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The Eye of the Economic Storm   May 7th, 2012
The economic storm isn't over yet       


More observations...

Over the last half year the economy, our debt problem, and the problems in Europe have largely taken a backseat to the presidential race. Though things have often appeared calm, the truth is that nothing has changed.

Greece is still in trouble, as is Europe. Our debt situation has been ignored for yet another year. The Federal Reserve is still standing by with QE3. And our fiscal trajectory is still on a course for economic collapse.

  • Problems in Europe. European confidence is falling across the board and there are even contingency plans underway for a breakup of the Eurozone. Interest rates in Spain and Italy are once again soaring , and this is now happening in short-term debt since markets are so hesitant to loan them long-term debt. This led S&P to further cut Spain's credit rating. And, as has been said in the past, Spain is too big to bailout.

  • Problems with U.S. Entitlements. Medicare funding will run short by 2024 , and part of the Social Security trust fund is now expected to run out of money three years earlier than expected in 2035. Further, Social Security's disability program is expected to run out of money in just four years. Meanwhile, Congress and the president have done absolutely nothing to address these problems that are just a few years away.

  • U.S. Spending. Despite all the fanfare last year about the debt ceiling and reducing spending, there have been no significant cuts in spending. Government spending continues to grow. Neither the Democrats nor the Republicans have made any serious effort to deal with the problem. Rep. Paul Ryan seems to be the only one even somewhat serious about the problem, but House Republican leadership is essentially ignoring and undermining his proposals.

  • U.S. Debt. As our immediate deficit spending and long-term entitlement programs have not been addressed, the U.S. national debt continues to spiral out of control. It should be noted that for all of Europe's debt problems, U.S. debt is actually worse. The only reason we're still able to borrow money is because investors think Europe will fail fail first.

  • Weak Economy. Despite multiple attempts by the Obama Administration to convince the country that the economy is finally starting to recover, it's not. Even MSNBC is saying that the "growth has been somewhat of an illusion." Despite 0% interest rates and trillions of dollars of printed money, the economy is teetering. And even Federal Reserve Chairman Bernanke says that the economy lacks the strength to sustain its gains.

  • Weak Housing Market. As I wrote last year, housing isn't going to drive any recovery. We have too many houses and too many foreclosures yet to come. Indeed the market isn't responding to the extent that would be expected given the ridiculously low interest rates. And one expert is even suggesting that a real housing recovery might be a generation away. Those pinning their hopes of a recovery on housing will be disappointed.

President Obama, Democrats, and the mainstream media have been trying to spin the news to convince the public that we're recovering. Two years ago the White House kicked off what was supposed to be "recovery summer." Now, in 2012, we're supposed to believe that the economy is really recovering this time.

It isn't. There's a growing inability in the mainstream media to ignore the problems. Even liberal Huffington Post ran an article titled "Unemployment Rate Falls To 8.1 Percent As People Give Up On Looking For Work." When the unemployment rate goes down because people have given up looking for jobs, that's bad news. When a liberal publication such as Huffington puts it in their headline, that's catastrophic news for Obama's campaign.

Yet we must recognize that it's more than just Obama.

The presumed Republican nominee doesn't really inspire much confidence that he'll take our fiscal situation seriously. Aside from some trimming along the edges, it's doubtful that he'll champion the kind of cuts that are necessary to change our fiscal trajectory.

The Republican House has demonstrated impotence with the power they've had over the last year and a half, and there's no indication that conservative principles will become dominant even if Republicans hold the House and take the Senate and presidency.

France has now elected a socialist president. This means that one of the stronger economies in Europe that has endured far less austerity than other countries wasn't even willing to tolerate their level of spending cuts. As a result, they've elected a socialist that opposes the modest austerity measures and advocates for a 75% tax on the wealthy.

Meanwhile, in Greece, the parties winning the most votes Sunday have advocated either renegotiating their bailout deal or overturning it completely.

So, in a nutshell, the U.S. economy remains weak, U.S. government spending and debt remains out of control with no real expectation that any of the players in either party will change it, entitlements have been similarly ignored, the housing market remains weak with a floodgate of foreclosures on the horizon, it's likely that Fed Chairman Bernanke will soon unleash QE3, it's unlikely we'll address our problems regardless of whether we elect a Republican or Democrat president or Congress, Greece elected parties that to varying degrees reject the austerity their country must confront, France just elected a socialist as president, and fiscal stability in Europe just hit the fan.

This economic storm isn't over yet. We're in the eye. But the storm is strengthening and we'll need to go through even harsher conditions before the storm has passed and we can recover.

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