There is clearly more to politics than the economy, but when there is an elephant in the room it is hard to talk about anything else. And do we ever have an elephant in the room! With the government on a seemingly endless spending spree that began two years ago, it is helpful to pause and see what impact the government intervention has had on our economy. While fiscal results are not fully available yet (and won’t be for awhile) there are some powerful indications that the government will not receive a passing grade.

Confidence in Stimulus Plan: On February 3rd, Gallup reported the results of their polling on Obama’s economic stimulus plan. The question was asked, “…how concerned are you that it [the stimulus plan] would not stimulate the economy quickly enough?” Of those responding 78% were either very concerned or somewhat concerned that the stimulus would not help the economy in a timely way.

A day later, Rasmussen reported that 58% of Americans did not support the stimulus plan and that half of Americans believed the stimulus plan will end up doing more harm than good.

Inflation: The Labor department reported that wholesale prices increased by 0.8% last month, well ahead of the 0.2% increase that economists had expected. This amounts to an annualized inflation rate of 10%. During the same period, consumer prices increased 0.3%, indicating an annualized rate of 3.7%. Knowing that consumer price increases lag wholesale price increases, we can anticipate even more consumer price inflation. This increase in prices should have been very predictable given the massive increase in the supply of money (think the government printing more money). In the last quarter of 2008, the money supply grew between 12-13%—an annualized rate of more than 50%. According to the “quantity theory of money,” economists expect prices will rise if the money supply increases. That theory is proving true today.

During recessionary periods it is not unusual to see price deflation. Consumer spending slows and businesses lower prices to encourage more spending. But when the government is madly printing money, this can overpower the deflationary tendency and result in markedly higher prices. To the consumer (you and me) inflation is like a tax. If we spend $50,000 year to provide for ourselves and our families and prices grow by 5%, next year we will spend $52,500 without changing our lifestyle or buying more things. Unless we get a raise to make up for the higher prices (does your employer do that?), we will find it harder to support our families on the same income.

So why does the government print more money? Controlling the money supply is a powerful tool the government uses to keep the economy within a healthy range. When done correctly, we benefit, and when that power is misused, we suffer. Earlier in the decade, the government mismanaged the money supply, contributing to the current economic crisis. By pumping up the money supply in the years following 911, the government contributed to the growing housing bubble.  Sometimes, though, the government backs itself into a corner and is forced to increase the money supply. When the federal government spends more money than it has, it must get the money from somewhere. Washington can either borrow money or print money (wouldn’t it be nice if we could do that!). In 2009, it is expected that the government will collect less than half of what it will spend, resulting in a $1.4 trillion deficit. Add to this all the money being spent in a vain attempt to help the economy, and we can fully anticipate that the government will be forced to increase the money supply, which will drive inflation rates higher still.

Wall Street: Without doubt, the financial minds on Wall Street are subject to certain frailties, greed among them. However, when they speak collectively about governmental impact on the economy, they can be quite persuasive. In the last several months, they have spoken with a loud and powerful voice. During a recession, we anticipate contractions in the market and some level of losses. It is no secret we have seen such contractions in recent months—and then some! By superimposing political events on the Dow Jones Industrial Average over the last 5 months, we get a solid sense of what the better financial minds in our country think of how the government is dealing with the economy.  We see market losses higher than a recession would normally cause and we learn that Wall Street significantly lacks confidence in the bank rescue (officially called the Troubled Asset Relief Program or TARP), the election of Obama, Obama’s presidency (one of the biggest drops ever for an inauguration), and the stimulus plan.

From Google Finance Beta

Consumer Confidence: Bloomberg, a member of the top tier financial media, reports that “U.S. consumer confidence collapsed this month.” Not prone to melodramatics, Bloomberg’s use of the word collapse does not go unnoticed. They indicate that the size of the drop in confidence was not only surprising, but very unusual historically. Consumer confidence is influenced by a number of things, including media reporting on the economy, government commenting on the economy, and the economic conditions of themselves, friends and families. Consumer Confidence is also an indicator of consumer spending and general economic changes. If confidence is low, consumers tend to spend less, which in turn slows the economy. The graph below shows clearly that, despite government spending for the last two years to revive the economy, Consumer Confidence continues to slide. The drop in Consumer Confidence then took a nosedive as the government discussed and subsequently enacted the bank rescue plan (TARP). It will be interesting to examine the data for the first quarter of 2009 to see how the stimulus plan actually impacts Consumer Confidence.

From Bloomberg