I woke up to the news that the Treasury has unveiled their plan to remove “toxic” assets from the banks to get people lending again and improve stability. I won’t go over my issues with favoring the big banks to the detriment of other banks (have you seen how high GMAC’s CD rates are? You couldn’t offer that without a government guarantee and it hurts other banks who did NOT screw up – another case of the prudent subsidizing the imprudent). And I won’t talk now about how the FDIC will back part of this new program (now the risk is spread to ALL banks, including the community banks, through the FDIC insurance premiums that most banks pay).
What I will cover is where the the economic forces of all of these bailouts and money printing are pushing. Basically, we use money to buy GOODS & SERVICES. In bad economic times, people often retrain to a new SERVICE career but not often to a new career in the “goods” category. What do I mean? Let me explain and, lets have some fun shall we? We will compare the possible economic effects on a sample good and a service. The good we will select is copper, and the service will be massage therapy.
Anyone who has shopped for massage therapy knows there are many levels of professionals in this field – highly certified masseuses, sports massage therapists, and on the other end, those, often from a foreign country, with very little formal training. Either way, the average person might factor in price heavily in her pursuit for massage services. And if many people train for a new career in massage therapy, it would make sense that the price would fall wouldn’t it (if suddenly there were 10 massage therapists in your town instead of 4 previously?)?.
Let’s compare that to copper. If demand for copper rises, in part perhaps due to government spending on infrastructure and in part due to growth in places such as China (they’re not done yet!), it creates a very different economic dynamic. With copper, you can NOT just go out and find another mine. Supply of a “good” like copper, can not increase quickly to lower the price as an increase in massage therapists would do to the cost of a massage.
What This Means
With increase government spending worldwide, AND a blast of inflation, you can expect increased money movement. There may even be nominal growth worldwide from all of this spending and printing of money. However, the prices of real goods, real assets, such as iron, copper, gold, oil, and food will rise because the supply can not be increased easily. The price of services, will likely fall in real terms, if not nominally (real terms means, subtract the rate of inflation from the nominal growth rate to arrive at the REAL rate). Makes me want to stock up on copper pipes and store them in the basement!
You could easily hypothesize that the economies of resource rich countries such as Canada, Australia, and Brazil, would perform better than the economies of consuming, service-focused countries such as the UK, and maybe the US. This thinking could make us some money…