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I believe we've reached a watershed point in the economic crisis for several reasons:
- Voters are losing faith in their governments and central bankers who under-report unemployment and exaggerate false debt-fueled growth
- Loose monetary policy has created massive stock market bubbles
- The US is heading for budgetary armageddon
- Inflation is on the rise worldwide except in the US
- Commodity prices like oil are on the rise
I'm at a loss to understand the US Federal Reserve's current strategy. The Fed is printing money to purchase US treasury bills. This is keeping government debt artificially low, allowing the US government to borrow even more. It's a bit like paying your mortgage with a credit card. And then paying the credit card bill with another credit card. You can't afford the house. Nor can the US government afford trillon-dollar deficits. With all the money flying around it was inevitable a large chunk of it would push up stock prices. Not a surprise then the Dow Jones has almost doubled from its post-crisis lows.
Political paralysis regarding US debt is another problem. It was unrealistic to expect President Obama to cut government spending in a meaningful way just a year from the 2012 presidential elections. Obama seems to have little aptitude for leadership on this issue and the Congress is deadlocked along party lines. He's purely a campaigner, not a leader. Moreover, no one is talking about slashing the holy trinity of costs: healthcare; pensions; and military spending. The canary in the mine in my opinion is what's happening with state and municipal budgets. The fed isn't paying their debts so an adjustment is underway as mayors and governors slash spending. Wisconsin is a good example of what happens when you try to legislate wage caps on government workers. Look to states with the biggest drops in home prices (California and New Mexico for example) and subsequently drops in tax revenue to cut spending.
Inflation has always been a thorny issue. History certainly repeats itself yet governments continue to delude themselves and lie to their voters. If anyone is dying to read a good book about economic cycles, try "This Time It's Different" by Rogoff. It certainly feels like the 70s in Great Britain with increasing inflation and now an oil shock due to unrest in North Africa and the Middle East. I've always found it strange that negative economic indicators are always "short-term anomalies" whereas good news is "a trend". The Bank of England maintains near-zero interest rates when commodity prices, oil, and inflation are all ticking higher. These were similar conditions to the 1970s 20% inflation. Will history repeat itself?
In closing, I think we're in for another downturn. The US, UK and most of Western European countries failed to make the post-crisis structural reforms nessary to ensure future prosperity. Deficits ballooned, failed banks simply got bigger (often on borrowed government funds), unemployment rose, and trade deficits with emerging economies continued to rise. While this may have little to do with the 2011 Tour de France, the outcome will have an impact on consumer spending on such things as Tour de France tours.
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