Ravengate
Partners - Stock market, economic and political commentary by Patricia Chadwick

The Wall Street Journal’s weekend editorial “It Isn’t Working” lamented that “three years of spending and monetary stimulus haven’t helped jobs”. While making a number of valid points about lack of confidence and concern over costs as factors inhibiting firms from rehiring, it failed to point out that the Federal Government has provided a significant amount of valuable and essential stimulus to the economy with an important part of the stimulus program – namely, in refurbishing the highways.

All across New England (and I hear from friends around the country that the same is true in almost every state) there are thousands of private sector companies and individuals employed in long overdue construction and maintenance of our vast highway system. It is astonishing that it took an unprecedentedly deep recession to act as the catalyst in this matter. It is in fact a duty of our Federal Government, as the overseer of matters of interstate commerce, to keep our interstate highway system in proper order.

So it is fair to say that the stimulus program has indeed had some very salutary impact on both employment and on the transportation grid that is vital to the health of commerce in this country. The problem is that this critical obligation of the U.S. Government was funded only as an emergency measure in response to an attempt to provide temporary funds to tie the economy over until the private sector could get back on its feet. But in fact, the private sector on its own initiative does not and cannot undertake the indispensable maintenance of our roads and bridges. This spending which supplements the Highway Trust Fund should be a core element of the appropriation voted on by Congress each year. It should not be part of an emergency stimulus bill.

Highway construction, maintenance and repair are obligations of our government, just as the maintenance of capital plant and equipment are the obligation of private sector companies who produce goods. Since the invention of the wheel, successful economies have understood the unbreakable linkage between transport and safe roadways. It is a disgrace that the last several congresses and numerous administrations have declined to address the growing backlog of crumbling interstate infrastructure in favor of other spending.

Of course addressing the issue now begs the question of where the funds will be found. For starters, Congress could take all the stimulus money it earmarked for future projects that will do nothing to get us out of the current economic malaise and reallocate those funds to the here and now, making a significant down payment on our obligation by allowing highway refurbishment to continue well beyond its current scope. Those private sector jobs include architects, structural and transportation engineers, surveyors, construction workers and all manner of hi-tech modeling and planning operations that utilize the skills already developed in all fifty states. Many of these should be permanent jobs, not the whimsical beneficence of a nervous congress as a one-time event.

Fiscal stimulus is an important and valuable economic remedy that should indeed be employed by the Federal Government during periods of recession: the element of its timing makes it far more valuable to the national economy than routine discretionary outlays. Moreover, any addition to the existing deficit resulting such an investment is not inherently harmful to either the long term health of the economy or to the Government’s balance sheet.

During the recent recession and its timidly emerging recovery, I would argue that the Government has taken some very specific and importantly appropriate stimulative steps, and I would argue also that it should both extend that spending, particularly infrastructure spending and offer incentives – mainly through tax relief to small businesses – to enable them to grow and create new jobs.

Our gargantuan and staggering Federal budget deficit is a problem of a different nature, tied to gigantic issues as financing two wars with borrowed money, an aging population whose health care costs will increasingly fall on the shoulders of a younger and smaller workforce, and a social security system that urgently needs adjustment. Tackling those problems is essential if we are to reduce much less eliminate the deficit.

In the meantime, the roads and bridges that comprise the backbone of our continental economy must continue to be restored.

Patricia W. Chadwick

President

Ravengate Partners LLC

August 10, 2010

Some of the smartest and most successful investment brains are on opposite sides of that question. The right answer matters a whole lot.
A simple definition of inflation is too much money chasing too few goods. That’s easy to understand. If lots of people want the same thing and they all have money to buy it, then the seller is in the catbird seat. Looking at the action of the Fed, there is ample evidence that they are keeping monetary policy easy and flooding the system with money. There hope is that all that cheap money will encourage people to go out and buy things. But it is simply not happening.
In fact, the response to the monetary stimulus reminds me of Japan twenty years ago. The country was in a recession (something unknown in that country since the end of World War II) and the Government was literally giving money to people and asking them to spend it. But they wouldn’t. They put it under their mattresses (literally) and saved it. The Government’s plan to encourage the Japanese consumers to spend their way out of recession was a failure.
It was hard for us Americans to understand the response of the Japanese consumers. Not spend gift money? Unheard of! However, that response should not have been a surprise because the culture in Japan for generations was one of saving, not spending. The Japanese had a 20% savings rate at that time and the insecurity associated with the recession only encouraged them to save more, even when it was free money.
So let’s turn to the U.S. today. We have been a population of spenders, not savers. Heading into the recession from which we are only now emerging, we were spending more than we were saving, i.e. we had a negative savings rate. Then came the recession, with the highest unemployment rate in over a generation, and spending slowed sharply. In response, Congress acted enacted an enormous stimulus program to flood the economy with money. In addition, the Federal Reserve logically opened the money spigot to accommodate spending and hopefully to stimulate demand. With our propensity to consume instead of save, that should have been an easy solution. But nothing happened – or at least very little happened.
What is wrong? Why aren’t we, the greatest spending nation on earth, spending? Why is all that cheap money not chasing the goods and consuming them and forcing the prices up?
Because we, the biggest spending nation on earth, are broke. We owe too much money from the good old days when we borrowed and overspent and nobody told us we had to save. Now we are having to mend our ways by simultaneously paying off our debts and increasing our saving. Those two priorities are overriding our want and instinct to spend, and that is good. Well it is good for our financial health in the long run, but it is dreadful in the near term because it acts as a drag on consumer spending which is what this economy needs to gain more momentum.
So despite all the cheap money around, Americans are not, or better said, cannot take advantage of it, which means that there is not too much money chasing too few goods. Instead, there are too many goods – all the things consumers are NOT buying – chasing the few dollars left in consumers’ hands after they have paid their debt and tried to save. That is the opposite of an inflationary environment. That is deflation. And that is certainly what it appears we are experiencing now and will continue to face in the short run. Unfortunately, there is a positive correlation between paltry demand and high unemployment.
On the positive side, the American consumer appears to have accepted the necessity of restructuring his/her balance sheet and once the savings rate has increased and the debt has been reduced, there will be a significant amount of pent-up demand. Then and only then will the spectre of inflation raise its ugly head. That may be years from now.
Patricia W. Chadwick
President
Ravengate Partners LLC

August 3, 2010