Wednesday, July 6, 2011

Debt to GDP

APPARENTLY BUYERS WERE EXCITED about the upcoming Independence Day celebrations, as stocks reported a solid week. By the numbers, for the two weeks ended Friday, July 1, 2011, the Dow Jones Industrial Average closed at 12,582, up 578 points, or 4.8%. The Standard & Poor’s 500 closed at 1339, up 68 points, or 5.4%, and the NASDAQ Composite closed at 2816, up 200 points, or 7.6%.

Some believe the government of Greece will be able to implement and maintain austerity measures. They won’t. Weaning politicians from buying votes today with promises paid for tomorrow is some multiple worse than getting a meth head clean. The reflection in the mirror when I look at Greece is the U.S., about twenty to thirty years out. The good news? We can change that future. Do we as citizens care enough to make the changes necessary, so we can say once again that America’s best days are still in the future?

Corporate America deployed $124 billion of its substantial cash reserves, during the first quarter, buying back stock, with the goal of increasing share price. Bank of America will take a $14 billion charge during the second quarter, to settle claims related to sales of mortgage backed securities.

Microsoft launched a web-based version of its Office Suite on Tuesday, in its efforts to capture cloud market share. U.S. home prices rose in April, for the first time in eight months. This is good news according to Case-Schiller.

Frank McCourt, according to reports, has enjoyed a very comfortable, debt financed, lifestyle. McCourt, currently going through an ugly divorce, has also filed for Chapter 11 bankruptcy protection for the LA Dodgers, blaming the move on Bud Selig’s refusal to approve a long term broadcasting deal with Fox.

On the economic front, jobless claims were 428,000 for the week ended June 25, 2011. The four week average remains below the near term peak of 440,000. U.S. consumer confidence declined again in June, following a decline in May. This decline was in both the “present situation” and “expectations” components. This confidence, or lack thereof, seems driven by the continuing challenges in the labor markets, as well as the ongoing deterioration in housing prices and conditions.

Some are suggesting the end of America as we know it, with the complete deterioration in the value of the dollar, and scenes reminiscent of a Mad Max movie. These scenarios are very attractive to many, probably for the same reasons that newscasts tend to open with bad news first.

Those whose livelihood and future depend on our centrally planned economy, essentially all of Washington, will do anything necessary to prevent this. In fact, in the next few months, we expect the White House and all of Congress to introduce all manner of initiatives designed with one goal – strengthen the economy and increase employment. After all, they have an election to win in the fall of 2012.

It is very possible that the economy will drag along, with meaningful underemployment, and a tired housing market, for several years. Real inflation, meaning what actually hits our pocketbooks, will remain in the 4% to 6% range for the next few years.

What must be controlled is federal spending. During the long depression of the 1870’s, debt to GDP stood at 166%. During the Great Depression of the 30’s, debt to GDP peaked at 300%. Today, debt to GDP is 350%. A 2010 McKinsey study showed that periods of de-leveraging tend to last six to seven years. We must stop spending beyond revenue, starting with the federal government, and pay down our debts.

However, in all of this, there is opportunity. Down cycles give all of us the opportunity to sharpen our decision making capacity, to learn new skills or new ways of working, to pay close attention to the dollars that pass through our fingers. These new skills will allow us to multiply our return in any number of ways as and when the economy hits a strong up cycle.

Those who are unemployed or underemployed will continue to go through tremendous change, as they learn new ways or working, and making a living. I can think of no better reason to start and build a business than to provide employment for those who want to work.

Supply chain managers are pricing oil at $150 a barrel, as they project costs over the next few years. This will continue to bring manufacturing jobs back to the states. As much as a centrally planned economy runs counter to the free enterprise system, America remains the Golden Land. We have the best infrastructure, the largest consumer base, and overall, the most highly skilled workforce in the world. In addition, more than anywhere else in the world, we are open to immigration, being a nation of immigrants. Add these together, and in spite of our problems, America’s future looks bright, compared to much of the world.

If we will choose to turn from the European model, which clearly doesn’t work, and return to a free enterprise, capitalist model, I believe America can restore its greatness. On a side note, the Wall Street system is not a free enterprise model, as they get substantial rewards, but bear little or none of the risk, associated with their poor decisions.

Quote of the week:

“America was not built on fear. America was built on courage, on imagination, and an unbeatable determination to do the job at hand.”
                                                                                                 Harry Truman

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