State of the Economy: December 2011

Its been a while since I wrote on the economy. From where I sit the US economy has stabilized and are growing in strength. Consumer confidence and spending is back. Large corporations are still making good profits. The only big minus, is congressional inability to decide on anything at all. I don’t see congress being able to get anything meaningful done before the nation votes either for a new President or gives the current President’s policies a vote of approval. Until then we could just send congress home to their states and save tax payers money.

EU had a major economic conference last night and it was a total disaster. In my opinion EU was destroyed for good when Germany, France and Italy retained a veto, while scrapping the need for full consent of all members of emergency fund decisions, ending any equality between member states. Imagine the United States with California, Texas and New York having a veto in congress. I think we would start to hear about secession plans very quickly. The fact that the UK was totally isolated from the EU also doesn’t speak well for the future of the union. Imagine having Florida sidelined from the union.

What I think will happen is that we will see the monetary union first down sized to fiscally healthy members. Without monetary union the economic differences between nations in the political union will grow out of control, which will force the better performing nations to limit free movement of labor across boarders. Then goes Schengen. Once we dismantle Schengen, the union is gone. With time we will only have a union between France, Germany and Italy, with a handful of smaller countries, as second class citizens.

Going back to the US, the reason why the United States is starting to rebound is due to the unprecedented level of monetary intervention by the Federal Reserve. Yes, there will be commissions and blaming, because the trillions of dollars spent and the national debt are hard for the nations collective psyche to accept, but the fact is that without bold decisive action we would be facing the same crisis as Europe. The difference being that the EU doesn’t have the collective will to take unprecedented action and thus will ultimately fail. Could the monetary intervention have been handled differently… absolutely. And that is why congress will be having hearings for years. In a society with this degree of political power wielded by special interest groups, you will always see in any big policy change morally questionable transfer of wealth. We need to remember that all sectors of American industry operate under the economic principle of maximizing share holder value. The current execution of that principle is short term and we need to get back to a long term mindset, but that change in mindset will take a generation. Universities need to be teaching economics students about long term shareholder value creation and grinding it into their thinking. We balk at C-level greed, but as a nation of shareholders that is what we’ve asked of them, what we incentivize them on and how we have our universities educate them.

Like with everything else, the future is in our youth. We need to instill healthy principles of frugality, equality, hard work and ethics in to our youth, so when they grow to lead our nation they will make better decisions than we have.


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