This morning, we got a whole range of news. Lets start with the bad news, Our GDP for the first quarter was adjusted down from 3% to 2.7% – can you picture finding out that you were getting a retroactive 10% pay cut for the first quarter of the year? Not good news at all.
The Better News? The Michigan Consumer Sentiment Survey came in higher than was expected, an increase of .5% to 76% when a drop was expected. Want to know more about this surveys overly-optimistic findings? Find out more – What are they smoking in Michigan?
Last but not least, the Financial Reform Bill was finally finished and made law last night – most people agree that the changes that were made are positive, but that the bill, overall, went very easy on major financial institutions. We are getting a new financial-oversight agency, titled the Consumer Financial Protection Agency; supposedly to police banks for Mortgage and Credit Card abuses.
One major positive from this bill is that it limits (although does not eliminate) the risks that large banks take through derivative and proprietary trading. We also saw the Home Buyer Tax Credit Extension shot down last night; and with 5 days left to close, it now appears that there will be no extension for people who fail to close by June 30th, and that they will not be eligible to receive the tax credit.
Earlier this week, we talked about how the Tax Credit merely delayed the continued dip of housing. Another downside to the Tax Credit is the 26.7 Million that was sent to non-qualifying buyers, including $9,000,000 sent to prison inmates!
However, the biggest topic in finance right now is Inflation.
With the government pumping inordinate amounts of money into the economy through stimulus programs, government debt buying, bailouts and new programs, an effect on our cash-flow as a country is guaranteed. The reason the Federal Reserve Bank exists is to control inflation by changing the rate at which banks are able to borrow money. This rate has been at 0% – 0.25% since December, 2008 – a year and a half at the time of this article. In this weeks meeting of the Federal Reserve, they voted to keep this rate for an unspecified length of time.
Including a 2-3% targeted annual inflation rate, this means that banks make money simply by borrowing money from the Fed. They can then stick that money into an extremely low-risk investment, make an extra percentage point and then give the money back to the Fed. This is called a Carry Trade, and it is one of the economic factors that deincentivize banks from lending to consumers (a higher-risk investment).
All of this government spending and incredibly low lending rates does not seem to be quickly resolving the real economic problems facing our country though; Unemployment, Housing Sales and other basic economic indicators are posting some of the lowest numbers since the great depression. Lets hope it doesn’t take another World War to get up rebooted.
Because of all of these negative economic indicators, many analysts think that we are actually experiencing an underlying trend of deflation; perhaps long-term, lasting for another 15 years. Since the Fed changed the GDP formula, we are seeing a very controlled number these days which no longer includes the number of dollars in circulation. Be very careful that you do not look at the GDP or Inflation reports as the authoritative number for their respective categories. These numbers are by nature biased, since they are estimated by the people whose jobs they effect; if the fed shows that inflation is out of control, they are the ones who catch the blame.
Lastly, we have heard a lot of buzz about various double-dips, including but not limited to housing. I think at this point we know that various pieces of the economy are going to continue to trend downwards, but the idea of a “double-dip” is a bit of a misnomer. When a market trends up, it does not do so in a straight line, neither do recessions go straight down – so, lets stop calling it a double dip and just realize that some markets have not found bottom yet.