Ben Bernanke needs fresh monetary blitz as US recovery falters

Federal Reserve chairman Ben Bernanke is waging an epochal battle behind the scenes for control of US monetary policy, struggling to overcome resistance from regional Fed hawks for further possible stimulus to prevent a deflationary spiral.

 

By Ambrose Evans-Pritchard, International Business Editor
Published: 9:44PM BST 24 Jun 2010

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Ben Bernanke needs fresh monetary blitz as US recovery falters Photo: GETTY IMAGES

Fed watchers say Mr Bernanke and his close allies at the Board in Washington are worried by signs that the US recovery is running out of steam. The ECRI leading indicator published by the Economic Cycle Research Institute has collapsed to a 45-week low of -5.7 in the most precipitous slide for half a century. Such a reading typically portends contraction within three months or so.

Key members of the five-man Board are quietly mulling a fresh burst of asset purchases, if necessary by pushing the Fed's balance sheet from $2.4 trillion (£1.6 trillion) to uncharted levels of $5 trillion. But they are certain to face intense scepticism from regional hardliners. The dispute has echoes of the early 1930s when the Chicago Fed stymied rescue efforts.

 

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"We're heading towards a double-dip recession," said Chris Whalen, a former Fed official and now head of Institutional Risk Analystics. "The party is over from fiscal support. These hard-money men are fighting the last war: they don't recognise that money velocity has slowed and we are going into deflation. The only default option left is to crank up the printing presses again."

Mr Bernanke is so worried about the chemistry of the Fed's voting body – the Federal Open Market Committee (FOMC) – that he has persuaded vice-chairman Don Kohn to delay retirement until Janet Yellen has been confirmed by the Senate to take over his post. Mr Kohn has been a key architect of the Fed's emergency policies. He was due to step down this week after 40 years at the institution, depriving Mr Bernanke of a formidable ally in policy circles.

The Fed's statement this week shows growing doubts about the health of the recovery. Growth is no longer "strengthening": it is "proceeding". Financial conditions are now "less supportive" due to Europe's debt crisis.

The subtle tweaks in language have been enough to set bond markets alight. The yield on 10-year Treasuries has fallen to 3.08pc, the lowest since the gloom of April 2009. Futures contracts have ruled out tightening until well into next year.

Yet the statement may understate the level of angst at the Board. New home sales crashed 33pc in May to an all-time low of 300,000 after the homebuyer tax-credit expired, confirming fears that the housing market has been propped up by subsidies. Unemployment is stuck at 9.7pc. Manufacturing capacity use is at 71.9pc. The Fed's "trimmed mean" index of core inflation is 0.6pc on a six-month basis, a record low.

"The US recovery is in imminent danger of stalling," said Stephen Lewis, from Monument Securities. "Growth could be negative again as soon as the fourth quarter. There is no easy way out since fiscal stimulus has already been pushed as far as it can credibly go without endangering US credit-worthiness."

Rob Carnell, global strategist at ING, said the Obama fiscal boost peaked in the first few months of this year. It will swing from a net stimulus of 2pc of GDP in 2010 to a net withdrawal of 2pc in 2011. "This is very substantial fiscal drag. On top of this the US Treasury is talking of a 'Just War' against the banks, which will further crimp lending. It is absolutely the wrong moment to do this."

Kansas Fed chief Thomas Hoenig dissented from Fed calls for ultra-low rates to stay for an "extended period", arguing that loose money risks asset bubbles and fresh imbalances. He recently called for interest rates to be raised to 1pc by the autumn.

While he has been the loudest critic, he is not alone. Philadelphia chief Charles Plosser says the Fed has blurred the lines of monetary and fiscal policy by purchasing bonds, acting as a Treasury without a legal mandate. Together with Richmond chief Jeffrey Lacker they represent a powerful block of opinion in the media and Congress.

Mr Bernanke has fought off calls from FOMC hawks for moves to drain stimulus by selling some of the Fed's $1.75 trillion of Treasuries, mortgage securities and agency bonds bought during the crisis. But there is little chance that he can secure their backing for further purchases at this point. "He just has to wait until everybody can see the economy is nearing the abyss," said one Fed watcher.

Gabriel Stein, from Lombard Street Research, said the US is still stuck in a quagmire because Mr Bernanke has mismanaged the quantitative easing policy, purchasing the bonds from banks rather than from the non-bank private sector.

"This does nothing to expand the broad money supply. The trouble is that the Fed does not understand broad money and ascribes no importance to it," he said. The result is a collapse of M3, which has contracted at an annual rate of 7.6pc over the last three months.

Mr Bernanke focuses instead on loan growth but this has failed to gain full traction in a cultural climate of debt repayment. The Fed is pushing on the proverbial string. The jury is out on whether or not his untested doctrine of "creditism" will work.

