John Mauldin argues that inflation is not an immediate problem. The immediate problem is deflation. The deflation in prices is and will be caused by decreased, indeed, crippled consumer demand. Unemployment is up, percent of the population not in the labor force is down, wages are lower and going down in terms of purchasing power, household wealth in stock investments and housing have been lowered by at least 33 percent, households are saving because they are scared: consumers do not have the money and will not have the money to lead the US into growth. Moreover, the enormous tax increases that are coming to everyone, if Obama's agenda in health care and carbon emissions is passed, will lower personal net income even further. Mauldin says:
"Think about this. Only a few years ago, less than 1 in 16 Americans was unemployed or underemployed. Today it is 1 in 5. That is a staggering, overwhelming statistic. Mind-numbing."
Business will have to pull the economy into growth; but under-utilization of manufacturing and service capacity is go great that businesses can meet all foreseeable increases in demand without hiring more employees. All businesses have to do is to increase the weekly hours of employment of the workers they have. Most laid-off workers will not be able to return to their previous employers; they will have to find new employers, that is, new jobs.
The main source of new jobs has to be business startups; but the Obama administration is enacting every policy imaginable that would cripple new business formation. Historically, one of the main sources of capital for entrepreneurs to start businesses was home equity--taking a second mortgage and investing the cash in a new business. But the destruction of the housing market and decimation of home values have destroyed that source of capital. Turn to your family, another traditional source of startup investment money? Not likely. Families usually took money out of their home equity to loan to relatives; but of course that source is dried up. Turn to banks? Not likely. Lending by banks to small business continues to decline. And banks are reluctant to lend to start new businesses. They demand security. The US Small Business Administration is no help on this score; it only guarantees bank loans and also requires security. A new business has no security to offer. Don't believe me? Walk into a bank, talk to a loan agent. Ask the agent for a loan to start up a new business, which doesn't yet exist and hasn't made a sale. All you have is an idea. Outcome of your request? Hint: No chance in hell you'll get a loan. So an explosion of small businesses is not going to pull the national economy into growth.
The economy is apparently at a floor. If the housing market doesn't start falling again {*}, then it is likely that the economy will drift along sideways, up a little each month, but not accelerating into another high growth era. Watch the employment rate, unemployment rate, and percentage of adults in the labor force for indications whether the economy is moving into a real growth mode.
Meanwhile, work politically to sabotage Obama's anti-growth agenda, reverse his anti-small business policies, and elect pro-market, low-tax, pro-growth politicians in 2010 and 2012.
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* We still have an enormous inventory of foreclosed mortgages owned by banks, called by realtors the "shadow inventory". These homes have been deliberately held off the market by the banks. If the houses are are released quickly, the oversupply of homes on the market will kick prices down again. Further, some housing purchases, by persons intending to be residents, not speculators, has been driven by the Federal credit. That credit is due to expire. Some realty forecasters are predicting a further 5% to 10% decline in housing prices in 2010.
Update. October 26, 2009. A survey of businesses indicates that a majority intend (or expect?) to hire additional employees in the next six months. The WSJ report of the survey does not indicate whether the hires would be re-hires of furloughed employees or new employees to fill new positions.
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