I have not written a new Musings since last fall. There was not really anything new to write about. Nothing new? Think for a minute about the issues that have concerned us for the past two years. Are they still paramount? You bet.
Okay, Europe has succeeded in postponing its problems for a while, although Spain may be the new Greece.
And, yes, the U.S. economy is improving at a slightly better rate than was true on average for 2009-2010. But by most measures we are still below where we were five years ago. The dents being made in unemployment are still miniscule, although total employment growth has been modestly encouraging.
Ben Bernanke spoke to the National Association of Business Economists this morning and expressed some puzzlement over the reasons why GDP growth wasn’t matching the improvement in employment. The best he could muster was that employers, shocked by the pace of decline during the worst of the crisis, overdid the layoffs and are now in a catchup phase of hiring.
But the truth is that we are still clawing our way back from a precipice, a precipice that was avoided by massive, world-wide monetary expansion, and giant federal deficits.
I am aware, of course, of the critics who say that the cure for an overload of debt either cannot or should not be more debt. They point to the apparent lack of success of these monetary and fiscal actions in speeding the recovery, but, in my opinion, fail to give enough credit to them for avoiding what probably would have been a full-blown depression, and whether we would have had any recovery without them.
But the past is now prologue for a future that will require very different and very difficult political-economic decisions if we are to have the recovery continue and if we are to avoid both a serious inflationary aftermath and severe decline of our sovereign credit worthiness.
The nation’s political fortitude continues to sag. The hope of having either a congress or a president willing to tackle out-of-control entitlements is feeble at best. And the senate’s making it necessary to garner 60-votes for passage of controversial legislation was not what our founders had in mind; nor is it true to our democratic spirit.
What happens to interest rates when inflation of, say, 5-6%, is combined with lack of faith in the nation’s credit? And what does the federal budget look like then? It will be overwhelmed by interest costs alone.
And how does the economy’s growth survive what must be both a significantly higher level of taxation and spending cuts if we are to bring our fiscal mess in to some sort of order? Truly forceful leadership would help. Right now, I don’t see that on the horizon. Frightening to contemplate is the fact that historically our best leaders were created by crises, e.g., Lincoln, FDR, Harry Truman. Must we, therefore have another serious crisis? All the recent crisis did was aggravate an ideological war, not create leadership.
These are truly serious issues. When will they be addressed and by whom? That question forms the context for the economy’s next few years. It forms the investment climate, not the day-to-day reports on retail sales, employment, production , and profits, all of which are merely weather reports.
This climate, I believe, will limit investor enthusiasm and valuations for some time to come. The future holds similarity to the recent past; that is, spurts of more rapid improvement followed by periods of doubt and worry. Investment returns are likely to be modest at best.
For now, go ahead and enjoy the faster rate of economic creep, but remember we are living in a bad climate.