Economic news from the U.S. is darkening, while news from Europe suggests that tempestuous times are imminent. What can citizens expect and what should investors consider?
Barack Obama's economics policies face increasing criticism. August's report indicated that net zero jobs were added. GDP grew at an annual rate of 0.7% the first half of 2011. Typically, the economy must grow at 3% annually for significant sustained job-creation. This means the unemployment rate of 9.1%, counting only those still motivated to look for jobs, will stay level at best. This rate persists above the 7.8% rate at Obama's inauguration. Sinking consumer and business confidences are correlated negatively with expectations for a double dip recession.
The hunkered-down business view is that Obama's war on capital never abated while opportunities to redistribute wealth are never missed. Taxes are high and increasing due to Democrat legislation passed in 2009 and 2010. The number of pages in the Federal Register under Obama has climbed to ~83,000. For comparison, Ronald Reagan inherited ~75,000 from Jimmy Carter but whittled that down to ~50,000 by the end of his second term. The biggest anchor for economic growth is probably Obamacare, since the estimated cost of employers' compliance varies by an order of magnitude. Such uncertainty induces business paralysis.
Shortly after the debt ceiling was raised, Standard & Poor's lowered the U.S. sovereign debt rating for government issued bonds from the highest value of AAA down one notch to AA+. The expected impact is the cost of borrowing will increase slightly since the market will demand higher returns in exchange for elevated risk. This scenario likely will be borne out in the long term, but, for now, bond yields have actually fallen as the consequences of European profligate spending make headlines and investors seek safety.
Instead of learning from this downgrade experience, Obama only contemplates more deficit spending. Standard & Poor's wouldn't have lowered the bond rating if the House, single-handedly and as only one third of government, had acted responsibly and unilaterally decided to balance the budget and not raise the debt ceiling. Reducing government spending summarily by $1.3T would have instantly shrunk GDP, since government spending, even deficit spending, is part of the formula along with private-sector goods and services. However, the resulting economic recovery likely would have been as strong as the Roaring Twenties after Warren Harding slashed spending in 1921. And it likely would have endured for two decades like the recovery initiated in 1945 after government spending was cut by almost two-thirds.
Obama has not set the country up well for another downturn, whether it's one that sinks slowly into recession or jolted downward by European meltdown. He doggedly pursues policies of reckless monetary and fiscal profligacy. His first two years set up punishing tax hikes to be enacted. Although Republicans prodded Obama into extending Bush's tax cuts for two years, by not making them permanent, he created uncertainty in the business climate regarding their expiration. Recently, Obama overruled EPA requirements to reduce ozone levels. This was one of about a dozen new regulations expected to cost at least $100M apiece and lead to layoffs of at least 10,000 workers apiece. But this cancelation isn't a positive thing for the economy; Obama just elected to not do more damage. Additionally, he still prefers to direct taxpayer monies toward politically correct crony capitalist projects instead of unleashing entrepreneurs.
The Department of the Treasury administered taxpayer funds through TARP bailing out bondholders and shareholders of large banks and AIG insurance and the unions of General Motors and Chrysler. Declaring these businesses too large to fail meant that these large businesses didn't have to reorganize through bankruptcy proceedings. It meant that better management at smaller, more nimble companies were blocked from ascending to market leadership. Not requiring writedowns meant that bad debt remained on the books at banks. This debt overhang has inhibited lending for most types of loans except for mortgages that can still be shoveled over to Fannie and Freddie as if there had never been a mortgage bubble.
The Consumer Price Index (CPI) has climbed to 3.6%, but this is misleading. The government statistic excludes some fuel and food that citizens must buy. The Federal Reserve's exceptionally loose monetary policy would have spurred galloping inflation except that, with banks declining to make loans, monetary velocity is nil. Ben Bernanke is unembarrassed to claim belief in the discredited Phillips Curve. His rationale for buying government bonds, spewing liquidity, is to stimulate employment. He is not discouraged that data from QE and QE2 are unsupportive of his hypothesis. That's because the reason for these quantitative easings was to debase the U.S. dollar in an effort to prop up the flailing Euro currency. Obama is unconcerned that this process is transferring wealth from U.S. taxpayers in order to support a loose monetary union of countries with disparate fiscal policies that could never succeed.
Customarily, the IMF has been a sinkhole for U.S. taxpayer monies and a plague on countries with their enervating prescriptions of austerity. Preemptively, the IMF has been blind and silent to European welfare-state encroachment, socialism by nationalistic or regulatory means, and the cataclysmic endgame of Keynesian economics. But they are ever-ready to stand as poseurs of macroeconomic expertise and administer their medieval bloodletting.
European nations are lining up for bankruptcy and IMF attention. Portugal, Ireland, Italy, Greece, and Spain are at the head of the line having blithely spent other people's money until now. Today, in a market harbinger of recession, Greece has a severe yield inversion, with 1-year bonds yielding 60%, 2-years 45%, and 10-years 18%. These yields are too high for Greece to afford to borrow funds at market rates. Italy is the EU's third-largest economy, but their fiscal policies are just as carefree. Italy's debt is about the same as Portugal's, Ireland's, and Greece's combined. Last year's bailout of 440B Euros is about exhausted. Unfortunately, deteriorating fiscal events suggest that 2T euros are needed to stave off collapse in another round. On top of this, news comes that European banks need 1T euros to re-capitalize. This means that European banks aren't lending.
One or more government-made economic calamities is impending. Obama's response will be to bulldoze Congress once more. Ignorant of economic history and disinclined to policies of liberty, growth, and prosperity, Washington will come together, establishment Republicans holding hands with Democrats, for another fleecing of taxpayers. The hair-of-the-dog prescription will be consistent with IMF malpractice. Proposals will include tax hikes. Another round of TARP will be packaged to bail out Wall Street and banks. Instead of stabilizing our currency, Bernanke will churn out more dollars, ostensibly for employment. Keynesian macroeconomists will recommend yet more borrowing for stimulus. In this deflationary environment, bears will drive equity values south. Gold will follow suit. George W. Bush goaded the U.S. into trotting toward the Grecian cliffs of financial doom, but Obama has us running. Even so, for the next few years, the best store of value in the coming deflationary times likely will be long-term U.S. government bonds.
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