Posted on 08/25/2016 3:26:50 PM PDT by HomerBohn
By popular measures, the U.S. economy is in the midst of one of the longest economic recoveries in its history. After all, the current economic expansion — now 85 months and counting — is the fourth-longest since 1857. As reported by the Bureau of Labor Statistics, the U3 unemployment rate was 4.9 percent in July, less than half the level seen during the depths of the Great Recession. Meanwhile, the housing market is booming and the stock markets are hovering near their all-time highs.
So why does the Real Clear Politics “Direction of Country” polling average indicate that Americans believe the United States is on the wrong track by a margin of more than 2:1? Quite simply, because it is.
Fundamental Analysis
In finance, the traditional means by which to determine the probable value of a stock is through fundamental analysis. Investopedia defines the term as follows:
Fundamental analysis is a method of evaluating a security in an attempt to measure its intrinsic value, by examining related economic, financial and other qualitative and quantitative factors. Fundamental analysts study anything that can affect the security's value, including macroeconomic factors such as the overall economy and industry conditions, and microeconomic factors such as financial conditions and company management. The end goal of fundamental analysis is to produce a quantitative value that an investor can compare with a security's current price, thus indicating whether the security is undervalued or overvalued.
Fundamental analysis can be incremental, exacting, and tedious, and frequently flies in the face of investor exuberance, but the process is critical. Without it, speculators tend to follow a herd mentality: Assets increasing in value must be worth buying. The faster things rise, the greater the demand.
Most people now understand the fallacy of this approach. The dot-com and real estate bubbles that dealt a one-two body blow to the economy were the result of irrational speculation despite a lack of fundamental support. There isn't a person reading this article who wouldn't agree with that assessment.
And yet, it's happening again — right before our very eyes.
Low Interest Rates
To combat the last recession, the Federal Reserve performed a series of maneuvers in order to reduce interest rates to historic lows. Lower rates tend to spur demand for more expensive items such as cars and houses. And businesses are more apt to purchase big-ticket assets such as equipment and commercial real estate.
It worked. Once the lending freeze that gripped the financial services industry during the recession eventually thawed, credit began to reach Main Street. Car sales increased by 46.3 percent between 2009 and 2014, and new home sales reached a nine-year high just last month.
Here's the problem: The appearance of strong demand is an illusion foisted upon the economy by near-zero interest rates. Rates cannot stay down forever, and when they finally rise (and if history is a guide, they could boomerang upward), demand is all but certain to dry up. With nearly 70 percent of the economy tied to consumer spending, that's a really big deal.
Excessive Money Supply
In concert with lowering interest rates, the Fed bought bonds and infused cash into the economy. Lots of cash. The table below shows just how much the M1 money supply has grown over the past 10 years:
All that money has to go somewhere. And it does: Banks lend it out, consumers and businesses spend it, and the economy is stimulated in the process. However, much like demand created by artificially low interest rates, the excessive cash sloshing around is a house of cards. Not only will its stimulative effects diminish once the money supply normalizes, but it has the propensity to trigger above-normal levels of inflation.
Those of us old enough to remember the 1970s era of stagflation during the Carter administration know that feeling all too well. Some argue it's right around the corner.
Lack of Fiscal Discipline
America's utter unwillingness to practice fiscal discipline is so pervasive that deficits are considered a fact of life. Over the past 76 years, just 12 saw the budget balanced, the last time being in 2001.
Although Dick Cheney once insisted that “deficits don't matter,” that simply isn't true. Deficit spending means the U.S. government loses money every year, and a business that consistently posts losses endangers its own existence.
The ballooning national debt is the net result of fiscal and monetary malfeasance, and although low interest rates mask the serious nature of the threat, that won't last. Once interest rates begin marching upward, they could zoom out of control — in 1981, mortgage rates hit 18.5 percent — with the resulting rise in the percentage of the budget necessary to pay the interest potentially crippling the economy.
Funhouse Mirrors
The aforementioned factors may have served to help grow the economy over the past seven years, but much like a funhouse mirror, the image is badly distorted.
Gross domestic product may have grown, but at a rate less than two-thirds the post-WWII average. Jobs have rebounded somewhat and the official unemployment rate has diminished, but so has the Labor Force Participation Rate, meaning the official unemployment rate hides the fact that lots of Americans aren't working. Adjusted for inflation, income has fallen. Worst of all, the biggest factors driving the recovery — low interest rates, a burgeoning money supply and debt, and deficit irresponsibility — are the metaphorical equivalent of a freight train about to jump the tracks. When it does, watch out.
The Day of Reckoning Is Coming
Damon Lindelof once wrote, “There is no suspense in inevitability.” We may not know when it will happen, but there is no question that the day of reckoning is coming.
The United States cannot continue to manipulate interest rates, the money supply, and the budget without serious consequences to its long-term economic health. The only solution is to allow market forces to take hold, impose fiscal and monetary discipline, take the resulting medicine and ride out the storm
The meager 1.2 percent growth in second quarter GDP may have landed with a resounding thud, but without the courage of convictions overcoming political cowardice, the bigger worry is that the next loud thumping sound will be the other shoe dropping on the economy.
The suicidal election of a Hillary Clinton will churn the nation into utter economic and civil chaos.
