Every once in a while, the powers that be manage to get people to take their eyes off the ball....including people like me. That's when, in my rainy day walk to the library today, I retrace the logical steps I made in the conclusions that I have...outloud...with my lips moving...making the driverbys think I'm crazy.
First, the housing market became saturated. They had finally reached a point where they couldn't sell anymore houses.
When word got out that they couldn't sell any more houses, banks couldn't package any more mortgages to investors.
But by then, investors didn't want the loans because the homebuyers weren't paying on the loans anyway. They were merely paying the interest.
When investors didn't invest, banks cut back on all kinds of credit, not just for homes.
Well, why did we need so much credit in the first place? Wasn't it because of stagnant wages caused by global competition? Wasn't it due to the fact that there was nothing that we could do that couldn't be done by someone else on the planet for cheaper, better and faster?
So, when the credit crunch happened at a time when we were experiencing stagnant wages, what is the only possible result?
A very substantial portion of the economy was based on debt and when that credit dried up, the current price structure has no basis.
Obama and the Federal Reserve are trying to make up for that difference between wages and reality with stimulus packages and increasing the money supply. True, federal spending would normally have an effect on the economy in terms of inflation, but the banks are hoarding more than the amount that the government is spending. So they cancel each other out and the economy continues to fall towards its real value--real wages minus the credit. The hope is that the federal spending will have a snowball effect on the economy. This may be the hope driving the recent stock market rally.
More currently, however, there appears to be an increase in the price of oil brought on by a weaker dollar, like it did last year. The weaker dollar appears to be as a result of federal deficit spending. But wasn't mighty oil brought down last sumer by ....weak demand? What makes us think that demand has increased? Has there been an increase in wages? No. Has there been any substantial new lending? No. Demand has not changed.
I don't expect the oil rally to go on much longer....even in the face of deficits. The new deficit spending is not the independent variable in all of this. Weak demand isn't the independent variable. The credit crunch isn't the independent variable. What's the problem? Stagnant wages.
Either we sit down with other countries and tell them that they're not going to be able to sell their products in our country unless they have similar wages or we must accept a lower standard of living. That's the bottom line.