"We are now walking on deflationary quicksand," said Albert Edwards from Societe Generale.

http://www.telegraph.co.uk/finance/economics/7852945/Ben-Bernanke-needs-fresh-monetary-blitz-as-US-recovery-falters.html

Bernanke Warns of ‘Unsustainable’ Debt

Bernanke Warns of ‘Unsustainable’ Debt



Mark Wilson/Getty Images
Federal Reserve Board Chairman Ben S. Bernanke during a House Budget Committee hearing on


Wednesday in Washington.
By SEWELL CHAN
Published: June 9, 2010

WASHINGTON — The chairman of the Federal Reserve, Ben S. Bernanke, warned on Wednesday that “the federal budget appears to be on an unsustainable path,” but also recognized that the “exceptional increase” in the deficit had been necessary to ease therecession.

Mr. Bernanke’s comments, at a hearing of the House Budget Committee, reiterated his view that the economic recovery would most likely be slow and painful for many Americans. The Fed projects gross domestic product, the broadest measure of economic activity, to rise about 3.5 percent this year — a pace barely above that needed to keep pace with the growth in the labor force.

Mr. Bernanke noted some improvements in consumer spending, particularly on durable goods, and in business investments in software and equipment, but also cautioned that “underlying housing activity appears to have firmed only a little since mid-2009, with activity being weighed down, in part, by a large inventory of distressed or vacant existing houses and by the difficulties of many builders in obtaining credit.”

The chairman offered a somewhat positive assessment of the debt crisis in Europe.

“If markets continue to stabilize, then the effects of the crisis on economic growth in the United States seem likely to be modest,” he said. “Although the recent fall in equity prices and weaker economic prospects in Europe will leave some imprint on the U.S. economy, offsetting factors include declines in interest rates on Treasury bonds and home mortgages as well as lower prices for oil and some other globally traded commodities.”

In response to a question, Mr. Bernanke said that he expected to the economy to grow at a “modest pace” this year .

But what is likely to be the most closely watched part of Mr. Bernanke’s testimony, on fiscal policy and his comments about the budget, will offer little comfort to either Democrats or Republicans.

“A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy,” Mr. Bernanke said, “show a structural budget gap that is both large relative to the size of the economy and increasing over time.”

During nearly two hours of questioning, Mr. Bernanke parried efforts by members of both parties to score political points, seeming to disappoint both sides. After saying “the budget deficit should narrow over the next few years,” he refused to make policy recommendations on how to do so, though he did caution against reacting hastily.

“This very moment is not the time to radically reduce our spending or raise our taxes, because the economy is still in a recovery mode and needs that support,” Mr. Bernanke told Representative Bob Etheridge, Democrat of North Carolina.

To Representative Jim Jordan of Ohio, one of several Republicans who accused the Obama administration of being profligate, Mr. Bernanke said that “increased taxes, cuts in spending that are too large would be a negative, would be a drag on recovery.”

To Representative Gerald E. Connolly, a Virginia Democrat who tried to get Mr. Bernanke to criticize the huge 2001 tax cuts signed into law by President George W. Bush, Mr. Bernanke said, “It probably did strengthen the economy, but it also raised the deficit.”

While defending the extraordinary responses to the recession as necessary, Mr. Bernanke has also emphasized the risks associated with the aging of the population. This year, he said, there are about five Americans between the ages of 20 and 64 for each person aged 65 or older. By the time most of the baby boomers have retired in 2030, he warned, there will be only three.

“In addition, government expenditures on health care for both retirees and nonretirees have continued to rise rapidly as increases in the costs of care have exceeded increases in incomes,” Mr. Bernanke said. “To avoid sharp, disruptive shifts in spending programs and tax policies in the future, and to retain the confidence of the public and the markets, we should be planning now how we will meet these looming budgetary challenges.”

Mr. Bernanke did not disclose his views on either the timing or the composition of the steps to meet those challenges — in a question-and-answer session with the broadcast journalist, Sam Donaldson, on Monday night, Mr. Bernanke said he, like Congress, was awaiting the conclusions of a bipartisan fiscal commission appointed by President Obama.

http://www.nytimes.com/2010/06/10/business/economy/10fed.html?src=me&ref=business

US faces one of biggest budget crunches in world – IMF

US faces one of biggest budget crunches in world – IMF

By Edmund Conway Business Last updated: May 14th, 2010
98 Comments Comment on this article

Earlier this week, the Bank of England Governor, Mervyn King, irked US authorities by pointing out that even the world’s economic superpower has a major fiscal problem -“even the United States, the world’s largest economy, has a very large fiscal deficit” were his words. They were rather vague, but by happy coincidence the International Monetary Fund has chosen to flesh out the issue today. Unfortunately this is a rather long post with a few chunky tables, but it is worth spending a bit of time with – the IMF analysis is fascinating.

