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Ways of the World

Carol Stone, business economist & active Episcopalian, brings you "Ways of the World". Exploring business & consumers & stewardship, we'll discuss everyday issues: kids & finances, gas prices, & some larger issues: what if foreigners start dumping our debt? And so on. We can provide answers & seek out sources for others. We'll talk about current events & perhaps get different perspectives from what the media says. Write to Carol. Let her know what's important to you:

Monday, November 10, 2008

Where Do We Stand Now?

The first answer to "Where Are We?" has to be that we have a new President. This election will stand forever as a landmark in American history. To us, it is the culmination of the American dream, the American Idea. We have written here before about "The Radicalism of the American Revolution" (see July 7, 2007) and how the social consequences of our break from England broke apart the centuries-old notion that society should be organized in tiers, with patrons and clients – and slaves. Yes, it took another 90 years to free the slaves and another 100 years after that to ensure their descendents full voting rights. But the porousness of society that allows the son of Kenyan and Kansan parents, raised by a single mother, to rise through the political ranks to the top, had its roots in the foundation and invention of America.

This said, we can't stop long to celebrate, nor can Barack Obama bask in the glory too long. This man, with a liberal mandate from the American people, is now the primary source of hope in fixing our economy that is in such distress. Here are four parts of the economic challenge that marks "Where We Stand Now".

The Stock Market
The last four days of last week, the Dow Jones Industrial Average was up and down like a yo-yo: it surged 350 points on Election Day, plunged by more than 900 points Wednesday and Thursday, then regained 250 points Friday, and turned back down 140 points or so today. Friday's rise came despite a sharp fall in General Motors, which issued poor third-quarter results and a caution that it could run out of cash fairly soon. But shares of Ford, the other big American auto company – and also expected to report a Q3 loss – ticked up in price Friday, as did 28 of the 29 other firms that make up the Dow Jones Average. With all this volatility and counter-intuitive responses, there is clearly no consensus among investors on the value of any company or group or any way to know whether the market is finding a bottom.

One element of concern is the repeated statement by Candidate Obama that he would engineer a rise in the capital gains tax. Now that he has been elected, some investors are selling stocks to ensure that they will owe the current lower tax – assuming they still have gains at all – and not a prospective higher one. This phenomenon, known in the jargon as "tax-loss selling", isn't helping.

Interest Rates
The Federal Reserve and other central banks have poured billions and billions of dollars into money markets to support the strained banking system. The so-called "monetary base", the Federal Reserve's underlying liquidity pool for the economy, stood last week at $1.237 trillion, up nearly $400 billion or 47% just since mid-September. The idea was that banks, money market funds and dealers in short-term debt would be able to use these funds to increase the availability of credit and lower its cost. Then, borrowers of all kinds could begin to get back on their feet. However, fear gripped potential lenders so that several weeks passed before short-term business debt stopped contracting, and initially, interest rates rose, instead of falling. LIBOR, the London Interbank Offered Rate, the headline rate for one bank to lend to another, surged on 1-month loans from 2.5% in mid-September to 4.35% in early October. Now it has finally retraced that rise, reaching 2.29% on November 7.

LIBOR is widely used in setting rates on longer-term debt, especially mortgages. Mortgage rates themselves have also remained higher than helpful, as lenders are squeezed by the fear their creditors have in them and the fear they have in their would-be borrowers. The benchmark rate on 30-year fixed rate mortgages was 6.28% this past week, hardly different on balance from its level in mid-summer. Mortgage credit availability also remains tight, regardless of rate.

The $700 billion "bailout" is meant to help all of this, but funds from it have not yet flowed out in size, as the Treasury Department needs at least some weeks to set up the administration of its various programs. As you have probably read, the latest wrinkle is an appeal by auto companies that they should have a share in these funds, and some are being invested in AIG stock. We will detail more of this in a subsequent article.

Energy Prices
For consumers (i.e., us), at least energy prices have been moving in the right direction. We were in low-tax New Jersey on the weekend and saw an off-brand gas station selling regular for $1.97! That's right: less than $2.00!! New York's gasoline taxes are higher, but even there, the price at the pump is well under $3.00.

National personal income data are available through September and we calculated our measure of "take-home pay" – wages and salaries after deductions for income and social security taxes. A year ago, this gauge was rising about 0.5% each month. But in the last 3 months, the monthly change has been -0.25%, that is, income is actually falling a bit. Thus, it's a good thing energy is cheapening. There has been no such relief from food inflation, though; you have surely noticed! So food and energy necessities are still eating up a large portion of take-home pay: 27% of it in September, barely down from a high of 27.4% the prior three months, and burdensomely higher than 25% a year ago. The lower gas prices in October would have helped relieve this some more, although income is almost surely still weak.

Employment and Economic Stimulus
All this, and we haven't yet mentioned the mounting job losses and rising unemployment. Partly that's because they are not separate from everything else that's going on; they are the unfortunate and almost automatic fall-out. Enhanced unemployment insurance was enacted back in the summer, and in the latest week, October 18, 773,000 people were receiving the extra benefits. Some of the recent job weakness was related to the two major hurricanes in September and the Boeing strike, which ended only very recently. So some "improvement" could appear.

Meantime, there is already widespread talk of an upcoming stimulus package from Congress, apparently similar to the tax rebate we all got back in the spring. This may help, and while we're not excited about sporadic, one-time "gifts", that action may give the incoming Obama Administration time to get its act together on longer-term fiscal policy. One aspect we hope for: no tax increases for any segment of the income distribution, at least for a while. Herbert Hoover learned about raising taxes during a period of economic weakness and so did the Japanese in 1997. More economic malaise follows.

Also note that it's not really necessary to "pay for" economic stimulus programs. If they do their job, revenue will recover anyway. If they're not very effective, then trying to pay for them would bring still more weight on income-earners.

One last item, one we haven't read elsewhere: state and local governments generally aren't legally allowed to run budget deficits. So if their revenues start to weaken, as many have already, they have to respond promptly with contractionary actions. So an early "stimulus" from the federal government could be the reinstatement of the old program called "revenue sharing". If banks and auto companies need "aid", surely state and local governments deserve the same.

We haven't touched on several key current issues: the environment and health care especially. And every item we have talked about here merits more exploration. So there is clearly more to come. Let us know how your priorities run for more information. Email


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