It’s not one of those video games, with all the fancy graphics. It’s just an old Milton Bradley game (remember those?) called Perfection, but the grandkids have had fun playing it. OK, I have, too. Basically, it’s a game where you try to fit different shaped pieces in their appropriate slots on a game board. You put the square shaped piece in the square slot, the oval in the oval, the triangle in the triangle, etc. It’s actually a good way for the kids to learn shapes. It may not sound too exciting, and it wouldn’t be, except for the timer.
You see, you set up the board. You wind up and start the timer, with its tick, tick, tick. You probably have a little over a minute to get as many of the pieces in their slots on the board as possible. As you get closer to the end the ticking gets faster and faster. Then the time runs out, the board pops up, and all the little shaped pieces go flying out everywhere. The goal is to get as many of the shaped pieces in their slots as you can before you run out of time. And when the timer starts ticking faster, you know you had better hurry. It’s not if the timer was going to go off and the game would be over, but when. It’s not a matter of if, but when. Looking around these days, I quite often get that feeling of it’s not a matter of if, but when the game our government has been playing with our economy will be over.
After the financial meltdown of 2008, many in leadership in our country felt that something must be done to get the U.S. economy moving and out of the recession. This was after our government had already bailed out banks, financial institutions and an automotive giant. (We found out this week that taxpayers are going to lose over $10 billion on the General Motors bailout.) The $800 billion stimulus program proposed by President Obama was passed by Congress, with some tax cuts and a lot of government spending. While it has done little to improve the economy, it did add to the U.S. government debt (the $800 billion is borrowed money), and rewarded members of Congress that supported it with money for their pet projects.
But the primary way Washington has tried to get the U.S. economy moving is by the manipulation of the money supply by the Federal Reserve Board. The Fed has kept interest rates low so that banks have been able to charge historically low interest rates on home loans, business loans and other types of loans. This has primarily been done through a program called “quantitative easing.” While not actually printing money, it is a program designed to pump money into the economy in hopes of stimulating business and purchasing. The program, started in late 2008, was designed to inject $800 billion into the economy by buying bank debt and Treasury notes and last until 2010. But when the economy didn’t bounce back like planned, “QE” continued, with many more billions spent. The Feds are continuing to spend $85 billion a month in the program and will continue until they feel the economy is strong enough for them to ease off. In the meantime, the U.S. government debt is now over $17 trillion and growing.
Kimberly Amadeo of World Money Watch.com explains why the stock market and big business loves what the Fed is doing. She writes, “QE increases the money supply because lower interest rates allow banks to make more loans. Bank loans stimulate demand by giving businesses more money to expand and shoppers
more credit to buy things with. By increasing the money supply, QE keeps the value of the dollar low. This made U.S. stocks seem like a relatively good investment to foreign investors, and made U.S. exports relatively cheaper.”
All this sounds great. Well, at least to those who are in the stock market and to those who have benefited in the business community. The stock market’s Dow Jones average has gone from a March 2009 low of under 7,000 points to over 16,000 this past week. According to Bloomberg News, “Five years into a rally that has restored $14 trillion to market share prices, U.S. payrolls remain 1.5 million below the level in 2008.” Companies are making record profits and are cutting payrolls.
But, like the grandkids playing the game, you can hear a tick, tick, tick. The government can’t continue to pump money it doesn’t have into the economy indefinitely. China and the rest of our debt holders will not allow it. Why? Because the weaker dollar makes the debt they hold worth even less. When the Fed even gives a hint of pulling back from the QE program, the stock market takes a sharp drop. What will happen to the markets and the U.S. economy when the Fed actually stops injecting all that cash into the system?
To say that the current U.S. economy is like a house of cards might be a strong statement. Maybe it’s more like the old game of Perfection I play with the grandkids. And that tick, tick, tick of the timer is getting faster.