Monday, April 29, 2013

In February, I wrote about the budget game I called "Cancel the football program." The first winner in the game is the FAA and their furlough of the air traffic controllers. They took the path of maximum inconvenience for the public and parlayed it into getting a release of long term capital improvement funds to cover wages. "Special Assist" goes to every member of Congress who voted for this supposed fix to the sequester. Congress ( both House and Senate) tried to force themselves to actually make policy by imposing the automatic cuts if nothing got done. Now they are in the position of working diligently to avoid even that consequence of their ineptitude. In the weeks to come I expect every other agency involved in the sequester to try the same thing.

There was a good article in the Financial Times this weekend concerning the debate about austerity vs stimulus as the better policy for the current state of the US economy. The article reviews the experience of England, Ireland, Japan and Spain to their austerity policies and the attendant problems and progress. It seems like all major world economies are regressing to the middle as the severe austerity countries (Ireland, Spain) are beginning to pursue expansion mostly in response to high unemployment and the stimulus countries (US) are beginning to address long term debt levels. As I stated earlier this year I believe the sequester will not be enough to push the US economy into negative growth. It will however slow things down.

Wednesday, April 17, 2013

The commodity markets are telling us that the world economy is slowing down. Besides gold dropping like a rock, many other commodities are weak. This is based on perceived weak demand for commodities in the future. With Europe and England making a conscious decision to opt for austerity a few years ago the last glimmer of a growing economy was the US. We have not actually felt the effects of the sequester but the perception that the US is willing to forego growth and cut government spending to start correcting the deficit is enough to push the world economy onto a slower track. In the US, this slower track will manifest itself by showing lower growth and lingering unemployment into late 2015. For the rest of the world, the effect will be magnified when combined with their existing austerity measures.

Europe has not made much progress with their existing problems. Portugal and Ireland requested and received an extension on their bail out payback. Greece is same old, same old. The unemployment numbers in countries like Spain and Italy are enormous. There seems to be a recognition that the EU should look to a more pro growth and a less austere monetary policy. It is impossible for any economy to correct its deficit or overspending history without growth. No growth, no increase in tax receipts, no increase in job creation, no decrease in unemployment. All this talk about confidence and job creation is hokum because unless a business senses an opportunity to expand it will not add jobs.

The commodity markets are pointing to a worldwide contraction, the bond market is on board, the train is leaving.