BALI, Indonesia — With stock markets around the world having beaten a hasty retreat recently, a cautionary tale might be found by looking at the United States, since it is ground zero for current economic and financial upheavals.
While President Barack Obama is overseeing vast spending increases to stabilize the economy, the U.S. stock market was tanking while prices of long-term Treasuries continued to rise.
It is no coincidence that the Dow Jones Industrial Average (DJIA) had the worst January in its 113-year history, down 31 percent, nor that blue chips had the worst February since 1933, down another 120 points, while the S&P 500 declined by 2.4 percent. After six consecutive monthly declines, the DJIA breached 7000, sparking talk of a correction to 5000.
Since markets are forward-looking, share prices represent anticipated future earnings. Recent dismal performances show that investors do not like what lies ahead. One element of a future perspective is to capitalize on the effects of government economic policies. As such, share prices can be expected to fall when current or anticipated policies are seen to lead to lower economic performance.
With recession long factored into stock market indexes, the recent retreat is signaling fear that Obama’s policies will inflict great harm on the U.S. economy. Another harbinger of waning faith in the economic future is that gold prices began a sharp ascent in November. Did someone say “panic?”
One reason for economic dread over the Obama policy mix is the likelihood that elements of the stimulus package will become permanent, leading to continued high deficits, higher taxes or both. Anyone believing otherwise is either delusional or in denial.
Obama’s proposed federal budget of $3.6 trillion for next year carries a $1.75 trillion deficit — nearly four times the highest in history. This puts the proportion of GDP going to federal outlays in fiscal 2009 at 27.7 percent, the highest share of the economy in any year since 1945. The deficit would be 12.7 percent of GDP and is $250 billion more than earlier projections due to proposed new spending to bail out banks and other financial institutions.
Obama complains about inheriting a large deficit and that the national debt under Bush doubled. But under his watch, the current deficit will almost surely double and perhaps triple.
As it is, Congress is led by politicians with a penchant for increased regulation and more public-sector spending regardless of the size of deficits. So, despite campaign promises to banish earmarks and recent entreaties to Congress to exercise restraint, the most recent spending bill was heavily laden with pork.
Market players do not buy the hyped justifications for such an enormous increase in government spending and expanded controls over the U.S. economy. Following Obama’s penchant for “channeling” Lincoln, he is finding that you cannot fool all of the people, all of the time.
For their part, the Obama team increased the climate of uncertainty to stampede the general public into accepting the stimulus package and the mushrooming deficit. While successful entrepreneurs can deal with uncertainty from market conditions and even thrive under them, uncertainty created by politicians tends to stifle business activity. Fear-mongering and negative remarks about the economy to spook the electorate into supporting his spending plans have undermined overall confidence.
One political certainty is that there will be more taxes on small businesses, on work and on capital investments. There will be new and costly burdens from taxes related to a cap-and-trade carbon emissions scheme and the move toward nationalized health care. All this will increase the size of government as the private economy shrinks.
As the private sector reels from recession, massive public-sector borrowing will force up interest rates and “crowd out” private investments. As private firms face higher borrowing costs, marginal investments that could create new jobs will not receive needed capital. Then there is the elephant in the room that nobody wants to notice: rising inflation. Myth-making about this being a redux of the Great Depression induces the Fed to orient monetary policy toward warding off deflation. But this is not your grandfather’s recession; it is more like the one conjured up by U.S. President Jimmy Carter.
In a single term of office (1977-1980), Carter oversaw double-digit inflation, double-digit unemployment, double-digit interest rates, shrinking incomes and increasing poverty. As the Federal Reserve raised the federal-funds rate from 9 percent to 19.1 percent, the 30-year mortgage rate hit 18.45 percent.
With the Fed fighting the wrong enemy, the annual rate of growth of the money supply has been about 20 percent since last September. With monetary spigots on full blast and pork-barrel politics in full cry, it can be said with near certainty that this will trigger rising domestic prices.
Given the dollar’s pre-eminent role in global trade and finance, this in turn could lead to globalized price inflation and stagflation.
Regardless of the hand dealt to them, the Obama administration and its allies in Congress aim to increase the burden of taxation and regulation on a weakened economy. Therefore, it is not surprising that this policy and the massive inflation of the money supply draw a thumb’s down from the stock market, ending hope for a quick recovery.
Christopher Lingle is research scholar at the Center for Civil Society in New Delhi and visiting professor of economics at Universidad Francisco Marroquin, Guatemala.
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