fed and government will just prolong the pain.

So, in short, and perhaps in oversimplification, the fed should start raising interest rates to deflate the bubble in private sector debt, while the federal government should borrow and increase spending and hiring to lower inflation and maintain aggregate demand while consumers are adjusting to higher interest rates and, at least theoretically, buying less.  Once we have decreased private sector debt to an acceptable level, the government can concern themselves with balancing the budget, paying off its debt, and decreasing the size of government.

More of the same

It's midday again, and the market is rallying on the bad news that China's GDP growth slowed more than expected, while here in the U.S. consumer confidence sagged to it's lowest point in seven months.  Oh yeah, we certainly have reason to celebrate.

Midday 7/12/2012

As global economic conditions have deteriorated, investors seem to think that economic weakness is good, because it means that the Fed and other central banks will have to take action to prop up their respective economies, creating more easy money opportunities.  This year, the hope that the Fed will continue to do the things that people have been decrying as ineffective or even bad has buoyed the stock market.  Of course, once the Fed announces they will take action, such as quantitative easing or buying up long bonds, the market will realize that this is bad; that it won't really help all that much; and that it could lead to future inflationary pressure as well as speculative bubbles in certain asset classes.  At this point, I can't really say whether that means a market crash is in the making or not.  It does, however, appear to me that the risks are much higher than is being recognized by the market.  The VIX is currently fairly low, while the S&P 500 is fairly high, but at the same time, we are seeing evidence that we are heading toward a global recession.  Further, the last I checked, the market risk premium was low, at less than 5 percent.  Just saying, there doesn't seem to be a whole lot of risk recognition going on at the moment, but I also think that at some point, investors will come to their senses.  Then again, maybe not.