Still Plenty of Stimulus

August 2, 2011

I do not like the details of the debt ceiling deal signed into law by President Barack Obama today. I'll mention my reasons later. What I want to point out to investors and decision makers is that there is still plentiful stimulus in the new economic plan. Let's call it the new Two Year Plan.

The federal government, for the remainder of 2011 and 2012, is still going to create a lot of debt, which strangely is the same as creating a lot of money. Tax revenues will still be less than expenditures by over 2 trillion dollars in the next two years, unless the economy starts growing a lot faster.

Note that the Federal Reserve is keeping the interest rates it charges member banks near zero. That, in a normal recession, would be very stimulating in and of itself.

So why is the economy not growing faster?

People want simple, one variable solutions [we need more government spending, or we need less government spending, or deregulation, or ...] but in fact we are looking at a complex, multiple-variable problem.

If all those variables could be wrapped into one, I would say they relate to lack of confidence. There are many indicators of lack of confidence. One is the historically low price-to-earnings ratio in the stock market versus the historically low interest rates in the bond market. It is pretty easy to make 2 to 10 times as much return on your capital (or savings, if you prefer to think like a consumer) in the stock market today as in the bond market. Take fear out of the equation and funds would flow from bonds to stocks. Stocks would go up, and interest paid on bonds would climb as well. All investors would feel wealthier (except maybe those who were heavily in long-term bonds), and would spend more freely. That would help revive the consumer segment of the economy.

But that is easier said than done. The bond holders are the same people, in their tens of millions, who sold their stocks in 2008, at the bottom of the market, and effectively traded them for bonds. They are a fearful lot, easily stampeded.

We see a lack of confidence in bank lending practices. We see it in deferred purchasing of houses. The demand for housing is huge; interest rates and house prices are both low. But fear holds people pack.

The fear is not irrational, it is simply not analyzed. Bad things happened to a lot of people starting in 2007. Everyone who has a job today knows someone, maybe many people, who lost their jobs, homes, and even families. Almost everyone wants to minimize risk, even if that means substantially diminishing long-term opportunities (like buying houses and stocks cheap).

Sadly, the business men and women of America are hiding with the frightened steers rather than boldly leading us out of the recession. Every CEO wants the other CEOs to hire first, increasing demand, so that it will be safer to hire. Some even continue to lay off employees when they are running profitable companies, like Cisco's John Chambers, because they are not able to inspire investors with visions of future profits. Once a proud leader, John has become a harried, frightened little rabbit of a CEO.

U.S. executives, and their political mouth pieces, complain about taxes and regulations and high labor costs in the U.S. What, business was supposed to be easy? I agree that there are unnecessary regulations, but they are not what is stopping business expansion. Second rate CEOs are stopping business expansion. We still have some hard-charging leaders who can build up businesses (look at the biotechnology sector), but most contemporary CEO's are too effete to get their hands dirty doing real work.

The fact is the business climate in the U.S. and internationally is quite good now. Is anyone besides me embarrassed that a bunch of Communists in China are kicking our collective, free-market behinds? Do we want to have to admit that all our post-World War II free-market individualist posturing was not based on our outstanding individual capabilities, but on the fact that in World War II all of our competitors factories were bombed out of commission? China, at the end of World War II, had an economy they would have been ashamed of in the Middle Ages. They did not get to where they are now by slacking and refusing to deal with challenges.

What don't I like about the debt ceiling deal? I don't like the bloated military and homeland security budget, which we simply cannot afford. But mainly I don't like the fact that they could have come to the exact same decision a month ago. Congress and President Obama, Republicans and Tea Party and Democrats, basically killed economic expansion in the month of July.

The President, Congress, and other national leaders need to focus on restoring confidence. We need to reassure people that have jobs that they will keep them, and those that are looking that their search will end soon. We need for people to feel they can buy a home or replace some old appliance. We need to show the old American can-do business spirit of innovation. We also need to cooperate with each other to find solutions. We need to expand the pie, not fight over the crumbs.

There is plenty of stimulus. There is plenty of money being created. It needs to go into productive uses, not into the federal bond market.

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