Where is the Economy Going? Where is the Finance Going?

The first quarter reports on the state of the economy were released this week and they were not good. The charitable analysis of the results argued that it was a tough winter and there were other things going on that were not helpful.

The year-over-year growth rate of real Gross Domestic Product dropped to 2.3 percent in the first quarter, down from 2.8 percent the previous quarter and down from 3.2 percent from two quarters ago.

We can also look at the information on Industrial Production to see how industrial activity is tracking. Whoops, looks like Industrial Production is not doing too well. In May, June, and July of 2010 Industrial Production was increasing by more that 7.0 percent, year-over-year.

Are the words “double dip” on the minds of our policy leaders in Washington, D. C.?

The Federal Reserve continues along the QE2 path yet says it will finish up this program by the end of June. But, monetary policy is still aiming to keep short term interest rates at current levels. And, Fed Chairman Ben Bernanke continues to tell us that at the current “blips” of inflation are just temporary jumps that will recede with the spring.

What our “leaders” are telling us just does not match up with much of the information being generated. And, a situation like this does not add up to a lot of confidence building.

The two most important leaders on the economics side in the current government, Bernanke and Geithner, have just re-iterated their commitment to a strong dollar. And, the value of the dollar drops!

Either the Obama administration, which includes Ben Bernanke, knows something it is not telling us or it doesn’t know what it is doing.

The movement of the lips just does not match up with the movement of the hips!

This situation is not unlike those we see in other circumstances of faulty decision making. In such cases, the leaders of organizations find themselves in an uncomfortable position because of the decisions they have made in the past, yet don’t want to admit their policies and procedures might be wrong. The leaders continue to claim that things are under control and that events will get better. Still, they keep doing what they have been doing….digging themselves even deeper into the hole they have created.

These leaders eventually find themselves in a state where there are really no good choices available to them. Any path they choose to get themselves righted will be painful.

In many ways the leaders of the United States look to be in such a situation. And, this is why what they say does not seem to conform to what is happening.

We can look for all the bits and pieces of good news we want and we can always find reasons for explaining why results are not as good as desired similar to the explanations of the first quarter growth.

Still, others say, the stock market is going up. And, they continue, other nations continue to buy United States government debt.

But the Federal Reserve has flooded the world in liquidity. What is there not to understand about asset prices going up and up when there are excessive amounts of liquidity and credit around.

But American banks are not lending? However, the liquidity is getting out into the rest of the world! (See “Large Foreign-related Banks Now Hold $776 Billion in Cash Assets”, http://seekingalpha.com/article/265481-large-foreign-related-banks-now-hold-776-billion-in-cash-assets.) What the Federal Reserve seems to not understand is that the flow of funds it is providing is just staying in the financial sector (including commodities) and is not going into the real sector.

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