50% Chance of Recession

It’s unfortunate that we’ve had to wait until a year before the next presidential election to get the American Jobs Act. There’s no reason, except for politics, why we couldn’t have gotten this $450 billion a year ago.

But now that an actual jobs bill is here, it will be interesting to see how it’s treated in Congress.

On the subject of spending and debt, a Daily Profit reader asked:

How can you advocate sound fiscal policy and fiscal stimulus at the same time? We are borrowing over a trillion dollars a year, just to keep the economy on life support. Do the math. If the government increases spending and cuts taxes the difference has to be made up by borrowing, i.e. more debt.

Our debt is quickly approaching the size of our annual GDP. This can do long term harm to the country, and for what. To create a few temporary jobs to re-elect the same political hacks. The politicians care more about the next election than the future of our country. How about you? Lets continue to borrow our way out of debt, and see where that takes us.

It’s standard operating procedure for government to step in and spend — even deficit spend — when an economy slows dramatically and even enters recession. The key, however, is that government also must act to build a surplus when times are good.

Prior to the Internet bubble bursting and the 9/11 recession, the federal government was running a surplus. Unfortunately, the government didn’t adopt sound fiscal policy between 2003 and 2007 and instead, ran budget deficits. So when the financial crisis hit, there was no surplus to draw on. And the situation was made worse by levels of private debt.

I am not claiming that we have sound fiscal policy now. The U.S. government hasn’t used sound fiscal policy in several years. Still, we can hope…

Here’s another comment from Richard K.:

Why don’t you have the guts to discuss Bill Gross’s idea that capitalism can not solve this economic disaster brought on by deliberate malfeasance? Gross calls for government to employ millions of laid off workers. Those jobs were sent overseas. Why don’t you call for a government program to employ millions? When will capitalists realize that 70% of the economy is consumer driven spending, and capitalists have sent millions of jobs overseas, who do the capitalists expect to be spending? Who will buy the tennis shoes that Nike makes in Indonesia, that were made by Americans, and sold to Americans? Who will buy all the products made overseas, and now sitting on shelves in American stores due to unemployment caused by sending the jobs overseas? Ross Perot was right.

With all due respect, you should read Daily Profit more often. These issues are discussed with regularity, and you won’t find me suggesting that economic recovery can simply be left to America’s corporations.

Much like politicians who will say anything to get re-elected, most companies will do whatever it takes to keep quarterly profits increasing. That’s what they’re supposed to do. In time like these, when demand is slack, corporations have the obligation to adjust production to meet demand. That means lay-offs.

Daily Profit is an investment letter. And Wyatt Investment Research is a company that helps readers find profitable investments in companies. I try to limit my political discussions to issues that affect our investments. I guess I don’t always succeed…

Inflation finally cooled a little in China. This is very good news. As much as U.S. and European debt has been the primary issue weighing on the stock market, China has been in the back ground.

As on of the primary sources of demand in the world, the potential for instability there is worrisome. A Chinese economic meltdown is exactly the kind of shock that would send the global economy back into recession.

China’s inflation rate has only moderated for one month, so it’s a little early to say the soft-landing is happening. I will also point out that China could allow its currency to appreciate to combat inflation. Of course, China is too afraid that this would choke its export economy, but it will have to happen eventually…

Economist Paul Krugman says there is a 50% chance the global economy will enter recession. Not coincidentally, he also says that there is zero chance the president’s jobs bill will pass Congress.

Krugman is just the latest to point out the obvious, that austerity equals recession.

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