Read the details here:
http://blogs.telegraph.co.uk/finance/edmundconway/100005702/us-faces-one-of-biggest-budget-crunches-in-western-world-imf/


So does all of this mean the US is Greece? The answer, you might be surprised to hear, is no. Now, it is true that the US has some similar issues to Greece – the high debt, the need to roll over quite a lot of debt each year, the rising healthcare costs and so on. But it has two secret (or not so secret) weapons.

• The first is that unlike Greece it is not trapped in a monetary union. The US, like Britain and Japan, can independently control its monetary policy; it can devalue its currency. These are hardly solutions in and of themselves, but they do help make the adjustment a lot easier and more gradual. 
• Second, the US has growth. It remains one of, if not the, world’s most dynamic economies. It is growing at a snappy pace this year (in comparison to other countries). And a few percentage points of GDP make an immense difference, since they make those debts much easier to repay.

Finally, some might be tempted at this point to cite the fact that the US has the world’s reserve currency in the dollar as another bonus. I am less sure. There is no doubt that this has made the US a safe haven destination (people buy US bonds when freaked out about more or less anything), and has meant that America has been able to keep borrowing at low levels throughout the crisis. However, the flip side of this is that because it has yet to feel the market strain, the US also has yet to face up properly to the public finance disaster that could befall it if it does not do anything about the problem. America is not Greece, but if it does not start making efforts to cut the deficit within a few years, it will head in that direction. The upshot wouldn’t be an IMF bail-out, but a collapse in the dollar and possible hyperinflation in the US, but it would be horrific all the same. America has time, but not forever.

Comeback of the Year? Try Corporate Profits

May 7, 2010
Comeback of the Year? Try Corporate Profits
By PAUL J. LIM

THE market remains worried about plenty of things — including a sharp decline late last week, and the spreading debt crisis in Europe. But, recently, it has appeared that investors are ready to strike one item off their list of concerns: corporate profits.

“To say that earnings so far have been off the charts would not be too much of an exaggeration,” said Robert C. Doll, global chief investment officer for equities at BlackRock, the investment management firm.

Of the companies in the Standard & Poor’s 500-stock index that have announced first-quarter results, 77 percent have beaten Wall Street earnings forecasts. And profits for the quarter are on track to grow 56 percent compared with the 2009 period.

These earnings reports, however, started to arrive just as the market has shifted from confidence to much uncertainty.

From Feb. 8 to April 26, the S.& P. 500 gained 15 percent, largely in anticipation of an improved earnings and economic outlook. But the downgrading of Greece’s debt and fears that the crisis may be spreading throughout the region and the world have taken center stage, sending the market tumbling more than 8 percent. Concerns about Europe notwithstanding, many analysts have already begun ratcheting up their forecasts for stocks for the rest of this year.

Still, it’s important to remember that earnings season isn’t over, so it’s premature to proclaim complete victory on the profit front.

Stuart A. Schweitzer, global market strategist at J.P. Morgan Private Bank, noted, “Where the jury is still out is on the sustainability of this upswing, because companies had been achieving improvements in profits largely by slashing costs.”

He added, “Without increased revenues, it would be hard to imagine companies moving from cost-reduction to spending mode and hiring mode.”

So far, sales for the S.& P. 500 have also been stronger than analysts anticipated. Of the 437 that have reported earnings, 66 percent had revenue growth exceeding analysts’ expectations, according to Thomson Reuters.

But the news isn’t all positive. For one thing, revenue surprises pale in comparison with profit surprises. Companies are beating Wall Street profit forecasts by 15 percent but beating revenue projections by just 0.8 percent.

And not all companies are reporting revenue growth. The casino operator MGM Mirage said revenue fell 4 percent in the first quarter versus the 2009 period. And Sara Lee, the food giant, said quarterly sales fell 2.5 percent.

David A. Rosenberg, chief economist and strategist at Gluskin Sheff & Associates, the investment manager in Toronto, said that if figures from just one sector — financial services — were excluded, revenue of S.& P. 500 companies would be just about meeting expectations.

To be sure, analysts’ forecast for first-quarter sales growth is 11 percent — nothing to sneeze at.

“The interesting thing is how much of the good earnings news is coming from the banking and financial sector,” said David C. Wright, managing director of Sierra Investment Management.

He pointed out that this sector, which was hit hardest in the financial crisis, has been a big beneficiary of government stimulus. That ranges from mortgage relief efforts and the government purchase of “toxic” mortgage-backed securities to the recent Fed policy of near-zero short-term interest rates.

Because these efforts can’t continue forever, he said, “I can’t conclude that we’re seeing anything resembling a self-sustaining recovery.”

IF the improved outlook for the financial sector is indeed spreading to the broader economy, he said, an uptick could be expected in commercial and industrial loan activity.

