Macroeconomics

[lusus]

I have seen quite a few hooahs on the site making statements that the economy is weak, that the tax cuts only benefit 'the rich', and that the deficit and debt are unmanageable.

Since I gave up my -16 for a spreadsheet and spend my days trying to figure out the forward earnings outlook for industrial companies, I figured I might as well present the other side of the argument. If there is a better forum for this discussion I hope someone will move it, and if no one cares it will slowly sink like a non-swimmer.

My contention is that this is a strong economy, exhibiting sustainable and deep growth across multiple segments which in turn drives job and wealth creation. Unemployment is ridiculously low, interest rates are in line with historical levels, GDP growth has been robust despite 9-11, Katrina last year, and oil prices which were recently at $80/bbl.

The fact that the US ecnonomy has been able to absorb those impacts and drive on is pretty amazing to me, and tells me everything I need to know about the superiortiy of capitalism and a republican (small R) form of government. You just don't get results like that in other places, which means that the people who run those countries dont' get it. These results are not a fluke, they are a design.

It would be a disaster for us to adopt a more socialistic model with its slow-and-no-growth policies in order to be 'fair'. There is a reason why we lead the world technologically, militarily and in terms of immigration. People vote with their feet and their wallets. Some other countries are figuring it out. Every single time you cut taxes (which by definition has to benefit 'the rich' because they pay the most taxes in the first place) the economy takes off. Every single time. Governments don't create jobs, people with money and ideas and the willingness to take a risk do. We have to keep more money in their hands, because they are the engine.

As to the market making a new high, the number itself is not important. The thing to remember is that the market is a giant discounting machine. It guesses what the future value of a stream of earnings from the US economy is, applies a risk factor to discount those future cash flows, and arrives at a present value. The Dow at this level is indicative of the collective wisdom of all the market participants, and they are saying that the near future looks pretty good.

Here is a short editorial from todays WSJ which says this better than I can.

It took nearly seven years. But the Dow Jones Industrial Average finally closed at a new record of 11727.34 yesterday, topping the previous high recorded at the peak of the dot-com bubble on January 14, 2000. Adjusted for inflation, the Dow still has some ways to go to catch that earlier peak. And the Nasdaq, loaded as it is with tech stocks, closed with a slight gain yesterday at 2243.65, well below its 5048.62 peak on March 10, 2000.

Yesterday's new Dow Jones high is nonetheless worth celebrating as a sign of America's economic resilience. At the start of every bear market, there are always voices saying we will never see the top again. But the smartest investors always turn out to be those who see new lows as a buying opportunity.

In the current mini-bull market, stocks have been driven by a record 13 straight quarters of double-digit gains in corporate earnings. With more of the same expected this year and next, many stocks have price earnings ratios that make them good targets for "value" investors.

The stock market's strength is an especially good omen given that we are at a point in this expansion when many economists doubt its staying power. Investors seem to be betting that rising rates, the housing slump and a possible change of power in Congress won't stop the economy's growth. They may well be wrong in the short term. But the lesson of yesterday's new stock market high is that in the long term optimism always pays.

[Rock Island Ranger]

Good post Lusus...factual as well.
I do not disagree with what is though I tend to look beyond that and see "what could be". People are still working, stock markets still producing growth....Americans and this country still can out produce any nation anywhere. BUT, your example of Katrina is fine as far as it goes. If a calamity of MAJOR natire took place which was not regional but national, Im not certain we would see the same resiliancy. I dont know of ANY economy as fragile as this one. THAT boils down to the consumer expectations. IF the economy as a result of a major hit were to falter and fall, the people of this country would NOT be able to contain, sustain, or understand. It seems that when something happens, all eyes look to the Government to "FIX IT". That isnt good juju. Regionally, we are seeing some dips in real estate values. Worse, the deficit WILL have an effect and unfortunate for us...the Democrats will likly take the next election. Their answer is simple. Tax. They do NOT like big business, they do NOT like Americans who make alot of money and they NOT like independant thinking. They need and will legislate the population dependence on the Government. I see what is but more ominous, I see what could be and when the mind set of the population screams..."GOVERMENT...FIX IT"...we are so fucked.

[Scoty]

Good post Lusus...factual as well.

It seems that when something happens, all eyes look to the Government to "FIX IT".

So true, Pastor. I see consumer confidence plunging after the Dems take office and start raising taxes. This will be yet another test for our economy.

I'm glad I'm not smart enought to know much about this stuff.

[Jim]

Absolutly agree. Sadly, the idea that we need to "protect" the little guy is seen by many in government to meddle in the affairs of everyone. Jefferson was right: "Government is best which governs least."

[Ranger Ron]

Absolutly agree. Sadly, the idea that we need to "protect" the little guy is seen by many in government to meddle in the affairs of everyone. Jefferson was right: "Government is best which governs least."

And: "You can't strengthen the poor but weakening the rich"

[Invictus]

Was talking to my brother in law about this very thing and your other post Lusus in the news area. I'm still educating myself on some of these issues, here was his response though, which I'd like to hear your comments on. (Keep in mind this was in response to your previous post asking me about my concerns with the economy.)

