Economics 101 from the peanut gallery

We surely live in interesting times, especially when it comes to money. Right now, central bankers, politicians, and business folk alike are nervously awaiting the final shake-out of a situation that began with the sub-prime loan crisis. The banks have been duly rolling out their bad loan information, declaring the requisite write-downs, and causing the vox populi to be turned up to a fever pitch on the anger-meter.

Not to sound blasé, but what’s done is done. As far as the bad debts are concerned, one can’t put the genie back in the toothpaste tube, or squeeze the toothpaste back into the genie lamp.

I have been trying to get my pea-sized brain around all the comings and goings on the economic front, attempting to extract some version of the truth that will keep me from being plunged into a catatonic state. As best as I can decipher, here it is:

Banks lost a crap load of money on bad loans, and will continue to do so, because people’s houses – their biggest asset – are now worth 25 cents on the dollar less than what they paid, and when they try to refinance, the banks will not be generous enough with either the amount, the interest rate, or the other terms;
Oil, food, and metals are high because the US dollar dropped in value, and to get the same ‘value’ you have to jack up the prices. Think about it – you sell crap in US dollars, but the US dollar is worth ten percent less. That means you take ten percent less, right? Wrong, you charge more because 2 billion people in China and India want to trade their bicycles and three-wheeled scooters in for cars, and are prepared to pay what the Yanks won’t;
When the dollar drops, so does the value of stocks bought and sold in US dollars. You might decide, hey, it’s bargain time, but if people are losing their houses, and have to pay double at the pumps, how well are those companies going to do? So, you buy gold, silver, copper, and oil futures, maybe also a bit of wheat and corn for good measure.

As for those who think a recession is not in the cards, think about this:

Every time the price of oil spikes high, we end up in a recession;
Every time the stock market tanks, we end up in a recession;
If ten percent of homeowners are getting relocated to shopping carts, and the rest owe more than their house is worth, nobody’s buying stuff, which means nobody’s selling stuff, which, again, means recession.

What makes this one strange is that in the past, a recession would force prices down due to the drop in demand. Those who still have money begin to cabbage up the old stock, and we gradually get going again – just like pulling over for a pee break. Now, the old stock never gets old – it gets cabbaged up outside the country, and voila, prices don’t come down. It’s called stagflation, and it’s the reason why, despite all of the predictions, Japan did not buy up every corporation on Earth, like every tacky movie and TV show in the late 1980’s and early 1990’s predicted.

The only thing I can think is that we do not fully understand globalization. Controlling money supply, inflation, and all that is based on individual governments being able to control all the variables. Between emerging economic powers and huge hedge funds, policies that worked every other time are as effective as the little Dutch boy sticking his finger in the dyke (or Wile E. Coyote holding the umbrella in order to stop the anvil heading for his head).

Welcome to the future, folks, whatever it ends up as.