The Elephant in the Front Yard.
There is not an elephant in the front yard. That, which looks like an elephant, is simply a new economic paradigm. The non-elephant, along with the unchained tiger and wolf lurking near your front door, are not to be feared. They too are the new economic realities and, according to our economic elite, are no real threats.
Economic realities are now, very slowly, setting into the economy. Many of the high flying 'dot com's' are now 'dot bombs'. The main engines keeping this economy from sliding into recession are Greenspan's printing press and the fast talk of the financial press. Let me explain:
There are two very significant events transpiring in the economy right now. Each is being portrayed as isolated, in the mainstream press. The first is inflation. Now the government, goes through the motions of putting out the inflation numbers in the form of the Consumer Price Index (CPI) and it has become so un-reliable that the federal Reserve views it with suspicion, saying in its typically understated manner, " ...it is weighted very usually". The primary monetary body for the nation has stated publicly that those numbers that are spoken of as 'gospel' on the nightly news may not be completely reliable. It understates everything from fuel costs to food costs. The necessities of life are weighted in such a way that when prices actually rise in these critical sectors, the government can state, after applying some fancy government formulas, that prices have remained steady or actually decreased. The Bureau of Labor Statistics has also seriously manipulated the cost of fuel to understate the amount of inflation in the economy. There are other ways the Clinton Administration manipulates the numbers in other sectors of the economy, one way is the use of non-quantifiable 'quality adjustments' which supposedly explains why, even though the prices of goods skyrocket, they are not counted in the governments inflation numbers. Additionally, there are what as known as seasonal adjustments, which the Bureau for Labor Statistics says, "Extreme values and/or sharp movements which might distort the seasonal pattern are estimated and removed from the data prior to calculation of seasonal factors". These 'adjustments' are made only to understate the amount of inflation in the economy, never to correctly convey actual prices that consumers must pay, which is ostensibly what the index was created for in the first place. Not coincidentally, these numbers are used to calculate cost of living adjustments to retirees, the old and infirm. Understating The CPI puts less money in their pockets and saves money for the Administration to give away to foreign governments. In essence, the index seems only to be kept in order to provide a government mechanism that is used to keep the economy from going into a tailspin when prices rise significantly by telling consumers to believe the statistics, not their wallets.
Commodity prices are also surging. Everything from livestock to precious metals (except the heavily manipulated Gold prices) have seen significant increases since the beginning of the year. This has all been coupled with historic highs in US trade deficits. These signs, no matter how much blabber we hear about a 'new economy', are the elephant on the front lawn that no one wants to talk about. These simple facts show that there is no 'new economy' only an old economy that was carefully manipulated until it could not be manipulated anymore. Foreign governments with valuable commodities that the US needs to run on (i.e., Oil) are now asking for more of the printed green paper for their wares than they did in the past because they know the paper may not be worth as much as it used to be in the future. They know full well that inflation has been here all along. It (the inflated currency) did not go into the 'old' economy of supermarkets and gas pumps, instead in went into the 'new' economy of stocks and mutual funds. That was where most of the one-trillion dollars of freshly printed Fed 'funny money' went during 1999. In the past, people would have spent the excess money on goods and services. Instead the Wall Street hype and spin machine has persuaded millions of American families to spend their hard earned money in the stock market. This was done with such success that people even cleaned out their savings accounts in order to buy more of Wall Street's paper. The pain of realization that they have been 'had' will soon be upon them.
The Second event transpiring is the shift today among many corporate and financial insiders is to move assets out of stocks and into either cash or into harder assets such as commodities. In other words, the shift is now from the hyper inflated capital markets into the 'real' or 'old' economy. This does not necessarily mean that the capital markets are going to falter significantly in the near term, though that is a real possibility. Rather, it means that a degree of profit taking and hedging is transpiring in the US economy by insiders that will put a damper of the perpetual upswing the market has taken over the past several years. The loss in confidence in the Stock market by key players will translate in to higher prices in the general economy, as those financial assets will now no longer be chasing stocks but now will chase goods, services and commodities.
