Right now, I’m getting the very strong feeling that the U.S. economic system is running on what amounts to faith in magic. Every statistic I look at seems to be unsustainable… and most of those indicators have been at what traditionally seem to have been unsustainable levels for several years, whether it’s the various stock market indices, the price/earnings ratios of the vast majority of American companies, the ratio of various capital reserves to the debt levels they support, the plummeting velocity of money, the amount of government securities purchased by the Federal Reserve [although the official end of quantitative easing is as much a suggestion that continuing the QE program was unsustainable as it was that the economy has “recovered” enough that QE is no longer necessary]. The fact that the federal funds interest rate remains essentially at zero has meant that various bank deposits pay next to nothing in interest, which is likely the primary reason why stocks are priced at levels that would seem unrealistically high in almost any other situation.
What many people overlook is that U.S. financial policies combined with the high price of crude oil several years ago and the lack of decent returns on investment to make available billions of dollars for investment in new oil extraction technology, i.e., the combination of fracking and horizontal drilling, which in turn resulted in a temporary oversupply of oil. That led inevitably to the decline in the price of crude oil, and an on-going slow-down in the development of new oil wells. Because production levels of fracked wells drop off swiftly, so will world oil supplies, initially at the margin, but in a year or two oil prices may well begin to creep back.
Associated with all these magic numbers is the fact that a significant percentage of new and emerging companies are technically overvalued businesses which often command a premium in the marketplace, but hire comparatively few, if often high-paid, people. Valuing companies primarily on popular appeal, limited product/services, and the need to keep innovating in order to maintain marketplace appeal is another form of “magic.”
But what will support those jobs and valuations if the appeal dims or vanishes?
In the meantime, governments at all levels, and companies in the “infrastructure” business tend to be delaying or minimizing investment in highways, bridges, power plants, water systems, air navigation systems, and the like, all of which result in more jobs and more permanent assets.
But the politicians, especially the Republicans, are all for the “new” economics because it promises something for nothing… like magic.