Stimulus, Growth and Recovery: The Debate Continues

There is growing intelligent dissent to the administration’s stimulus policy.  Critics argue that recent growth is the result of market principles.  Edward P. Lazear wrote Monday in the WSJ, that he forecasted a return to growth without stimulus spending.  He goes on to argue, along with others, that  housing programs have had questionable results.  Lazear said that Uncle Sam is fibbing about job growth as well, reporting job retention as if it where job creation.  John Irons of the Economic Policy Institute agrees.  The administration has an incentive to report positive unemployment numbers- the most popular, but also misunderstood indicator.

Unemployment is only part of the overall picture.  Other improving indicators reported this week tell us that the economy is turning around-but for whom? It depends on how you define growth.  A technical definition says that growth is positive GDP.  That means little to most people.  Real growth, theoretically, is an improvement in living standards for the entire country.  That’s why Main Street understands the unemployment rate.  Accordingly, the media use it as the sole judge for growth.  The problem is, as Lazear mentioned,  job growth is the final component of recovery- behind financial stability and GDP growth.  Unemployment lags years behind an actual recovery.   If unemployment is a lagging indicator, Lazear cannot empirically link failed stimulus policy to persistent unemployment.  He says that the administration is ignoring job losses while inflating job creation numbers.  Isn’t he doing the same thing by ignoring market stabilization and GDP growth? 

BEA Released GDP Data This Week 

According to the BEA, GDP is up for a number of reasons.  Look closely at the report.  Exports rose 14 percent over last quarter and consumer spending rose 3.4 percent.  Market Watch reported that positive numbers where in part due to stimulus spending, but as I argued in the past, these gains are only temporary.  The purpose of the stimulus is to stabilize the economy so that private markets can function again.  There is no wider conspiracy.  The government will roll back stimulus as soon as it sees the return of private investment.  There is evidence of this already: government spending actually slowed by 3.5 percent.

Not all the news was good.  Personal income fell and prices rose.  Hopefully this is a temporary trend based on slight price increases and high unemployment.  However, as long as export growth remains positive, I see no need to fear 70s style stagflation.  

Savings and Long-Term Growth

According to the old Solow Model, a country’s savings rate is positively related to long-term growth.  Today, personal savings is around five percent, that’s up from around one percent just four years ago.  This bodes well for long-term growth in the US.  And now is a great time to invest.  As private investment (including people’s savings) replaces public spending in the next few years, markets will rebound.  Private investment will power an upswing in the business cycle, spark growth and reduce unemployment. The sooner the government rolls back stimulus, the better.  In the mean time, citizens can take advantage of great opportunities in real estate and other deflated markets.  This transfer of savings from a stock to a flow will jump-start the economy in way no stimulus could.  It would take tens of trillions of dollars in government spending to match the power of private investors.

Thomas J. Powell

The Strenuous Life of the American Dollar

A weak dollar wrestles inflation.

              With the enormous amount of government spending, some level of U.S. inflation is inevitable; but how high that level might get is debatable. With the global economy crawling out of the Great Recession, inflation-flavored fears now fill news broadcasts. As a result, gold and oil prices have climbed as inflation-conscious investors have poured their money into commodities due to fears of a devaluing dollar.

              Inflation concerns have been on economists’ minds since the Fed started passing drastic measures to combat our country’s troubled economy. Now, as the worst of the storm appears to be behind us, the concerns about the repercussions of our government’s monetary actions are under the microscope. The Fed’s commitment to keep the interest rate near zero for the next year has fueled speculation that other central banks will raise interest rates first—which would make other currencies more attractive than the dollar. Australia’s decision last week to raise interest rates already hurt the dollar and suggested that resource-based economies might recover quicker, and be more attractive to investors, than the United States.

              With credit streams far from unthawed, raising the Fed funds rate in the States at this point could be detrimental. A mainstay in economic reports is the number of challenges the government will soon face with unwinding all the different programs that are currently held up by economic stimulus money. The concern that the Fed will not be able to appropriately remove its massive monetary stimulus has many experts expecting high levels of inflation as the economy continues to recover. However, labor market slack and weak wage growth could be enough to keep inflation at bay.

              A weak dollar does have its upside. In the short term, by making American exports cheaper, a weak dollar can be good for our economy and useful in closing our trade deficit. However, in the long term, if the dollar stays weak, foreign investors will lose interest in putting money into U.S. Treasury securities without the promise of high interest rates. A significant, long-term drop in foreign-investor capital can make it much more expensive for Americans to borrow—something that can only hurt economic growth.

