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Getting So Much Better All The Time
by Mark M. Rostenko
Editor, The Sovereign Strategist
December 13, 2004

Stocks fell slightly last week, ending a somewhat volatile week barely changed. The sad and down-trodden dollar finally managed to stop falling, although relatively speaking, to suggest that it rallied would be a stretch. Gold got hammered but continues to do better than the dollar could even dream of doing and crude oil continued lower.

Into the final stretch of the year and neck-deep into the most important shopping season of the year, the economic folks are starting to worry. Retailers aren’t reporting much in the way of good news and even Wal-Mart is complaining. I say if you can’t sell bucket loads of cheap imported garbage to folks whose sole pastime is buying bucket loads of cheap imported garbage, it’s time to worry.

I don’t worry, but for those who do, consider that we’re now into the fourth year of this so-called expansion. We’re past the peak and about a year and a third from the end, based on the average length of past expansions. Did you notice the peak as it went by? Not the kind of stuff to write home about and statistically, it’s supposed to only get worse from here.

This all fits in quite nicely with our prognostications several years ago that the U.S. economy was likely to embark upon a sustained period of sub-optimal growth, neither here nor there, not terribly ugly but not likely the stuff of inspiration for poets and songwriters either. Others have called it “muddling through” and that seems to be about what it is.

Still no terribly strong economic data and not much cause for merriment on the jobs front. We get a bit of good data one month followed by a contradictory report the following month. What is this sort of tepid activity laying the groundwork for? Probably more of the same. Hence the “muddling through.”

Obviously the consumer isn’t dead yet. But he’s also not laying the foundation for a big boost in spending anytime soon. Uncle Al has seen to it, via ridiculously low interest rates, that the economy never got too bad and no one was forced to rein in much of anything, least of all spending. Hence the abysmally low U.S. savings rate of 0.2%. And hence the lack of resources with which to sustain an expansion.

Some might call the economic stimulation a good thing and when viewed from the perspective of today’s “instant gratification society”, perhaps it was. But avoiding economic pain now by stripping away wealth and replacing it with IOUs is not the recipe for long-term economic success.

We all got away with a mild recession. Our children are not likely to have it quite so good as Greenspan’s economic chickens will inevitably come home to roost someday. Those chickens will be coming back from overseas, by the way, each holding a foreign claim on U.S. assets in their beaks, as more than half of our debt is now owned by foreigners.

How do you build an economy on what amounts to about $80 a year (0.2% savings) for the average family? I don’t know, but then, no one really seems to care either. Because in 21^st century America, genuine wealth, savings and expansion are irrelevant. 

What matters is that consumption doesn’t decline and the average consumer isn’t unplugged from economic version of “The Matrix.” Bleed the consumer for money he doesn’t have but is happy to borrow and keep the credit bubble from popping. Bust the dollar down so far that prices of real stuff rise and create the illusion of increasing wealth. (Read: “strong housing” and “rising stock market.”)

I’ve said it before and I’ll say it again: your house isn’t worth more, your dollars are simply worth less and it takes more of them to buy the same house. Your stocks aren’t worth more. Your dollar is simply worth less and is collecting so little in interest that folks would rather put it ANYWHERE else before it falls even more. Oil doesn’t cost more, it’s just that no one is stupid enough to continue accepting the same amount of eroding dollars for a product that retains a particular amount of value and utility over time. 

Now 3+ years into the expansion, past the peak and into the final stretch, the true measure of Greenspan’s monumental disregard for the dollar and the American family will be put to the test. With the foundation put down thus far, does 2005 promise further growth? Or will the unfilled cracks that appeared in the year 2000 widen?

In a best case scenario, if everything lines up in perfect formation the way the powers that be are hoping they will, everything will be just fine. If the dollar falls in a nice & tidy fashion, if the rest of the world maintains faith that an effectively bankrupt nation can continue to meet its financial obligations, if real estate values can keep rising indefinitely, if Americans can continue to pay increasingly higher prices for their homes and if they manage to defy the odds and stay above water despite having no savings whatsoever, then all will turn out just swell.

On the other hand, if the world continues to revolve in its generally imperfect fashion, it’s far more likely that the marginal economic gains of the past few years will slow still further. Let us all pray that Uncle Al will find yet another bubble to blow, sustain the illusion of wealth for a bit longer so that we can selfishly rest in peace while our children pay the price for our profligate ways.

© 2004 Mark M. Rostenko
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