Wednesday, April 13, 2011

[Video] Byron Wein Talks Inflation, the S&P 500, and Why Cutting the Deficit Most Likely Causes a Recession

It has been a while since we posted any Byron Wein video, but he made an appearance on CNBC this morning.  While he talks about numerous subjects I want to highlight to readers a comment he made that touches on a subject I have been stressing the past 2-3 years - how dependent this recovery has been on government steroids.  (I am not even discussing what the Fed is doing).  Indeed, I just mentioned it yesterday in the piece about the the budget deficit.  It is remarkable how weak our growth is in the country despite running well in excess of a trillion of budget deficit OVER our previous record levels ($400B) the past 3 fiscal years.  You'd think we'd be getting 5-6% GDP, rather than struggling with quarters of 2-3%.  Again, I am not speaking of the variance versus a balanced budget, but how far in excess we are over our pre recession record levels of deficit spending. 

Here is Byron's comment reflecting on what I have been stressing but using percentages.

Let's say you did the Paul Ryan plan and cut an enormous amount out of it. You know, the economy is dependent on government expenditures. The government is representing 25% of the gdp right now. and taxes are 16%. there's a 9% gap. If the government really did cut the budget deficit, there's a possibility that we could go into a recession. so, you're walking a fine line here.

I used to couch this as 'cost-benefit' analysis back in 2009 and 2010.  Each time we talk about our economic reports, especially when they do 'better than expected' we MUST realize the costs involved.  They get brushed aside by Wall Street, all giddy like.  Take retail sales the past 3 months (including today's report) - does anyone mention there was a 2% payroll tax holiday that boosted every worker's income as of Jan 1? And cost $110 Billion?  Nope.   But that is just one of many examples.

Larger picture... 25% of our nation's GDP is now coming directly from government - which is nothing more than transfer payments + borrowing.  That's not entrepreneurial private sector business or wealth creation.  That does not represent 'healthy' in any shape or form.  (and yes some of it is needed i.e. infrastructure) Unfortunately, we've become addicted to our drug dealer Uncle Sam, as our multinationals and "free trade" agreements have carved out much of the private sector the past few decades - so there is no real easy path away from continued government stimulus.  I fear the dependence has become so great, that unless the Fed is engineering a bubble that can create jobs (ala housing) we will just head back to another recession as the 'real economy' is exposed.  Quite a conundrum.

7 minute video - email readers will need to come to site to view

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