MARKET WATCH | What fuels the current economy?

There is little to say that is bad about the existing economy, short term, but many potential problems exist long term. Let’s take a look at how we got to such a strong economy.

The economy is booming like never before

The charts show the deficits created each year by the Bush and Obama administrations. These two presidents will have added $10.1 trillion to the financial liabilities of the United States. All the money was created out of nothing. Funds went to welfare recipients of means-tested programs (not Social Security, Medicare and unemployment compensation that working people have paid into). 

Making money by printing it and calling it money has been called “economic stimulus” and/or “quantitative easing.” Both are deceptive terms for the highly inflationary creation of money with nothing to back it but the Federal Reserve’s “promise to pay.” The Fed’s policies over the last 60 years have resulted in inflation. Purchases of $10 in goods in 1954 would require $100 to purchase today. With more money being created now than ever, the destruction of future purchasing power is bound to exceed the harm witnessed in the last 60 years.

 This large amount of newly created money is sitting in commercial banks ready to lend. Interest rates are favorable; banks, businesses and individuals have more cash and wealth than at any other time in history. Huge federal deficits have contributed mightily to the prosperity America enjoys today. We got to this point because of federal government deficit spending in the last two administrations. In doing so, we borrowed from the future to enjoy current prosperity. The politician’s hope is that enough of that newly created money ends up invested in economically productive assets, which assets will earn enough over the lifetime of their use to pay off the newly created $10 trillion, plus interest.

Current and intermediate outlook

Our economy has come a long way in the last five years. More than 10 million new jobs have been created. Increasing real estate values coupled with record stock market values are measures of the good fortune Americans enjoy. Both large corporations and small businesses are creating record profits. 

American productivity has had huge increases the last several years, which has lowered our domestic cost of production. The major decrease in the cost of oil benefits Americans most because, in addition to falling oil prices, the dollar has increased in price by 22% over the last few months. Oil is priced in U.S. dollars. The benefit to America is that costs of production are less than costs of production for most of our competitors. 

U.S. public outlook toward business is positive, as witnessed by the record stock market. All but 3% of mutual fund money is invested, a very low percentage of money to be left in cash. Mutual funds expect future stock market prosperity, and their expectations are greater than ever before. 

Where can U.S. corporations find new markets?

The map on page 15A is an interesting look at just one area where a good deal of U.S. expansion is expected the next several years. Notice that NATO has moved most of its ready units hundreds of miles east toward Russia. This area is half as large as the Louisiana Territory but has millions of people as potential customers, most of whom are literate. It also represents a tremendous acquisition of property for the free world that has pretty much gone unrealized by the public. 

In addition to a major reduction in past Russian trading markets, Russia is further contained. Because of her problems in Ukraine and the collapse of the Russian economy occurring now, they should not be a threat to NATO forces in the short term. 

In the meantime, U.S. corporations are making huge investments in hotels, manufacturing and infrastructure in Eastern Europe, a territory once controlled by Russia. Russia can’t compete with the U.S. in Europe because its currency recently crashed and has insufficient purchasing power. European countries can’t compete with the U.S. in Eastern Europe because the euro is going down in value and facing great pressure from problems such as Greece. The demand for American goods is great, and those markets should help the growth of large U.S. multinational corporations in the foreseeable future. 

 There are many other great markets out there. U.S. manufacturing opportunities exist around the world where other currencies have depreciated substantially against the dollar, such as Sweden (22%), Brazil (30%), Western Europe (22%) and Japan (16%).

 With the dollar up 20% this year, it buys a lot more overseas. It is more expensive now for the rest of the world to buy goods made in America, so U.S. corporations will use dollars to build facilities overseas from which goods can be shipped to other countries.

Long-term outlook

 The long-term outlook is just plain blurry. This $18 trillion U.S. debt could crush us if not gotten under control. As we have all learned in our lives, debt is great in bull markets; in bear markets, debt demoralizes and breaks us.

What 106 million people on welfare means is that one-third of our population is not supporting itself. The rest of the population cannot support one-third of their countrymen ad infinitum. The government is already borrowing money just to pay the interest on debt created to sustain the 106 million Americans on welfare. This is not healthy, and it cannot continue. Further, there is not a program in place or one being seriously considered that can solve any of these problems. 

Europe has now decided to make 55 billion new euros (equal to $60 billion) every month to “stimulate” the economy. It is copying what we have done for the last decade by bailing out countries such as Greece whose politicians are demanding loans to make the welfare payments to citizens “who are dependent upon welfare.” They are hoping this form of stimulus will put their economies in as good a stead as the stimulus has put this economy. That is not likely to happen because Eurozone workers are not as productive as Americans. Coupled with quarreling governments, and the outsized annual deficits of the southern European countries, Europe is a lot less likely to penetrate new markets than American companies.

Summary

All of this is wonderful short term and has the potential to make us a lot of money. But, as always, the question in the long run is: Who is going to pay for all of this?

So is our current situation Bush’s fault or Obama’s fault? It’s both, and it’s ironic that this great economy is a result of poor economic choices made by our last two presidents. 

Unfortunately, the day of reckoning will be very painful. Now, however, it’s nice to ride the train.

Caveat emptor!

George Rauch 
Contributing Writer