It’s raining.

It’s raining this week in Southern California. I shouldn’t complain as we need the water. And it’s part of the normal California earthquake-wildfire-mudslide circle of life. But it’s also raining in another way.

After six years of remarkably sunny economic weather, violent storms have swept through the world’s financial markets. Sucked in by the deflation of the housing speculative bubble, the credit house of cards is collapsing. Industries that have become dependent on credit to survive, such as construction, automotive, consumer electrogadgets, credit cards, and of course financial trading houses, are imploding and asking for trillions in loans and capital infusion in the hope that if they can just move the money around fast enough they will survive. Colleges are another industry that has fed from the surge of easy credit, turning their supply cartel in the face of overwhelming demand into double digit annual price increases. Unfortunately for me, I don’t think that the demand for the better schools will fall fast enough to affect the prices I’ll pay over the next five years. Addicted to the practice of double digit revenue and spending growth, some universities will fail to adjust spending in the face of a return to reality and will struggle.

The sheer size of the bailout is staggering. Near as I can tell the size of the bailout is approaching $8 trillion. To put that into perspective, the total national debt when W entered office in 2000 was around $5 trillion, a sum that many economists at the time felt was fundamentally unsustainable. Putting aside for the moment actually repaying that debt, the larger issues have to do with where and how we borrowed it, the effect on global trade and the value of the dollar, and the shift in ownership of “America” to foreign interests. In eight years, the size of the national debt doubled to over $10 trillion (you may have caught the news clip where they ran out of digits in the national debt counter), driven by a refusal to match spending to revenue and a government with no transparency and little accountability. The same government that got us into this mess has, in just a few months, almost doubled the debt again.

But no, you may be saying, those bailouts are just loans. Taxpayers will get the money back. Those damaged assets we’re buying won’t all turn out to be worthless. The companies that the government is buying will now have the capital and stock price stability that they need to turn around. Sorry, I don’t think it will play out that way. The fundamental issue isn’t liquidity, it’s solvency. There is too much debt, too much leverage, too many crappy products, too much reliance on services such as moving money around rather than actually making good products. Those practices created the illusion of great wealth (real wealth for a few percent with lucky timing) during the run-up of the pyramid scheme that has been our economy, but are a death sentence in a contracting economy.

Perhaps the most entertaining part of what is otherwise a very sobering state of affairs has been the financial reporting. Every day, the talking heads and financial analysts spew some short-sighted, myopic observation that passes for analysis. Take, for example, this excerpt from a national news organization:

“Obama’s remarks, meanwhile, calmed the market after the day’s economic reports pointed to more weakness. The government reported that unemployment at recessionary levels, new home sales at their lowest level in nearly 18 years, another plunge in consumer spending, and factory orders for big-ticket items down by the largest amount in two years.

“Analysts said some of the turnaround in stocks was due to the fact that the economic news was expected to be bad. Further, volume was about half of its normal levels on the New York Stock Exchange — with 1 billion shares traded — which can exacerbate price movements.”

Right, that makes sense. Those millions of individuals trading a billion shares on that particular day all listened to Obama and said something to the effect of “forget that we’re in a recession, that millions are losing jobs, that new home sales are the worst they’ve been in two decades, that consumer spending-the only thing that’s been holding up the economy-just tanked, that companies are cutting production. We were expecting that anyway. The President-elect had some soothing things to say so I think the economy is going to start growing again soon and I’m gonna’ start buying up all of the value.”

I don’t think so. This is like having weather men who rely on sticking their heads out of the window for their forecast. “Well it was raining pretty hard a few minutes ago, but it just stopped, so I recommend everyone go to the beach. Wait—no, it just started raining again.” Wouldn’t it be nice if we got weather advice from people who had weather models and data, radars and satellites, tracked weather movements across the world and could give a long-term forecast?

The economic world does have the equivalent of the weather world. There are models, and fundamentals and data, and long term forecasts. For example, here is one of the better long-view summaries I have found. Fair warning: it’s not reassuring.

So why is the long-term view so rare? I think it’s because the financial markets—certainly stocks and bonds but now also what were stable long term investments such as mortgages—have all become driven by short-term speculative investing. If you borrow enough money, a bet that a particular stock will rise or fall a few cents in the next fifteen minutes can reap a significant return. Forget day trading—there are seas of people out there trading in sub-minute cycles on everything from stocks to currency to commodities to derivatives. The overall direction of the economy is meaningless when I’m trying to guess what happens in the next hour. This explains the dramatic daily swings in the market. What fundamental factor would drive the S&P 500 index down 5% and then up 7% in a single day? No, this is a result of program trading and speculators getting caught on the wrong side of a short-term market swing.

I have no idea what is going to happen in the markets today, but I do know that a year from now the economy will be smaller and the markets will reflect that. From my window it looks like stormy weather.

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