The Year of Discovery
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After reviewing a number of reliable news sources it is difficult to find any good economic news. The future appears bleak causing all of us to loose confidence in the economy. It seems that everywhere we look old familiar patterns and beliefs are shattered. Movement in the price of oil has given us whiplash, the market’s decline has taken almost all our gains, at best, the federal bailouts will indebt us for years, while the economic pool, metaphorically speaking, was being drained we uncovered an investment scandal that could reach $50 billion in lost capital, and there may be more surprises ahead.
These events have forced everyone to debate and justifiably question the condition of our economic system and especially how to shape its future. The important point to remember is that we have entered uncharted territory and have yet to develop a workable strategy for dealing with these new realities. The resulting confusion and fear only adds to our growing lack of economic confidence.
We should expect very little good economic news in the first half of 2009 with continued declines in the Consumer Price Index (CPI), which will measure the drop in prices and real wages, better to work for less then not to work, plus higher unemployment. A record number of companies will seek bankruptcy protection or even liquidation; personal bankruptcy will increase due to high levels of personal debt, and credit restrictions will remain in place. Deflation has become the new economic norm.
We are familiar with and know how to deal with inflation and have developed tools for coping with raising prices but now a different set of tools is needed, one that will address the effects of falling prices. It is interesting to note that Alan Greenspan in 2001 lowered treasury rates out of fear that we would move into a deflationary spiral. Ironically this move has been blamed as one of the reasons for our current credit crisis. Currently, the Federal Reserve has used most of their monetary tools, reducing treasury rates to 0-.25 points to stimulate credit and have increased the money supply by 11%, since May, as measured by M1 Money Stock. The fiscal policy used by the outgoing administrations took the form of bailouts and the new administrations plans include a stimulus package consisting of spending on infrastructure and green projects. All of this has or will do little to slow our steady slide into a period defined by deflation and a continued loss of consumer confidence.
By the middle of 2009 the economic shock will have worn off as we all begin to feel the pain and wrestle with accepting the inevitable. We will begin to look for and actually discover useful and effective strategies that will address these new economic realities while the previous fiscal and monetary changes should begin to take effect. In 1942, Sir Winston Churchill speaking after the Allied victory in North Africa said; “Now this is not the end. It is not even the beginning of the end. But it is, perhaps, the end of the beginning.” By the middle of 2009 we will be at, “perhaps, the end of the beginning” of this economic downturn; starting the long journey down the road to full economic recovery. Consumer confidence at this point will be at its lowest.
By the end of 2009 we will be solidly on the road to economic recovery, but it certainly won’t feel like it. These are my specific projections for the new year; the market will stabilize at around the 7,500 level, oil prices will settle into the range of $30 to $50 a barrel, prices at the pump will stabilize at around $1.25 - $1.50 per gallon, wages will settle in at $13 to $15 an hour, residential and commercial property will continue to decline, and credit will remain very tight. My guess is that commodity prices overall will decline as demand for raw material slows due to the economic downturn, although precious metal will be the exception.
Checking the movement of the CPI is a quick and reliable measure of the overall economic activity. If you are interested in tracking these changes go to www.bls.gov/cpi. By year end the declines will begin to slow and may even stabilize or begin a slight rise. Churchill also said “A pessimist sees the difficulty in every opportunity; an optimist sees the opportunity in every difficulty.”
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Library of Congress Cataloging-in-Publication
Business/News & Views® / by David. W. Weatherholt
ISBN: 978-0-9823041-1-2 (electronic format)
Published in the United States of America through www.waconsult.com
Published in an electronic format by Weatherholt & Associates, LLC
First Trade Publishing: October 2008
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