Last week featured plenty of negative news but the financial markets still went higher. Rising oil prices, problems in the Middle East, Japan, falling home prices, and sovereign debt problems couldn’t stop the financial markets from going up. Walmart’s CEO has said that consumers should expect higher prices because of the surge in commodity prices.
The Federal Government faces a shutdown if no new budget is passed. The entire debate is over a drop in the bucket; about $30 Billion when our budget deficit is over a trillion dollars. David Walker referred to as “arguing about the bar tab on the Titanic.”
According to the Case-Shiller Home Price Index, home prices have returned to their 2003 levels. Home prices fell 3.06 % (year over year) in January. With high unemployment, high inventories, and the coming foreclosures, prices will remain depressed for some time and likely to drop even further.
In other finance news this week, real wages continue to fall and have not improved in over a decade. Wages have generally been falling since the recession began in 2007 and remains the current trend. This, combined with commodity inflation, is a big problem and will negatively impact consumer spending.
Josh Brown of the Reformed Broker believes there will be no QE3 and that the economy should be able to pick up the slack when QE2 ends. In an interview on CNBC, it was noted that banks are still not lending to the most important part of our economy – small business. Brown sees commodities prices going lower which should help consumers.
Stimulus vs. Austerity
The never-ending debate over stimulus vs. austerity wages on. This week, Paul Krugman fired back at those who often refer to the depression in 1921 as validation that austerity and a “hands off” approach by the government is always best. Although I generally disagree with Krugman’s magnitude of stimulus (he continues to claim that government stimulus and spending is too small), he brings up a great point that the depression in 1921 is far different from the Great Depression and the situation we are in right now. The depression in 1921 did not take place because of a credit bubble and was rather ordinary. Like a typical recession, this one was a function of the normal business cycle and had a v-shaped recovery. A recession/depression brought on by a credit crisis is different because the deleveraging phase usually takes years to get through. Instead of spending money, people will save and pay down debt instead. This is why historians are wrong in assuming that governments doing nothing will lead to a fast and painless recovery similar to 1921.
In the current environment, consumers are paying down debt while the government is adding debt. This trend cannot continue without serious consequences, but that is a discussion for a different day. We will eventually have to get our fiscal house in order, preferably before the bond market forces it.