The financial economy in the US has been largely a psychological phenomenon that has its roots in the pyramiding of debt (personal credit and government), coupled with an adept public relations machine. It has remained extremely resilient even through the Asian Crisis of 1997. Many economists seriously underestimated the resilience of the US capital markets and were dumfounded to see the US markets continue to rise in spite of this serious economic downturn. Yet this has had some negative effects as well, primarily in the form of an increase in consumer confidence. This has led to a slew of new consumer debt based on rising economic expectations. This has caused a rise in credit costs for businesses and individuals alike. People flocked from the stable and productive jobs of the 'old economy' to lucrative yet non-industrial jobs in the 'new economy', where 'productivity' is largely accomplished in cyberspace. Skilled workers have become increasingly difficult to find in 'old economy' jobs, and many of them have been shipped overseas. This is primarily because industrial jobs were seen as less profitable here in the US and thus were shunned in the new economic paradigm. Americans were drawn to the new economy like bees to honey, both with their capital and their employment choices.
Rough Water Ahead
The prognostications of non-establishment economists have not proven true yet. Are their figures wrong? Hardly. What must be understood here is that those who have had a strangle hold on the two mainstream parties have had the political leverage to allow a degree of financial 'freedom' for the big money center financial institutions that heretofore was unheard of. The Fed initially sounded the warnings back in 1996 but was shouted down by the Mutual fund owners and Wall Street's cheerleaders, such as the big NY banks and the financial elite. Thus, for a few short months he warned, but did nothing. Now the scene is different, The Fed has acted, albeit somewhat timidly in the last year by actually doing what was before unthinkable in the 'new economy', he (gasp!) raised interest rates. Yet more ominous in the political scene is the repeal of the Glass-Stegall act, which prevented the types of financial monopolization now transpiring on Wall Street. This act was adopted after the Crash of 1929 in order to preclude such an event from happening again in the future. Its repeal allows the corporate aristocracy to essentially monopolize financial assets under one roof (banking, brokerages and Insurance) and it cannot be overstated here, the creation of these entities will only create corporations which will be considered 'too big to fail' by the politicians who depend on these very same corporations to get re-elected. It will allow them to continue to exist after any future crash. An analogy would be like building Noah's ark. Build it so big that it can't sink and those with little boats (you and me) will not get the governments 'too big to fail' bail-outs.
Things have indeed already been done to protect the well connected in a serious financial downturn. The owners of so many of the 'new economy stocks have sold large block of their stocks and have insulated themselves from a serious financial shock to the markets, and while a serious negative jolt to the economy may not be likely, it is certainly a possibility that one who wise to remain financially liquid should keep in mind.
Those who are heavily invested in the high flying tech stocks should keep in mind the idea that it is not only companies like Cisco, Agilent, Oracle and Microsoft that 'power the Internet' but other less known old economy dinosaurs like oil, coal and your local utility company which literally do power the internet.
Oil prices today are a serious problem also because there are real problems that happened and are still happening in the economy that Americans have been lied to about regarding Y2K. No, there were no huge blackouts and people starving on the streets like many less responsible people were prognosticating. Yet many of the old predictions the the Y2K guru's were making seem to be coming true, roaming brown outs, skyrocketing oil prices, market volatility. Companies have refused to attribute these phenomenon to Y2K, perhaps for legal reasons, as just before the the turn of the millennium clock, hundreds of lawyers spread across the nation telling other lawyers ways to sue big companies in the event of a Y2K failure. So now we have failures but miraculously, none are Y2K related. Time would fail me to discuss payroll problems at large companies, unscheduled oil refinery 'outages' and the likes. People in the power and electrical industry have stated on the 'QT' that many municipalities are working on 'manual' rather than on computer managed electrical management systems. Y2K happened all the signs are here, It's just that none will ever attribute their problems to Y2K. Technical problems, yes. Y2K? There was no such thing and you had better not say ever was.