Where is this Going?

It’s possible that I could be wrong, but something about what’s happening in the economy leads me to suspect that despite the rosy prognostications of Government bureaucrats, and the even rosier hopes of some market analysts, I don’t think the improved GDP growth numbers for the third quarter are going to mean much for the long-term health of the economy.  For one thing, the government has had to revise every quarter downward as they adjust their numbers to better fit reality.  These first numbers are raw at best, and propaganda at worst, and may bear little or no resemblance to what is actually going on.  For another thing, I’ve noticed a trend, and I suspect you’re going to notice it too.  Fuel prices fell with the ugly end of summer, and they’ve recently begun to tick up anew.  I suspect this will tell us the direction of the economy in two months or so, if history is a guide.

As I have discussed at length before, our economic prospects are linked to many things, but few are more important to growth than the price of energy.  Through the first half of October, gasoline prices fell at the pump because the economy was doing poorly and producing few new businesses.  By mid October, the price decline suddenly reversed and we watched the cost per gallon begin to tick upward again. As I have explained ad nauseum, once the prices tick back past the $3.50/gallon boundary on gasoline, or the $4.00 threshold on diesel, you can expect the temporary increase in growth we saw in the end of the 3rd quarter begin to be choked off.

There is always a lag to these things, but what should have offered you the tip on the economy’s underlying condition was when fuel prices began to decline well before Labor Day weekend.  That’s a sign of a struggling economy, all else being equal, and it should have been noted with trepidation.  I knew the numbers for August were going to be abysmal long before they eventuated.  The price of fuel continued to slip, but some time in the last part of the third quarter, we saw a turnaround in growth.  The reason is simple:  With the prices of fuel in decline, economic activity increased, consumers had more to spend on other things, and we saw a brief uplift.  I suspect that as this little bubble grows, the prices of fuels will follow.  As they reach higher, they will begin to suck all of the oxygen out of the economic room, once again.  When that happens, well, you know the rest.

At the same time all of this was going on, Texas was seeing record heat and a continuing drought(that persists for most of the state even now.)  In that period, Texas began to experience rolling brown-outs, and threats of them, as our once enviable electrical grid could no longer support the demand.  We’ve had to shut down a number of coal-fired power plants in Texas due to EPA regulations, and with no new plants to replace them, and more plant closures almost certain in the coming year, the prospects are going to worsen.  Barack Obama’s obsession with the elimination of coal-fired plants is going to be the death of Texas, but hey, Texans didn’t elect him anyway, so why should he care?  This political aspect aside, Rick Perry has been somewhat successful in getting some companies to relocate here, but they’ll find it difficult to function when they can’t turn the lights on.

At the end of it all, it was her superior understanding of this particular facet of the economy that had made me most hopeful Sarah Palin would run for president in 2012.  Most politicians are blissfully ignorant of how thoroughly dependent growth is on energy.   They will soon discover it if Obama has his way.

Now comes some very realistic analysis to which you should pay close attention.  Despite all the assurances of impending improvement, and the ostensibly good news of last week’s Euro-deal, you should still prepare for all of that to collapse.  As Liam Halligan reports in the Telegraph,  this deal, this latest round of bail-outs offers not much hope of failure. As he rightly points out, with all of these government bail-outs, the natural signaling in the free-market is short-circuited, which means people take actions based on conditions that are largely ore even entirely artificial.  It’s much like Treasury forcing all banks to take TARP money during the crisis of 2008, because they realized that by giving assistance funds to some banks, but not to others, they would be signaling which banks were in trouble.  Rather than permit depositors to draw their own conclusions, and make rational choices, what they did was to intentionally obscure which banks were healthy and which were not.  This sort of tinkering is part of what got us here from the outset.

Halligan’s basic warning boils down to a suggestion that the prideful Euro-set will not accept, but is nevertheless the best advice he could give them:  Let Greece default, openly, and boot them from the Euro.  Dump Portugal too, says Halligan, because as he points out, it is “absurd” to think of Portugal as having the same monetary stature as Germany.  This is what you get when politicians interfere in the markets: Unbridled chaos and fakery, and this is what we are now experiencing.  When the Euro-deal fails, as it almost certainly must, Wall Street and markets around the globe will lose all the value they’ve gained in recent weeks, and then some.  Mr. Halligan concludes as follows:

“The eurocrats, of course, lack the guts to trim back monetary union to a more manageable size. Too much face would be lost. So “euroquake” fears, once viewed as outlandish, are gaining pace. Despite Thursday’s deal, and all the reassurances of a “durable solution”, the Italian government on Friday paid 6.06pc for 10-year money, up from just 5.86pc a month ago and a euro-era high. Such borrowing costs are disastrous, given that Rome must roll-over €300bn of its €1,900bn debt in 2012 alone. A default by Italy, the eurozone’s third-biggest economy, and the eighth-largest on earth, would make Lehman look like a picnic.”

“The eurozone must be consolidated. World leaders should similarly force European banks to disclose their losses, we all take the hit and then we move on. Instead, we are served-up, in ever more complex variants, the same “extend and pretend” non-solutions. It gives me no pleasure to write this, but I give this deal two weeks.”

Indeed, what Halligan predicts looks bleak, but as he reminds, it needn’t be the case.  Just like in our own domestic policies, this is being done by people who are largely ignorant of the workings of markets and the conditions that drive them.  The problem is, they always do what politicians have done since the first elections on record: They kick the can down the road hoping for one more postponement.  There w ill come a day that such tactics will offer no further hedge, and I suspect it will be sooner rather than later.

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