The Economic Hangover

The banks are loaded with cash to lend. Credit cards interest rates are coming under control by law. Those with jobs have credit to deploy. The Fed has promised to keep rates low for two years. Why is this liquidity not making its way into the economy? Maybe we realize we’ve all been drunk on too much liquidity for too long. Americans are feeling hung over after a big party on credit and paper profits and now we’re staying in bed. We’re saving rather than spending.

Savings rates have rebounded to levels not seen since the Clinton administration. In the short term, this is depressing the recovery of economic activity and keeping unemployment high, but in the long term, this is a good thing. We have just come off a spending bender and now Americans have decided to get sober.

Our government deficits are primarily a result of a disastrous loss of tax revenue caused by the Bush tax cuts, his unfunded programs, his expensive wars and the collapse of the housing bubble. These things have been bad for the government balance sheet but are not the main cause of the general economic malaise. To quote Pogo, “We have met the enemy and it’s us.”

For a decade, most everyone believed his or her paper profits in real estate were real, took excessive risks and spent beyond their means. Sure, long term commitments to social programs do hurt the government’s pro forma for the future, but a few years of President Clinton style growth and tax policies would bring the government balance sheet back to normal levels.

I found the debt ceiling debate and the bulk of the Tea Party agenda to be wildly illogical and counterproductive. My favorite Tea Party slogan I’ve seen is “Keep your government hands off my Medicare.” Skimming the pork fat off the budget is a worthwhile goal and long term adjustments to entitlements are a must, but overall austerity in government spending right now is probably the worst idea out there. If the private sector won’t spend, the government must.

It’s not a lack of capital that has corporations hoarding their cash. American corporations have over $3 trillion in cash sitting on their balance sheets being used for nothing except stock buybacks. This use of cash never seems to accomplish what it is suppose to do, reduce the float to force stock prices up. It doesn’t ever work but companies keep doing it. It is a demonstration of just how few innovative ideas there are in corporate America. “We could invest money in becoming more energy efficient and cut long term costs or screw that, let’s just buy back our stock.”

Is there any doubt the bean counters run American business? Stock prices of individual companies are much more influenced by the overall economy than raising earnings per share by accounting tricks. American CEOs need to grow a pair and invest in the future. Instead, they just play it safe and hang on to their overcompensated, overrated, phony-baloney jobs. Collectively, they have the courage of an armadillo and when threatened, they rolled themselves in a ball and pretend to be stones. Our captains of industry are a bunch of cowards.

That brings us back to the consumer and his new found financial sobriety. He knows his credit card balance has been too high, his house is down in value and he may lose his job; he’s feeling that he needs to get out of debt. So, does he need that second HD TV, a new car, a new kitchen, and a new wardrobe? No. These are choices, not necessities and the consumer is saying, “I’d rather pay down debt.” Until housing prices rebound, personal debt is reduced and companies start investing their hoard, the economy will sputter. The government can only help a little by keeping interest rates low and investing in infrastructure. Government spending is still less than 40% of our country’s GDP and a tiny part of our net worth.

All bad news? No. Since new house construction has been dead for a few years and rents continue to go up, we will eventually evaporate the housing surplus and prices will recover. Personal debt levels will reduce to a point that people will feel they can handle some new spending as long as interest rates remain low. Some companies will begin investing because their shareholders have begun to ask why CEO’s are keeping so much cash on the sidelines earning nothing in interest and they will insist that money be put to work.

We are recovering. The stock market is cautiously predicting we are getting well. That is the first indicator of a reviving national feeling of well-being. European debt still has us feeling ill and Chinese growth is in a real estate bubble that may burst as their huge, risky bank loans go bad. So, will we feel robust strength soon? No, but we are getting healthier than most people think. We are letting our aching heads clear and our individual finances convalesce. That’s the reality with binges; you always pay big time afterwards with a hell of a hangover.