How Much Will the Economic Recovery Cost Us?
Scarborough Capital Management, Inc
The United States has a renewed sense of optimism.
There are 3.4 million unfilled positions waiting for qualified applicants and jobless claims have fallen to their lowest level in four years. Meanwhile, manufacturing jobs are being created for the first time since 1997, corporate profits are at their apex and General Motors is the world’s best-selling automaker.
Who’d of thunk it? In September of 2009, El Erian, president of the largest bond manager in the world, called his wife and asked her to withdraw as much money from the bank as she could because he thought the financial system was about to collapse. That’s where we were, teetering precariously on the brink of the abyss, just a stone’s throw away from everything we thought we could never become.
What ensued was a chorus line of knee jerk reactions, best described as being in a room with trusted friends, only to discover that somebody had a contagious disease transmitted through conversation – people stopped speaking to each other. That was the basis of the liquidity crisis; banks didn’t know which balance sheet was infected and investors wanted nothing to do with toxic assets.
The government responded with over $12 trillion of commitments, acting as an investor, insurer and lender of last resort. These programs included the guarantee of money market funds, commercial paper, Asset Backed Securities and TARP. The FDIC insured senior subordinated debt issued by banks and poorly performing assets owned by banks, as well as non-interest-bearing deposit accounts used by businesses to run day-to-day operations. The Fed also made low-interest loans and opened the discount window to the tune of $1.4 trillion.
The argument can be made that the Fed’s actions were unconstitutional; that our founding fathers believed only Congress had the ability to create money. Perhaps, but time was short, dominoes began to lean on one another and consumer spending wasn’t 70 percent of America’s 18th century economy.
There’s nothing glamorous about where we’ve been, America’s aura of economic invincibility challenged by a housing bust and budget deficits as far as our black eyes can see. And while it’s convenient to poke holes in doctored accounts of prosperity, namely the U6 numbers and absence of food and energy in the calculation of CPI, progress cannot be ignored.
It has, however, become a race against time, our economy speeding towards an oncoming truck carrying $15 trillion of debt and explosive derivatives, hoping to make it to the exit ramp just in time. Congress and the administration have borrowed money to reinvest in a family business that’s seen better days, banking on higher tax receipts and reduced dependence on a federal government that subsidizes 50 percent of all U.S. households.
The candlestick maker had time to ponder the sale of light bulbs, while today’s creative destruction moves at a blistering pace. What a fine game of chicken we find ourselves in? We’re in better shape than before, although future stability will be measured by how fast we navigate the gap between a thriving economy and the due date of our obligations. There’s something to be said about playing to win, but this is a deal with the devil, and I’m told he charges one hell of a hard bargain.
Ivory Johnson, CFP, ChFC, is the director of financial planning at Scarborough Capital Management, Inc. and has over 20 years of investment experience. Mr. Johnson attended Penn State University, where he received a Bachelor of Science degree in finance. He can be followed on www.IvoryJohnson.com.