Upon his re-election, President Barack Obama pledged to get America’s economy moving again. It is troubling that the President made this same promise four years ago, yet America’s economy is still stuck.
The Federal government and the Federal Reserve have injected trillions of dollars into the economy and reduced interest rates to their lowest levels in history, yet America’s economy is still stuck. And reckless attempts by Obama and the Fed to drag it forward will eventually destroy it.
I grew up in the country, and I saw a lot of things get stuck in snow and mud: trucks, tractors, even a snowmobile. What I remember most clearly is that when I was 10, my dad’s 1966 Lincoln became immobile. It was a white, four-door Continental with the signature rear suicide doors (they opened backward, making it an easy car to jump from if you were in the back).
In the mid-1960s, my father built a log cabin beside Lake McGregor in Southern Alberta. The lake runs along a thin valley he lived above as a boy in the early 1900s, when his parents were homesteaders.
The equipment that built the cabin had come and gone, as had the permafrost. When he took our family to see the finished cabin, the spring thaw was in full force. We drove beside the lake on a cow trail — not a road.
It didn’t take long for the big Ford to sink right up to its fenders. Loaded down with building materials and people, not even the Lincoln’s massive 460 cubic inch engine could pull us free, despite my dad’s heavy-footed attempts to get it rolling. It turned out to be a car that could pass anything except a gas station or a mud trail.
Eventually, two big tractors towed the car onto dry land. Unfortunately, the car’s transmission remained in the mud and muck. That beautiful car was a write-off.
That car was built during the high-level mark for Detroit. In 1966, U.S. auto companies were building one out of every two cars sold in the world.
A decade after that Lincoln slipped deep into the mud, Detroit was also slipping toward failure. In the 1970s came the Chrysler bailout. In the late 1980s, President George H.W. Bush instituted protectionism for all U.S. automakers. And just four years ago this month, President George W. Bush kept America’s auto industry afloat by giving a $17.4 billion bailout to General Motors Co. and Chrysler.
Just like my dad did that day on the cow trail, the Federal government and the Fed keep flooring the gas pedal. Rather than pumping gasoline into an immovable vehicle they are pumping money into an immovable economy.
Policymakers simply will not accept that the U.S. economy is permanently stuck.
It hasn’t always been that way. Starting with Lincoln (the President, not the car), U.S. gross domestic product grew by more than 3 percent per year. The growth continued until I was a kid. That was 100 years of consistent growth, a record untouched by any nation in history.
But America’s economic growth rates have fallen significantly in the past two decades. America is getting weaker, not stronger.
Reported GMO Quarterly Letter last month: “Going forward, GDP growth (conventionally measured) for the U.S. is likely to be about only 1.4% a year, and adjusted growth about 0.9%.”
Today, American manufacturing contributes 9 percent of GDP. In 1966, manufacturing made up more than 20 percent of GDP. GMO Quarterly Letter predicts that by 2040 manufacturing will make up only 5 percent of GDP.
Another High Level Mark In 1966
The first year the Dow Jones industrial average reached 1,000 was 1966. Today, it trades around 13,000. You might think that if your parents had left you a share in the DJIA, you would be 13 times richer. That isn’t so. What a dollar would buy you in 1966 now costs more than $7. In today’s money, the 1966 DJIA was priced at 7,000. Those numbers are given to us by the Federal government and do not reflect the true decline of the dollar’s purchasing power.
If you bought a share of the Dow 46 years ago and held it (not accounting for dividends), you haven’t even doubled your money.
The Federal government has a lot of people fooled into thinking we can pull out of the economic morass simply by printing more money. Money in itself isn’t more wealth; it is just more money.
It is no different than owning 100 shares of a stock at $100 per share. The board of that company decides to do a two-for-one stock split. One morning, you have twice as many shares. But now they are priced at $50 per share — not $100.
The commentary by Ben Inker in November’s GMO Quarterly Letter sums up how priming the monetary pump isn’t going to be helpful and may, in fact, be harmful:
According to the Fed, an important goal of current monetary policy is to drive asset prices higher, generating a wealth effect that will lead to more spending and economic growth. There is a significant problem with this policy from a theoretical standpoint, though. The problem boils down to this: while Fed policy actually can cause rational investors to bid up the prices of assets, it probably can’t cause a wealth effect if investors truly are rational. Because the truth is that for the majority of investors, current Fed policy is taking them backwards, despite higher asset prices. The slightly odd corollary to this fact is that the less effective current Fed policy is at boosting the economy, the longer it is likely to persist, leaving rational investors in the position of hoping the damn thing works so that it will end, but unwilling to participate in the actions that would lead to success.
Real wealth comes down to real jobs, and the United States simply is not creating them at the pace it once did. The wealth you read about in the stock market is all smoke, and it can dissipate just as quickly.
Action to take: The trading wheels on Wall Street may be spinning just as fast as the double-ply tires on that Lincoln did. But I must tell you: That car didn’t move an inch forward and neither will the U.S. economy. This truth is going to surface early in the New Year when even investors finally see it. When that happens, there will be a rush to the doors. Make sure you beat that calamity and sell any stocks you own as soon as you can. Keep some gold as insurance and put cash into three-month T-bills or physical cash in a secure place like a good home safe or a bank safety deposit box.
Yours in good times and bad,
Editor, Myers’ Energy & Gold Report