You and I Aren't Part of the "Economy"

Or at least not in Mr. Don Luskin's mind, or most other pundits for that matter. You see, for these experts, the economy is already rebounding, earnings reports from major corporations like Google are beating estimates handily, the housing market is poised for an upturn, and the Wall Street investment banks are raking in profits again.

Consider the following quotes from Mr. Luskin's piece dated April 18, titled "Economic Recovery Already Underway." This piece was unfortunate in that Mr. Luskin has been known for libertarian economic views and overall support for the ordinary citizen from an economic perspective...thus making this piece all the more puzzling:

"And yet now, a month later, the economy has not gotten worse. Compared to the bleak expectations then, even just hanging in there would have been an upside surprise. But it's more than that. Things actually are getting better."

"Other than [GE's earnings disappointment], the news has been terrific. Look at what's come out of the technology sector the last couple days. Intel (INTC3), IBM (IBM4) and Google (GOOG5) all surprised big time on the upside. No falloff in world-wide technology demand at Intel and IBM. And no falloff in the consumer sector for Google."

"Industrial production was reported as rising 0.3% last month, when it was expected to have declined. That's a key recession indicator and it's just not indicating. The high-tech component of industrial production has been especially strong, currently at all-time highs."

"The worst is over. It's more than over. Consider what's happened in the banking sector. With Merrill Lynch's big write-off yesterday, and Citigroup's (C6) this morning, cumulative bank and broker losses from subprime lending and related credit craziness has come to something like $250 billion."

"They'd like you to believe that America has no economic future, that our best years are behind us, that we've run out of tricks. But it's not true. And Google's big earnings report yesterday proves it."

And the most inane...

"So what if there was some excess home building and home buying? So what if some stupid banks made some stupid loans, and some stupid home buyers took those stupid loans and now can't pay them back? It's a problem, I suppose. But in the end it's a side show. The economy marches on."

First and foremost, we need to find out where Mr. Luskin buys his gas and groceries. Apparently, it's much cheaper than where you and I are buying it. Or maybe people like Mr. Luskin are paid so handsomely that 100+% increases in their grocery bills don't register when they balance their budget. The fact that the above-quoted commentary makes nary a reference to spiraling costs of consumer staples is a startling omission to say the least. It's as if the daily challenge faced by the American consumer to make flat or only slightly increasing wages extend far enough to purchase the essentials is inconsequential to the economic state of affairs in America.

Having said that, let's examine some of the statements from his piece.

"No falloff in the consumer sector for Google." Of course there isn't...or at least not yet. What is being ignored here is that consumers are relying on credit, probably nearly exclusively, for buying the things that they want. Budgets are strained by the purchasing of food and gas, as well as paying the mortgage and car note, so the credit card becomes the only means of acquiring what the middle class desires. Eventually, as the credit crisis trickles inevitably down to the consumer level, the bridling of consumer spending will show up in Google's numbers. Plenty of other sectors have already begun feeling the crunch from less spending by their usual customers. In fact, the WSJ just reported on this phenomenon in the restaurant sector last week.

Mr. Luskin points to the industrial production indicator as a sign that there's just no recession in sight. The problem with this assertion is that it ignores the fact that the production in question may not necessarily be aimed at US consumers; the production output may very well be aimed at selling the products overseas to healthier economies. Even more so, to suggest that no recession is upon us simply because an economic production indicator rose by 3 tenths of a percent is bordering on irresponsible. Perhaps Mr. Luskin could sit down with and convince middle and lower income families of this fact...but I doubt it.

Regarding the Merrill Lynch and Citigroup write-offs, it's as if Mr. Luskin is celebrating the fact that another $250B of investment banking sludge has been successfully sloughed off and dumped onto the shoulders of the American taxpayer. Only in the world of the monetary elite is this an accomplishment worth touting. You see, the $250B that was "written off" is really handled roughly in the following fashion: the banks declare the loss; the Fed assumes the responsibility for the debt; the Fed monetizes it through the printing of money and addition of the loss to our overall national debt; the taxpayer experiences rising prices from the resulting inflation and higher taxes to pay off the burgeoning government debt.

"And Google's big earnings report yesterday proves it." So goes Google, so goes America. This facile connection between a Google quarterly earnings report and the state of the US economy belies the fact that the average American is meaningless when it comes to the perceived strength of the US economy.

As if the previous resolutions regarding US economic growth were not enough, the piece ends with a declaration of minimization of the housing bubble and the resulting credit implosion that it manifested. What Mr. Luskin and other experts fail to realize is that the credit crisis' worst effects have yet to find their way into our economic system. The bulk of ARMs have not reset -- but they will do so over the next 18 months. The impingement of people's budgets by higher mortgage payments has yet to be fully realized. The aftershocks will spread to their ability to purchase food, of which prices are already rising sharply; buy gas to get to their jobs or travel destinations; pay off car loans and credit card balances; and ultimately, stop buying the goods and services that are considered non-staples. This last item will show up in reduced consumer spending numbers, of which 70% of the US economy is based upon. When this occurs, the economic stagnation fostered by the housing bubble and credit crisis will be upon us in full force.

Before closing this entry, it is important to analyze another of Mr. Luskin's points. Early in his piece, he references the Bear Stearns collapse in the following paragraph:

"Just a month ago yesterday, markets opened to the news that the firm Bear Stearns (BSC1) had been vaporized and for no better reason than that investors had arbitrarily lost confidence in the venerable brokerage firm and all withdrawn their money from it at the same time. It was only the Federal Reserve stepping in with $30
billion in risk capital that prevented the Bear collapse from taking down world capital markets."

For no better reason than investors lost confidence? Amazingly enough, Mr. Luskin has found a way to foist the blame for the bank's failure onto you and I. Perhaps it was not enough to suggest throughout the piece that nothing is amiss in the economy while ordinary citizens struggle -- rather, adding insult to injury was called for as well. Bear Stearns' collapse is rooted in faulty investment decisions and downright financial alchemy that produced securitized debt that had no legitimate underpinnings for being packaged and sold to investors in the first place. To blame the BS collapse on investors is like blaming the Titanic sinking on the ship's wait staff.

Mr. Luskin doesn't stop there, however. He goes on to say that the Fed saved the day by injecting "$30B in risk capital" into the firm to prop it up. First off, what does he mean by "risk capital?" This term evades my understanding; perhaps the reader can illuminate it for the good of all. That aside, this comment makes forfeit any possibility that Mr. Luskin understands how the Fed works. The Fed has no capital in its "vaults." What it does have is the obligation to monetize US government debt and print money. Apparently, it now has the obligation to save any and all irresponsible large banking institutions as well. So the $30B of largess that the Fed supposedly provided to BS was simply a fresh sheet of money rolling off the printing press, creating the dual effect of rescuing a Wall Street titan while resulting in inflation in US and world markets. In other words, the taxpayer, not the Fed, unwittingly bailed out BS by shouldering higher prices and a greater tax burden.

I would close by asking the reader, the next time he or she is hearing or reading some report on the state of the US economy or the plight of the consumer, to listen for the reasons being given as to the current state of affairs. More importantly, pay attention to those reasons not being provided.