Fixing the Economy - Affecting Stock Market and Housing

The way I see the stimulus package presented by the government is that households across America will receive some money and hopefully that will go back into the economy and generate consumer spending, company profits, and higher wages/more jobs. This will create higher economic activity, eventually leading to a higher US dollar and higher interest rates.

Now, that's nothing new. However, wouldn't this stimulus package only achieve this result if prices of goods were lowered simultaneously? If prices remained just like they are now, and a stimulus package arrived, the only thing that we would achieve is a delayed recession.

I'm going to look at one good, Oil. If the price of oil was coming down and this stimulus was brought into the economy, then a recession could be averted. My basis for prices going down is supply and demand. Since demand for goods has dropped, prices must be lowered to create more consumer interest. If prices are lowered and the consumer has some more money to spend, companies will receive higher earnings and the stock market will be rejuvenated.

With homes becoming cheaper and cheaper, houses are looking more attractive than rent. Therefore, rental rates are decreasing. If what I said in the above paragraph works and the economy is saved from recession then housing prices will still go down as there are still problems, but eventually people will have more money with better consumer spending/higher wages and they will look to buy a home. Interest rates will not go up immediately but will take effect as spending is increased, so people will continue to buy homes before the rate starts going up and will continue to buy them as the rate is hiked because they will have more money from the new economy.

These are just some thoughts that I share with you. Please, send me feedback and correct me on anything, input your thoughts.

The way I see the stimulus package presented by the government is that households across America will receive some money and hopefully that will go back into the economy and generate consumer spending, company profits, and higher wages/more jobs.

Yep!  The stimulus effectiveness assumes that people have savings and manageable debt.  If that's not true, the money will go towards putting oil in the fuel tank,  gas in the car, or paying debts for another month or two.  The only reason the price of goods are lowered is lack of demand.  That only hapens in an economic slowdown or a chane in technology that lowers demand.

However, you need to consider the time frame involved.  Also, interest rates are not a closed system in the US.  There are external factors - such as foreign investors.  If the US really needs capital and it has to attract foreign investors, interest rates could increase before the average citizen feels solvent enough to buy a home.  BTW, it's still cheaper to rent than to buy.

You are ignoring a number of factors.

First an aside. Our contemporary economists, inspired by Keynes and a few others, like to think of the economy as a big macro-economic baloon. They even use a simple-minded equation, the equation of exchange: PT=MV. By this reckoning, the important thing about the economy is a "price level" (P), total goods and services produced (T), the money supply (M), and the money's "velocity."  This equation has so many flaws that Murray Rothbard wrote about ten pages demolishing it in his Power, Economy, and State. The equation isn't even a valid heuristic, because it leads to false conclusions and notions about how the economy can be "fixed." 

One problem you are ignoring is that the credit boom did not impact the economy uniformly, like adding "M" in the equation of exchange. No, the credit expansion impacted particular economic sectors -- housing, other real estate, and finance -- for example. Rampant house price growth lead to false entrepreneurial signals -- it appeared for a time as if the demand for houses was unlimited. There were similar false signals in these other impacted sectors and we now have huge economic distortions -- too many people working in construction, in real estate brokerage, in mortgage lenders, ... it goes on and on. We have too many houses standing, too many retail outlets, too much specialized capital equipment. All of these malinvestments and misallocations of people and resources have to be corrected. People have to move to industries that have customers with real income to spend -- not yet more credit and not a handout from government!  Some of these adjustments have already begun, naturally, and corrections shouldn't last more than a couple or a few years -- if government doesn't keep mucking up the market mechanisms. But, of course, government is going to do exactly that.

The other facts you are ignoring have been well stated by Mish and many others -- the stimulus money has to come from somewhere. You cannot "improve" the economy by stealing money from one person and giving it to another. You also, however, cannot improve the economy by creating new money out of thin air and giving it to someone to spend. Everything produced will be consumed, it's just a question of at what price and with what profitability (or loss) to the producer. Our problem is that we are now producing the wrong mix of goods because our producers were fooled by bad price signals in the economy caused by the credit expansion.

These comments are based on my understanding of the so-called Austrian School of economics, principally Ludwig von Mises.

Tom

 

 

Great to know about stock market. Here you have provided good analysis.

Thanks a lot .....



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