How Long is This Tunnel Anyway?

Everyone is looking for guidance as to what is happening to the economy and what the immediate future has in store for us. I believe that the tea leaves can be read without a lot of difficulty right now. It's really a function of how much money is available in the system compared to what demands for said money are extant. The one shot tax rebate last year caused a spike in buying (and a little credit card debt reduction) but it only lasted a month or two. The "clunker" program has gotten a few new cars off the lot but does nothing for the systemic problem- Too much leverage- Not enough capital-

The consumer everyone is waiting for to bring home the bacon is probably the wisest of all- Or maybe most fearful. Hunkering down probably isn't a bad idea right now. Savings rates have climbed significantly since the American public stopped drinking the big government Kool-Aid, you know, the part where Paulson said back in 2008 that we would undergo a slowdown but everything was OK. Right now government is worrying about how to pay for the corporate largess foisted on the American public- Let's see, we have to pay a lot of money for those fixed costs like Social Security, government payrolls, tax credits and pork barrel stuff. Hey- What if we just print more money and in doing so dilute the real costs of that stuff since we are paying in cheaper dollars. Who cares about inflation or the purchasing power of those on fixed incomes. When we get the bubble resuming people will forget all about the real costs. Keep the Now Generation happy and get re-elected. That's the mantra.

I don't know though, Can we print enough money so that we make up for the phony collateralized pools the finance gurus set up? After all, the asset base compared to what finance is available out there will be impossible to reconcile. Assets that aren't necessary any more will go unpurchased or sold at distress prices. Check out the prices of big screen TVs and other toys. Banks are, and should be afraid to lend money for home mortgages knowing in their heart of hearts that home values are already underwater before they take on a new mortgage. We are being told now that by the end of the year 50% of mortages in the country will be under water, that is, the mortgage will be higher than what the property could sell for.

The second home, the fun car, the Mediterranean cruise, the trip to see the kids are all on the block- The whole world economy save a few hardliners like China, Germany, Switzerland and Malaysia became a humongous Ponzi scheme that won't get fixed overnight. Some European nations had enough faith in the US finance schemes to buy collaterized debt paper to make up their reserves. Iceland is a good example. Sorry folks- You have to get in line just like the other investors who were sucked in.

How long until this mess is fixed? Some of the big finance outfits, you know, the ones that sold everyone on the Ponzi schemes to begin with are now fluffing up the equity markets and the end of the day's trading to make things look rosier, and stating that the worst is over- Investors get back in there and put your capital to work! This is getting to be a harder sell. Some of the small investor crowd is saying "I was already burned once and you want me to do what?"

The Feds are phasing down their debt purchase programs so in order to sell more treasuries the yields will have to increase. The government had hoped the investing public and the markets would have improved by now but they have indeed found a sticky wicket. If rates increase it could be bad news to the nascent recovery, but they can't continue to debase the currency forever. Some folks feel that the best way to deal with the situation is to let market economic rules do their stuff. However, the elephant in the room, you know, the big one with the best economy in the world holding $2 Trillion in US debt is looking a little worried here. Can you blame them?

So what do we do now? Obama must be thinking Franklin D. Roosevelt at this point like in WPA projects or some other kind of infrastructure fix. I really don't believe that there quick ways to unwind what took place over the last decade. The creating of asset bases on illusions can't be reversed overnight although many, through failure have ceased to operate. Are we done failing? As in banks, foreclosures, personal and corporate bankruptcies? Sorry, kids- No instant gratification this time. School of hard knocks here we come.

The trade deficit must eventually be recognized as the real barometer of this country's health and as long as we keep importing energy at the rate we do our standard of living's future is murky at best. I don't believe that the Chinese are willing to keep funding our deficits forever. Are the people of the country ready to do whatever is necessary to reduce our energy consumption? We'll see.