Stimulate Demand and Supply will Follow

Everyone wants their piece of the pie, the pie being the $787 billion stimulus plan. But the cries from small business for more of the pie have gone on deaf ears, according to their mouthpieces at the NFIB and SBEC.

Of course direct assistance is preferable, but haven't we finally gotten past the days of trickle-down Reganomics? Remember the Lafer curve? Is a payroll tax holiday really an effective stimulus? I think not, it will surely keep the lights on a bit longer for struggling small businesses. But isn't the free market supposed to weed out the week suppliers?

With consumers representing 2/3's of economic demand in the economy, should not the biggest stimulus go that group. And in the bill it does, the biggest single item ($116 billion) is for a tax cut for individuals. People are not spending as much as they were, and won't until they feel better about the economy and their prospects. The direct stimulus to consumers will temporarily prop-up their spending until the job engine restarts. This is what the small business community needs, even if they can't see it right now. Fix the demand side and supply will follow, Economics 101.

Clarity is not Enough

As usual, the Bush folks don't know what to do with what they have been granted by Congress (see Wars Afghanistan, Relations Rest of World, etc.). As Fair Game columnist Gretchen Morgenson writes today, what the administration is doing with the Troubled Asset Relief Program is not working. They have invested several hundred billion dollars into banks and others too big to fail. They are certainly not doing what the title of the program says, or maybe they are, that is giving relief to the banks and others who hold the bad mortgage assets. They are really not giving relief to the engine of the economy, that is the bank's customers - individual consumers (who are losing their sources of income) and companies (losing customers) - the ones who need the most help and who generate more than 87% of GDP (individuals via consumption, companies via direct investment).

It now looks like we will have to wait for Obama's guys to use the money appropriately. Would that be to bail out the auto companies? Not so fast, they might be better going through bankruptcy - see Steel companies, US for a surviving example.

What proof do the markets display to us about what will work? On the downside, the decline in the markets since the election have been serious, and are primarily due to the uncertain actions by the existing folks. The uptick this past Friday was a reaction to the guy Obama will appoint as the new Treasury Secretary. Certainty is good, certainty about an experienced dude is very good. Still, even including Friday the equity market is down 45% so far in 2008. For a full year it hasn't been down that much since 1931. We'll see what the remainder of the year holds, but from the current actors don't expect much.

Back in the Saddle

I haven't had much to add lately - all that is going on with the Fed, the economy, the banks, whew!!! Where to turn for good news? Look to the optimists as described here by the NYTimes on Sunday. A few of them even sound rational. Maybe it's not that bad on Main street. Of course when the ETF that follows the US Dow financial sector is down from 120 a year ago in half to $60 currently, portfolio's are hurting. It must be hurting Main Street in their retirement funds. Or maybe they just invested in Gold, looks good now but long term stocks are the best option - see below...

So Sad

The news has been unusually depressing since Labor Day, so much so that it's been hard to write anything worth while for small companies. But no doubt, Wall Street is hurting more than Main Street. Keep the faith.

You are probably better off than the big boys out there. But if you needed a cash infusion in this time of low rates, would you pay 17% interest? That is Goldman Sacks agreed to if you read the wonderful blog The Big Picture I follow regularly. It must be scary out there for the big boys who are used to reaming money from the little guys. What comes around, goes around.

In a longer look, could this be the end of dollar hegemony? Could this be the end of American economic leadership? For you folks in the manufacturing world, it sure has seemed so over the past 10 years. If the high-value-add manufacturing sector, services sector and new economy companies don't win us back some power then we maybe in a slow decline, time will tell.

Batten Down the Hatches, a Slowdown is Coming

David Leonhardt at the NY Times is correct about the sorry state of our economy, further bolstered by today's learned comment:

“Six straight months of job losses are the strongest evidence yet that the economy has slipped into a recession of uncertain depth and duration,” said Peter Morici, an economist at the University of Maryland School of Business.

In Leonhardt's article he rates the chances of a recession at 75%. I would tend to agree.

Leonhardt further addresses the fact that we have deeper problems going forward, the toughest one is that we are not creating enough good new jobs. It's a relative lack of innovation caused by our poor recent performance in education. As I have argued in the past, we need to keep all of the college educated folks we can, including the foreign ones, in order to create enough good jobs here. Let's see if this is something the new President will address, as "No Child Left Behind" has not been the answer.