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Why Aren’t We Hearing About How Well The US Economy Is Doing?

By Andy Shaw | January 23, 2010

Originally Posted 30th July 2008

The truth of the matter is that the US economy is not in recession and it doesn’t even look likely to go that way anymore this year. In fact the figures about to be released should be around 2% which would make it miles away from recession. Now when you consider most economic pundits including myself predicted that they would go into recession easily by this quarter why have our predictions been so way off base?

Well because despite the fact that everyone is quick to criticise the government over there, they were quick to respond and actually try to help the people (unlike over here). They brought in an economic stimulus package where they gave everyone $600, and how did they pay for it, well they wrote a guarantee. And what did the Fed do, well they cut, no sorry, slashed away at interest rates, leaving themselves open to criticism by the establishment of economists (and the results are plain to see, will somebody please show the results to Mervyn King and Gordon Brown?).

President Bush got on the TV and told everyone that they will sort it out, and here’s the start with a stimulus package. Now this despite the fact that most of us believe that he is lying when we see his lips moving, so why do they listen to him? Well I think despite his various failings he can still sell em ’snake oil’ (whereas Gordon Brown can’t! That would require a personality!), and then most recently the Fed backed their mortgage institutions and have said they will back other financial institutions.

Now this is what I call support! And why do they do it? Well they do it for the greater good. They have to as in times like this the paradox of de-leveraging occurs. Which is that of the banks deciding that they are over-geared so they try to de-leverage. Then what happens is that the value of the asset slips so now they can’t de-leverage any more and they have actually increased their leveraging because of the asset value slippage. This is where support is needed in the way of the guarantee of public funds which bolster up the sentiment and are used for the good of all to buy the assets that the banks no longer want and allow them to de-leverage without the asset value slippage. The funny thing is, on those funds it is very likely that the government and the Fed will return a very fair profit.

Whereas if we look at the UK economy it is on a slippery slope and being pushed downwards by those bastions of good and balanced reporting who are otherwise known as the media (all of them). As I’ve said before we can avoid these treacherous waters despite the media’s intention for us to get wet and a fair number to drown. But in order to do this they need to cut interest rates by at least another 1%; this does of course fall on deaf ears.

Trouble is they (the UK policy makers – 8 out of 9 of them, the only one who is on my side actually studies the US economy (as he lives there!)) are fighting a fight that shouldn’t be fought right now. Just like I have said, if you cut all taxes down to just 10 pence in the pound you will vastly increase revenue into the economy (a paradox I know, but that is the way it is, just look at what happened with the Bush tax cuts in the US for a recent example). They (the Bank of England and the government) are fighting terrorists in the garden whilst the roof is on fire, at the end of the day you always have to fight the greatest threat to your survival first and if the roof collapses and kills you, then who cares about the terrorists? If the economy collapses into recession, then we won’t have to worry about inflation!

The high commodity prices we are experiencing right now should/will actually be short lived and come down nicely by this time next year. If you note the price of oil came down as I mentioned it would recently, so the cure for high prices as usual is of course…high prices.

Another thing is that I am expecting the Libor rates to continue coming down. So if they stop fighting terrorists for a second and start smelling the smoke, then we may well be in for some rate cuts that can prevent what I see coming. And this time unlike earlier cuts this year we will actually feel those cuts, as before the banks had to build in their comfort margin, which I believe is well and truly constructed now. However, if Libor comes down enough anyway and returns to pre-credit crunch levels then we should see a 0.5% cut off current rates as well (which could happen), so just 0.5% from the Bank of England would get everybody back in the ball park.

So there we have it, the US is an economy that has as its central bank a bank that has a dual mandate, inflation and the economy, whereas our central bank is just working on inflation only. Does anyone else think this is madness or is it just me?

So another question is why are we not hearing about the good news because I think it’s fair to say we need some?

Well this opens for us the political problem and Gordon Brown, where even the supposedly loyal newspapers are turning away from him because they want him out. Now if the media were to be airing the good news, then do you think it would be more difficult for them to oust Gordon then, after all it’s proving somewhat difficult now?

So this does raise the question of whether we are hearing all this bad stuff just while they try to get rid of him. Now I think we all know that I am no fan of Gordon Brown (that doesn’t really cover it does it?) but I wonder whether the media is in anyway generally aware of the trouble and pain they are causing at this time of economic turmoil. Afterall, all they’d need to do is give a fair balance to the figures coming in and the sentiment, then the feel good would start to come back quicker. Or is it simply because nothing sells like bad news, or should that say nothing sells to the British public like bad news.

The trouble for the press is that some things are getting better, and it will only be so long before they can’t just keep selling doom and gloom as there are some good figures coming out. Things are starting to swing a little towards positive factors and the feel good is starting to show. Still, I’m sure they can find something else to try and make the public feel bad about.

I think the US economy will play the wait and see game at 2% interest rates whilst we will wait and see at 5% (who do you think will do best?). Their economy will survive this whereas ours will really suffer although the fundamentals of our property market are really strong right now (and the US’s are weak). Therefore when the rebound happens it will be fast. As to when it happens then the jury is still out and this could end up being down to how desperate Gordon Brown is to try and stay on as leader, as he may well take more risks to keep his job.

So what will they do next regarding rates? Well, unfortunately they’ll wait and see (and I really am hoping I’m wrong here and they cut rates). They will not take a chance and give the public a boost in the best feel good time of the year, why would they ever want to do that! Then I think as in times before when they realised they needed to cut rates (which they do now, they just don’t know it) they will cut them slowly.

Still here’s to hoping that I’m wrong and they cut the rates in August as that would start to pull us back up the slippery slope!

Best wishes

Andy

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