Since the publication of the previous edition of the Sterling Weekly the overall market as measured by the Dow Jones Industrial Average rose 149.79 points or approximately 1.6% to finish at 9,321.40 The recent market rally is beginning to show signs of running out of steam. The Dow has basically oscillated around 9,300 since the start of August and trading volume has been trending lower. These are the things that start to make nervous and worried about a market pullback. While this week's economic calendar is rather light, it does contain the PPI numbers and housing sales. It's tough tell at times, but I would not be surprised to see a pullback in the market sometime between now and Labor Day.
The economy has been performing below the expectations of some people and below what others believe is its potential. Those who thought that the so called stimulus package earlier this year was actually going to work are those who most likely think the economy is performing worse than expected; and those who think there was no stimulus in the stimulus package probably feel the economy is performing below its potential, because they stimulus package to help the economy in the 1st place. The problem with the "stimulus package" earlier this year is that it had no real stimulus in it. The package contained a majority of pork barrel spending for special interest groups and other pet projects and it contained very little of the infrastructure projects that it was advertised as being made up of. In other words it was a Keynesiam style, a/k/a deficit spending package. You would have thought that the economic performance of the late '60s and 70's would have proven that Keynesian economics didn't work, I guess the media and younger generations of today have forgotten the lessons of the 70's and 80's.
So with an under performing economy and the President's approval ratings following the economy south, there is now talk of a second stimulus package. But, before we rush out a second stimulus package, we need to really ask ourselves a couple of key questions. The 1st being why didn't the stimulus earlier this year work as promised? The Second Question I would ask is, what has worked in the past?? And finally, I think we can all agree that the economy has some structural problems, but most people can't seam to agree on what they are. So, for my Third Question, I would like to ask what those long term problems are, and what we can do to address them.
First, has this stimulus package worded?: No it hasn't. The stimulus package from earlier this year didn't work because it contained very little of the infrastructure style spending that is was advertised to contain. A vast majority of the stimulus package was pork barrel spending and pet projects that really did not give the economy any growth. Additionally, history has shown that there is not the so called Keynesian multiplier where a dollar of deficit spending generates $1-$2 or more in economic growth. In fact, history has proven that $1 in deficit spending generally only generates about $0.80 in overall economic activity. In other words, Keynesian style deficit spending hurts the economy and reduces economic output. Another way of looking at it is that this so called stimulus package has actually hurt the economy and made things worse. We definitely don't need a second stimulus of this nature.
Second, What has worked in the Past?? When Ronald Reagan entered the White House 1981, the economy was in far worse shape. Both unemployment and the rate of inflation were at far higher levels that they were earlier this year. President Reagan took a totally different approach. He knew that the government was very inefficient at delivering goods and services to the American people, and that private enterprise could deliver the same goods and services much more efficiently than the government could. So Reagan opted to privatize the delivery of as many of the services provided by the Federal government as possible. This has 2 main effects. The 1st being that it lowered the cost of delivering those good and services to the American people, resulting in cost savings; and secondly the private companies that took over those services were able to generate profits in the process and this added to the tax revenue collected by all levels of government. The second major thing that President Reagan did was to cut taxes. By cutting taxes, companies were able to increase their after tax income and thereby allowing them to have more money to reinvest and to hire more employees; secondly the American public was able to take home more income due to lower taxes and this left the American public with more money to spend and invest. The lower tax rates were very stimulative to the US economy. Let's not forget the recession in the early 1980's was far worse than the current one and we recovered very nicely from that one with far less trouble than we are currently having. President John F. Kennedy also lowered taxes providing the US economy with a boost; and President George W. Bush was able to cut taxes in 2003 and pull the US economy out the recession following the September 11th terrorist attacks. So we have a history of tax cuts stimulating the US economy and promoting long term economic growth.
Third, Structural Economic Issues and What can be Done: Everyone can agree that the economy has long term structural issues. The problem is that not everyone can agree on what they are. So, let me offer my perspective on this topic. The world has become a much smaller place, and word trade has become so fully integrated into the major economies that all nations are competing in the world market in a manner they never before envisioned. What that means for the United States is that we are now competing in a way that we have never had to before; and that goods and services now move across borders looking for the most efficient and competitive markets. One of the main economic issues we have is that we have failed to recognize this and as part of that failure we have enacted policies that make us uncompetitive in the world economy. The think tank, American Solutions has published a list of 12 items that we can change that it views as being able to make the United States again the most competitive nation in the world, and in the process again the leader in world economic for the future. A list of those items can be found here. I'll post the full list on my economic blog later today when I get the chance. But at the end of the day we need to be very aware that the laws, and policies we enact here impact our combativeness in the world economy and in the end will have unintended consequences for our domestic economy.
Summary: At the end of the day we definitely do not need another stimulus like the one we had earlier this year. Keep in mind and never forget these three (3) things. A. There is no such thing as a free lunch. B. No country has ever depreciated its currency as a means of long term prosperity; and C. No country has ever achieved prosperity through deficit spending. What we need is to bring our deficit under control, to privatize as much of government services as we can, to keep tax rates low, and to make sure we are competitive in the world economic market place.
Sterling Investment Services is currently offering FREE SUBSCRIPTIONS to its daily Prime Stock Newsletter. This FREE SUBSCRIPTION OFFER is available between now and September 1st. In order to take advantage of this FREE SUBSCRIPTION OFFER please click (here.) Additionally, Performance Reports on our trading recommendations can be found (here.)
|
