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The combination of unusual unity in the G-20 about its
future goals, mostly austerity, and the response from a Nobel Prize winning
Economist, Paul Krugman, seem to have combined to making investors increasingly
jittery.
The G-20, over the weekend agreed that in order to improve the global economy,
the world's governments should decrease spending, and raise taxes. Mr. Krugman
says they're wrong. Instead he suggests that they continue to spend until the
global economy improves.
Investors, cynical or not, realize that Mr. Krugman may have a better chance
of getting it right than the government leaders, whose policies were instrumental
in getting the global economy into the trouble it's in. Oh sure, governments
had help from the big banks and the big money guys who lobbied for this, and
that, and took advantage of the government's ignorance about derivatives and
so forth. But the fact is that the global government leaders are the ones who
put the laws into place that allowed the excesses that brought us here.
In a spellbinding editorial for the New York Times, Mr. Krugman laid out his
case, noting: "Neither the Long Depression of the 19th century nor the Great
Depression of the 20th was an era of nonstop decline — on the contrary, both
included periods when the economy grew. But these episodes of improvement were
never enough to undo the damage from the initial slump, and were followed by
relapses." In other words, just because we've had a recovery doesn't mean we're
out of the woods. This raises the specter of the "Double Dip" recession, which
Nouriel Roubini has championed as the most likely scenario in the future of the
global economy.
We are now, I fear, in the early stages of a third depression. It will probably
look more like the Long Depression than the much more severe Great Depression.
But the cost — to the world economy and, above all, to the millions of lives
blighted by the absence of jobs — will nonetheless be immense. And this third
depression will be primarily a failure of policy. Around the world — most recently
at last weekend’s deeply discouraging G-20 meeting — governments are obsessing
about inflation when the real threat is deflation, preaching the need for belt-tightening
when the real problem is inadequate spending."
Inadequate spending is a very broad term. And Mr. Krugman doesn't expand on what
he means by that. Is it inadequate because governments aren't spending enough?
Or is it that they are spending it on the wrong things? And if the latter is
the problem, then what are the right things for government to spend their money
on?
This, of course brings us to where governments get their money, taxpayers. If
there are fewer of them then government receipts fall. And if central or federal
govenrnments have fewer receipts then state and local governments get less from
the feds. State governments, in the U.S. can't spend with deficits, although
many already have huge deficits, thus they start to layoff employees and cut
services, raising the number of unemployed citizens. And the cycle perpetuates
itself, and things get worse.
So, when Mr. Krugman notes: "tens of millions of unemployed workers, many of
whom will go jobless for years, and some of whom will never work again," we have
to agree. But again, Mr. Krugman doesn't address the two central issues involved
here.
One is that automation, and globalization have ended the job prospects for millions,
for the rest of their lives. And that governments, instead of spending money
on creating jobs for those who lost them, have created a welfare system which
is now crumbling under its own weight. And it's doing so predictably, since fewer
workers leads to fewer tax collections, and less money to support the welfare
system.
In other words, Mr. Krugman is correct. Bad policy got us here. And bad policy
in the future will make things worse. What bugs us the most is the lack of detail
in Mr. Krugman's analysis, and his lack of idea generation for the government
to shift gears away from the welfare system into one of creating an environment
where job creation is the prime directive.
So instead of raising taxes and cutting services, Mr. Obama should appoint a
jobs "czar." He's got one for everything else. And maybe the jobs "czar" could
bring in Mr. Krugman and Jeremy Rifkin, the guy who in the 1990s predicted this
permanet loss of work in his book "The End of Work." Maybe Steve Jobs, as Joe
Piscopo (of all people) suggested on Fox Business News, should be considered
for the job of "jobs czar." It would fit.
Conclusion
On our trip to Austin over the weekend for a national tennis tournament, we got
a glimpse of the central Texas economy, a few months after our last trip there.
It was still moving. But there are signs of no further progress.
Restaurants are half to three-quarters full at best. And there are no waiting
lines. Ironically, the only restaurant where in the past we've had to wait in
lines, a TGI Friday's located at The Arboretum shopping center, actually closed.
We asked a waitress at the nearby Cheesecake Factory where we had lunch what
happened. She told us that one day the place closed and " a couple" of waiters
from the closed store came over to her restaurant and were able to get jobs.
She told us that the new hires told her that they came in for a staff meeting
at Friday's and were told that the place was closing on the next day.
That was several months ago. The locale is still empty.
We figure that TGI Friday's had a staff of about 50-60 people. And two got jobs
at Cheesecake Factory. That means that the rest of them are unaccounted for.
We don't need austerity. We need governments that will set up a climate where
businesses that are busy can stay in business and people can grow.
We'll be on Twitter
some time today before the market closes with some updated comments.
Know when to sell and how to make money when the market falls. Get
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Shares of the
S & P SPDR ETF (NYSE: SPY) have gone nowhere for the
last three trading days. But a negative close on Tuesday
could set up another test of the recent lows.
Chart Courtesy of StockCharts.com
The "W" bottom formed by the S & P 500 (SPX) in June,
seems to have failed. The index has not been able to rise
above the 1130 area convincingly, and the sellers have
redoubled their activity.
That means that the burden of proof has shifted to the bulls. They now have to
prove that they have the stuff to take the market higher.
Yet, the bulls are facing a tough set of obstacles. One of them is that the sellers
seem to have gathered new energy. And the other is that in an election year,
politics will create a very difficult climate as pols looking to be re-elected
will act more irratinally than usual.
What it adds up to is that, barring a major set of positive developments, we
may have seen the highs for the summer, and perhaps for the year, although that's
too far out to predict right now.
Keeping a trading posture is the only way to deal with this market. Having both
longs and shorts for now makes sense. And being able to make fast decisions will
also be helpful.
Above all things, keeping the bets small will make the most sense.
Follow Dr. Duarte on Twitter |
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