Will America Be Greece in Four Years?

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 11, 2012

IN THIS ISSUE:

1.  National Debt Tops Record $16 Trillion

2.  Obama’s Downward Spiral For America

3.  Does Obama Want the Economy to Improve?

4. US to Hit Debt Ceiling Limit in December

Overview

The US national debt topped $16 trillion last week, and it was almost as if no one paid attention. At the rate we are going, the national debt will top $20 trillion just four years from now in 2016. In my August 21 E-Letter, I pointed out just how mind-boggling a trillion dollars is. Let’s revisit that analogy of a trillion in terms of time:

  • 1 Million seconds is 12 days.
  • 1 Billion seconds is nearly 32 years.
  • 1 Trillion seconds is 31,688 years!

16 trillion, by the way, is 507,008 years. The US will never pay off this debt.

Despite (or perhaps because of) four years of trillion-dollar budget deficits, the US economy remains stagnant with sub-2% growth in GDP – the worst post-recession recovery since the Great Depression. You would think that our leaders in both parties would figure out that trillion-dollar deficits are NOT the answer, and that they are the problem.

Question: Why do you and I know this, but our leaders do not? This is not a political question, because both parties in Washington have been guilty of spending us into oblivion. Are we smart and they are stupid? If we are smart, why do we keep electing them? We need to think about that.

One thing is for sure – if we don’t get our economy turned around, we can’t begin to tackle our budget deficit crisis. Our current president desperately wants to raise taxes on families making over $250,000, increase taxes on capital gains, etc. and increase the size and scope of the government. But why does he think this formula will work to spur the economy and create new jobs? (More on that question later on.)

Last week, I read a great article in Forbes on what to do about the economy. I wish I had written it myself. But since I didn’t, I have reprinted it for you today.

I must warn you (especially my liberal readers) that this article starts off with a political bent against President Obama, yet the assertions and statistics are accurate. But about half way through, the author really tackles what it will take to turn our economy around. That is why I have reprinted the article for you today.

Obama’s Accelerating Downward
Spiral For America

by Peter Ferrara

New income data from the Census Bureau reveal what a great job Barack Obama has done for the middle class as President. During his entire tenure in the oval office, median household income has declined by 7.3%.

In January, 2009, the month he entered office, median household income was $54,983. By June, 2012, it had spiraled down to $50,964. That’s a loss of $4,019 per family, the equivalent of losing a little less than one month’s income a year, every year. And on our current course that is only going to get worse not better.

Obama never tires of telling us that the economy was in one of the worst recessions since the Great Depression when he entered office, as if he was the only President to have suffered a recession early in his term. But nobody expected that he would use the vast powers of the most powerful office in the world to make it worse. But that is what he has done.

Even if you start from when the recession ended in June, 2009, the decline since then has been greater than it was during the recession. Three years into the Obama recovery, median family income had declined nearly 5% by June, 2012 as compared to June, 2009. That is nearly twice the decline of 2.6% that occurred during the recession from December, 2007 until June, 2009. As the Wall Street Journal summarized in its August 25-26 weekend edition, “For household income, in other words, the Obama recovery has been worse than the Bush recession.”

The Journal elaborated, “The President portrays the financial decline of American families on his watch as part of a decades-long trend. He’s wrong. Real income for middle income households rose by roughly 30% from 1983 to 2005, according to the Congressional Budget Office.” And MSNBC hosts, listen up, you might learn something. The Journal further explains, “The political left likes to blame the ebbing of union power. But non-government unionization fell dramatically in the 1980s and 90s, and incomes rose.”

True, income growth lagged from where it should have been during the Bush years. But that only reflected the abandonment of half of Reagan’s economic program during those years. While Bush’s tax rate reductions did promote growth, Bush and the Republican Congress lost control of federal spending during the 2000s. Federal spending as a percent of GDP increased by one-seventh during the Bush years, almost exactly reversing the gains that had been won under Speaker Gingrich’s Republican Congress in the 1990s. (Clinton played a good rhetorical game appearing to fight the spending reductions, but deserves great credit for substantively giving into them in the end.)

But more important by far was that the Bush Fed abandoned the Reagan/Clinton strong dollar monetary policy for a cheap dollar, Keynesian style monetary policy, falling for the dopey Keynesian line that a cheap currency promotes exports. The Bush Treasury Secretaries cheered this debasement of the Fed’s monetary policy, reflecting the dark cloud of reemerging Keynesian influence on national economic policy.

What is overlooked is that a declining dollar may reduce the prices of American exports, but it makes the entire nation poorer in the process, reducing the international purchasing power of every dollar every American worker earns, and reducing the international value of every asset owned by every American investor, business entrepreneur, and property owner.

