Economic Emergency?
Thursday, May 1, 2008 | Jason JovineRating:
No, I am not going to talk about Rev. Wright or Thomas Friedman getting pies thrown at his face (How funny was that?). I want to tell you that the United States has roughly a $14 trillion dollar economy.Just to put this into a little bit of context for you, China’s Economy (Gross Domestic Product) is roughly $7 trillion, India’s is about a $3 trillion, Russia’s is about $2 trillion, and finally Brazil’s is just under $2 trillion.
So, the U.S. economy is about as much as those four countries combined, for the moment! We must not become complacent, as these other countries are growing very rapidly. These other countries are doing their very best to become number one.
They will try to do this by any means necessary; whether by trying to insert spies into our government (e.g. China), or by simply stealing the materials that Americans have invented and selling them illegally.
The U.S. is in a precarious position. Oil is at almost $120 per barrel. Gas has been selling in some parts of the country for $4 per gallon. Food prices are out of control. Inflation overall is out of control. Take a look below at the red circle (just click on these images to enlarge them):
Personal Consumption expenditures (which is the Fed’s preferred inflation gauge) rose by 3.5%. PCE excluding food and fuel rose by 2.2%. The fed’s upper limit of tolerance for inflation is 2%. So they are not happy now, but they are in a pickle.
Here’s why they are in a pickle:
As you can see from the red circle above, the economy grew at only .6% in the first quarter of this year (2008). So the fed is caught between a rock and a hard place. If they keep lowering interest rates, then they exacerbate the inflation mess, but if they don’t, then there may be a recession.
The rule of thumb for a recession is two negative quarters of GDP. We have not had one so far. This is what the fed is trying to avoid.
The worst case scenario is stagflation: a recession coupled with super high inflation. This is what happened in the late 1970’s and early 1980’s and this is what we want to avoid at all costs.
In 1979 inflation was running over 13% a year! The prime rate (the interest rate that commercial banks charge their most credit-worthy customers) was up to 21.5% in 1980, and unemployment got up to 10.7% in 1982!
As I write this, the prime rate is 5.25% and the unemployment rate is at 5.1%. I already told you about inflation.
Thomas Malthus (1766-1835)
He was the author of an essay on the Principles of Population. In 1798, he postulated that any temporary or local improvement in living conditions would increase population faster than the food supply. He also theorized that disasters, such as war and pestilence, which check population growth were inescapable features of human society.
Many academics believed, and still believe, that the fallacy in his argument(s) was that he didn’t take technological gains into account when he postulated his theory. Even with technology, it seems like the increase in human population is growing faster than technology is.
We are seeing inflation spiral out of control right now because of four primary reasons:
1. Increase in the population
2. Increase in the economic prowess of much of that population (e.g. China & India). More people are entering the middle class and can buy more (and better) goods and services.
3. Energy changes. For example: switching over to Ethanol increases food prices.
4. Speculators. There are, of course, speculators seeking to profit from this.
In closing...
The $168 billion dollar economic-stimulus package started to go out to people last week. We probably won’t start to see any real effect until the later part of this year. The fed rate cuts will also begin to take effect soon.
For the short term, we may not have a super hard landing in this recession. However in the long term, there must be significant changes with the with the way business is done. Or else future generations will just read about the U.S.A. in their history books.
Until the next time folks...
P.S. As always, feel free to send your love/hate mail.
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Jason Jovine
Contributing Editor
The Tycoon Report
