Fiscal Responsibility Has Moved Abroad

Last week, to the delight of its media cheerleaders, the government announced that economic growth had returned and the recession had ended. But before we start celebrating one quarter of modest growth, we should realize the only force driving this apparent recovery is an enormous increase in government spending. To finance its largesse, the government is now borrowing at a rate that has ordinary citizens and the international community extremely concerned.

Leading into the first election season under Obama's reign, this unprecedented government borrowing and spending is creating a false sense of security. The activity has allowed GDP to increase despite stagnation in corporate and consumer spending.

Small businesses – the most important creators of new jobs – are nervous. Due to uncertain economic conditions and a high degree of regulatory uncertainty, they are hoarding cash rather than investing. Indeed, their largest expenditures are often solely to replenish inventories.

Likewise, consumers are rationally hoarding their resources. Year over year, consumer spending – which constitutes 70 percent of GDP – is essentially flat. With such a large segment of the economy quiescent, the percentage increase in public sector spending has to be very large in order to push the GDP upward.

The new government spending spree has focused on major stimulus initiatives, including the new homebuyer tax credit and 'cash for clunkers'.

Early results are showing that spending on autos dropped to recession-levels immediately after 'cash for clunkers' ended. Meanwhile, some reports are estimating that the program cost $24,000 for every additional vehicle it caused to be sold.

The multi-billion-dollar tax credit for first-time homebuyers juiced real estate sales and provided a strong boost to GDP in the third quarter. But the net result is that many responsible young people, who had chosen to rent and save in the face of a declining housing market, are now saddled with mortgages they cannot afford. These 'homeowners' will quickly join the ranks of the foreclosed.

Perhaps the most concerning aspect of GDP growth is that, even with a deeply progressive Administration spending our children's children's money, the best we can achieve is a modest, fleeting boost in growth. Even the government's biggest apologists have a hard time explaining how these gains can last without continued stimulus. In short, this country is not just bankrupt today, but for generations to come. This is the real truth and should concern those with investments within the United States.

The unhappy situation in America, of which we have long warned, should be contrasted with the healthy growth experiences of other countries such as Australia, New Zealand, China and India.

The Australian central bank is now so confident in its growth potential that it has raised interest rates two months in a row. Though they have a center-left Government, the Aussies have managed to control stimulus spending and overall debt.

New Zealand is seeing an increase in real wages amid a strong Kiwi Dollar. Much more than GDP, this is a signal that economic growth is truly returning to this island nation.

China, a place where 9% annual GDP growth is considered a recession, is still developing its market economy while Obama cripples our own. Much fanfare was showered upon the launch of ChiNext, a stock exchange for privately-owned, small- and mid-cap Chinese companies. It surged in its first day of trading, showing the strength of that economy even outside the State-Owned Enterprise sector.

Finally, there is India. Though still far too closed to foreign investment, this country is making shrewd moves to protect its internal capital. In a deal announced today, India bolstered its gold reserves by 50% by trading $6.7 billion of its U.S. dollar reserve to the IMF. Not only is this a positive sign for India, it is a crushing verdict on our own lauded 'GDP growth.'

A currency's value reflects investors' faith in a particular nation. Though commentators are seizing on this figure or that to make the bull case, the dollar index belies their claims.

Rather than dancing in the dollars falling from helicopters, we should be concerned about their worth when they hit the ground. Unfortunately, fiscal responsibility has moved abroad – and the smart money isn't far behind.

Comments

[User 353732:]

1. The growth in the US economy is a statistical artifact: a financially engineered hoax, much like a manipulated stock hyped by a boiler room operator. The real economy, which most of the Middle class inhabits, continues to compress.

2. Cash hoarding is a sign of fear. The US economy cannot have consistent, material growth if the majority of Middle class consumers are fearful and small businesses are starved of credit. Fear and credit starvation are the harbingers of further decline in the productive economy, not growth.
3. Increasingly, the world wants to flee dollars because it wants to flee the US Regime, which is now the largest generator of economic and investment risk in the world. The dollar is the symbol of these serial and multiplying risks.

Nov 05 06:49 AM

[Leftfield:]

Socialism only works until you run out of other people's money--Margaret Thatcher. We're out, but the fairyland mentality that believes "government" can somehow afford what we individually cannot; a $trillion here, a $trillion there, pushed to the future, to prop up the most culpable failures, is devastating our hopes and chances of real recovery for generations.
Sentient citizens are aware of this, sometimes dimly. A fact: State/local employment was 5 million in 1955, is now 20 million, and it pays 43% higher than the private sector rather than the reverse that it once was in exchange for job security. We pay 5x more for state/local government for all that hellish micromanagement and extra steps and procedures they require of us.
That gives some idea of the insane burden the shrunken private economy carries along with other burdens from general malinvestment and hopeless federal obligations.
Either we believe the tooth fairy in Washington can rescue us from the nightmare by propping up the worst failures, on our tab, or we use our intelligence on the hard facts to begin the task of turning this long-building debacle around. The first step is to admit the real problems.

Nov 05 07:52 AM

[ringo3khan:]

Intelligent "Americans" are investing and saving overseas; many are leaving and I expect the numbers of those departing to dramatically increase as a sign of a no-confidence vote on not only this gov't but the entire governmental system and it's financial institutions. The grand experiment has, for all practical purposes, failed.

Nov 05 08:36 AM

[Joseph L. S...:]

The worst crime against working people is a company that fails to operate at a profit -- because then the business will ultimately fail and its workers will lose gainful employment and their incomes.

By the same token, a government that consistently operates at a loss while claiming that "deficits don't matter" is bankrupt both morally and financially. Deficits matter -- to individuals, to businesses and to nations.

"You can fool some of the people all of the time, and all of the people some of the time, but you can not fool all of the people all of the time."

It's time we stopped letting anybody fool us any of the time and began once again to work hard, savie for the future, spend responsibly, and elect leaders who share those values.

Nov 05 08:54 AM

[like mike t...:]

this was a good article

Nov 05 03:11 PM