Our problems started before Otoken was elected; he just made them worse...
With this ‘deficits don’t matter’ mindset, it’s just a matter of which party will drive us to ruination first.
“The suicidal election of a Hillary Clinton will churn the nation into utter economic and civil chaos. “
I believe that Hillary thinks this would be fun!
Not joking.
There is no recovery, because we never left recession. Americans know this, at least those who pay attention and have the intellect and maturity to look beyond their own circumstance.
I see homes on my road going to or in danger of foreclosure. Homes where the residents have been there for more than twenty years. I see empty storefronts staying empty, or being filled with something lesser than what went before (auto repair shop gone, tattoo parlor in its place), I see more panhandlers (including the nasty one who screamed at me today), grocery prices rising weekly and my tax burden the proverbial lead weight. I work my face off and consider it an accomplishment if I can stay afloat.
My tagline came true a while back, but we haven’t realized it yet.
I checked several houses where I remember the values/prices 10 and 18 years ago. They are still under water. The recovery is 90% in the beltway counties and Silicon valley and Cape Cod?
People still have family members who used to work and are looking for work. Employment is not up, except in special places.
Well, most industries are doing even worse under 0bama....
But The Smoke Industry and the Mirror Industry are booming, with their government contracts.
What recovery?
This Administration’s objective will be a healthy, vigorous, growing economy that provides equal opportunities for all Americans, with no barriers born of bigotry or discrimination. Putting America back to work means putting all Americans back to work. Ending inflation means freeing all Americans from the terror of runaway living costs. All must share in the productive work of this ’new beginning,’ and all must share in the bounty of a revived economy.”
President Reagan had earned a degree in Economics at Eureka college, and even though he would sometimes joke about “two economists having three opinions”, he knew what needed to be done and how to do it. He had a simple, but specific plan, of which he spoke often during the campaign: cut taxes, get control of government spending and get the government out of the way so that the entrepreneurial spirit of the American people could be unleashed. Some skeptics derisively called his plan “Reaganomics,” but President Reagan was undeterred. He knew that only if people had money in their pockets and incentives to invest and build businesses would jobs be created, inflation tamed and interest rates reduced.
Almost as soon as the Inaugural ceremony was over, President Reagan set his sights on Capitol Hill. From day one, he and his team worked tirelessly to get Congress to pass legislation to put the economy back on track. Even a near-fatal assassination attempt did not slow him down. While still recovering, he summoned Congressional leaders to the White House to twist their arms. Ronald Reagan may have been the first President to wear pajamas to a meeting with the bipartisan Congressional leadership. He wanted them to know he meant business.
His efforts paid off. In August 1981, President Reagan signed the Economic Recovery Tax Act of 1981, which brought reductions in individual income tax rates, the expensing of depreciable property, incentives for small businesses and incentives for savings. So began the Reagan Recovery. A few years later, the Tax Reform Act of 1986 brought the lowest individual and corporate income tax rates of any major industrialized country in the world.
The numbers tell the story. Over the eight years of the Reagan Administration:
20 million new jobs were created
Inflation dropped from 13.5% in 1980 to 4.1% by 1988
Unemployment fell from 7.6% to 5.5%
Net worth of families earning between $20,000 and $50,000 annually grew by 27%
Real gross national product rose 26%
The prime interest rate was slashed by more than half, from an unprecedented 21.5% in January 1981 to 10% in August 1988
Given actual rates of inflation, through 1987, the Reagan tax cuts saved the median-income two-earner American family of four close to $9,000 in taxes from what it would have owed in 1980.
Tax cuts were only one “leg of the stool.” The second, jobs, was equally strong. Not only were there millions of new jobs, but the benefits of job creation were not limited to one segment of society. Employment of African-Americans rose by more than 25% between 1982 and 1988, and more than half of the new jobs created went to women.
Taming the lion called government spending was another key component of the plan – the “third leg of the stool.” Here, too, President Reagan did what he said he would do. During his Administration, growth in government spending plummeted from 10% in 1982, to just over 1% in 1987. With inflation factored in, Federal spending actually went down in 1987 – the first time that had happened in well over a decade.
So impressive was the Reagan Recovery that at the G7 Economic Summit in 1983, when it was obvious the President’s plan was working, the West German Chancellor asked him to “tell us about the American miracle.” That was quite a turnaround from two years earlier, when President Reagan outlined his economic recovery plan to an unconvinced group of world leaders. Now, however, they all wanted to know how he did it, so he told them: reducing tax rates restored the incentive to produce and create jobs, and getting government out of the way allowed people to be entrepreneurs. From there, the free marketplace operated as it was supposed to.
As President Reagan observed with a wry smile, “I could tell our economic program was working when they stopped calling it Reaganomics.” But what really pleased him most about the Reagan Recovery was not the vindication or all the impressive statistics. To him, the success of Reaganomics was what it brought to the American people. Millions had good jobs and were able to keep more of the money for which they worked so hard. Families could reliably plan a budget and pay their bills. The seemingly insatiable Federal government was on a much-needed diet. And businesses and individual entrepreneurs were no longer hassled by their government, or paralyzed by burdensome and unnecessary regulations every time they wanted to expand.
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