Connecting the Dots

West of the Mississippi: El Paseo Bank’s Vice Chairman & CEO Explores the Economy.

(Palm Desert—August 18, 2008). In a recently published column in the Public Record, Andy Montgomery, Vice Chairman and CEO of El Paseo Bank takes a realistic look at today’s economy asking the question—“where do we go from here?”

Montgomery in his, “Connecting the Dots!” column looks pasts the often touted economic models to tackle some tough issues.

Connecting the Dots!

When Lewis and Clark crossed the mighty Mississippi and headed west they went into a world completely unknown to them. Sure they had fur trappers and Native Americans who described the world ahead, but for all real intents and purposes it was a complete mystery. This has prompted one of my favorite expressions: “we are west of the Mississippi.” And, in relationship to the economy I now believe we are west of the Mississippi.

Economists frequently use past models and proven beliefs to project future events. They develop bar charts, pie graphs and never ending statistical models to measure what happened and predict what will happen. Often, those economists miss very badly as they want to believe we are travelling down the same road as before and fail to adjust their forecasts for current and future events.

Let’s take inflation for example. Most economists are very worried about the specter of looming inflation. In fact, economists at the Federal Reserve have viewed that controlling inflation is their primary mission ever since Chairman Volcker broke the back of it by forcing the prime rate into the high teens in the 80’s. All through the 90’s and the first 7 years of this decade we worried about inflation. And, it never really appeared. At least, it didn’t appear where we were looking.

You see, we were focused on the costs of most typical goods and services. So, why is it that cars, or TV’s or Barco-loungers didn’t really go up that much cost that in nearly 20 years. After all, consumption was going through the roof during those years and usually that creates supply problems, which in turn creates a higher cost of goods, or inflation.

In my opinion, two things happened for which we have never fully accounted. First, Al Gore invented the internet and that ushered in a technological revolution that rivaled the industrial revolution a century earlier. The efficiencies created by this revolution made the cost of producing goods a whole lot cheaper than before.

The second occurrence, globalization, was a result of the first. With the advanced efficient, technology we could figure out how to produce goods anywhere in the world. And, much to everyone’s surprise there are actually people in other countries that are willing to produce those goods cheaper than a unionized American on a 35 hour work week with 100 percent paid health care and workers compensation benefits to protect against sore backs. With no Lou Dobbs to protect America-by the way, I hear he is coming out with a fascinating new book debunking the theories of Charles Darwin, whom he considers a phony and a fraud-, the market was flooded with cheap goods.

The Federal Reserve not having to worry about ominous inflation and having to deal with shocks to the system (i.e. 9/11) kept rates artificially low. The availability of cheap money almost certainly will create inflation, but the overwhelming supply of cheap manufactured goods countermanded it. This all occurred except for primarily one area-housing. The Chinese haven’t quite figured out how to make cheaper U.S. housing. In fact, the increased manufacturing capacity of the rest of the world created a greater demand for natural resources at the same time free money created an increased demand for housing, which resulted in unprecedented and unsustainable housing inflation. That housing appreciation created more liquidity, which was invested in consuming more goods and services. Overall, this was not good or sustainable, but at least we had a new place to put our new plasmas.

So, where do we go from here? With housing deflation, a slowing global economy, much tighter liquidity, and a tapped out consumer, won’t that reduce demand for goods and services and, therefore, abate inflation concerns? Or, have we created such a demand on natural resources that we are looking at higher costs no matter what? Are China and India dependent on the U.S. consumer or have they reached a critical mass of self-sustainability making the world more dependent on them? The truth is I have no idea. I have seen no bar charts, pie graphs or statistical curves which I believe provide the answers. We are in an unprecedented housing downturn with high energy costs contributing to inflation at a time when interest rates are still historically too low. We are west of the Mississippi.

El Paseo Bank has become one of Palm Desert’s premier locally owned and operated banks. What’s more, the impressive banking expertise provided by El Paseo’s board of directors has been instrumental in forming this outstanding community bank. El Paseo Bank is a wholly-owned subsidiary of Western Community Bancshares, Inc., which has over $300 million in assets, with operations in California and Utah.  The bank specializes in providing a broad array of financial services to local businesses and consumers.