Posted on 12/02/2004 12:14:59 AM PST by kattracks
If the economy's so bad, why is it so good? Crashing dollar, twin deficits, rising gold, foreigners selling our assets -- the list goes on and on for members of the negative and pessimist mainstream media. But unfortunately for them, and fortunately for the rest of us, the economy is in excellent shape.
According to the latest report from the Commerce Department, real gross domestic product rose 3.9 percent in the third quarter of 2004. GDP is still the best overall measure of the economy -- that is, outside of the stock market, which is always smarter than the bean-counters. The S&P 500 and the Wilshire 5000 are both up about 50 percent since October 2002. That's two more votes for a healthy, non-inflationary prosperity, one that's chock full of rising profits and record productivity.As usual, the optimists' list is way longer than the pessimists'. Core inflation is coming in around 1.5 percent. Business equipment and software ("cap-ex" as it is known on Wall Street) grew by 17.2 percent last quarter, while consumers spent at a 5.1 percent pace. Meanwhile, U.S. trade is very healthy. Exports rose by 6.3 percent at an annual rate, while imports increased 6 percent. New jobs are running near a 200,000 monthly pace. Unemployment, at 5.5 percent, is historically low.
The dollar? If certain officials at the Federal Reserve will stop bad-mouthing it, we'll wake up one of these days with a 15 percent dollar rally. Why? Because President Bush's pro-growth fiscal policies will restrain spending and reduce tax rates, especially on saving and investment. Higher after-tax investment returns will attract foreign capital from all over the world. If you haven't noticed, Japan's economy is slumping again. Europe's economy never recovered in the first place. And fast-growing China and India are becoming our best export customers. The dollar is way undervalued in this environment.
However, if you truly want a balanced trade account in the United States, the most effective but demoralizing way to achieve it is to induce recession with rising tax rates and excessive Fed monetary restraint. The trade accounts were balanced in the early 1980s and the early 1990s because of recession -- but this was reflected by a total collapse of U.S. imports, jobs and just about everything else. Recessionary policies would be lunacy today. America's trade gap is itself a sign of prosperity. Our economy is rising, while other industrial economies are not.
Under President Bush's revival of Reaganesque, low-tax, cowboy capitalism, world money is migrating to the highest investment-return nation. Right now, that's the United States, among major countries, and China and India among emerging countries. This inflow of foreign money is raising our national income and stimulating our economy, including import demands.
Meanwhile, the conventional wisdom that twin budget and trade deficits cause the weak dollar -- a thought that has been wrong for 25 years -- misses a crucial point: Strong U.S. economic growth reduces the budget deficit (which has already dropped $100 billion) but increases the trade gap.
Here's another way to look at it: As the U.S. economy rises, tax collections go up and the budget deficit goes down, but the trade gap widens unless our major trading partners take pro-growth policy steps to cut taxes, deregulate markets and end socialism. This is what China and India have done as they liberalize their policies, increase their growth rates, and become important buyers of U.S. goods and services. Not until our G-7 partners take pro-growth policy steps will the trade gap begin to narrow.
Meanwhile, both domestic interest rates and the dollar exchange rate are primarily driven by the Fed's monetary policy -- i.e., whether the central bank creates more dollars than the rest of the world wants. It is this excess money that causes inflation at home and sinks the dollar abroad.
Rising gold and higher Treasury bill rates are market-price signals that the Fed should remove some excess money. That is what the Maestro intends to do, as he takes monthly steps to normalize the Fed's target rate.
But the Fed is already tighter than many recognize. Commodity markets tell that story. The Commodity Research Bureau's spot index of 22 commodities has slowed markedly from a 24 percent rate of yearly increase last spring to only 7 percent recently. This sensitive market-price indicator is suggesting that the central bank is already creating dollars at a much slower pace, another reason why the dollar is undervalued.
In the end, the pessimists will be wrong again. Lower tax rates and inflation-restraint will be a powerful tonic for rising stocks and the economy. Provided, of course, that the maestro doesn't take restraint too far.
Bush needs to cut spending or the economy will collapse.
