Friday, August 12, 2011

The Med'cinable Gum of Arabian Trees

I’ve been asked a lot lately to comment on the economic news of the last week.  The S&P downgraded US government debt, and in the week which followed the stock market has been, shall we say, volatile.

The quick summary of my view on the situation was brought to my attention by a friend of mine with whom I have been talking about the events of the last week.  He mentioned an old movie title which is exactly my conclusion:

Situation hopeless, but not serious. 

The details:  The S&P downgrade is really rather silly.  S&P has precisely zero information the rest of us don’t have, and so they have no expertise in figuring out how safe the US Government is.  People are willing to lend to the US for literally no return.  Why?  Everyone knows that the US government is the safest place in the world to lend money.  It was the safest place in the world before the S&P action; it is the safest place now.  So, there will be absolutely no effect from the downgrade on US borrowing costs.

So, why has the stock market been volatile in the last week?  Who knows and even more importantly, who really cares?  Day to day movements in the stock market mean absolutely nothing these days.  The day-to-day movements are dominated by people who are best described as gamblers.  They move lots and lots of money in and out hour by hour trying to make a fortune.  And they make and lose fortunes ever day.  All this money rushing in and out of stocks causes things to be volatile.  And it means exactly nothing.

All the discussion about raising the debt ceiling which precipitated this whole last week was equally as silly.  There was absolutely no doubt that the US was never going to default on its debt.  It wasn’t going to happen, no matter what.  And, of course it didn’t happen.  Lots of great political theater for those who like such things (read: cable news programs), but in the end, nobody was going to let the US default.

Moreover, the whole problem was simply a matter of nickels and dimes.  The real budget problems are not the current ones.  Within the next two decades, Social Security and Medicare are going to present deficit problems that make the current ones look like small change.  And nobody in Washington is saying or doing anything about the real debt problem which is coming as a simple demographic fact.  When politicians start dealing with the real budget problem, then it will be worth paying attention.

So, for the short term, it’s pretty hopeless.  Washington will dither.  The economy looks like it will stay pretty stagnant.  The average forecasts by real forecasters (not the ones you see on TV) is 2% growth for the next few years.  That’s flat.  And flat growth will mean lots of quarters of growth around zero.  Unemployment seems stuck, and we may now have permanent European-style 9% unemployment (those who have been wishing the US economic structure looked more like Europe’s may be getting their wish!).  The whole economy is on hold.  Europe may blow apart.  Inflation may hit double digits.  And I haven’t seen anything which will change any of that.

So, hopeless.  But, no need to get all depressed about it.  The US is still the wealthiest country in the history of the world.  Unemployed people in America are better off than employed people in much of the world even today (quick test, would you rather be unemployed in America or employed in Chad?).  Zero growth over the next two years means on average you will be exactly as well off then as you are now.  Life will still be that same mess of depressing and happy news it is now; people will still be born, get married, and die—and those things matter way more than what happened to the stock market in the last hour.  Sometimes, people take economics far too seriously. 

So, my quick advice.  Turn off CNN, MSNBC, or Fox News and read Shakespeare.  Othello—now that guy had problems.

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