One big problem is the debt that was mentioned. It is beyond what real economist, that aren't apologist, can foresee us being able to deal with in the next 20 to 30 years. Things can change and get suddenly better but we have to stop creating the debt to ever get to a place where we can start to pay it back. The current plan is to make this problem worse. Bush fired O'Neil because he told him his third phase of tax cuts during a war was not wise and would create extraordinary debt. Bush now has a guy that just follows lock-step with whatever he says regardless of how destructive it is. This is the very scenario that got Bush #1 run out of town. Perot showed everyone with his goofy little graphs how long and hard it would be to get us flush again. Current Bush out spends Lyndon Johnson on the non-essentials (Reason Magazine, June '06). He spends more than Clinton on non-essentials (Reason Magazine also, not exactly a liberal rag). He is obviously outspending them on essentials like security expenditures as well. Your kids will still be paying debt service on our loans for today when they turn 30. Bush is obligated to fund the war and has made sure that continues to happen which is obviously a good thing. He however funds everything else as well, including further tax cuts. The little checks that were sent out to everyone the last couple of years were funded with 30 year obligation loans. It is quite plain to see that we have to stop spending. George Will and Bill Krystal (conservatives of all conservatives) have been questioning his spending for the last several months. I agree with what was said about us paying relatively low taxes. That being the case, why not stem the flow a hold off on the tax cuts until we don't have to borrow the money to provide them. It isn't a maintainable situation. It isn't even logical. If we continue on the present path of spending for even a few more years, our debt service will out pace our spending on anything else. That is irresponsible at best.

Our economy is the reason we are what we are. We would just be another nice place to be if weren't for our economy. The problem now is that our current policy jeopardizes that. County to County loans are all based on US currency. However, as a direct result of our debt service getting so high, the value of the dollar is suffering dramatically. The Euro is kicking its ass and even the Yen is making gains on us. If the standard ever changes to a more stable currency, we are screwed. No one can call our loans now because all we would have to do is make some money and give it to them. That would not be good money policy but we don't bother with that currently either. If the standard changes to the Euro, our ability to get called is very real and very scary given the dollars performance in the last 4 to 5 years. The World Bank started making noise about a year and half ago about this very thing.

[Silverback]

Let me guess:

The market is successful in spite of all President Bush has done

[Invictus]

SB,

What liberal Fuckstick are you referring to? I can't seem to find where someone made the comment you indicated.

[Silverback]

SB,

What liberal Fuckstick are you referring to? I can't seem to find where someone made the comment you indicated.

Liberal fuckstick was a generic term. I was commenting on the inability of the liberal base to assign any responsibility for good that happens to Bush

[Invictus]

Gotcha. Thanks for clarifying.

[PatriotFront]

Dennis Miller said, "National debt? I don't even know what the national debt is. Do we actually owe someone that money? Fuck it, don't pay."

Is it possible to not pay the national debt?

[Looon]

Is it possible to not pay the national debt?

If I was President?..........................FUCK YEAH, it would happen.

Anybody remember the movie 'Dave'?

[Rock Island Ranger]

Dennis Miller said, "National debt? I don't even know what the national debt is. Do we actually owe someone that money? Fuck it, don't pay."

Is it possible to not pay the national debt?

It sure is. Of course, the value of the dollar, the entire Gold Reserve System, the stock market and all Bonds including zero coupon, Savings and other debt instruments would devalue to zero.

Doesnt seem like a good idea.

[IntelToad]

I've said it before. As a business owner, the next time I hear a politician say that they can create jobs, and that tax cuts benefit the rich, I'm going to drive my head through the wall.

Government does not create jobs. It redistributes wealth in the form of benefits, hand-outs and give aways from those that produce to those that do not.

If you leave more money in the hands of the "rich" they will do the following with it- spend it, invest it or plow it back into their companies thus creating jobs and creating wealth.

If you give more money to the government, it disappears into a black hole. If I tried the lax accounting that the government uses, I'd end up in jail. Government does not face any competitive pressure to improve, cut costs or manage to a bottom line.

My favorite screw the rich story happened under Clinton. They raised the luxury tax to punish evil doers that bought supposedly excessive stuff like yachts. All of the screw the rich sympathizers cheered. One net result of this was that it virtually wiped out a number of companies in coastal Maine that specialized in building expensive boats- blue collar craftsmen, electricians, mechanics etc. Plus it had the double whammy of affecting the gas stations where these people bought their gas, the stores where they bought food etc. etc. Under political pressure, parts of it were repealed.

Our society is totally fucked up. It punishes those that achieve and rewards those that do not.

As for the above, no the US cannot default on its debt. Countries have credit ratings, just like people and companies. Although the US debt is at historically high levels, as a percentage of GDP, it isn't.

And with that, I'm off to drink a beer.

[Ranger Ron]

I've said it before. As a business owner, the next time I hear a politician say that they can create jobs, and that tax cuts benefit the rich, I'm going to drive my head through the wall.

Government does not create jobs. It redistributes wealth in the form of benefits, hand-outs and give aways from those that produce to those that do not.

If you leave more money in the hands of the "rich" they will do the following with it- spend it, invest it or plow it back into their companies thus creating jobs and creating wealth.

If you give more money to the government, it disappears into a black hole. If I tried the lax accounting that the government uses, I'd end up in jail. Government does not face any competitive pressure to improve, cut costs or manage to a bottom line.

My favorite screw the rich story happened under Clinton. They raised the luxury tax to punish evil doers that bought supposedly excessive stuff like yachts. All of the screw the rich sympathizers cheered. One net result of this was that it virtually wiped out a number of companies in coastal Maine that specialized in building expensive boats- blue collar craftsmen, electricians, mechanics etc. Plus it had the double whammy of affecting the gas stations where these people bought their gas, the stores where they bought food etc. etc. Under political pressure, parts of it were repealed.

Our society is totally fucked up. It punishes those that achieve and rewards those that do not.

As for the above, no the US cannot default on its debt. Countries have credit ratings, just like people and companies. Although the US debt is at historically high levels, as a percentage of GDP, it isn't.

And with that, I'm off to drink a beer.

IntelToad, I agree wholeheartedly!!! Especially the beer part.