Give me a $3 trillion credit line on VISA and I could throw a hell of a party too.
The only way to ensure we stay strong over the long run is to reduce the size of government and dramatically reduce federal spending.
It's not a complicated principle. If you splurge on credit cards your budget will look phenomenal for a while, until the payments come due.. The same may very well be happening with the national economy. We shall see.
wouldn't bet on it.
And, if you were sitting on top of the economic engine that made that 3 trillion dollars possible, you wouldn't have time to party.
I'm all for smaller government. I just disagree with the popular misnomers that accompany national budget and debt discussions.
If the government can't make better use of the money than the people who earned it, it has no right to it nor will it help the economy, regardless of the size of the economic engine.
I must have failed to make my point. I'll try again. A discussion about spending that does not take into account GDP is really not balanced.
Bush has spent, and largely because of terrorism.
But lets be realistic. Bush's spending is well under the point where it becomes a concern, well within safe percentage margins of GNP. And it is needed spending, National security and improvements in our military hardware. Tell the people building abrams if Bush should cut spending. Lets keep in mind that lots of this spending is within country, and giving a needed boost to manufacturing, which will give them capitol to reinvest come more peacefull times. Meanwhile more people are employed, and spending money, which causes more demand, and more business creation, which is permanent.
People are concerned about a lower dollar? It has huge benifit as well. It makes our products more competitive with those produced in countries that have labor cost advantages, and unvalued currencies, like China. Europe's Lefties were all smug that their Euro was climbing. They just don't get it, that it makes them LESS competitive. Their socialist economy is in big trouble because they can't compete. China is a big worry to them, as is a competitive USA. It's forcing demand that China increase their yen value, which is even better for us, making us even more competitive.
overall, our economy looks good, and with better things ahead. It looks like we are going to spend our way through what should be a down cycle. With oil falling, thats icing on the cake.
Correct. When debating the size of government one needs to consider size of government as a percentage of GDP not in absolute terms.
Although I wouldn't shed a tear of government was actually reduced in absolute dollars.
A good article to share with you:
http://www.econlib.org/library/Columns/y2004/Caplanidea.html
or (better):
http://www.gmu.edu/departments/economics/bcaplan/ideatrap.pdf
unless you're the ozone layer. it was a joke
"Bush needs to cut spending or the economy will collapse."
Nah - go back and check the math. As long as GDP grows faster than our total debt (measured as a percentage of GDP), we can run deficits forever -- and actually decrease our debt as a percentage of GDP.
This is sustainable growth while controlling inflation.
Think our deficit is out of control? Go to the CIA world factbook, and compare our Total-Debt-to-GDP ratio. We're doing pretty good compared to the rest of the world.
The "crisis" is just another media-fabricated frenzy, intended to sell ads for the nightly news.
I understand your point perfectly clear. You're saying it's perfectly OK for the government to spend our money as long as we can afford it. You probably wouldn't say that if a Rat was in the WH.
Is that what's happening now? The government is growing faster than the economy without a doubt.
Maybe our economy won't face a crisis for now, but affordability doesn't justify the current level of government spending.
Nice article, but I'm still trying to figure out how the big government policies LBJ and FDR got back in the White House after the good ideas of Reagan.
"President Bush's pro-growth fiscal policies will restrain spending and reduce tax rates"
I think Bush's pro-growth fiscal policies will increase revenues, but only Congress will restrain spending.
Congress needs to reduce spending. Just because you have a lot of revenue, does not mean you have to spend it. Bush needs to veto a few bills, like the Omnibus Spending Bills that just are packed with pork...send them back to Congress and tell them they need an emergency "pork-otomy"
The implications of the alternative are far worse. We may as well enjoy the ride and continue to target and remove irresponsible congressmen and senators at each election.
It appears that "Voodoo economics" is working again. The economic policy of the 80s that brought us the prosperity of the 90s that Clinton managed to dismantle looks like it will bring us another good economic era. Now let's just keep the Rats from undoing what takes a number of years to get going good and strong.
Which anti-big government policies did Reagan implement? He had lots of great ideas for shrinking government but unfortunately he was never able to do much.
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