As I mentioned above, Exhibit A for the "never let a crisis go to waste" approach is the stimulus bill, which accomplished a lot of things for the left, but has failed to stimulate the economy. The most ominous figure on this—ominous enough to push the Dow Jones Industrial Average back below 10,000—was a recent employment report in which virtually all of the new jobs created in May were temporary government jobs working for the census.
Meanwhile, there are increasing signs of the possibility of a "double dip" recession, such as the report below about corporations accumulating record-high amounts of cash—rather than investing in new equipment or the hiring of new employees. It is a statement of their lack of confidence in the future.
Jack Wakeland sent me the main link below—I can't explain why it's a Wall Street Journal report linked via The Australian—along with the following comments:
"US corporations are moving 2011 profits into 2010 and accumulating record cash positions. This parallels investors' withdrawal of capital from the equity markets. Many investors have accumulated large cash positions.
"Arthur Laffer opines that this all is driven by the automatic income tax increase we're due for (the expiration of George Bush's temporary income tax and capital gains tax cuts). In TV interviews, Mr. Laffer has observed that corporate policies to book profits this year instead of next also reflects their fear of what kind of taxes will be imposed by the next couple of years in order to reduce the yawing federal budget deficit—a deficit of over $1.5 trillion per year that we cannot "grow out of" as long as our economy remains stagnant. In addition, there is considerable uncertainty created by gigantic new regulatory structures being created at HHS and the EPA. Corporations hold cash as a way to deal with uncertainty.
"But tax and regulatory fears aren't the only issue driving the hording of cash. It is also driven by fears of another liquidity crisis. US corporations are not confident that they can secure outside financing the way they used to prior to the crash of '08. This is the 'new normal' for our credit markets.
"The buildup of the corporate cash position further decreases the use of money as a tool of exchange, moving more of it into the 'store of value' column (money's other function). The reduced circulation of money occurred suddenly and precipitously during the financial freeze in the fourth week of September 2008. And it has not recovered yet.
"The rate at which a US dollar circulates (the number of times per year that M1, M2, M3, etc. changes hands) is the velocity of money. The fed increased the monetary base (euphemistically referred to as its 'balance sheet') from $0.9 trillion to $2.3 trillion in large part to counter the collapse of the velocity of money. This injection of liquidity into the credit markets kept them from totally collapsing and continues to maintain them in an uneasy state, sort of like a seriously ill patient in the ICU.
"But what happens if the US economy and/or the world economy picks up a little bit? Won't the velocity of money pick up, leading to rapidly rising general price levels?
"Since the Fed increased the monetary base by approximately 150%, one would expect the general price level would rapidly begin to rise 150%, but the Fed would rapidly begin to shed Treasury bonds and some of its less defective mortgage-backed securities in order to reduce the monetary base and stabilize the value of the dollar in response to the general inflation of all prices. One would also expect that this Paul Volker-style inflation-fighting process of reducing the money supply would cause another recession. The Fed has always been very good at creating inflationary bubbles followed by credit-contraction recessions—a necessary consequence of its crude, command-and-control 'adjustments' in the money supply.
"However, this conventional analysis misses something that my friend (and fellow power industry engineer) Hank Mentik observed in this excellent analysis:
'The money supply is the minor factor; money velocity is the major factor. Our current slowdown and deflation is due to a dramatic slowdown in money velocity. If people get the idea that their money will be worth less a year from now, they will suddenly start spending like crazy, resulting in a huge increase in money velocity. This is an unstable control system, and will cycle back and forth.'
"It is possible for the Fed to reel in its 150% expansion of the monetary base in an orderly manner? No.
"Hank's evaluation that we're in 'an unstable control system' is correct. Just as individuals and corporations are hoarding cash during this deflationary price environment, they will dump it like a hot potato the minute that we transition into an inflationary price environment.
"Welcome to stagflation, and the double- and triple-dip recession."
"US Firms Hoard Biggest Cash Pile Since 1952 as Recovery Fears Persist," Justin Lahart, Wall Street Journal via The Australian, June 11
US companies are holding more cash in the bank than at any point in the past 58 years, underscoring persistent worries about the sustainability of the economic recovery and the potential for a renewed financial crisis.
The Federal Reserve reported yesterday that non-financial companies had socked away $US1.84 trillion ($2.12 trillion) in cash and other liquid assets as of the end of March, up 26 per cent from a year earlier and the largest increase on records going back to 1952.
Cash made up about 7 per cent of all company assets including factories and financial investments, the highest level since 1963.
While renewed confidence in corporate-bond markets has allowed big companies to raise a record amount of money, many are still hesitant to spend the money on hiring and expansion amid doubts about the strength of the recovery.
They're also anxious to keep cash on hand in case Europe's debt troubles lead to a new market freeze....
The Fed reported yesterday that net lending by the financial sector fell at a seasonally adjusted annual rate of $US1 trillion in the first quarter from fourth quarter, the fifth straight quarterly decline....
Meanwhile, US household debt fell for the seventh straight quarter in the first three months of 2010 as Americans continued to respond to the recession's fallout.