But according to the Federal Reserve Bank of St. Louis, commercial and industrial bank loans nationwide have fallen every month between October 2008 and March 2010, the latest period for which data is available.

For now, at least, Mr. Schweitzer of J.P. Morgan says he is optimistic. “You know that saying that half a loaf is better than none? At this point,” he said, “I’m willing to take a quarter of a loaf.”

But such patience won’t last indefinitely. For evidence of a full recovery, investors will need to keep checking corporate reports through the end of this earnings season — and, quite likely, well into the second quarter.

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://www.nytimes.com/2010/05/09/business/09fund.html?ref=business

IMF warns of acute debt challenges for West

The International Monetary Fund has warned that advanced economies such as the UK and US are facing an 'acute' challenge in reducing debt loads following the financial crisis which could in turn hamper economic growth.

By James Quinn, US Business Editor
Published: 8:40PM GMT 22 Mar 2010

John Lipsky believes that high levels of governmetn debt could slow growth Photo: Bloomberg

The International Monetary Fund has warned that advanced economies such as the UK and US are facing an 'acute' challenge in reducing debt loads following the financial crisis, a problem which could in turn hamper economic growth.

John Lipsky, the IMF's first deputy managing director, said that high levels of government debt and fiscal deficits have already led to increased risks for a number of countries.

Mr Lipsky cautioned that such problems could slow economic growth over the medium-term and trigger higher interest rates.

"Maintaining public debt at its post-crisis levels could reduce potential growth in advanced economies by as much as half a percentage point annually compared with pre-crisis performance," he said in a speech in Beijing.

He went on to say that for "most advanced economies' " fiscal consolidation should begin in earnest in 2011, and gave warning that simply unravelling stimulus programmes would not be enough.

Mr Lipsky cited evidence that all G7 countries except Germany and Canada will have debt-to-GDP ratios close to or in excess of 100pc by 2014.

"This surge in government debt is occurring at a time when pressure from rising health and pension spending is building up," he continued.

In a separate speech in Hanoi, Mr Lipsky said the global economy will rebound by 4pc in 2010 and 4.25pc in 2011.

However, what the IMF terms the "emerging Asia" region – including China and India - will grow at more than twice the pace, with an economic growth rate of 8.25pc estimated in the current year.


http://www.telegraph.co.uk/finance/economics/7500211/IMF-warns-of-acute-debt-challenges-for-West.html

Slowly, Americans are regaining their lost wealth

Mar 11, 7:06 PM EST

Slowly, Americans are regaining their lost wealth

WASHINGTON (AP) -- Americans are recovering their shrunken wealth - gradually. Household net worth rose last quarter, mainly because the healing economy boosted stock portfolios. But the gain was slight. And it was less than in the previous two quarters.

The Federal Reserve said Thursday that net worth rose 1.3 percent in the fourth quarter to $54.2 trillion. It marked the third straight quarter of gains. But economists say consumers would need a stronger and more prolonged increase in their wealth to persuade them to ratchet up spending.

Net worth had risen by a more robust 4.5 percent in the second quarter of 2009 and an even faster 5.5 percent in the third quarter. Net worth is the value of assets such as homes, checking accounts and investments minus debts like mortgages and credit cards.

Even with the gain, Americans' net worth would have to rise an additional 21 percent just to get back to its pre-recession peak of $65.9 trillion. That illustrates Americans' vast loss of wealth from the worst downturn since the 1930s.

Growth in stock portfolios delivered the biggest lift to net worth in the October-to-December period. The value of stocks rose by nearly 4 percent to $7.7 trillion. Higher home prices helped a bit. The value of real-estate holdings edged up 0.2 percent.

During the recession, which began in December 2007, household net worth had plunged as low as $48.5 trillion in the first quarter of 2009. Stock holdings and home values nose-dived. As their net worth evaporated, Americans felt less inclined to spend.

For all of last year, consumer spending dropped 0.6 percent. This year, as wealth, the economy and financial conditions slowly recover, consumer spending is projected to grow around a modest 2.2 percent, according to the National Association for Business Economics.

By contrast, in 1983, when the economy was recovering from the 1981-82 recession, consumer spending surged 5.7 percent. Unlike past rebounds led by ordinary shoppers, this one so far has been driven more by spending from businesses, foreigners and - until it runs out - government stimulus. Consumers have been spending more lately. But they remain cautious.

"It would take a string of increases of a size that they believe can continue and that they can have faith in for consumers to really boost their spending," said Scott Hoyt, senior director of consumer economics at Moody's Economy.com.

Each dollar increase in household wealth translates into roughly three to four cents of consumer spending over two years, Hoyt said.

That isn't much.

Just ask Marcia Karon, 55, of Atlanta. She's felt little benefit from the economic rebound or the stock market. Her family's finances are being crimped in other ways. Her husband has taken two pay cuts in the past year, their property taxes remain high and "everything else is going up," she says.

