Dollar Demise Returns after weak US Economic Data

Share



Last year, governments around the world rushed to save the economy. The immediate plan was to pass a stimulus package hoping to boost demand and provide incentives for businesses to increase productivity. This stimulus wave did some good; it kept us from experiencing something far worse, added some jobs, and fueled overall growth - at a snails pace. The main problem was that the stimulus came with an expiration. This forecast for pullback made the incentives more like handouts.

Tax credits for home buyers helped the housing market rebound, but as soon as the credits expired, home sales plunged. The National Association of Realtors stated that pending home sales index fell 30 percent survey to 77.6 percent based on contracts signed in May. Jobless claims increased last week to 472,000. This just after the government temporarily boosted employment with about 225,000 census jobs. Once the census ended, the job market was back on the radar. Congress is now hoping to extend unemployment benefits. Obama wants to extend George W. Bush's tax credits (but not for families above the $2K mark per year) which expire at the end of this year.

This proves that stimulus hand outs did not effectively boost aggregate demand. The forecast that set these expirations was supposed to allow government some time to come up with a long term plan, while working to push the stimulus (most of which unspent) to fuel the economy. Unfortunately, we are still behind, and now is not the time for a pull back. At the G-20, Obama urged other countries to keep spending. But does this mean more handouts? Governments need to change the way they incentivize.

Setting limits provides a goal for when the economy should recover, but these programs should be aloud to float. Unlike monetary incentives, political stimulus creates more of a public dependency on government. Interest rates float and can be adjusted; except when you're stuck near zero, but public incentives should do the same. A home buyers tax credit in response to a sluggish market should gradually increase and decrease according to market activities. A sudden withdraw does not help with the confidence of a recovery. If the public knows that they are given some help, without having to worry about buying before a deadline, aggregate demand will become sustainable. What we have now is artificial demand that responds to a shot of stimulus. Political gridlock in Congress does not help the issue, which is one reason why monetary stimulus is independent from politics.

Currently, investors fear a double dip approaching, but most economists see this as a temporary downturn. Former Fed Chairman Greenspan said that this is a normal pull back during a recovery. Perhaps all we need is more extensions, but there comes a point when government must show some concern for their own budget. The UK is introducing an emergency budget full of government pull back, and European countries are cutting back as well. Government needs to raise revenue and cut spending. By now, the economy should have been recovering smoothly so that government can step back and heal itself. Obviously something is wrong, it could just be a hiccup, but the pullback clearly shows that the public isn't ready. Famed Economist Nouriel Roubini thinks bond vigilantes will return as government ops to spend more.

Investors should avoid the US for now. Technicals don't show enough selling pressure to confirm a sustained downturn, but the Euro has rallied on the dollar's recent decline. And, well, there's always China.

Become a Fan of Dantes Outlook on facebook!