To the delight of its media cheerleaders, the United States government last
week announced that economic growth had returned and the recession had ended.
But before we start celebrating one quarter of modest growth, we should realize
the only force driving this apparent recovery is an enormous increase in
government spending.
To finance its largesse, the government is now borrowing at a rate that has
ordinary citizens and the international community extremely concerned.
Leading into the first election season under Barack Obama's reign, this
unprecedented government borrowing and spending is creating a false sense of
security. The activity has allowed gross
domestic product (GDP) to increase despite stagnation in corporate and consumer
spending.
Small businesses, the most important creators of new jobs, are nervous. Due to
uncertain economic conditions and a high degree of regulatory uncertainty, they
are hoarding cash rather than investing. Indeed, their largest expenditures are
often solely to replenish inventories.
Likewise, consumers are rationally hoarding their resources. Year over year,
consumer spending, which constitutes 70% of GDP, is essentially flat. With such
a large segment of the economy quiescent, the percentage increase in public
sector spending has to be very large in order to push the GDP upward.
The new government spending spree has focused on major stimulus initiatives,
including the new homebuyer tax credit and "cash for clunkers".
Early results are showing that spending on autos dropped to recession-levels
immediately after "cash for clunkers" ended. Meanwhile, some reports are
estimating that the program cost US$24,000 for every additional vehicle it
caused to be sold.
The multi-billion-dollar tax credit for first-time homebuyers juiced real
estate sales and provided a strong boost to GDP in the third quarter. But the
net result is that many responsible young people, who had chosen to rent and
save in the face of a declining housing market, are now saddled with mortgages
they cannot afford. These "homeowners" will quickly join the ranks of the
foreclosed.
Perhaps the most concerning aspect of GDP growth is that, even with a deeply
progressive administration spending our children's children's money, the best
we can achieve is a modest, fleeting boost in growth. Even the government's
biggest apologists have a hard time explaining how these gains can last without
continued stimulus. In short, this country is not just bankrupt today, but for
generations to come. This is the real truth and should concern those with
investments within the United States.
The unhappy situation in America, of which we have long warned, should be
contrasted with the healthy growth experiences of other countries such as
Australia, New Zealand, China and India.
The Australian central bank is now so confident in its growth potential that it
has raised interest rates two months in a row. Though they have a center-left
government, the Aussies have managed to control stimulus spending and overall
debt.
New Zealand is seeing an increase in real wages amid a strong Kiwi dollar. Much
more than GDP, this is a signal that economic growth is truly returning to this
island nation.
China, a place where 9% annual GDP growth is considered a recession, is still
developing its market economy while Obama cripples that of the United States.
Much fanfare was showered upon the launch last week of ChiNext, a stock
exchange for privately owned, small- and mid-cap Chinese companies. It surged
in its first day of trading, showing the strength of that economy even outside
the state-owned enterprise sector.
Finally, there is India. Though still far too closed to foreign investment,
this country is making shrewd moves to protect its internal capital. In a deal
announced this week, India bolstered its gold reserves by 50% by trading $6.7
billion of its US dollar reserve to the IMF. Not only is this a positive sign
for India, it is a crushing verdict on America's lauded "GDP growth".
A currency's value reflects investors' faith in a particular nation. Though
commentators are seizing on this figure or that to make the bull case, the
dollar index belies their claims.
Rather than dancing in the dollars falling from helicopters, we should be
concerned about their worth when they hit the ground. Unfortunately, fiscal
responsibility has moved abroad - and the smart money isn't far behind.
John Browne is senior market strategist, Euro Pacific Capital. Euro
Pacific Capital commentary and market news is available at
http://www.europac.net. It has a free on-line investment newsletter.
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