"Things are tight," says Karon, who works at home as a calligrapher and bookkeeper. "Over the last year we've had to go through what little savings we had set aside just to get by."

Not until 2012 does Hoyt think household wealth will return to its pre-recession levels. A severe setback to the economy could delay it further, he added.

Americans reduced their borrowing last year at a record pace. They did so amid rising defaults on mortgages and credit card debt. The drop also reflected concern among households about their diminished net worth.

Household debt - including mortgages, credit cards, auto and student loans - contracted at an annual rate of 1.75 percent in 2009, the Fed report said. It was the first annual decline on records going back to 1945.

Benefiting most in the fourth quarter were those invested in the stock market. The Standard & Poor's 500, a broad barometer of stocks, climbed 5 percent in the quarter. The Dow Jones industrial average gained 7 percent.

But the gains have slowed this year. The two indexes have risen just 2 percent and 1 percent, respectively. Even with the market's rally, the S&P 500 is still 27 percent off its October 2007 peak.

Holders of 401(k) retirement accounts have recovered somewhat from the walloping they took in the meltdown. But even with continued contributions to those accounts, many are still struggling. Average account balances for 401(k) contributors ages 45 and older remained 2 to 3 percent lower at the end of December than at the end of 2007, according to the Employee Benefit Research Institute.

Some have fared better.

Julie Arnheim, 43, of Los Altos Hills, Calif., returned to work a year ago because the economy had beaten down her and her husband's finances. Now, thanks to the stock market's rebound, their net worth has come all the way back from a 30 to 35 percent drop.

"We've lost a year and a half of growth, but it's easy to be upbeat," says Arnheim, an entrepreneur. "There's a lot of retired people I know who were hurt, and they don't have the longevity for the market to come back and keep growing."

October U.S. Trade Deficit Narrowed as Exports Rose

http://www.nytimes.com/2009/12/11/business/economy/11econ.html?ref=business



By JAVIER C. HERNANDEZ
Published: December 10, 2009
The United States trade deficit narrowed unexpectedly in October, the government said Thursday, helped by a surge in exports like cars and computers and a drop in demand for foreign oil.


As countries struggled to sustain a recovery, the 2.6 percent rise in exports surprised some analysts. The increase helped bring the trade deficit down 7.6 percent in October, the Commerce Department said, and it is expected to help drive economic expansion in the last part of 2009.

But economists cautioned that October might be an exception caused by the extraordinary drop in oil imports. Long-term, the trade balance, which measures the difference between the value of imports and exports, will swell in the next several months as demand for oil returns to higher levels and as exports remain steady.

The country imported $17.44 billion in oil in October, a decline of $2.o7 billion from September. The decrease was the product of weaker demand — 27.4 million fewer barrels — and a 78-cent drop in the price. Excluding oil imports, which can be volatile from month to month, imports rose 2.9 percent.

“Growth both here and abroad is quite firm in the fourth quarter, and that’s an important sign of recovery,” said Dean Maki, chief United States economist at Barclays Capital. “Still, we don’t think this month’s decline reflects the underlying trend.”

The more significant number, Mr. Maki said, was the annual rate of growth for imports and exports. Both increased at a pace of about 25 percent in the last three months, leaving the trade deficit relatively unchanged.

The trade gap fell to $32.9 billion in October from $35.7 billion in September. After months of stagnation, exports climbed $3.7 billion in October, reaching the highest level in almost a year, while imports increased $0.7 billion. The gains in exports were broad-based, led by computers, automobiles and semiconductors.

The trade gap has fallen significantly in the last year, totaling $59.4 billion in October 2008. Exports were also helped by a weaker dollar, which is making American products cheaper overseas while, in the United States, driving up the price of everything from Italian cheese to Japanese cars.

“The lower dollar means there is scope for exports to rise at a faster rate,” Capital Economics, a Toronto-based research firm, said in a research note on Thursday.

Julia Coronado, senior United States economist at BNP Paribas, said strong recoveries in emerging markets could eventually help reduce the deficit. But monetary restrictions in places like China, she said, were hurting the competitiveness of American products, making the gap difficult to reduce.

“It’s a good sign that both imports and exports are picking up — that’s an indication that the economy has normalized,” Ms. Coronado said. “But as long as misaligned currencies, like China’s undervalued currency, are there, you’re not going to see a closing of the trade imbalance.”

Ms. Coronado said she expected to continue to see increases in exports of goods like computer equipment, commercial aircraft, and agricultural machinery, as businesses in emerging countries grow.

In its note, Capital Economic said that the strength of exports in October would probably help speed the rate of expansion in the fourth quarter to 3 percent.

In the third quarter, the economy expanded at a rate of 2.8 percent, but it was held back by a swelling trade deficit.

