It May Be Worse Than You Think

Do not be fooled by what the government tells you, watch how they act.  This is critical at this junction in the road.  QE2 is basically over, the market is under serious threat and there is every chance that we could slip back into another recession.  Looking at the facts it appears that things may be worse than you think.

As of today the unemployment rate is stuck well above 8% and may start to trend higher.  The reason for this is that yesterday President Obama announced early withdrawal from Afghanistan.  10,000 troops will start to be pulled out of the country in the coming months.  This was done to stave off the massive expenditure that the United States has in fighting all the wars around the world.  This was never a war that was going to be won but it did cost the taxpayer over $1 trillion and is climbing by billions of dollars a month.  In order to try to cut the current massive government deficit expenditure needs to be cut.  Bringing the troops home will go a long way toward narrowing the deficit.  The war was a failure other than more than $1 trillion later we caught and killed Osama.  That has to go down as the costliest manhunt ever recorded.

Financial costs aside, the cost of human life was huge and, due to the superior air power, medical aid and communications, far more wounded soldiers were kept alive than ever before.  This will have an immeasurable toll on American society for years to come as these young men and women will require (and deservedly so) our support.  To those who fought on behalf of their country I salute you, but this war could never be won and now it is time to withdraw before more lives are lost.

I would anticipate that the withdrawal will also mean a reduction in military personnel required.  This will feed into the unemployment rate as the government is the largest employer in the United States by far.  The deficit is out of control and the government has now admitted that by pulling back from Afghanistan.  It was expected but it was accelerated and this points to massive problems below the surface.  I would expect more budget cuts and layoffs coming out of the government soon and these cannot be picked up by the private sector.  There is trouble brewing in Washington.

After spending trillions of dollars fiscal responsibility is required.  There has been no economic traction to date and all the bandages are starting to fester and reveal themselves.  The unemployment rate is still high, the housing market continues to crater and inflation is crimping consumer spending.  Banks are dealing with the housing melt down and are loathed to invest money and why would they when they can earn a spread by giving the free money straight back to the government?  Across the Atlantic Greece's problems never went away they just festered.  Without a currency that fluctuates there is no way out of their mess except a massive growth in GDP.  This is not likely so their problems will continue to plague the European economy dragging down growth.

Bernanke just reduced his forecast for GDP growth by 10% from 3.1% to 2.7%.  This is still too high and will be reduced further, but the magnitude of the decline is large by any measure.  With growth this slow (and I question whether the real rate will be anywhere near to these levels) it means that housing and the economy will continue to struggle and unemployment will continue to remain elevated.  The only part of the economy that has increased with all the stimulus money is the stock market and that is looking like it is on its last legs.  I would once again advise you to take your profits off the table and hunker down for the foreseeable future as I believe that the future may be worse than any of us expected.

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