oldfashionedway (39.12)

The Four Horsemen of the Economic slowdown

August 24, 2008 – Comments (1)

There has been much debate here at CAPS regarding inflation/deflation.  I would like to muddy the waters with a few random thoughts.

Anyone who has been to the supermarket or a gas station in recent months is painfully aware of PRICE INFLATION.   A gallon of milk or a pound of ground beef  as well as most of the items on your shopping list seem to be slowly creeping up in cost each week.  With increasing costs of raw materials/ingredients, manufacturers have a difficult choice:  raise prices or reduce the size/weight/quantity of their retail products.  I have been somewhat suprised at the frequency this year when companies have actually done BOTH.  (Half-gallon containers of ice cream are rapidly being replaced by 1.75 quart packages by most producers in my local grocery.)  Companies across the board have struggled in recent years to absorb raw material and energy costs, and are now forced to reduce quantity to maintain a price point or pass along these costs to the consumer.  I am aware that reduced demand naturally forces prices to decrease, but given the choice to freeze/drop prices or simply close up shop, the latter increasingly makes more "business" sense.

The much heralded minimum-wage increase was widely debated this year and was probably long overdue.  It is, however, the latest impotent attempt in the past several decades to deal with the reality of STAGNANT WAGES.  Increases in mechanization, productivity, and globalization of labor have all contributed to the effective loss of purchasing power by the working middle class.  One- income families become two-income families as a couples feel the need to enter the workforce to maintain their desired standard of living.  There is continual discussion with regard to America's ever increasing perceived need for more stuff (necessities vs. luxuries, keeping up with the "Jonses" etc. ).  Yet it is crystal clear that more and more households, whether single- or dual-income are struggling to remain solvent let alone get/stay current on their bills. 

As the Motley Fool is a financial website, we are all well aware of the price fluctuations of equities.  The past decade has been difficult for conservative, "small-time" investors to say the least.  Well-worn phrases from the ghosts of the past such as "buy and hold" seem less relevant than ever in the computerized, dirivitized (if there is such a word) twenty-first century.  We all hope to "invest" in assets that will appreciate in value over time, whether stocks, bonds, real-estate, or personal businesses.  Of late, global markets and economies have confounded the brightest minds on Main Street and Wall Street.  Economic cycles and rotation of classes within markets are to be expected and profited from by the informed investor.  With the painful memories of several "bursting bubbles" fresh in our memories, namely dot,com and housing, the harsh reality of ASSET DEFLATION has become the latest lesson learned by comparatively young investors.  "Things" do NOT always go up in value.   A generation of Americans has been conditioned to expect unlimited easy credit as well as ever appreciating values of homes, real-estate and equities.  Unfortunately that which goes up may/can go down.  Many of the items we pay the most for in life and hope to "own" the longest (houses, autos, pensions, etc.) are for the first time for many people worth less, much less, than they were a month or year ago.  The term 'upside down" applies to more and more home, property, and auto owners every day.

Finally to the crisis-de-jour:  CREDIT CONTRACTION/DESTRUCTION.  The CAPS community has done an excellent job educating its readers as to the house of cards known as fractional banking.   The U.S. economy has roared along on the premise of everyone borrowing money for any and everything.   Constant unsolicited offers for credit cards, banks loaning money to the homeless (figuratively? literally?), people using home equity as an ATM,  putting daily necessities on revolving credit-  all this fiscal insanity is now coming home to roost.  Now that the truth is slowly trickling out about the severity of the situation, from the Federal government to huge corperations to State and local governments to your neighbor next door, things are going to change.  Banks, which make money by lending the same dollar out to five or ten people have suddenly decided to get picky about the customers to which they loan.   Verifyable income, tangible collateral, and excellent credit scores seem to be irrelevent today.  It seems their questionable buisness practices of the past several years (decades?) have come back to bite them big time.  So now in the fantasy world of the Federal Reserve they just fire up the printing presses one more time.  The federal gov't borrows another trillion to use for corperate welfare, mega-bank buyouts, and token "stimulus" packages to keep the masses momentarily pacified.  The founding fathers are likely spinning in their graves.

This could very well be the perfect financial storm of our lifetimes.  The global powers that be may once more manipulate, fabricate, spin and deceive their way out of a U.S. recession or depression yet. Be careful where and how you place your bets.

Thanks for letting a novice vent,  I admire the knowledge, generosity, and passion of the CAPS community.   I have real $ in the market and still have much to learn!

o.f.w.