04 Nov 2011 “We are all Greeks”

The Federal Reserve Open Market Committee met this week and held to the major tenets of its monetary policy. Rates will remain unchanged at near zero; Operation Twist will continue to extend purchases of longer-term Treasuries; language that rates will remain exceptionally low through mid-2013; and principal payments from its holdings of agency debt will be reinvested in agency mortgage-backed securities. The Committee anticipates “a moderate pace of economic growth over coming quarters and consequently anticipates that the unemployment rate will decline only gradually.” The statement also said that the FOMC “anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee’s dual mandate (inflation and employment) as the effects of past energy and other commodity price increases dissipate further.” 

In a very good sign for the economy, productivity rebounded and annualized 3.1% in the third quarter after dropping 0.1% in the previous quarter. Also good from an inflation standpoint, unit labor costs fell an annualized 2.4% reversing a 2.8% increase in the second quarter. However, compensation growth rose only 0.6% compared to a 2.7% rise in Q2.

The ISM gave further support to the thesis of improvement in manufacturing. The ISM new orders index moved into positive territory to 52.4 in October after three months of contraction. Many elements of the report including employment and production were little changed. But particularly noteworthy was that prices paid were down 15 points to 41.0, the lowest reading in 2-1/2 years.

On a regional basis, the Chicago Fed reports healthy business activity as indicated by very strong rates of monthly expansion in purchasing rates of 58.4 (anything above 50 indicates expansion). Orders, the most important component, point to improving production and employment in the coming months as businesses expand.

Also on the positive side of growth was Construction Spending, inching forward at 0.2% in September following a 1.6% rise in August. Residential construction led the way and was followed by private non-residential construction. Public outlays declined 0.6% in September following a 3.5% jump the prior month.

Factory orders rose 0.3% in September on strength of petroleum and coal on the non-durable side, which are sensitive to price drops, and transportation on the durable side. The report also revealed a healthy increase for core capital goods, indicating that businesses continue to invest in their equipment, if not in their workforces.

Jobs are coming back, but painfully slowly. The government announced today that unemployment fell from 9.1% to 9.0% in September. The survey reported a 277,000 increase in household employment which has posted significant increases for three months in a row.

At the margins, the economy is clawing its way back. But the modest gains noted this week regrettably do not portend an end to the malaise this great economy suffers.  Regardless of what the administration and the Federal Reserve say, there is no way this economy resumes its potential until debt and deficit spending are addressed both here and abroad. We must actually endure the painful consequences of the necessary remedies. There is magic medicine.

Erskin Bowles, co-leader of President Obama’s fiscal commission told the congressional supercommittee seeking a $1.5 trillion debt-reduction package, “I’m worried you’re going to fail.” The 12-member panel is just three weeks away from its deadline with no agreement in sight.

Former Senator Pete Domenici of New Mexico, a Republican, criticized Democrats who oppose changes to Medicare and Republicans who refuse to accept tax increases. “They are both complicit in letting America destroy itself, in letting this great democracy destroy itself because we don’t want to make tough decisions,” Domenici told the supercommittee. “I hope you heard that.”

Chuck Bently of Crown Financial Ministries notes that Veronique Riches-Flores of France’s largest bank, Societe Generale, recently entitled her analysis of the crisis, “We are all Greeks.” According to Bently, “she was bluntly pointing out that the member nations of the Organization for Economic Cooperation and Development (OECD) all have unsustainable levels of debt. Essentially she made the case that both the US and European nations are facing tough choices ahead and that she foresees the need for austerity plans in most of the Western world.”

The hour has come for Europe and this country, which is rushing headlong into the same mess, to deal with, not only our debt and deficit spending, but more importantly with the sick mentality of spending more than comes in. It is an attitude ingrained in our political system. The two political parties stand diametrically opposed on the issue of the role of government. Each year when they debate the so-called budget, they undertake an impossible mission; the reconciliation of small government and large government. When they fail as they inevitably always will, they simply spend what they must on each side to gain re-election and pass the certain spending excesses onto the next Congress and the resulting debt to the future generations.

We are all Greeks and our future is unfolding before our eyes in Europe. We were able as a country to save ourselves from the $5.00 charge that banks were going to charge customers for using their debit cards to spend their own money. Are we capable of electing political leaders who will take us off the road to Greece?