The problem is that Obama has only greatly accelerated everything Bush did wrong, and reversed everything Bush did right. So Obama’s spending has skyrocketed the federal budget by nearly one-fourth as a percent of GDP in just one term. Moreover, the Obama Fed has abandoned any semblance of control over monetary policy, buying most of the soaring federal debt issued to finance Obama’s record smashing federal deficits with newly printed money (actually created by computer record, a sort of cyberprinting). Of course, the whole point of Obama’s tax policy has been to more than reverse the Bush tax rate cuts, which is now already slated under current law to go into effect on January 1.

That is why it will all only get worse in a second Obama term, as the economy slides back into a double-dip recession in 2013 unless these Obama policies are swiftly reversed. I first began ringing alarm bells about that a year ago with the publication of my Encounter Books Broadside No. 25, Obama and the Crash of 2013. But now even the Washington establishment CBO is pealing the air raid siren as well.

Renewed, double-dip recession would mean unemployment rocketing back into double digits once again, the deficit exploding to over $2 trillion, the highest in world history by far, real wages and incomes declining even more, and poverty soaring further.

Obama has failed the poor as well as the middle class. Last year, the Census Bureau reported more Americans in poverty than ever before in the more than 50 years that Census has been tracking poverty. Now The Huffington Post reports that the poverty rate is on track to rise to the highest level since 1965, before the War on Poverty began. A July 22 story by Hope Yen reports that when the new poverty rates are released in September, “even a 0.1 percentage point increase would put poverty at the highest level since 1965.” But a consensus survey of experts across the political spectrum indicates the poverty rate could soar from the current 15.1% to as high as 15.7%. “Poverty is spreading at record levels across many groups, from underemployed workers and suburban families to the poorest poor,” Hope Yen reports.

This is consistent with the effect of Obamanomics on incomes. “The group that has suffered the most during the Obama Presidency has been black Americans, whose real incomes have fallen by more than 11%.,” the Journal also observed in its August 25-26 weekend edition.

There is no secret or magic as to how to turn around these declining incomes. Increased investment in business expansion and start ups increases demand for labor, which drives up wages. That investment buys new tools and capital equipment for workers, making them more productive, which provides the cash flow to increase wages.

Increasing investment results from reducing the tax rates on investment, which enables investors to keep a higher percentage of what they produce, increasing incentives for investment. It also comes from maintaining a stable or rising dollar, which assures investors they will not lose some of their investment returns to a declining dollar or rising inflation, or the boom and bust cycles that dollar manipulation and inflation create.

As the Journal further explained,

“A key driver of higher wages in the 1980s and 1990s was a surge of capital investment in computers, plant and equipment, which made American workers more productive. When Mr. Obama pledges to raise taxes on investment income (capital gains, dividends and small business profits), he is making it costlier to innovate and modernize. That plays out over time into slower gains in productivity and wages.”

A renewed economic boom in jobs and incomes is long overdue, straining within the bonds of Obamanomics to break out. Before this last recession, going back to the Great Depression 75 years ago, recessions in America have lasted an average of 10 months, with the longest previously at 16 months. But here we are 56 months after the recession started in December, 2007, with no real recovery yet in sight.

Yes, the recession technically ended more than 3 years ago. But the point is that what we are suffering today is the worst economic recovery since the Great Depression. And no, Obama apologists cannot say that the recovery is so bad because the recession was so bad, because the American historical record is the worse the recession the stronger the recovery, as the American economy has always before snapped back to its world leading economic growth trend line. That even happened after the Great Depression (once Roosevelt was gone). Check out for yourself the historical record of American recessions and recoveries at www.nber.org.

Based on this historical record, America should be enjoying its third year of a raging recovery economic boom right now. And it will, after Obama is gone, and his policies are reversed.

The above market process of increased investment, increased demand for labor, increased productivity, and increased wages and incomes is the way that it has worked to increase the wages and incomes of American workers for 300 years. And it is the only way that works. Rising wages, incomes, prosperity, and living standards do not result from increased government spending, increased deficits and government debt, increased Fed money creation, greater income and wealth redistribution, or any other fever swamp of Obamanomics.

If this generation of Americans does not get it, they will not enjoy the world leading living standards, and American Dream, of prior generations of Americans. Moreover, they will not deserve it. There is no law of the universe that says America must be the richest, most prosperous nation in the history of the world. If the American people do not choose the wisest leaders following traditional American, free market, economic policies, but instead choose the hope and change of the economic policies of Argentina and Venezuela, then they will get, and deserve, the prosperity and living standards of Argentina or Venezuela. END QUOTE

*     *     *     *     *     *

Does Obama Want the Economy to Improve?

