I punched a good friend of mine yesterday.

In the face.

Well, let me rephrase that – I almost punched him in the face. Being the adventurous type, one evening this close friend (who we’ll call Hank – the name choice not entirely an accident), made a meager attempt to control his own finances by putting me under strict instruction to clock him square in the face should he attempt to spend more than a given dollar amount at an entertainment venue. Hundreds of dollars over his “limit”, I shamefully admit that I did not have the fortitude to slug my friend in the jaw.

I did, however, take note of the recurring theme in this man’s expenditure history.

Cash is like kryptonite to Hank. I doubt he knows who is on the one dollar bill or even how to make change, for that matter. Each and every time expenditures would occur, whether at a store or in a restaurant, the plastic would come out.

The parallels between this person and the United States’ economy are staggering.

Borrowing from tomorrow

When the debt would accumulate, Hank would grin and muse, “don’t have to pay for that ‘til next month!” In some ways amusing, in some ways unsettling. Paying for today’s demands with tomorrow’s money. What Hank failed to realize is that tomorrow’s money is expensive.

We, as a country, are not paying for our daily expenditures with credit cards. We are paying off maxed-out credit cards with maxed out credit cards that will be paid off with lines of credit from banks that may or may not exist.

I’m not going to recap the six thousand ways this country has passed around bad money for the past x-amount of decades. You’ve read, seen, and heard it all already.

The travesty I want to point out instead is that we are throwing borrowed money at bad money. At mistakes. We are travelling through an underwater tunnel that has sprung a leak, patching it with bubble gum, and pretending to ignore the drips.

This incessant dripping is forming a puddle of inflation.

The billions that will, in all certainty, lead into the trillions of dollars cannot be printed without consequence. Like any other commodity or security, the laws of supply and demand apply to currencies – the more dollars there are floating around, the less each one is worth. So, the more dollars it takes to buy something and hence inflation is on its way.

Inflation looms, but more issues abound

There are a few major issues we’re going to have to deal with as we sit in the middle of this crisis. They are: restoring consumer and investor confidence, the reduction of interest rates, and one final issue that I find very interesting… we’ll get there in a minute.

Confidence

In terms of consumer confidence, well… are you confident? Are you ready to proclaim that you have faith in our society, that it’s time to expand business and we’re ready to turn this thing around? Enough said.

Interest rates

Given the globalization of the economy in recent decades, it is equally important to monitor the steps that other countries are taking in order to help stave off this financial debacle. Well, prevent it from getting any worse, anyway.

In November, the Bank of England cut interest rates sharply (by 1.5%) to 3%. That’s the lowest rate in over fifty years, and in the 300 year history of this bank their rate has never gone below 2%.

Guess what happened last week.

Hello 2%. There’s not far to go before we’re drinking skim.

Only a dozen or so other countries slashed their rates as well. But here’s the problem: No one seems to care. And not just about that. I’ll revisit that after I make one more point.

What happens when the bailer bails out?

Gary Hager, president of Integrated Wealth Management, made a great point recently. In the mad scramble of analysts and experts attempting to put a semi-final number on the price of the government bailout packages, there has been little talk about the danger that this will be successful.

In other words, the bailouts are in danger of succeeding. Should these businesses actually get back on track and the economy receives a jump start, we should really be considering the method and consequence of the government’s eventual process of withdrawing its support. After all, much of the bailout packages did not involve no-strings-attached free money. In many cases, the government is essentially buying a stake in these entities. Unless the government plans on being perpetually and heavily invested in banks, automakers, and any other hat-in-hand corporations they have helped, they’re going to have to sell that off little by little.

As Uncle Sam slowly and carefully removes this band-aid, we’re going to see whether the wound is actually healed. In my opinion, we may need to stop picking at it.

Some great ideas that no one cares about

Cutting rates – a nice idea to stimulate growth. Unless, of course, people don’t feel like borrowing, don’t feel like expanding business, and are just trying to avoid laying off half of their employees.

Bailouts – interesting the first time, not the 23rd. I would wear out this keyboard if I committed to fully expressing how disgusted I am with the redundant, contrived, and essentially obsolete headlines proclaiming some variation of one of the following two things:

“Stocks slump on bailout fears/worries” or

“Stocks surge on bailout talks”

Although I couldn’t hit Hank, I nearly want to put my fist through the computer screen when I see these headlines. Not only is it complete horse manure, but no one gives a crap about bailouts anymore. We’re looking ahead to the results, and in all likelihood, the consequences of these handouts instead.

Most likely inflation. More fruitless rates cuts. And maybe some surprises, who knows. But I do know this – anyone, analyst, author, or otherwise, who thinks that the market is moving based on whether or not there will be another bailout of “XYZ” corporation, is obviously abusing a set of prescription drugs that I would love to get my hands on.

John K. Whitehall
Analyst, Oxbury Research