Recently by Richard Russell: What Do You and I Do?
In prison on death row, they often refer to condemned men as "dead men walking." We are now living through a period in history when the US and its economy are "dead nation walking." Why do I say this?
I’ve gone over this before, but the cover of the current Bloomberg Businessweek put it so starkly, that I decided to discuss the whole picture again.
The cover of the magazine reads, "Would You Invest In a Company that lost $2 trillion last year, and has a net worth of a negative $44 trillion?"
And what is this company? Why, it’s USA Inc. The article is written by the well-known stock analyst, Mary Meeker. She writes about the US’s finances as though the US was a corporation.
Mary writes, "Imagine no Army, Navy, Air Force, Marine Corp or Coast Guard, no federal courts or prisons, no national park service, no food and drug administration, no embassies, no salaries for Congress. That’s what it would take to finance the budget by 2025 and still pay interest on America’s debts, without either raising revenues or reducing entitlement growth. That’s certainly not a recognizable America."
Later in the article, Meeker notes that the nation’s problem is not a revenue problem, it’s a SPENDING problem. She writes, "Simple math says that balancing the budget purely by raising taxes would require doubling rates across the board, which would kill growth."
So as I see it, what’s coming up is a massive cut-back in federal (plus states and municipalities and cities) spending.
This is the stark and painful picture of the years ahead. The pressure is going to fall on our craven politicians. They are going to be faced with the duty of ordering massive cut-backs in spending. Every politician wants to cling to his or her office (because of the power and huge perks), and one of the ways to do that is to present juicy spending programs to their constituents. Now politicians are faced with the exact opposite. They will have to present the voters with LESS in the form of painful cut-backs and with those cut-backs the chance of being voted out of office.
But what about the markets? What of the Dow and the S&P which have been rising steadily for two successive years? As I see it, investors are taking it "one step at a time." Corporate earnings on a year-over-year basis have surged. And that’s what investors have tuned in to. As far as the coming cut-backs, investors’ attitudes are "We’ll worry about that when the time comes. In the meantime, hasn’t the ‘good ol’ USA come out of every tight problem with ringing bells and confetti. We’ll do it again, and the hell with the deficits." Recently and rather ironically, I read that consumer confidence was at its highest level in three years. The history of America has been perpetual optimism, or that well-known expression "What, me worry?"
Which is where I believe we are today. The Bernanke experiment with massive money-creation has been going on for a few years. The Fed has fought the "bogeyman" of deflation with huge infusions of liquidity. Ben Bernanke, our Fed Chairman, is convinced that if he creates enough liquidity, housing will levitate like the stock market, and business will, in turn, rocket up with the stock market. The Bernanke creed: "Give them the money, and they will spend, once business improves, businessmen will hire again, and the unemployment problem will be solved". I believe this theory will be put to the test during the remaining months of 2011 and into 2012.
What do I see ahead? The debt and deficit problems alone will keep the market and the economy on edge. The Dow can levitate just so far with the help of enormous Fed-created liquidity. I think we are close to the upper extreme of the Dow level now. "So what’s really new about the current situation?" you argue. My answer is that we are, indeed, experiencing something very new. Never before in history have trillions of dollars been manufactured out of busy computers all in an effort to create a bit of inflation in the face of world deflationary forces. Furthermore, much of the happy market action has been created by an anxious Fed with the help of enormous stimuli. Soon the stimuli will end. And that will have a negative effect on the markets, particularly the stock market. At the slightest sign of a ‘double dip,’ I think the Fed will turn to Qe3 and more money creation.