Vice President Joe Biden recently acknowledged the administration's misreading of the weak economy.
In view of his comments, I would like to update readers on my three-baseball-game analogy (introduced Nov. 3, 2008, in "Economy sinks as we save bankers") and note where we are now:
Although we've managed to put the financial crisis behind us, the reality of the economic crisis is slowly becoming clearer to more and more people.
A bubble gave jobs, then took 'em away
As an example of the fact that more people are starting to understand the root problem: The Financial Times recently carried an article by Pimco CEO Mohamed El-Erian titled "American jobs data are worse than we think" (subscription required).He notes that "there are rare occasions, such as today (July 2, when the June employment report was released), when we should think of the unemployment rate as much more than a lagging indicator; it has the potential to influence future economic behaviors and outlooks."
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Of course, the reason we have such a problem creating jobs is because the country spent 10 to 12 years engulfed in financial bubbles. They created a vast misallocation of capital and gave the economy the appearance of health -- when all we were doing was creating more risk.
Now we've got a broken economy and will experience serious difficulty creating real jobs. One of the shocking developments, El-Erian points out, is the speed with which jobs have been lost and how fast unemployment has screamed higher. He notes (in terms not far from what I've written): "The unemployment rate will increasingly disrupt an economy that, hitherto, has been influenced mainly by large-scale dislocations in the financial system."
That's El-Erian's way of saying: The big issue now is not the financial mess but the economic crisis.
A mania couldn't sustain an economy
Slowly but surely, I think that as "green shoots" come and go without really yielding a lot (read "Will economy's 'green shoots' wither?"), more folks will start to grasp that we have an enormous hole to dig ourselves out of.What landed us there was Federal Reserve money printing, which created the bubbles -- aided and abetted by greed on Wall Street and Main Street, and by authorities' abdication of responsibility. All of that allowed us to experience a decade-plus of bubblenomics. Until folks fully process those facts, I believe that they will find it virtually impossible to navigate this post-bubble period.
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At some point, the economic crisis may feed back into the financial system, creating another financial crisis as we discover that the stress tests done on banks were way too lenient and that some financial institutions are back on the disabled list.
Ultimately, we will endure the real nightmare of the funding crisis, the third part of my three-baseball-game analogy. (Read "The next crisis has already begun.") Thus far, the risk of a dollar meltdown from all the Fed's money printing doesn't seem to have attracted much attention outside the occasional maneuver by China (to express its concerns about the dollar, to ever-so-slightly rejigger the rules for settling trades in renminbi or to set up currency swaps).
A bright spot for savers
Though it may be quite a ways off, higher interest rates caused by both our own massive borrowing needs and a weak currency will not be "fixed" via stimulation. Once we get to that point, only austerity and intelligent policies will extricate the country from that quagmire.The one bright spot? In that environment, the financially prudent may actually get a fair return for saving money.
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You, Mr. Fleckenstein, are one of the few msn commentators left worth reading.