Where is this Economy going?

Harvard and Bernanke, Bernanke and Harvard. Harvard has crept into my blog this week. Fed Chairman Ben Bernanke spoke at Class Day at Harvard University yesterday and naturally made a few remarks about the state of our economy. He even went so far as to compare and contrast the economy and the Red Sox baseball team of 1975, the year Ben Bernanke graduated from Harvard with a degree in economics, with the economy and the Red Sox in 2008.

I remember 1975 as the year the Cincinnati Reds beat the Boston Red Sox to win the World Series. And, I remember the Big Red Machine beating the New York Yankees four straight to sweep ‘em in the 1976 World Series. The great thing about great sports teams and great armies is that they all work together for the same result, to win. Talking about winning, I even remember President Ford in 1975 and the WIN buttons, “whip inflation now.”

The problem as I see it today is that where our economy is perhaps more efficient and productivity is up from where it was in 1975, the politics part of the political-economy is down. While economists with their computers and piles of data may have a more accurate picture of the economy, the politicians are even more in the pocket of special interests groups that have the dollars to lobby them. Today, the campaigning and collection of campaign contributions starts one minute after the election results are posted. Because of the cost of running a campaign, politicians are perpetual running machines for reelection.

The Fed can not do the right thing for all the people without the cooperation of the Congress and the President. Fiscal policy and tax policy that are crafted for the benefit of the very wealthy, leaves the vast majority of the American people paying the price in blood and dollars for policies they do not even have a hand in shaping.

No, there are no long lines at the gas stations in 2008. No even/odd days to buy gas as there was in 1975 either. But the price of gas is a tax on everyone that buys it and it is especially a tax burden on the families of the so called “middle-class.” To think that inflation is under control is a serious mistake. When the war in Vietnam came to an end with the last helicopters flying people out of Saigon in 1975, inflation was just heating up. Fed Chairman Paul Volcker would have to push interest rates up into the double digit range before the inflationary psychology in the country was broken like a fever. I remember the years 1975 to 1985 very well, as I traded bonds, both government and municipal, during those years five days a week. I managed bond portfolios during those years and I remember 15.75% corporate bonds being offered at par and 13% or higher municipal bonds. These were not junk bonds either, they were rated AAA by the major rating agencies in 1981-82. Inflation does not just show up one morning out of no where. Inflation works its way through the economy over several years. The peak in interest rates, as I remember, was the fall of 1981, a good five years after 1975. In early 1982, the fever had been broken and interest rates started to move very slowly downward.

I do not doubt our Chairman’s sincerity when he says that inflation today is different than inflation in 1975, but 1975 was not the year that saw bond prices tumble out of bed. The inflation that will be caused by the increase in the price of gas and diesel will work its way through the economy over the next five years. People that can afford $5 a gallon gas, or higher, will continue with their present buying habits, while the vast majority of Americans who can not afford $5 a gallon gas with modify their spending by eliminating services and products they can no longer afford.

Unless the United States implements a strong self sufficient energy policy that includes the production of our own oil resources, it will be many years before this country achieves energy independence and eliminates their dependence on foreign oil. If only our politicians could come together and craft an energy policy that would create a path towards energy independence, and let the world know we are serious people about taking charge of our future, perhaps then we would receive the respect of other nations. We give the world plenty of reasons to believe we are a paper tiger when it comes to our energy policy. Would it not be nice to get OPEC off our backs and out of our pockets? Stay tuned.