Please Don't While They Fiddle About

Twisting by the Pool



I economic data has been lackluster (I am being kind), European leaders are in denial and the Fed has taken dancing lessons.

The economy is slowing. Is any one really surprised? With food and fuel prices elevated going into the third quarter, how in the world did anyone believe that consumers would keep on spending? When prices of goods with inelastic demand curves rise, consumers must make choices, if incomes were rising the situation might be different, but with employment in the dumps, wage growth is just not happening.

Some thought it was just a matter of time before companies making handsome profits exporting affordable goods (thanks to the weak U.S. dollar) would hire workers. However, few pundits were paying attention to new factories going up overseas or the cheap financing paying for new equipment and more efficient processes here in the U.S. Machines are cheaper than humans.

What will these pundits say now that the U.S. dollar has rallied against most major currencies? The one blessing is that the consumption tax on households has been reduced as lower food and energy prices, resulting from the stronger dollar, could put discretionary cash in the hands of consumers. Worst case is that households can delever (pay off debts) more quickly. Speaking of taxes, will somebody tell the President that we tax and spend too much and that temporary stimulus does a better job encouraging consumers to save or pay existing debts rather than spend? How are consumers to make large purchases, such as an automobile, when the extra cash in their budget lasts for a year and their loan is for five years? We won’t even the discuss the folly of limiting the tax benefit of municipal bonds and creating infrastructure banks. I am not even sure if the Federal Government has the power to tax municipal bonds used to fund essential services and projects.

Then there is the Fed. I come here to praise Mr. Bernanke, not to bury him. It is thanks to him that we have avoided recession as the President and Congress fiddle while America burns (Roman enough for you? Yeah, yeah I am mixing Nero and Julius Caesar, but cut me some slack). Seriously, the Fed is supposed to foster full employment and price stability. It is not supposed to keep the economy growing while the executive and legislative branches of the government bicker and pursue their own interests. However, this is exactly what has happened for the past two decades. Please stop looking for the Fed to solve all problems. The problems are structural, fiscal and not monetary. When will that penetrate the thick skulls of politicians, pundits, market participants and consumers?!!!!!!!!

Meanwhile all the Fed can do is dance, dance, dance, dance to keep the economy out of recession. Mr. Bernanke had better have his dancing legs ready because it looks like fiddling time in DC.