As we look around two years after the end of the recession in mid-2009, we find a still grim economic landscape, with unemployment statistics stuck in the doldrums and hardly a hopeful sign of improvement. Gross domestic product growth is ever so slow.
Why is this happening?
The easy-to-prove answers that rush to mind are 1) big government and 2) interventionist politics at the Federal level.
Our Republican readers may naturally want to blame Democrats. However, the facts say that both parties are to blame. They have both worked to increase government intervention. Since 2000, both the Bush and Obama administrations have greatly moved public policy toward government intervention and the impact on economic growth has been severe. A brilliant article on this subject by John B. Taylor in the Wall Street Journal reveals just how much blame there is to go around. Taylor, a Stanford University economist, and former member of the first President Bush’s council of economic advisors [George H. W. Bush’s], is author of the 2009 book “Getting off Track: How Government Actions and Intervention Caused, Prolonged and Worsened the Financial Crisis.”
In his recent article, Taylor argues that over the last four decades both interventionist and non-interventionist policies have had support of each political party. The destructive interventionist policies, first during the 1970s, and then from 2000 to the present, were supported by Democrats and Republicans. Similarly, both parties supported the very successful non-interventionist policies of the 1980s and 1990s. Taylor makes this important point: with lessons learned from the century’s tougher decades, including the Great Depression of the 1930s and the Great Inflation of the 1970s, the era of the 1980s and 1990s not only saw an amazingly strong job growth—44 million jobs created during those expansive times — but “it was a more stable and sustained growth period than ever before in economic history.”
The take-away message for both parties is simple and it is this: intervention has caused problems and the removal of interventionist policies has created great prosperity. Why can’t politicians see the obvious? Likely because they are always too busy running for re-election. Please take a moment to read Taylor’s insightful article.
The End of the Growth ConsensusAmerica added 44 million jobs in the 1980s and ‘90s, when both parties showed they had learned from past mistakes. The lessons have been forgotten.
By. John B. Taylor
This month marks the two-year anniversary of the official start of the recovery from the 2007-09 recession. But it’s a recovery in name only: Real gross domestic product growth has averaged only 2.8% per year compared with 7.1% after the most recent deep recession in 1981-82. The growth slowdown this year—to about 1.5% in the second quarter—is not only disappointing; it’s a reminder that the recovery has been stalled from the start. As shown in the nearby chart, the percentage of the working-age population that is actually working has declined since the start of the recovery in sharp contrast to 1983-84. With unemployment still over 9%, there is an urgent need to change course.For the full article please click the link below
Wall Street Jounal Online
We believe that both political parties should work together to bring back an environment where small and medium sized companies —the great engines of U.S. economic growth — can once again grow and prosper. The government needs to remove unnecessary red tape and penalizing regulations that make it almost impossible to build a big company today.
This is the problem. The economy is floundering. The politicians are flailing at each other. When small companies return to growth the U.S. unemployment problem turns in a direction that both parties want to see. As we have stated many times big companies in the U.S. are not adding net jobs; some are adding jobs some are cutting employment. Over the last decade, all net job growth in the U.S. has been a result of hiring by companies of 50 people or less. These small businesses are the engine of U.S. employment and they are burdened by excessive regulation.
Sharing this view is Bernie Marcus, the founder of Home Depot. In an interview in Investor’s Business Daily, he said the following: “Having built a small business into a big one, I can tell you that today the impediments that the government imposes are impossible to deal with. Home Depot would never have succeeded if we’d tried to start it today. Every day you see rules and regulations from a group of Washington bureaucrats who know nothing about running a business. And I mean every day. It’s become stifling.”
Please click image to enlarge
The Fork in the U.S. Economic RoadA stark political difference of opinion exists about the best long term economic strategy. One side favors a more centralized government control of economic activity, the other believes in controlled free enterprise.
Both have their benefits and their drawbacks. History has shown that U.S. employment and GDP have grown much more rapidly during periods of controlled free enterprise. If fair and honest-dealing free enterprise can be returned, the U.S. stands to enjoy strong economic growth and high employment like the 1980s and 1990s.
When we measure the odds of each scenario, the odds currently tilt in favor of the continuation of centralized government control which in our opinion is leading to a falling standard of living. There is still time for a long term change.
The current economic stagnation means that a continuation of quantitative easing (QE) and other policies to stimulate growth will be pursued here and in Europe for the foreseeable future. This will cause continued currency debasement, higher commodity prices, and higher inflation. We believe that it is probable that the U.S. will have their debt downgraded in the next few months whether the debt ceiling is increase immediately or not. The U.S. politicians have not addressed the problem of too much debt. We have long planned for this very contingency and our startegy remains intact.
This scenario benefits all of our favorite investment areas —gold, oil, food, strong non U.S. currencies and fast-growing foreign markets.
The Bond Raters Getting Tough
The Big Three bond rating agencies — S&P, Fitch, and Moody’s — are showing some spine these days with appropriate downgrades. Can they withstand the huge pressure from the powers-that-be to back down a bit? Time will tell, but so far so good. An article in the Financial Times written by Tom Braithwaite last week quotes S&P saying that taxpayers would have to bail out banks in a future crisis. We all know this to be absolutely true, but to have S&P say it is significant. To quote the article: “Officials fighting the next financial crisis might again bail out banks using the public purse. We believe that governments may try to avoid a contagion and a domino effect if an ailing financial institution finds itself in a financially weakened position in a future crisis.”
As we wrap up the writing of this letter congress and the president to have come no closer to a solution for the debt ceiling and have no agreed upon plan to cut the U.S. deficit.
While waiting and watching this display of political selfishness by the elected representatives may we again suggest that you remember the only solution that we currently see to protect the buying power of your assets is to hold gold, oil, food, quality non U.S. currencies and fast growing foreign stock markets.
We thank you for your continued support, to request information about Guild Investment Management services and offerings please call (310) 826-8600 or email email@example.com
Please see our recommendation table below, and stay tuned to our upcoming letters for new recommendations.
|Investment||Recommended||Closed||in U.S. Dollars|
|30 YR Long Term|
|U.S. Treasury Bond||8/27/2010||10/20/2010||0.0%|