Wednesday, February 25, 2009

Starting first post with the universally fundamental truth of mathematics as it applies to our current economic crisis. Our economy is the sum total of all goods and services, aka Gross Domestic Product ( GDP ) so….

GDP = Consumer Spending (70%) + Business Spending + Government Spending

If consumer and/or business spending should falter from say increased unemployment there is only one source that can make up the difference. It seems intuitive that some government spending would create more jobs quicker than others but according to the math it ultimately does not matter. What we spend on reflects our value choices as a society. But just any government spending on domestic goods and services is the most important aspect of keeping the economy from contracting as much as it otherwise would. That is why most economists say the stimulus was not big enough now nor in the Great Depression of the 1930s.

GDP = Money Supply x Velocity

Our economy in dollar terms equals how much money is in circulation multiplied by how many times each dollar changes hand every year. When people lose their homes and especially their jobs or even fear that they might the velocity of money plunges. That is why printing money is not inflationary at a time like this. In fact velocity has fallen so fast and so much that despite multiple massive government capital interventions in numerous ways from Federal Reserve and Treasury prices have fallen on almost every asset class in the last six months. These formulas are so accepted that Richard Nixon said in 1971 that “We are all Keysians now.”

We are not bankrupt as a nation unless our citizen creditors and foreign debtors say so with their money. And if fact, right now, they say the opposite. They feel the book value of America far exceeds its debt. So despite having a government and people that lived long time beyond their economic means America is in a much better strategic position than every other major country. The cost of capital for our government has never been cheaper as fearful investors seek the relative safety of government t-bills and bonds. Not taking advantage of that opportunity to make wise and valuable investments in our country and people would be the true economic calamity.

I am not saying all is guaranteed and rosy path to the future. Quite the opposite. We face our own explosion in poverty and a world that will be worse shape than us. I have heard phrases that I have never heard before like “pet food bank” and “Police prepare for ‘Summer of Rage’” on a CNN crawl. Gas mask supplier says business is “through the roof”.

Whether it ends with orderly markets and good visibility or ends with no markets and new currency is still a real question at this point. The Saudi Arabian and the Chinese government each independently have the option of ending western capitalism as we know it simply by selling their t-bills and buying gold. Will they? Probably not but thought that they could still makes me uneasy and a bit queasy. I got to think a growing 10 to 20 percent of their leadership would ,now favor cutting off their own nose to spite America’s face. Their feeling is that they could end up as the world’s economic powerhouse on the other side of the chaos. On the other hand I heard Art Cashman say recently, “Don’t bet on the end of the world, it only happens once.”

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