What the heck is going on in the economy?
The stock market plummets, rebounds and drops again by the time this publishes.
Gasoline prices are flat even as the price of oil drops precipitously below the $40 a barrel level, down a full $55 a barrel since one year ago. The drop in oil prices looks to get even more significant as OPEC nations led by Iran, seek to dramatically escalate production in the face of an oil glut.
A market basket of food is more costly today than it was six years ago, even as wages have declined. When you add the fact that the Bureau of Labor Statistics adjusts what is in the market basket based upon what people typically buy, you see that as consumers choose lower-cost protein alternatives (chicken over beef) due to budget considerations, the upward push of the cost of a market basket of goods is significantly understated.
The Chinese vapor economic growth is evaporating as both their currency and their stock market devalues. The Greeks continue to confound the European Union and threaten the permanency of the Euro with other massive debtor nations: Portugal, Italy, Ireland, Spain and even France looking on to see if the Athens government will be held to their promises.
Even Suze Orman, the self-described ‘most trusted’ financial advisor, is demanding that the Federal Reserve pump more money into the system through a fourth round of Quantitative Easing.
So where is the economic good news?
The first thing to understand is that the stock market goes up, and it goes down. It is relatively disconnected from the economy as a whole. While this volatility is bad in the short term for those dependent upon the growth of stock prices, the market as a whole has been up over 100 percent since the last correction, so a decline is inevitable. For those depending upon income from their portfolio based upon dividends, this income stream is unaffected, and in fact, declines in price make the cost of purchasing high-quality, income-producing stocks even more affordable.
The flight to safety effect that drove people out of the equities market typically will put those investors into U.S. government bonds. This has the inverse effect of driving up the value of older, higher-yielding bonds. Those who purchased these income instruments can now book some gains if they choose and potentially offset book losses to the equities side of their portfolio.
Gas prices will be coming down. The current flatlining of gasoline prices against the drop of oil prices is a direct result of the lack of domestic refining capacity to meet the needs of the American consumers’ summer driving patterns and the more expensive, federally-mandated, summer gasoline. As the leaves turn, the domestic demand for gasoline will drop, and the EPA-mandated summer refining process will end. Before the last leaf hits the ground, gasoline prices should have dropped significantly, putting more money into the pocket of every driver of a gasoline-powered vehicle. That is good news.
Absent Federal Reserve intervention, which may be meaningless anyway, interest rates should continue to decline based upon this flight to safety phenomenon. The lower cost of credit opens the doors to cutting credit card bills and a wave of home refinancing. For those positioned to take advantage of these opportunities, that is good news.
The declining interest rates required to finance the more than $18 trillion U.S. deficit provide an offset to the annual $500 billion expansion of the debt outstanding. The Congressional Budget Office predicts that, should the interest rates increase to what would be considered a normal level, the federal government would have to pay $808 billion on interest payments alone in 2025, a more than three-fold increase over today’s payments.
Delaying this payment explosion is definitely good news, but before one gets overly excited, realize that these interest payments are a significant understatement of real interest on the debt, as they exclude payments to the bonds held by the Social Security Trust Fund, Medicare Trust Fund and other government entities. So, in spite of the seeming good news of continued stable or lower interest rates, the burgeoning budget deficit itself continues to undermine the financial security of the nation; and lower interest rates merely mask the depth of the problem, which is bad news.
Recently-released regulations on utilities, train cars that transport oil, and methane all promise to drive the cost of energy up at a time when, due to our nation’s abundance, the prices should be declining. As a result, the lower energy prices that should be showing up on each person’s electricity bill are, on the whole, being more than eaten up by the costs of Obama’s Environmental Protection Agency’s regulatory activity.
When a new administration takes over and ends President Obama’s ill-conceived war on energy, consumers will benefit over the long term from the abundance of electricity producing fuels like coal and natural gas. This potential windfall will benefit everyone, but has a particularly strong impact on manufacturers who use electricity to build things.
As the news coverage in the weeks ahead is likely to be filled with the economic negatives and policy makers largely have their hands tied in dealing with these challenges due to bad prior decisions, it is important to remember that there are some positive elements at work. While it is unlikely that the federal government restraints that are keeping the American people from fully benefitting from the domestic oil and natural gas glut will be lifted while Obama is president, it is likely that should a Republican be elected, that these gates will be opened with everyone receiving more net income due to the continued declining cost of energy.
In the meantime, the world and domestic economies are likely to be buffeted about, shocking bankruptcies are likely to occur, and the overall news will seem bleak. Just remember that a torrent of growth can be unleashed simply by freeing the energy sector, which the next president can do.
In the end, it is this reed of economic hope that has the potential to wipe out President Obama’s new normal and return America to robust economic growth.
This guest post is by Rick Manning, President of Americans for Limited Government.
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