by Elliott Morss, Morss Global Finance
During the entire “Cliff” debate, I focused on one thing only: Will the politicians be foolish enough to imperil the slow and fragile recovery taking place in the US? And on this issue, merely avoiding the Cliff was not enough: the government deficit stimulus had to be large enough to keep the recovery going.
The Republicans remind me of the German political leaders: oblivious to the dangers of “imposing austerity” too soon, the Germans have demanded that Greece, Portugal and Spain tighten their belts by reducing their government deficits. The result: Greece and Spain have unemployment rates of 26% with Portugal not far behind at 16%. As I have written, these rates are politically unsustainable time bombs.
The US Situation
The employment numbers appearing in the following table are all that matter: 3.8 million jobs lost in 2008 and another 5 million in 2009 – 8.8 million jobs lost! In the last three years, a fragile and gradual recovery has started: 5.3 million new jobs created. But that leaves another 3 million+ jobs to go. This is not the time to impose US austerity.
Source: US Bureau of Labor Statistics
US Monetary and Fiscal Policy
Give Bernanke credit: he studied the ’29 recession and now just how fragile the US recovery is. He has done all he can to keep interest rates low. But as Keynes pointed out, there is a “liquidity trap” – a place where interests are low but nobody will borrow. In such circumstances, the only thing the government can do to stimulate aggregate demand is to spend more than it takes in. And despite a dysfunctional Congress, the Federal government has stimulated aggregate demand by running deficits of $1.3 trillion in both 2010 and 2011, and $1.1 trillion in 2012.
According to the Congressional Budget Office, the deficit would have fallen to only $641 billion in 2013 if the Budget Control Act (The “Cliff”) provisions had kicked in. That would have meant a reduction in US aggregate demand in 2013 of $487 billion caused by a smaller US government stimulus. Is the private sector yet healthy enough to pick up that much slack? I don’t see that as a risk worth taking.
On January 1, the Congressional Budget Office put out a table estimating the effects of the bill approved by Congress and signed by the President to avoid the “Cliff” – the American Taxpayer Relief Act. The CBO document gave only changes. Changes from what? An attempt to clarify the table was issued a couple of days later – http://www.cbo.gov/publication/43835.
While I am not absolutely certain about the January 1 CBO table, I assume it means that as a result of the legislation enacted, the deficit will be $971 billion in 2013 instead of the $641 billion it would have been under the “Cliff” legislation. That is promising. The private sector should be able to make up for the reduction in the government stimulus of $157 billion (1.128 trillion in 2012 to $971 billion in 2013).
The new bill should not interfere with gradual US recovery. Of course, Congressional wrangling over increasing the debt limit could change all this. However, I am bullish on the US economy in general (SPY) and US real estate in particular (KBWY).
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