Where’s the Lone Ranger when you need him?

We have not entered uncharted territory in the economy yet.  I suppose that should be reassuring in a world where uncertainty seems to rule the day.  The deal is this, while economists have charted the territory, we’ve never be in the position of stopping so many things from heading that direction.  That is what is worrying me right now.  That is also why I am relieved that among the advisers the next president has picked is Hillary Clinton and some very good economists.  I’m not sure how much good this is going to do because I still am not sure if President Elect Barrack Obama is going to be up to the task, but I think that the measure of how huge of task lies ahead of him might be sinking in.  I think there’s a realization that he’s going to need a lot of help.  That in itself says something.  After a few inklings of Pritzker for Commerce Secretary or Larry Summers for a repeat performance as Treasury, President Obama changed direction.  To me, that was a good thing.

I keep looking at the volatility in the market, the problems that face the dollar as the world’s currency, the collapse of GM, and the challenges that face us globally, and I’m glad Hillary is there at the table.  I’m glad some of the best bureaucrats that came up in the Clinton Administration will be there too.  I may not like Barrack Obama, but I certainly do not want him to fail.  If he is smart enough to realize that what is going on is far bigger than anything he is prepared to handle, than that is good first step to regaining some solid ground.

There is realization that the Fed can no longer wonk the economy into a stable state.  Its primary tools are the dollar and interest rates.  Interest rates are so low they have lost their ability to translate stimulus into the part of the economy where jobs are created and food is bought.  The dollar is facing its own set of challenges.  Due to the enabling of export economies like Saudi Arabia, Japan, and China, the United States has been able to avoid tax increases, support growing wealth among its richest citizens, and preserve the dollar as the international currency.  This has been true since the Reagan years.  Countries like these have given us money so we can turn around and buy their products.  They have basically agreed to lower living standards in their countries so that they could hook into the benefits of a stable US economy with its safe financial system and lack of financial dramas.  This  is no longer the case. 

There has been a huge accumulation of dollars in these countries.  There has also been a huge foreign investment in the Treasury bills and bonds that have funded two wars (with no tax increases) as well created an extremely well-paid financial sector.  Meanwhile, we’ve agreed to seeing manufacturing jobs transferred  abroad while replacing those jobs with low-paying service jobs.  We do not have a free market or a free trade system with floating currencies (even though they like to tell us we do).  We have a bunch of countries holding informal agreements to rules that have sustained us for maybe  20 years.  The US has huge trade deficits while they fund our budget deficits.  The export countries accept a low standard of living so they can grow the countries with exports using the drama-free dollar.

Is this situation on the verge of a game change?  I think it is.  Who better to work these issues out than Hillary Clinton and a team of first rate economists.  If we have to endure fireside chats with Obama to get the Treasury and the State department out there ahead of this disaster, than I say, fine … I’ll just change the channel and hope she gets the job done.   Meanwhile Richardson can negotiate the next industry looking for a hand out.  That’s going to be the real dirty job.   What a great person to get the blame for the next taxpayer’s check to a Corporate Welfare Queen.

Meanwhile, I’m glad to see the appointment of Tim Geithner at Treasury.  As the president of the NY Fed, he’s already been a part of the team carrying out monetary policy and the Wall Street Rescue and is already on the ground running.  He’s worked in the gut operations of both the IMF and the Treasury.  From folks that know him, I hear that he’s not a person that ever feels the need to prove himself and is a person that does not make judgements until he understands the situation. 

It’s a grim situation out there in both the equity and the credit markets. Last week, we broke thru two ‘psychological’ levels in the markets.  The situation with the S&P 500 is beyond troublesome.  Many of these stocks are so cheap now that institutional traders will no longer be allowed to hold them in portfolios.  They’ll be forced to sell.  We’re seeing the lowest treasury yields ever.  There’s not just a flight to quality, there’s a stampede.  I’m glad to see the main team for the next administration on deck.  What we need now is both the Bush and the Obama administration to work together and show some leadership and announce some joint policies as well as folks that will work to transition together.  Obama cannot afford to sit in Chicago and look pensive nor can Bush sit in Crawford and look any more lame.

This is getting more serious by the day.  I’ve been avoiding the “d” word because I know we know what it takes to fend that off.  I just need to see movement by the folks in charge right now that shows they know it too.  We do need some major stimulus and the two camps better sit down and get it started right now.