What Is The Economy Telling Us?

World's Centrifugal Force

Where is the never ending cycle of global economy going? What factors should we be analyzing to get ahead in these times of transition? Let’s take a snapshot of what the markets are telling us, and make an assumption of how the animalistic market will react.

The Eurozone is as strong as it’s been in years, or is it? The big word right now is “Credit Crunch”. A rippling effect has hit all major banks, starting a year ago in July of 2007. One of Europe’s largest banks HSBC, has felt the kidney punch being among the banks worst hit. HSBC profits dropped from $2.9bn to $10.2bn in the first half of this year, being dragged down by troubling U.S. housing and credit markets.

“It is clear that growth models in our industry based on high and increasing leverage will no longer be sustainable,” said Chairman Stephen Green.

“It is also clear that complexity in financial services and the recent consequences of failed risk management need to be addressed.

“Ultimately the real economy will recover from the crisis although it may get worse before it gets better. Financial markets will not, and should not, return to the status quo ante.”

HSBC’s global portfolio is a reflection of the banking sector’s confidence. The “Credit Crunch” is a year old, and still not showing signs of loosening its armbar. Who else is feeling this abuse past year’s profits?

UK’s largest lender HBO is amongst the battle against “The Credit Crunch”, because of there weakness ‘Lil’ Confidence’ they feel a long recovery time. HBO’s stating that it may take up to 18 months, or till 2010 for the U.S. housing market to turn around. Until this turnaround Banks won’t have the confidence to start lending.

The European Theater is feeling the power of “The Credit Crunch”, and only has “lil’Confidence” to defend itself. Let’s jump the pond and look at how the leading world economic power has unraveled, and look at key economic factors are underpinning these feminoid Capitalistic economics?

Lets take a Snap-Shot of three main Macro-economic indicators, Growth, Unemployment, Inflation or Monitory Policy, and Fiscal Policy. With these indicators we can make an assumption on how the market may react to the Tsunami that went across the pond.

Growth-GDP, are indicators of what an economy’s output is producing per capita. The factors that are monitored to perceive GDP are investment, population growth, and technological change. GDP grew in the first quarter at a rate of 0.9% in the first quarter, after a meager 0.2% in the last three months of 2007. This reconfirms the Federal Reserve’s warnings of a weak economy for 2007, and its twin threat of weak growth and rising inflation. The Fed dilemma of bleak employment and rising inflation will be painted big if they raise interest rates.

Inflation is a consumer price index of the cost of goods. That has many variables that change, making it another Houdini economic indicator. Factors of Inflation you may ask, Consumer Price Index (CPI), Cost-of-Living Index (COFI), Producer-Price Index (PPI), Commodity-Price Index (CPI), GDP Deflator, Core Inflation, and it keeps going! The rate of inflation was much greater that what economist had predicted, soaring to 5.6% in the first half of 2007, because of a 30% increase in energy prices, which doesn’t put into consideration Core Inflation.

“[Inflation] is certainly above expectations here, but I think we’ve probably seen, for the near-term anyway, the worse of the inflation readings,” said Keith Hembre, chief economist at First American Funds.

How does the U.S. Monitary Policy respond? Ok, Im not an economist like my friend Ben, so I’ll let him tell you.

“The Federal Reserve’s response to this crisis has consisted of three key elements. First, we eased monetary policy substantially, particularly after indications of economic weakness proliferated around the turn of the year. In easing rapidly and proactively, we sought to offset, at least in part, the tightening of credit conditions associated with the crisis and thus to mitigate the effects on the broader economy. By cushioning the first-round economic impact of the financial stress, we hoped also to minimize the risks of a so-called adverse feedback loop in which economic weakness exacerbates financial stress, which, in turn, further damages economic prospects.

The second element of our response has been to offer liquidity support to the financial markets through a variety of collateralized lending programs. I have discussed these lending facilities and their rationale in some detail on other occasions.¹ Briefly, these programs are intended to mitigate what have been, at times, very severe strains in short-term funding markets and, by providing an additional source of financing, to allow banks and other financial institutions to deleverage in a more orderly manner.

Briefly, these activities include cooperating with other regulators to monitor the health of individual financial institutions; working with the private sector to reduce risks in some key markets; developing new regulations, including new rules to govern mortgage and credit card lending; taking an active part in domestic and international efforts to draw out the lessons of the recent experience; and applying those lessons in our supervisory practices.

Closely related to this third group of activities is a critical question that we as a country now face: how to strengthen our financial system, including our system of financial regulation and supervision, to reduce the frequency and severity of bouts of financial instability in the future. In this regard, some particularly thorny issues are raised by the existence of financial institutions that may be perceived as “too big to fail” and the moral hazard issues that may arise when governments intervene in a financial crisis. As you know, in March the Federal Reserve acted to prevent the default of the investment bank Bear Stearns. For reasons that I will discuss shortly, those actions were necessary and justified under the circumstances that prevailed at that time. However, those events also have consequences that must be addressed. In particular, if no countervailing actions are taken, what would be perceived as an implicit expansion of the safety net could exacerbate the problem of “too big to fail,” possibly resulting in excessive risk-taking and yet greater systemic risk in the future. Mitigating that problem is one of the design challenges that we face as we consider the future evolution of our system.”

Chairman Ben S. Bernanke

Fiscal Policy, well the last 8 years it’s been the best money maker behind ‘lil’Bush. I honestly don’t know what to say! Lil’President George W. Bush has recently dropped his presidential power threat to veto the U.S. House of Representatives housing rescue bill that would inject $3.9bn into community grants to buy up and repair repossessed homes. Over a Million Americans have lost their homes, making this the worst crisis since the Great Depression. I guess we owe a thanks to a landmark figure Lil’Bush.

There it is, Econ 101 with me a confusing teacher, but your looking at all the key indicators in a flash of economic time. Now what is it telling us its going to do next? You tell me! I’m no econ-major, and this felt more intense than any econ class that I ever had. The problem I have is that I’m back to my initial question. How do you read the global economy? Do you just get a hunch after years of cyclical cycles? Do you plug it into a program and kazoos answers! That’s what I’m waiting for.

Thanks for taking the time to read my first Blog, I hope my next Blog topic isn’t as hardcore and confusing as this one but I just had to get it off my chest. Economics is just way too much! That’s why I just keep plugging in the information into my computer database. If you have any comments Id like to hear what you have to say about our new horizon of 2009-Future. Let’s go capitalism-passive income, just try to put into consideration our Lil’ Mother Earth.