In other economic news, the number of newly laid-off workers filing for unemployment benefits rose unexpectedly by 17,000 last week.

That comes against the backdrop of signs of stability in the jobs market, with the economy shedding only 11,000 jobs last month. Still, the unemployment rate remains at 10 percent. The Labor Department attributed the unexpected rise in part to a rush of claims after the Thanksgiving holiday, when employment offices were closed.

Is The U.S. Government Too Big To Fail?

Is The U.S. Government Too Big To Fail?

by Marv Dumon


When considering whether the U.S. government is too big to fail, it's helpful to look at historical precursors and ask yourself: Was the Roman Empire too big to fail? How about Genghis Khan and his Mongolian Empire, or Alexander the Great and the Macedonians? Can we find an everlasting civilization in the ancient Egyptians or the early Chinese? History not only teaches, but shows, that civilizations and species are only as fragile as one non-adaptive and careless generation.

Most people believe that incomprehensibly large systems are simply beyond demise, or are somehow invincible. Compared to other nation states and empires that once dotted the globe, America is a fairly young country, at a little over 200 years old. The U.S. boasts the world's biggest economy, which helps to fund and support its gargantuan bureaucracy. Massive amounts of liabilities on the government balance sheet, however, threaten significant cuts on important programs that are aimed at keeping the country strong.

Programs such as education, defense and homeland security, and technological research are reliant on adequate funding (along with effective implementation and execution) for the continuing long-term prosperity of the U.S. Significant fiscal pressures placed on the U.S. government may well reduce future funding of these critical programs - especially if belt tightening becomes the only option for fiscal responsibility. Lack of funding, along with lack of effectiveness of the funded programs, heightens the country's economic, geo-political and defense risks. (Learn more in our Credit Crisis Tutorial.)

Financial Metrics
The U.S. economy is the world's largest, with a gross domestic product (GDP) of approximately $14.5 trillion as of the end of 2008. This economy supports a massive governmental bureaucracy with a budget of $2.9 trillion for 2008. This budget represents annual expenditures spent on defense, homeland security, education, health services, infrastructure and other programs. The latter half of the 2000s saw severe economic pressures on ordinary citizens, the federal government, as well as state and local governments. (Mutual funds devoted to keeping roads, structures and communities safe can make you money, read Build Your Portfolio With Infrastructure Investments.)

A Decade of Missteps
As of the latter half of the decade ending 2010, the federal government and markets underwent the following:
The war on terror cost hundreds of billions of dollars in 2008, and was projected to rise in 2009. Since 2001, the total cost of the war has exceeded $2 trillion.

The years from 2000-2008 brought in the five biggest budget deficits in America's history. In 2008, the federal budget deficit exceeded $450 billion – an all-time high at the time. In 2009, the budget deficit is expected to exceed $700 billion. That deficit figure was highly unforeseeable (if not unimaginable) merely a decade earlier.

2008 saw the U.S. hit a 53-year high for national debt as a percentage of GDP. In the fourth quarter of 2008, the national debt clock in Times Square ran out of space, and had to eliminate the dollar sign in order to add another zero to the government's debt. As of October 2008, the national debt exceeded $10 trillion for the first time. Merely three months later, the national debt exceed $10.6 trillion, and at the time, some were expecting the national debt to increase by $1 trillion within the next year. (Learn more in The Treasury And The Federal Reserve.)

To facilitate the national debt, the federal government had to borrow more money, much of which came from foreign sources including the Middle East, Europe, China and others. Additional liabilities on the balance sheet means that the government has to set aside interest payments that could otherwise be spent on education, healthcare, infrastructure and military programs. Interest payments are essentially a zero sum expenditure with high opportunity costs. (Find out more about these debt obligations in Buy Treasuries Directly From The Fed and Where can I buy government bonds?)

U.S. taxpayers, with their periodic payroll checks, have been funding Social Security and Medicare in anticipation of benefits as they get older and retire. Congress had been spending hundreds of billions of dollars of trust fund money on various spending programs, as opposed to setting it aside for the taxpayers' retirement benefits. In 2008, Congress "borrowed" $674 billion in Social Security trust funds. Social Security and Medicare have been regarded as unfunded liabilities. That is because only a portion of the monies provided by taxpayers are actually set aside. They are also regarded as generational liabilities, which is when a current generation borrows money, and when they die, the bill is handed off to future generations – while the current generation benefits from the current spending. As the U.S. approaches the end of the 2000s, some economists and government accountants estimate that these unfunded liabilities would exceed $80 trillion. (For more, check out Introduction To Social Security.)

A U.S. and global economic recession not seen since World War II was placing financial stress on citizens, affecting the lower, middle, and upper classes. Wall Street's poorest performance since the Great Depression of the 1930s saw stock market wealth worth $6.9 trillion wiped out during 2008.

