Cramer versus Obama

I tend to agree with Cramer here. The Recovery Act is full of junk and lacks vision. Obama let others craft a plan portrayed as a strategy to stimulate the economy, but which is instead a debt creation initiative to be paid down by future generations. Of course, a worse (and more likely) scenario is that future generations will see today's balance inflated away.

Obama is capable of something more. The country is changing; the whole world is changing. By letting Congress choose the direction of federal outlays, Obama deferred to the status quo, which we all know is broken.

As I predicted, China would gauge the winds before deploying their own stimulus. They have done so, and the initial reaction by the investor class is positive. I'm going to look at some of the details before lending my own opinion, but I would suspect that people who are long on oil will find something to smile about. Of course, a China stimulus repairs the status quo, it does not project the world economy into the future.

Sadly, there will be more breakage in the economy before things will get set right. Obama missed his chance to be the architect of the future economy. Rather, he sowed the seeds for the inevitable breakup of the Union of Fifty States. More on that subject some other time.

Who Knows The Economy?

The real question is not who knows or understands the economy. The question is who understands the fall, and who understands the way through the trough, and then who knows the way up again. Any given economic or market genius may only know one part of the cycle. For example, check this out if you want to see someone who understands what brought us down, but has lately shown little comprehension of the trough or the way through it.

Or, think of Krugman railing against tax breaks. Please tell me, Mr. Nobel, how does a stimulus alone make up for the coming wage deflation? It doesn't. The only way to get people to simultaneously delever and consume is to put more money in their pockets.

I just got around to reading The World Is Curved. I am curious to see what Smick sees about the next phase.

Forget Deflation

Consumer and producer inflation indexes are both down. Consumer confidence is down. Employment is up. In a vacuum, this is a recipe for a deflationary cycle. Don’t be fooled. Unless you're a dust mite, you don't live in a vacuum.

We live in a world of interconnected national markets. Even though there is ample granite in the 50 states, we import granite countertops from India. Think of that, a boat full of rocks sailing the Pacific. All that fuel and overhead, yet it is less expensive to import the items than to produce them domestically.

I’m not worried about India. Like China and Brazil, it has a diversified economy. So, as the ass falls out of the commodities markets, India will be able to absorb the downturn over time.

Think, though, of Colombia. By natural assets alone, it should be one of the wealthiest countries in the world. Yet, we know that geopolitics prevent national stability. This instability (or chaos and butchery, if you prefer), prevents the country from reaching the market fantasy of maximizing wealth through comparative advantage (low labor costs + abundant resources = lucre from sales with countries with consumer and producer demand for raw materials).

Even with a free trade agreement, what happens when the prices of their exports drop? Farmers go back to growing cocaine. Shippers go back to shipping cocaine inside vats of coffee beans. Bureaucrats receive a higher concentration of bribes from cocaine producers. Military expenditures by the official government increase. Civilian deaths increase. Crime shoots up (so to speak). Instability foments into carnage. Again. Net effect: prices of raw materials will increase due to increased labor and transaction costs (in the form of physical security) and from scarcity as producers of raw materials flood back to the profits of the illicit drug trade.

Play this out in Kenya, Nigeria, Indonesia, Bolivia, Mexico, Egypt. What about Iran? As the demand for oil drops, the wealth dries up. What will the mullahs do to fasten their grip on a population hungry for economic modernity?

Net effect: we’re still sitting on an inflationary time bomb. Prices are correcting as a result of the bursting of the asset bubbles and as consumers feel the reckoning of their own over-leverage. There’s still too much money out there. It’s just not changing hands – yet.