The Media is Dumbing Down The Economy - We See Potentially Disastrous Consequences

Aug 13, 2010
Author: SCP Editor

August 13, 2010 - The financial media continues to exacerbate the problem by lame thinking. We listened to a reporter on Bloomberg this morning talking to a fund manager about the potential for a double dip. The fund manager forecasted slower growth, at about 2% this year but suggested a double dip was unlikely. While the Bloomberg reporter brought up the ‘Bush tax cuts’, opining, ‘why would we eliminate the Bush tax cuts while we are in this period of slow growth?’ insinuating that to do so would almost certainly thrust us back into a double dip.

This is bone-headed thinking. The Bush tax cuts go to the heart of the ‘leveraged’ way of thinking that threw this economy off the rails in the first place. Remember that before Bush took office the economy ran at a surplus. As Nobel winning economist George Akerloff put it, Bush just ‘looted’ the U.S. economy, drove national debt to record levels and sent the dollar into a tail spin.

Here we are now in a debt-ridden economy and short-term thinkers are suggesting an extension of the Bush tax cut regime, which, by the way aren’t paid for, so they would add to our debt. Keep in mind that the proposal by the Obama administration is not to raise taxes on the middle class but only on those making more than $250,000.

The leftover dogma of ‘trickle down’ economics from the Reagan era has got to go. We don’t see money trickle down from the haves to the have-nots. In the W Bush era, amidst his tax cut regime, poverty levels increased. There was an appearance that the tax cuts were having an effect of driving the economy because there was so much other leveraged policy in place, including easy money and ridiculous incentives for folks to borrow on homes and personal expenditures. But as we saw, at some point, in a leveraged economy you have to pay the tab.

We would expect a more intelligent positioning of the issue by a media powerhouse like Bloomberg. But they have dumbed the issue down to suit the political purposes of those advocating the extension of a Bush tax cut and through implicit advocation of the policy, they are almost holding the Obama administration hostage on the issue. The more they build up expectations that the Bush tax cut policy should be extended and show the perception that more fund managers are behind it, the higher the potential shock to the markets if the Bush tax cuts get eliminated.

As it stands, there are hardly any people in Washington that have the intestinal fortitude to craft and advocate policy that is designed for the long-term good of the country. We have ‘fast food’ policy instead – policy for the here and now. Policy to make us feel good for the time being – never mind the longer term implications.

This is the same mindset that drug addicts get – just one more fix. In this analogy, our addiction is leverage and spending.

But we are inevitably faced with the ‘new normal’, where GDP growth is going to, at best be in the 1% to 2% range. Consumers who are tasked in this flawed economic paradigm  to carry the weight of 70% of GDP, have seen 8 to 9 million jobs lost and confidence is reasonably poor. So we see in this morning’s data that retail sales are sluggish. This is a predictable conclusion.

We haven’t seen the Street recalibrate expectations for S&P earnings yet to reflect 2% GDP growth instead of 3%. When they do, stocks will look more expensive, so we see systemic risk built into the markets at current levels are suggest that investors take a risk-managed approach accordingly. Here is another topic that the financial media is totally missing. There is no serious reporting going on, only ‘oohs’ and ‘ahs’ of the type that you get at a  circus when the ringmaster stands in front of the elephant in the room.

Well, the elephant in this room is that the system is broken. The economic assumptions are flawed. Policy makers in Washington are paralyzed by partisanship. And the financial media, which should be informing us and providing us with a breadth of perspective, is just dumbing us down instead.

Structural Problems:

·         Housing market continues to reel and foreclosures continue to increase, while home price values remain soft;

·         The labor market remains in bad shape, as businesses borrow and hoard cash but are not hiring back the workforce;

·         Credit remains tight, if not totally unavailable to most consumers;

·         Consumer confidence remains poor;

·         Retail sales continue to be soft (keep in mind that in order for consumers to carry their weight of GDP they will have to spend more than 90% of their disposable income);

·         Economic data is basically weakening across the board;

·         The national debt is approaching 100% of GDP.

The New Normal

·         Target unemployment will be closer to 7% than 4%;

·         Target GDP growth will be closer to 1.5% than 3%; and

·         Unless the U.S. addresses its debt issues, a step down from Aaa rated debt.

There is no quick fix. We are not going to get the economy back to a truly stable condition until we make some hard and uncomfortable decisions, which may mean a prolonged period of that feels recessionary. Do we expect that to happen? No. Politicians won’t have this conversation. The financial markets don’t want to hear it. Consumers have been led to believe it doesn’t need to happen, having bought into the rhetoric spewed out by talk radio that all negativity in the economy which impacts them at home could have been avoidable by a better decision and policy in Washington.

So the best case in our opinion, is the New Normal. The worst case, in our opinion, is that the stress just continues to build as Washington kicks the ball down the road in deference to the quick fix today. If that happens, the stress in the system, the structural problems, will ultimately lead to a break and the recession of 2008 will look mild in comparison. At that point, we will have less tools to deal with it as well. We will have run debt up to much higher levels, and our debt will likely have achieved a lower rating by that time. We won’t be able to as quickly print our way out of it.