Over one million jobs were eliminated in the U.S. in 2008, which contributed to the unemployment rate approaching 8%. With U.S. per capita earnings of $48,000, one million layoffs translate to approximately $48 billion in eliminated payroll and earnings for working families. These statistics do not include under-employment figures in the country – it is estimated that one out of nine Americans are underemployed. As of 2007, approximately 12.5% of Americans lived below the poverty line. (From unemployment and inflation to government policy, learn what macroeconomics measures and how it affects everyone in Macroeconomic Analysis and Economic Indicators To Know.)

The housing collapse was expected to require government intervention and action on mortgages that require over $1 trillion. American homeowners saw over $1.9 trillion in home values wiped out in 2008. A frozen credit market forced the government to spend several hundred billion dollars through a stimulus package. Continued frozen credit facilities through 2009 made the economic downturn of 2008-2009 more protracted and more costly for the government.

Future Opportunities
The U.S. continues to be the most technologically advanced nation in the world, with the best research universities. New developments and advances can bring a wave of economic stimulus simultaneously ushering in a new age in commerce activity.

These areas could become the economic rallying cry to uplift the economy and refill government coffers:

•clean / alternative energy and fuel efficiency
•infrastructure building and repair
•nanotechnology
•robotics
•healthcare advances

Parting Thoughts
The ruins of ancient Rome, and numerous other civilizations centuries ago, serve as warning to national leaders against taking rash actions on behalf of their people or on behalf of future generations. Such gambles can spell disaster, and risk the very existence of the state. Fiscal irresponsibility may not bring about such a rapid decline as that of Napoleon's charge on Russia, or Germany's multi-front wars, but it can lead to a longer-term protracted decline similar to ancient Rome's nagging and continued multi-front wars and internal discord.

Fiscal decline is a slower process of reduction in flexibility, which forces leaders to make choices in proportional constriction. Affected citizens encounter reduction in economic wealth and quality of living. The philosophy of monetary and resource conservatism has endured over the millennia, from agricultural to hunter-gatherer societies, for a reason. There is a time when corrective measures in the form of resource conservatism, temperament and an urgency in common sense, are the clarion call of the times. (Learn about the series of events that triggered the Great Depression and other crashes in The Crash Of 1929 - Could It Happen Again? and our Market Crashes Tutorial.)

by Marv Dumon, (Contact Author | Biography)

Marv Dumon serves as a mergers and acquisitions advisor for a middle-market financial services firm specializing in industrial and energy companies. He maintains established relationships with more than 500 mid-market private equity firms. He also serves as a national business and finance columnist for Examiner.com. Dumon's background includes experience in consulting, finance and operations with several organizations including two S&P 500 companies. He received a Bachelor of Arts, a Bachelor of Business Administration and a Master of Accounting from the University of Texas at Austin.

http://www.investopedia.com/articles/economics/09/us-government-too-big-to-fail.asp

US to reduce Quantitative Easing as rates kept low

US to reduce Quantitative Easing as rates kept low
The Federal Reserve reiterated its desire to keep American interest rates “exceptionally low” for an extended period, but gradually reduce some of its quantitative easing as the US economy begins to recover.

By James Quinn, US Business Editor
Published: 8:51PM GMT 04 Nov 2009

America’s central bank, holding interest rates in a range of 0 to 0.25pc, did not signal when borrowing rates might rise, as it remains wary of knocking the US’s nascent recovery off course just a week after productivity figures signalled the country emerged from recession in the third quarter.

The decision comes ahead of the results of the Bank of England’s Monetary Policy Committee meeting, which is due to report its views on interest rates and quantitative easing on Thursday.

In a more upbeat assessment of the state of the US economy, the Federal Open Markets Committee (FOMC) said that it would begin to pull back on some of the extraordinary capital injections it made into the US economy during the crisis.

The Fed has completed its $300bn (£181bn) US Treasuries purchase programme, and reduced the fund for buying agency debt through the first quarter of next year from $200bn to $175bn. But it will continue with its $1.25 trillion purchase programme of agency mortgage-backed securities.

The FOMC’s unanimous decision to hold rates came as it noted that “activity in the housing sector has increased over recent months” and that businesses are beginning to slow the rate of cutbacks.

New data from the FOMC included the latest ADP payroll survey, which showed that the US private sector lost 203,000 jobs last month, ahead of tomorrow’s government unemployment figures, which could show the US unemployment rate hit 10pc in October.

Fundamentally10 Years Later, a Much Less Expensive Dow 10,000

Fundamentally10 Years Later, a Much Less Expensive Dow 10,000


By PAUL J. LIM
Published: November 14, 2009

INVESTORS may take some comfort now that the Dow Jones industrial average is back above 10,000 after slipping to around 9,700 at the end of October.

