One of the best articles I've read in a long time about what is going on with the government and the economic push to get consumers to reinflate the bubble.
DON BAUDER/ A battle of prudence vs. spending
November 3, 2001
This is war.
The enemy is evil.
We must prevail -- or, at least, our financial gurus think so. From the economic news -- and Wall Street's response to it yesterday -- it looks like we will triumph.
Early yesterday morning, the government announced that last month the nation lost 415,000 jobs -- the biggest slash in payrolls since May 1980. The unemployment rate made its biggest jump in five years.
It was no surprise. Companies have been laying off employees at a frantic rate.
Initially yesterday morning, stocks fell moderately. Then they jumped back, because Wall Street knows that reinforcement troops are in waiting.
Wall Street knows that the Federal Reserve and the Treasury have the ammo to defeat this enemy.
The enemy is prudence. Economic conservatism. Savings. Sound economic sense. We have to defeat it.
Washington's shibboleth: Punish the prudent and reward the profligate.
Our Washington policy-makers have watched in horror as the U.S. personal savings rate has risen from zero to 2.5 percent.
Since early 1999, consumer credit soared from $1.3 trillion to $1.6 trillion -- but then it began flattening out, month by month.
As layoffs mounted, people were not using their credit cards so much. The traitors!
The ratio of consumer and mortgage credit to disposable personal income is already an astounding 105 percent. But we have to get it up there to 150 percent to win this war.
Our leaders tell us that terrorists may attack any day -- but we must spend and buy stocks as if nothing is unusual. They cannot understand why we cannot grasp what they are saying.
Anyone old enough to remember World War II -- when consumption was rationed, people bought low-yielding victory bonds and tended victory gardens -- is told to shut up. What was patriotic then is unpatriotic now.
Even though we are in a military war once again, the patriotic thing to do is to go out and load up on consumer goods, paying with a credit card.
The Federal Reserve has dropped the federal funds rate from 6.5 percent to 2.5 percent in 10 months, while pumping reserves through the banking system at a staggering 15 percent to 20 percent rate. This is unprecedented monetary ease.
But the Fed was thwarted. Short-term interest rates came down, as the Fed mandated, but long rates only dropped very stubbornly. So this week, the Treasury announced it would eliminate the 30-year Treasury bond.
This sent long-term bond prices heavenward and long-term rates down. Bond prices and rates are like two buckets in a well: When prices rise, yields fall, and vice versa.
The artificial lowering of long rates, which also helped to lower intermediate-term rates, should help knock down mortgage rates and other long-term and intermediate interest rates, juicing up a credit cycle that already is vastly overloaded.
The moves also encourage people who are out of work -- or fear they will be out of work -- to go out and spend.
The Fed certainly will lower rates next week -- half a percentage point seems in the bag. Then you can count on it lowering rates again before the year ends.
Short rates probably will come down to 1.5 percent. You will make something like that on your certificates of deposit and money market funds. The powers-that-be want you to turn to the stock market.
They did this in the early 1990s and it worked -- well, sort of. Actually, it created a gigantic financial bubble, perhaps history's worst, that led to runaway greed and a ridiculous and wasteful distribution of capital.
We are just getting over the bursting of that bubble, and they are trying to pump it back up again.
But you have a dilemma. Returns on short-term paper are extremely low. Long bond rates are now too low. But you don't have to go out and buy Cisco and Microsoft stock.
You can buy insured California municipal bonds, which are still reasonable, and are state and federally tax exempt. You can buy real estate investment trusts. Preferred stocks. Closed-end municipal bond funds that offer tax-protected yields of 6 percent.
Most of all, you can delay those purchases.
The Federal Reserve led you into one bubble. Don't let them lead you into another.
Union-Tribune Library researcher Michelle Gilchrist assisted with this column.
Don Bauder: (619) 293-1523; don.bauder@uniontrib.com |