 

The V-Shaped Climb

 

              As manufacturing gains its footing, the stock market strengthens, housing inventories fall and retail spending returns; our economy will continue traveling up the V. However, government provides the stability in many market rebounds.  Once government funds are pulled back, the likelihood of dropping back into a recession could increase.

              Until spending is once again a consumer behavior, instead of a government one, the underlying economic problems will remain—threatening to pull us into another deep recession. In order for consumers to spend again, they are going to need to be convinced that their hours will not be cut, their jobs will not be lost and their wages will not be dropped. Of course, before they can be convinced of any of this, the unemployed will have to be reintroduced into the workforce.

              We will continue wrestling with high unemployment numbers until business owners are confident that their products and services are once again in demand. Currently, businesses are getting by with nearly-depleted inventories. But, as consumer demand rises, business owners will beef up inventories; which will produce the need for more employees in the manufacturing industry. Business owners are scraping by with the bare-minimum number of employees. Larger inventories require new employees to sell, stock, ship and manage the products.

              So, as consumer demand slowly returns, so too will new jobs. As we crawl out of this recession, a number of positive signs fuel consumer demand. As home prices continue to rise, homeowners will no longer be underwater and their confidence will get a boost. As the stock market continues to climb, so too will investors’ confidence. Major markets are all interrelated. Signs of growth in one market have the ability to positively impact another. The process is slow and filled with pockets of discomfort, but the climb has begun and the journey is forecasted to be slow and steady. Being patient and taking the right steps now will help our economy avoid falling down the second trap in the dreaded W-shaped recovery.

 

Protecting Your Wimpy Dollar, Not Fearing it

 

              Fearing inflation is a reactive investor’s behavior. This group of investors waits until something drastic happens in the marketplace that demands they respond. Active investors prefer to take more proactive measures to prepare for unappealing market conditions, such as inflation. Wise investors salt the slugs of inflation long before they have the chance to take over their gardens and devalue their investments.

              First, let us be clear that our country still may be on track to side step a nasty bout of hyper-inflation; which could cause a gallon of milk to cost a truckload of fifties. Our policy makers have to make the right decisions as we trudge through this recovery. To recognize the silver lining, an economy needs to have ultra-low unemployment levels and rising wages to effectively foster a period of hyper-inflation—both of which we are lacking at the moment. Unemployment is flirting with the 10-percent mark and real average hourly wages fell from December, when they were at their recent high point, to August at a seasonally-adjusted 1.5 percent.

              Some may consider worries about inflation to be premature, but there are countless signs suggesting that the dollar will continue to considerably weaken over the next couple of years. The most concerning: Our government has borrowed hundreds of billions of dollars in efforts to hold up our banking system and this has added to our country’s already-enormous debt responsibilities. Having far too much money and too few goods is the root cause of inflation. Therefore, the biggest worry is that our government will continue to print money to pay for its extraordinary debt. Even if some experts are arguing that inflation concerns are premature, there are proactive actions an investor can take to protect his or her investments.

              Some assets rise in value during times of inflation and having a dose of them in your investment portfolio can do wonders for its performance. The following are widely-considered to be the best performers: 

• Real estate: Traditionally, investors have used real estate as a hedge against the spontaneous performance of portfolios that are overloaded with stocks and bonds. Real-estate assets can also act as a hedge against inflation. Plus, today’s affordable prices and availability have real estate looking extremely appealing as an investment opportunity.
• Commodities: Inflation causes the price of materials to rise. So, why not hold interest in the materials themselves? Investing in commodities through exchange-traded funds can help small investors avoid the many drawbacks that come with investing in commodities (like deciding where to store 1,000 barrels of oil).
• Gold: With our currency no longer anchored to gold, it can lose value—and often does. The magic with gold is that it often moves opposite the value of the U.S. dollar.
• TIPS: Treasury Inflation-Protected Securities are similar to other Treasury securities in that they are long-term IOUs that pay a fixed rate of interest until they mature. But, with TIPS, the government adjusts the payments up or down each month according to inflation levels.  

All My Best, 

Thomas J. Powell  

The discussion of investment strategies in this article should not be considered an offer to buy or sell any investment. As always, consult an investment professional to assist you in meeting your investment goals.  

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