Monday, March 12, 2012

Groundhog Day

Groundhog Day Bill Murray played a weatherman who was doomed to repeat February 2nd over and over, at least until he fell in love.  Barack Obama and Benjamin Bernanke could have written the script, except for the falling in love part.  The President and Federal Reserve Chairman have been sending the United States economy around in circles since 2009.  And by the looks of it, Punxsatwaney Phil could be in the picture again this year.  Every year President Obama jacks up the economy with a federal deficit equal to 8%-10% of the country's entire GDP.  (That's a lot.  Jimmy Carter peaked out at 6%.)  In 2012 it's predicted to be $1.3 trillion out of $16 trillion in total output, or 8%.  That's four years running.  Approximately $5.5 trillion of total new debt obligations have been issued over than span.  Doctor Bernanke just unleashed Operation Twist in late 2011, moreover.  In 2009 he cranked up QE-1.  In 2010 he did QE-2.  Last year he also shipped $500 billion of cash to Europe to smooth out their problems.  But all that money hasn't been directed to the American people.  Per capita inflation adjusted income is down -6% since the President took over.  It's gone into the bond market instead -- anyone wonder why Warren Buffet is such a huge supporter -- and from there to every other market, particularly hard assets and commodities.

Print.  Stimulate demand.  Inflate commodity prices.  Crush demand.  Print.  The Obama-Bernanke Groundhog Day economic cycle. The fact most of the money being created is being steered into the capital markets, well, that's good for stock and bond prices.  And it probably was a solid strategy from an economic standpoint at the beginning.  Regrettably, the administration focused all its efforts on a variety of pet projects instead of high rate of return programs like housing, controlling China, and energy.  All that "stimulus" money has gone down the drain, from a practical standpoint.  But it has remained in circulation, pushing consumer prices higher.

 ( Click on Image to Enlarge )

The federal deficit has shoveled $5.5 trillion of new money into the system since the current administration took over.  The Federal Reserve has created at least $2.5 trillion more, probably $3.0 trillion after the latest gambit in Europe.  Despite all that, plus renewed stimulus efforts in Europe and China, real growth in the U.S. is stuck at a 2.0% annual rate.  Personal income growth is zero.  ("You can have a performance review if you want one.  But either way, you won't get a raise.") 

Maybe the American people will fight through the Government's policy obstacles.  The Federal Reserve recently indicated the economy was looking good and more stimulus won't be necessary.  But that's what they said the last three years, as well.  What if the economy can't get rolling?  More deficit spending and QE-3, most likely.  Groundhog Day!

Walter Ramsley
Executive Editor