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Hate to harp on how things got screwed up in the late 1990’s and early 2000’s with the Fed raising rates into a slowing economy and flattening (and then inverted) yield curve, but the similarities are present. The Fed tends to hike rates late in the economic cycle and continues hiking them even after the cycle has peaked. It is a kind of leading indicator in that respect, at least as to economic slowdown. In late 1999 and early 2000 everyday you heard the economy described as either red or white hot. This was even as it was peaking.
Right now no one is using those adjectives, but there is a definite lack of concern what with consumer confidence high. Well, consumer sentiment was high back in 2000 as well and that didn’t stop the collapse. Businesses stopped spending when the Fed dried up the money supply and that contributed to the collapse. The downturn remained because businesses did not start spending until the right tax incentives made it advantageous to do so. As we have discussed of late, the business side of the economy is pulling back on its purchases and investments. Sure durable goods orders surged; a 120+% gain in aircraft orders will do that. Take those out and orders were negative.
The point: the Fed really needs to cut off its rate hiking soon from a perspective of the economy and market in the shorter run. The market has moved higher on the expectation it is just about done, and the Fed has to be careful not to get the cost of money too high for small businesses through its rate hikes and clamping down on the money supply. Remember, big companies are still laying off as we saw with last week’s and this week’s announcements from Alcoa and others with job cuts in the 10K plus range. Thus it is the small businesses that are the heart of any job growth and recovery, and if they start having trouble with obtaining money we are going to see less and less spending from the business side. When that happens it does not really matter what the consumer does.
Actually it does. If the consumer remains strong and businesses stop investing in what it takes to keep supply at levels to meet demand, then you have some inflation problems. That is the key to all inflation: making sure supply meets demand. That is why stimulating supply is always favorable to stimulating demand: you never get those bottlenecks. What is really cool about supply stimulus is that supply creates demand. When businesses are able to get cash and invest in their businesses, they start coming up with a lot of new ideas. That is the hallmark of US business: ingenuity, research and development, etc.
Call it what you want but when the incentives to take a chance or to take risk are there we come up with the craziest things such as, let’s say a personal computer. Who needed one of those? No one thought they did until they didn’t have one. Who needed an iPod and downloadable music? No one until Apple invented it. When companies invest money into their businesses our standard of living rises. We get better ‘things’ that we never thought of or thought we needed. Then when everyone decides they need one we get great jobs building them and more R&D jobs to think of more cool ideas to build. That is how it worked in the 1980’s and the 1990’s.
We are going through a very difficult transition now where the new companies are still rather new and young and many have yet to really make their impact. What we need to focus on is not trying to keep jobs here where people put together devices; we cannot compete with other labor costs whether it is in communist China or in India. We need to focus on making sure we give our companies incentives to continue the R&D that comes up with new technologies. That spawns whole new areas of development and manufacturing as well as new jobs. How many people now work at home or home businesses through the internet? Millions. To say we are losing all of our jobs looks only at one type of job. It ignores those now able to work from home because they want to and now can do so. We cannot forget those jobs and how our lives have improved accordingly when we lament losing some jobs overseas. Things are changing but not many are willing to look at what is changing for the good.
With our aging population we need to make sure we have the investment in R&D so we can be the world’s main technology and idea generator. That will keep the world coming to us and drive our standard of living now that the Baby Boomers won’t be the growth engine they have been for 40 years. We gave away our lead at the turn of the century with a self-induced recession. We don’t need to do the same thing again.
Right now no one is using those adjectives, but there is a definite lack of concern what with consumer confidence high. Well, consumer sentiment was high back in 2000 as well and that didn’t stop the collapse. Businesses stopped spending when the Fed dried up the money supply and that contributed to the collapse. The downturn remained because businesses did not start spending until the right tax incentives made it advantageous to do so. As we have discussed of late, the business side of the economy is pulling back on its purchases and investments. Sure durable goods orders surged; a 120+% gain in aircraft orders will do that. Take those out and orders were negative.
The point: the Fed really needs to cut off its rate hiking soon from a perspective of the economy and market in the shorter run. The market has moved higher on the expectation it is just about done, and the Fed has to be careful not to get the cost of money too high for small businesses through its rate hikes and clamping down on the money supply. Remember, big companies are still laying off as we saw with last week’s and this week’s announcements from Alcoa and others with job cuts in the 10K plus range. Thus it is the small businesses that are the heart of any job growth and recovery, and if they start having trouble with obtaining money we are going to see less and less spending from the business side. When that happens it does not really matter what the consumer does.
Actually it does. If the consumer remains strong and businesses stop investing in what it takes to keep supply at levels to meet demand, then you have some inflation problems. That is the key to all inflation: making sure supply meets demand. That is why stimulating supply is always favorable to stimulating demand: you never get those bottlenecks. What is really cool about supply stimulus is that supply creates demand. When businesses are able to get cash and invest in their businesses, they start coming up with a lot of new ideas. That is the hallmark of US business: ingenuity, research and development, etc.
Call it what you want but when the incentives to take a chance or to take risk are there we come up with the craziest things such as, let’s say a personal computer. Who needed one of those? No one thought they did until they didn’t have one. Who needed an iPod and downloadable music? No one until Apple invented it. When companies invest money into their businesses our standard of living rises. We get better ‘things’ that we never thought of or thought we needed. Then when everyone decides they need one we get great jobs building them and more R&D jobs to think of more cool ideas to build. That is how it worked in the 1980’s and the 1990’s.
We are going through a very difficult transition now where the new companies are still rather new and young and many have yet to really make their impact. What we need to focus on is not trying to keep jobs here where people put together devices; we cannot compete with other labor costs whether it is in communist China or in India. We need to focus on making sure we give our companies incentives to continue the R&D that comes up with new technologies. That spawns whole new areas of development and manufacturing as well as new jobs. How many people now work at home or home businesses through the internet? Millions. To say we are losing all of our jobs looks only at one type of job. It ignores those now able to work from home because they want to and now can do so. We cannot forget those jobs and how our lives have improved accordingly when we lament losing some jobs overseas. Things are changing but not many are willing to look at what is changing for the good.
With our aging population we need to make sure we have the investment in R&D so we can be the world’s main technology and idea generator. That will keep the world coming to us and drive our standard of living now that the Baby Boomers won’t be the growth engine they have been for 40 years. We gave away our lead at the turn of the century with a self-induced recession. We don’t need to do the same thing again.
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