But the return to 10,000 also serves as a bitter reminder that stocks have gone virtually nowhere, on balance, for more than a decade. It was in March 1999 that the Dow first climbed above 10,000, before soaring as high as 14,164 two years ago and plummeting as low as 6,547 this past March.

Of course, the Dow gauges only stocks in the United States, and a fairly narrow band of the market at that. And while domestic shares have appeared to run in circles for more than a decade, many global stock markets have prospered.

Look a bit deeper, though, and you’ll find that there have been some changes in the domestic market, too, in the last 10 years — and largely for the better. Some of them, however, are hard to see at first glance.

For example, a majority of sectors have actually posted positive returns since the end of 1999 — in some cases sizable gains. On average, including dividends, energy stocks have returned nearly 150 percent, shares of consumer staples companies (like Procter & Gamble and others that sell necessities) have gained nearly 65 percent and utility stocks have risen nearly 50 percent.

“That’s hardly what I would call a lost decade,” said James W. Paulsen, chief investment strategist at Wells Capital Management in Minneapolis.

Market valuations are another consideration. By almost every measure, stocks are far cheaper at Dow 10,000 today than at Dow 10,000 in March 1999.

Back then, the price-to-earnings ratio for domestic stocks stood at a very high 41.4. That’s based on 10-year average earnings, a conservative measure that smoothes out short-term swings in corporate profits. Since then, using the same measure, the market’s P/E has fallen to 18.9. While that’s not necessarily a screaming bargain — the market’s long-term average is closer to 16 — stocks are trading at a discount of more than 50 percent to their 1999 prices.

“The reality is that stocks are like any other asset,” said Robert D. Arnott, chairman of Research Affiliates, an investment consulting firm in Newport Beach, Calif. “If you buy them cheap, there’s a good chance you’ll be happy very quickly. But if you buy them at expensive prices, you’ll have to wait a long, long time to get rewarded. That’s what investors have learned in the past decade.”

Perhaps the most important change is the one that has occurred in many portfolios. Investors are generally more diversified today than they were a decade ago — and that has helped many households make money in an equity market that has been in neutral over all.

Consider that in 1999, four economically sensitive sectors — technology, financial services, telecommunications and consumer discretionary stocks (which include automakers) — made up nearly two-thirds of the overall market.

Those four areas also happened to be the four worst-performing groups over the last 10 years. Since the end of 1999, tech and telecom shares have lost nearly 8 percent, annualized, according to Standard & Poor’s. Financial shares, meanwhile, have fallen almost 3 percent a year, on average, and consumer discretionary stocks are down nearly 2 percent, annualized, S.& P. says.

Today, these four sectors make up less than half of the market.

At the same time, weightings have grown modestly in traditionally defensive areas of the market like health care, consumer staples and utilities. In fact, those three sectors now make up nearly a third of the S.& P. 500-stock index, up from less than 19 percent in 1999.

DIVERSIFICATION goes well beyond just sectors. Back in the late ’90s, investors held about $1 in foreign stocks for every $8 held in domestic equities — not counting their own company’s stock — within their 401(k) retirement accounts. That isn’t terribly surprising, in that the domestic stock market back then was routinely delivering 20-percent-plus annual returns.

Today, that ratio of foreign stocks to domestic shares stands at 1 to 3.

Why is that important?

In a decade when domestic stocks ended up going nowhere, foreign shares actually gained a decent amount of ground. In fact, the Vanguard Total International Stock Index fund, a diversified index portfolio that serves as a proxy for all overseas equities, returned more than 4 percent, annualized, from March 1999 through October this year. And the Vanguard Emerging Markets Stock Index fund, which invests in companies based in developing economies abroad, fared even better, climbing more than 12 percent, annualized, during this stretch.

If you diversified with, say, 75 percent domestic stocks and 25 percent foreign shares, your overall equity portfolio would have grown slightly — by more than 1 percent, annualized, since March 1999.

What’s more, foreign assets are now more important in global portfolios. In the last 10 years, emerging markets have gone from 4 percent of the world’s market capitalization to 26 percent, said Sam Stovall, chief investment strategist at S.& P.

Despite the Dow’s lackluster performance, Mr. Stovall added, “You can’t say that things haven’t changed.”

Paul J. Lim is a senior editor at Money magazine. E-mail: fund@nytimes.com.

http://www.nytimes.com/2009/11/15/business/economy/15fund.html?_r=1&ref=business

This recession is the longest we’ve had post World War II.

CNN Money just released an interesting slideshow about the state of the economy as of late. If you’re wondering about when (or whether) this economy will be *truly* turning around and whether your vague unsettling feelings about it have any basis, then these hard numbers should help give you perspective. If you’re going to get anything from this post, maybe it’s this: that this recession is the longest, most grating one we’ve had post World War II.

Visit here for more slides: 

http://money.cnn.com/2009/10/29/news/economy/gdp/index.htm