The Market Takes Strain

"I had not, it seems, the originality to chalk out a new road to shame and destruction, but trode the old track with stupid exactness not to deviate an inch from the beaten center." - An except from Charlotte Bronte's Jane Eyre

The above quote is one that a lot of us can use but right now it mostly applies to the global leaders and the central bankers of the world.  Whether they admit it or not we are heading towards a problem the like's of which have not been witnessed for almost a hundred years.  Trying to fix a debt problem by printing more money and increasing the debt level just will not work.  I have repeatedly mentioned this through my blogs but it appears that the central bankers of the world disagree with me and others who think like I do.

Even though we are running a fiscal budget deficit of more than a trillion dollars (and it appears that this deficit will continue to run for years to come) there has been no real expansion to the eeconomy.  I would agree that housing seems to be bottoming and that the stock market has been on a tear however the problem behind all of this is that printing money has not created an economic base that can sustain any growth.  Remove the juice from the Federal Reserve and we crater.  The problem is that when you print money you have no control of where it goes and so bubbles are created in areas that are not condusive to long term growth. We should know, our central bankers have been printing money for more than a decade now and the result is an ever larger problem.

An example of this is the fever associated with the Facebook IPO.  The launch was heralded across the globe and the company ahs raised over $16 billion giving it a valuation of over $100 billion.  The fact that it is trading at a price to earnings ratio of over 100 at its launch brings me back to the heady days of the Nasdaq bubble.  I have heard people rage about how it will be the first trillion dollar company, but how many other social netowrking sites are there out there?  If they have nto realized revenues off their subscriber base by now how will giving them $16 billion today help that endeavour.  It once again seems that the money printing has resulted in money being wildy speculated on a company in the hopes that it is the salavation of every investor.

The first quarter of this year is a case in point.  While the governemnt reported that the economy grew at a rate of 2.2% most if not all of that growth came from the automobile "sales".  I say "sales" as digging into the numbers reveals that most of these "sales' were just pushing product onto the dealerships floors rather than to the consumer.  Stripping this out takes growth down to around 1.0%.  This is the number that I believe is an accurate reflection of our growth prospects as long as the large government debt looms above our heads.  Not that the number in and of itself is a problem but as a percent og GDP it is.  Add to this massive budget deficits of more than a trillion dollars a year and you can see why we will rapidly blow well past debt of 100% of GDP in the years to come.

Now that is bad enough (and is the only reported number), but when you add in the problem of the aging population you then have to factor in the drains of the baby boomer population on Medicare and Social Security.  These holes take our total debt to $200 trillion.  This number is supported by a GDP of $14 trillion so in balance sheet terms we have leveraged ourselves 1,400 percent.  Try doing that as an individual and see what happens to your credit rating!  Also try doing that and then try getting another loan!

This is the problem that desperately needs to be fixed and it needs fixing now.  European problems are allowing us the time to get our economy in order as no matter how much money is printed the dollar remains strong.  Looking across to Europe it appears that we have a number of years before anyone looks our way, but believe me when they do they will not be happy with what they see.  If interest rates suddenly spiked, the bleed on the Treasury would consume most of the revenues to the government and would result in a continued deficit.  This is why it is imperative that the Federal Reserve keep interest rates low for the foreseeable future.  Keeping these down allow them to leverage the balance sheet to buy time to repair the damage to allow continued confidence in the US economy.

It is a conundrum and not one that is new however, with all the world's problems it is rapidly being exposed as the problem that it always has been and it will require a leader with vision to turn it around.  Looking therefore at the political landscape, our coming options are not good which means at least four more years of the same.  Cutting taxes will not work.  How can you cut your revenue to pay down your bills?  To take this to an extreme if you pay no tax how does the government pay its bills?  This idea that lowering taxes creates jobs and stimulates an economy looses merit at these levels of deficit.  Increasing taxes also does not stimulate growth.  So raising taxes is not the best policy either.  Cutting spending will become harder and harder to do as a smaller and smaller piece of the budget is going to actually running the government while almost 90% is being used up through Medicare, Social Security, interest payments and defence.  What is needed is to take a long hard look at our obligations, bring them to the forefront of debate and take them head on.

To do this requires a visioanry that can get the public to understand that pain must be felt all around in order to protect what we have created.  Pushing the can down the road has not worked.  In fact it has resulted in the current mess.  Socialism has seen its flaws revealed, communism with an open market will not work and while democracy is under attack the clear point is that free markets have not been the order of the day but rather a manipulated market has been tried and has not worked.  We are treading the tried and true path to massive problems and the rolling over of the stock market is beginning to show the cracks.