Over the summer, I raised the politically-charged question just above. No doubt there are well-meaning Democrats who truly believe that higher taxes and bigger government are the solution to our economic problems. They just don’t know any better.

Yet with President Obama, one of the most highly educated men to ever hold the office, you get the feeling that he knows his tax and spend policies won’t work to turn the US economy around. So what is he up to? While it’s impossible to know for sure, there is a growing movement of people who believe that our president does not want the economy to improve and is intent on continued massive deficit spending.

With the presidential election looming, politicians on both sides are focused on this question: Are you better off than you were four years ago? As usual, both sides have their scripted answers to this question. Those on the left argue that the economy was headed for a depression when Obama took office. Those on the right argue that the national debt has exploded by $5 trillion over the last four years, and we are closer to a depression now than we were back then.

As Peter Ferrara makes clear in the article above, the Census Bureau reports that median household income plunged from almost $55,000 in January 2009 to below $51,000 in June 2012. Ferrara also quotes the liberal Huffington Post admitting in print that the US poverty rate of 15.1% is on track to rise to the highest level since 1965, before the War on Poverty began. 

Meanwhile, the US economy is growing at less than 2% a year and appears to be slowing even further. Last week’s unemployment report for August showed that the headline unemployment rate dipped from 8.3% in July to 8.1% last month. That’s good news, right? Wrong! The rate fell because 368,000 Americans stopped looking for work and are no longer counted as unemployed. The labor participation rate was the lowest in 30 years.

The report was ugly and President Obama knew it. Some argue that this was the reason his convention speech lacked his usual oratory spark. Who knows? As noted above, I don’t know if President Obama wants the economy to improve or not. What I do know is that raising taxes on the so-called “rich” and on investment income (capital gains, dividends, etc.) will make the economy worse, not better.

More importantly, if we continue to run trillion-dollar budget deficits, we will be Greece in four years. As I warned repeatedly in August, via a series of e-mails to clients and readers, the bond market will put a stop to this madness at some point. It will not end pretty!

US to Hit Debt Ceiling Limit in December

The US debt ceiling is currently set at $16.394 trillion. At the end of August, the amount of debt subject to that limit – which excludes lots of other types of debt – was $15.977 trillion, roughly $417 billion below the cap. As this is written, the USDebtClock.org puts the national debt at $16.018 trillion.

Since the government typically borrows between $100 billion and $125 billion a month, that means we’re on track to hit the debt ceiling sometime in December. That means we could see another nasty debt ceiling fight in Washington before the end of the year – at the same time lawmakers will be dealing with the “fiscal cliff.”

However, the Treasury Department may be able to use so-called “extraordinary measures” to keep the debt just below the legal limit for a couple of months. If so, that may push the next debt ceiling battle into early 2013.

Bottom line: The new Congress will have to raise the ceiling in early 2013 or the Treasury will risk defaulting on the country’s legal obligations by failing to pay all of its bills in full and on time. Won’t that be fun… again!

The Fed & QE3

Keep in mind that the Fed Open Market Committee meets tomorrow and Thursday. It is widely expected that Bernanke will announce something new at his press conference on Thursday afternoon, especially in light of Friday’s grim unemployment report which was much worse than expected.

As usual, there is much speculation about what the Fed might do: 1) extend the promise of near zero short-term interest rates; 2) extend Operation Twist beyond this year; or 3) QE3. Or some combination thereof.

In light of several recent negative economic reports, investors are more convinced than ever that the Fed will take action at this week’s policy meeting. Thus, if the Fed’s decision is to do nothing or very little until after the election, it will likely be very negative for stocks.

9/11 – Eleventh Anniversary

Our hearts and prayers go out to the families and loved ones of those Americans that lost their lives in the September 11, 2001 terror attacks. Our heartfelt thanks go out to all the men and women in the military and those in law enforcement who put their lives in danger to keep us safe! God bless them.

Sign Up For My Blog

For the last couple of months, I have been blogging on the presidential race every Wednesday. I try to focus on the real drivers in the race on both sides. Here is last Wednesday’s posting. Then each Friday, I write about whatever I find most interesting or controversial during the week. Here is last Friday’s posting.

Remember, the blog is FREE. CLICK HERE to sign up and join the conversation!

Your happy that football is back analyst,

 

Gary D. Halbert

SPECIAL ARTICLES

Jobless Numbers Are Even Worse Than They Look

What an Obama second term might look like

Did Obama Really Win the Summer?
 


Read Gary’s blog and join the conversation at garydhalbert.com.


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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