Summer Economic Forecast: Sunny, with a Chance of Inflation

Two big economic trends appeared this week that might have flown under your radar, but they could have a real impact on your finances this summer. There's good news and bad news: your chances of being employed just went up, but the paycheck you'll start earning could be worth less.

Let's start with the good news: some of the 19 big banks that took your money in the TARP bailout last fall are talking about paying some of it back soon. Chase, Goldman Sachs, and a few others are nearly ready to hand over $45 billion. That's still only a fraction of the $700 billion we shelled out, but it's real money. And more than that it is the second clear sign that the economy may be on the mend. The banks would not pay TARP back if they weren't confident they won't need another infusion of cash down the line. They've got some of that swagger back, and that could cause a chain reaction that just might get some of the 15 percent of Americans who are unemployed or underemployed back to work this summer.

Confidence means increased lending to places like John Deere and Target, which makes those companies healthy enough to expand their businesses, which requires hiring new employees. We knew things were turning when the DOW started to recover; the next concrete sign will come when banks begin pay taxpayers back. Even though I still worry that the working class is not going to meaningfully benefit from this recovery in the way it both could and should, at least more people will get off the beach this summer.

The other piece of important economic news came overseas, but it's just as likely to affect your finances. This week China and Brazil, two of the world's largest economies -- and two of the few big ones that could actually grow this year -- announced yet another huge trade deal amongst themselves. (China surpassed the U.S. as Brazil's biggest trading partner a few months ago.) But the deal itself was not the big news. The takeaway is Beijing and São Paolo saying that they want to pay for future deals in their own currencies, as opposed to using the U.S. dollar.

"So what?" you ask. Here's the story: even though they may not have known it, Americans' money has stretched further at Wal-Mart, Target and a slew of other places over the years because the dollar was the world's reserve currency, meaning that other countries pay more for dollars than they should because it's the strongest and safest in the world. What happens if other countries follow China and Brazil's lead? The value of your money over time could be 15-20% less, and that's not just what's sitting in the bank -- you'll see it when you buy dinner or a flat screen, too. Put another way, imagine that your $40k salary is now worth about $32k. Yikes. It's not quite that simple, but it's also potentially not that far off. And some -- even President Obama -- worry that it could be even worse.

As we all know, big changes aren't always spectacular or immediately apparent. Sometimes you just look up in traffic and realize that it now takes twice as long to get home, or you step on the scale and notice that you weigh 20 pounds more than you did three summer ago. These two economic trends could gradually slip into our financial system without a ton of fanfare, but they could have a real impact on our lives and the the lives of our friends and families.

It's sobering, for sure. But remember: there is time for even more change to come.

Cross-posted at The Stimulist. If you like this, take a look at how Carlos thinks working class America can benefit more from the recovery and how you can get the most out of your company when it's hurting.

Follow Carlos Watson on Twitter: www.twitter.com/carloswatson

Comments

[nezumi]

It is rather interesting at the moment to follow the change from the dollar as a reserve currency. And I think that not all change is bad. I am no expert, but it seems that many of the imbalances of the past, that so painfully correct themselves now, could not have developed to their extremes without the reserve status of the dollar. The most interesting point right now is the pace of the process. I think consequences (devaluation of the dollar because of the status change) will be most severe, if the dollar loses its status as a reserve currency over night. That is not to be expected, but a considerable rise of inflation within the US could change matters a lot and then fast.

[WilliePilgrim]

Inflation is the rising tide in which small boats stay anchored on the bottom. There are strong incentives for big players in the economic industrial fields to want to see inflation. It means that their debt lessens in value while their income which is a percentage of volume continues to rise....un­like what is likely to happen to the rest of us...unles­s you are somehow connected to congressional pay hikes.
I see where Jimmy Carter and Obama are quite different but I will very interested in seeing how Obama pulls a rabbit out of his hat and avoid the inevitable when it comes to economic policy.

[yappnmutt]

i guess you missed the other more important happenings this week in the economy.

the bond markets' lack of confidence in the dollar raised the ten year almost to 3.5%. coupled with the dollar's dip below 80 on the dollar index says the world already thinks the dollar is worth 10% less than its highs just a few weeks ago. it's also a measure of the reluctance to buy usa debt if .gov is buying. both of these events rolled the stock market over as traders' realize the current p/e ratio as a function of this quarter's earnings is not justified.

russia also revealed it is holding less dollars than euros for the first time as it tries to balance its risk.

gold launched itself past 960/oz which means that fear has reentered the global economic analysis probably because the uk may be downgraded from its aaa status.

oil also went up in price in the rush to hard assets but also because there is a growing feeling that the middle east may flare up again after the obvious impasse in israel/usa talks this week.

oh, by the way, the balance of trade with brazil shifting to another country marked the end of the last two empires in the world, from portugal to britain, from britain to the usa. is the move from the usa to china next?

[Jose Quiles]

Carlos, that was some respect the host of Morning Joe showed for the president of the United States this morning on his program. Calling president Obama a liar. He tried to correct it, but no apology.

[aaronhbridges]

"The banks would not pay TARP back if they weren't confident they won't need another infusion of cash down the line."

BS. They will pay it back now to keep the government from telling them how much they can pay themselves and then hold us hostage again later when they run themselves and us into the ground again.

[swisskabab]

Geitner is not going to give the repaid money back to the taxpayer but instead going to recirculate
it amongst other banks. My question is if Geitner is not going to show us the money, then "ARE THE BANKS REALLY REPAYING THE MONEY BACK?"

[traveler501]

we shelled out $350 (not $700)...an­d $45 is about 15% of it, already...­not bad. let's be honest with this.

[Nicas]

http://blogs.wsj.com/economics/2009/05/20/where-is-tarp-money-going-how-much-is-left/

Here's a good breakdown of how the TARP money has been spent. $350 is about right in terms of the investments that have been made by the govt into the banks. However, this doesn't include asset-inflating effects of the TALF and PPIP, the subsidy by the FDIC to back a limited amount of their debt, relaxing of mark-to-market, and all of the other liquidity programs that have kept them afloat.

More importantly, though, as aaronhbridges mentions, the govt has given the banks an all-but explicite backing that, while difficult to quantify, is exceedingly valuable. Even when every penny has been paid back, the American public will not be free and clear of their obligations until a new philosophy is in place in Washington (diff from both Bush and Obama - who, increasingly, appear to be very similar when it comes to substantive policy).

[lederuvdapac]

You mean we can't just print money to fund endless bailouts and stimuli without consequence? Well, this is news to me.