Posted by Michael A. Kamperman on June 23, 2011
The Federal Reserve affirmed that it plans to end its QE2 program on June 30. Chairman Bernanke admitted the economy was slower than forecasted. He believes the reasons are temporary and caused by things like the Japanese tsunami and the rise in oil prices. He did say that it is harder to qualify for a mortgatge. But he admits he is not sure about the direction of the economy and the Feds next move depends on the data. Let me assure you the economy is in the ditch and the federal government keeps digging itself into a deeper hole with needless delays in rescuing the economy. I stand by my prediction that before the year is over the Federal Reserve will implement QE3. First and foremost, the economy has slowed markedly in the last couple of months despite the implementation of QE2, which the Fed assumes added 750,000 jobs to the economy. Secondly, the extra Medicaid payments to the states also ends on June 30, along with some other stimulus plan spending. The pink slips are already going out. Plus, the bulk of the layoffs occurred between the fall of 2008 and the fall of 2009. Over the last few months millions of Americans have rolled off extended unemployment benefits with no job in sight. Their spending has also rolled off. And as the Fed Chairman has pointed out, it is harder to qualify for a mortgage in 2011 than it was in 2010. Finally, there is the uncertainty surrounding Greece and our own debt ceiling.
So what solutions are our venerable Washington politicians contemplating to solve these problems? The answer is spending cuts and tax increases. The Republicans want to cut spending now. Simply put, cutting spending means cutting jobs. The Republicans believe the economy will improve from a confident nation knowing Washington has put its house in order. They are wrong. This was tried twice during the Great Depression and failed miserably both times. But the Deomcrats want to raise taxes. Raising taxes does not raise up new tax payers. Part of this is class warfare. But most of it is some misguided notion that because the economy boomed under Bill Clinton and he raised taxes, then that means raising taxes doesn’t hurt economic growth. Simply put, they are wrong. Raising taxes is always a drag on economic growth. Bill Clinton inherited an economy emerging from a recession and he inherited the technology boom of the second half of the 1990′s. President Obama inherited an economy turning into a depression and there is no innovative boom creating millions of good paying jobs and Dellionaires at the present time.
So Bernanke will be back. He will have no choice. Those in positions of power in Washington don’t have a clue as to what to do. Sadly it’s not rocket science. World War II spending brought us out of the last depression. Keynesian economics works. Keynesian economics was the policy of both Republicans and Democrats all the way from World War II until 2008. The Republicans went predominatley Austrian in 2009 and for some strange reason the President has led most of the Democrats to follow them in 2010. Now they are arguing over who will cut the most effectively versus the who will cut the most compassionately. The urge to cut is driven by rhetoric that the bond markets will collapse and we will become Greece if we don’t take action now. The yield on the 10 year Treasury closed at 2.9% despite the collapse of the budget talks this afternoon. The bond markets know we will not become Greece without action, rather we will become Japan. The 10 year Japanese bond yield is around 1%. Japan’s economy is stuck in a deflationary depression. The difference between Greece and Japan is two-fold. First, Japan owes a lot more money and has fewer government owned socialist assets to sell. Second, Japan controls its currency and Greece doesn’t.
Posted by Michael A. Kamperman on June 19, 2011
In less than two weeks the economy will start to run on empty. The gas stations fueling the economic engine will begin to run dry. Significantly, the enhanced Medicaid stimulus payments to the states ends on June 30. This $90 billion support of state budgets will simply be gone. Plus, the Federal Reserve will end quantitative easing II on June 30. Basically the markets will lose $20 billion in extra liquidity per week. The economy is dramatically slowing even with these two support structures still in place. What happens when they end? Other parts of the stimulus program also run out before the end of the year. Unless a new deal is in place extended unemployment benefits are set to run out at the end of 2011. But this is not the only thing we are running out of. Many struggling families have survived the last few years by draining their 401(k)s and IRAs, running up credit card debts, and selling off assets. We don’t know how many families will run out of gas in 2011, but I suspect the number is in the millions. Many of these families are “self employed” running businesses that are no longer providing the family the financial support it needs. Meanwhile, Washington is debating more austerity cuts and convincing one another that the way to create more jobs is to spend less money.
In what economic universe does less demand create more supply? The answer is only in a virtual one. In the real world what drives business confidence it is not a balanced budget or lower taxes, it’s customers. Any business will respond positively to more and more people showing up with cash to spend. Confidence comes from demand. Yet strangely the message of the day is businesses would create more jobs if Washington would just get out of the way and quit the spending. The very spending that is lifting up demand, not dragging it down. Just ask all the school teachers told to hit the pavement this coming fall if federal spending matters.
The debate has moved so far toward the austerity movement that AARP has come out supportive of raising the retirement age as long as their current members get every dime promised to them. Social Security is not in trouble, yet even AARP is folding to the misguided pressure to cut federal spending. The best way to cut the deficit is to create new tax payers that are either sitting at home collecting unemployment benefits or sleeping at home with Mom and Dad. We don’t need to raise taxes. We need to raise taxpayers. The old saying is it takes money to make money. It’s going to take federal spending to create demand to create new taxpayers. Right now the federal government is moving in the opposite direction. Worse, those arguing for more cutting are winning the debate in the minds of the American people. Like in Star Wars, we need an Obi Won to help us.
Posted by Michael A. Kamperman on June 12, 2011
In the rush to cut spending the easiest thing to cut is often infrastrucure spending on roads and waterworks. Projects on the drawiing board are simply delayed. But it is precisely these types of projects that create jobs in the private sector. For the most part governments don’t build bridges, they pay for bridges to be built by the private sector. Not enough attention has been paid to the fact that a lot of government spending directly supports private sector jobs. There is a lot of talk about the 3 million job openings and all the out of work job seekers that don’t have the skills to fill these jobs. But for the most part there are people with the skills to fill almost all of these positions. In an economy with almost 140 million jobs 3 million jobs is only 2% of the workforce and represents natural attrition. There are 25 million people seeking full-time work. The jobs issue is not a structural problem with workers without skills to compete on the global stage. The jobs issue is a demand issue. We need a lot more than 3 million job openings to put 25 million people to work. Tripling infrastructure investments will create well over 1 million jobs and will make our nation safer and more productive.
The narrative about whether or not the debt and the deficit is a threat is critical because the urge is to cut infrastructure spending in Washington rather than increase infrastructure spending to create jobs. No country that owes everyone in their own currency needs to worry about debts and deficits. Japan has the highest debt to GDP ratio in the world, higher than Greece, and yet they enjoy the lowest interest rates in the world because they owe everyone yen.
Unfortunately, the President has bought into the structural unemployment story about job seekers not having the right skills rather than the country not having enough demand for 25 million people. This week another economic adviser has abandoned the President when Austan Goolsbee resigned as the Chairman of the Council of Economic Advisers after only a few months on the job. The reason is there is no policy that can effectively create jobs if the emphasis remains on cutting cutting cutting.
