We live in interesting times.
More specifically, we live in interesting economic times. And this variation on that famous Chinese curse may cause us great harm in the next downturn.
You see, unemployment is just 3.6%. Yet, according to government bean-counters, there’s no inflation. As a result, the odds of an interest-rate cut this year are greater than 90%. That’s after the Federal Reserve raised rates four times in 2018.
That’s just bonkers.
One of the first lessons I learned in Economics 101 is that full employment is about 5%. The 3.6% figure is the lowest of my lifetime. Wages aren’t growing… but there is inflation.
Have you paid your health insurance recently? Is your recent high school graduate off to college in the fall? Do you buy milk at the grocery store? Dined out at a restaurant lately? You know, done stuff that average Americans do on a regular basis?
Still, the now 10-years-old economic recovery is so fragile that the Fed needs to cut rates to provide a quick hit to the markets and further line the pockets of bankers and hedge fund managers…
When the next crisis hits — and there will be another crisis — will the government offer these speculators trillions of dollars of bailout money? Again? When, after the last time around, no one went to jail for perpetrating the greatest feat of financial fraud in history?
I hope not…
As Peter Morici noted in a recent piece for MarketWatch, the next time the economy tanks, just give free money to people, not bankers and traders.
I agree 100%.
If the banks get the money, they won’t lend it. They won’t extend credit to people who are getting their cars repossessed. They’ll do nothing to ease up on folks who leave their housekeys in the mailbox and walk away. The money will do nothing productive.
If you give it to the people, they’ll spend it.
As the last crisis was bubbling up, I watched the amount of money that people withdrew from their home equity to fund their lavish lifestyle pile up… and pile up… and pile up. Because housing prices were never supposed to go down, folks took out more and more equity to buy Cadillac Escalades and flat-panel TVs and Caribbean vacations.
But, then, a funny thing happened…
They tapped out the ATM. There was no more equity left to withdraw. The cycle peaked. That’s when jumped ship to manage a fund set up to short banks and other businesses built on houses of cards.
Those were great years for me, 2007 through 2009. I lived right through the beginning, middle, and end of the Global Financial Crisis; I don’t need to watch “The Big Short” because I was there.
And, even in the moment, I thought it was outrageous for the government to spend trillions of dollars to bail out banks that created the problem in the first place.
Here’s another incredible fact: Did you know 40% of Americans don’t even have $400 saved for a rainy day?
The next time the market takes a dive, it won’t be a “rainy day.” It’ll be a cataclysm. The banks might nearly take us under again. No one will go to jail again. But they don’t need bailouts.
Bail out the American people. Just pay everyone $50,000 and let them decide what to do with it. Most will blow it on bigger cars, bigger screens, bigger houses, and other stupid stuff they don’t need.
But the velocity of money will pick up steam and power through the economy. And we’ll inflate another bubble that will eventually burst…
The debt will rise. But no one’s seemed to care about that for decades.