Obama’s Smoke and Mirrors Show Only Delaying the Tough Times

Monday, November 2, 2009 11:04 AM

By: Sean Hyman

Last week was a good economic data week, right? After all, the U.S. GDP number came in at 3.5 percent, better than expected. So good times are ahead, right?

That’s what Obama implied from his recent speech when citing the latest GDP number. Is he right? No, he’s wrong! Here’s why:

Sure the GDP number was higher. Now, that would be good if it were due to consumer-led consumption and corporate America expanding its earnings. However, that has simply not been the case.

You have to dig through Obama’s smoke and mirrors to really think about what’s really going on here.

You see, thus far the government has been propping up America by government spending programs such as TARP and Cash for Clunkers.

The problem? The government can’t keep that up forever. Sooner or later, it has to pass the baton to the consumer. For sustainable growth you have to have a consumer-led economy.

However, the consumer isn’t spending and, even more importantly, it couldn’t spend if it wanted to. Let me show you why.

In order for the economy to really expand, you have to have consumers buying up big ticket items like homes, furniture, cars, and appliances. They can’t do that.

Firstly, many of them are unemployed or either scared that they could lose their jobs at any minute like their neighbors have. Some have experienced pay cutbacks rather than getting laid off.

However, let’s assume that’s not even part of the equation and talk about the rest of the consumers for a moment.

What’s the story with your average Americans? They don’t save. They spend. In fact, they usually outspend what they make. So they have no real savings to tap into in order to make these big-ticket items to thrust the economy forward. But that’s okay, they can always get a loan or tap lines of credit like they always do, right? Wrong.

You see, we still have the same problems with the banks that we had before. There’s still a credit crunch out there. The banks still are hardly lending, even to those with great credit. In fact, they are still calling in some loans from people that have even had great payment histories.

So if average Americans hardly have any savings to make these big-ticket purchases with and they can’t get hold of the money they need through their banks, then how are consumers supposed to pick up where the government left off and support economic expansion? They can’t.

But are the banks just being mean? No. The government changed the game on them, too. You’ll notice that the latest banking TV commercials that you see are not about loans, like you’d normally see. They are about savings programs. Why?

The government is having them beef up their reserves so that they could weather another downturn. This supposedly looks out for the consumer.

However, if banks have to beef up reserves and loan less, then have they really helped the consumer? Of course not.

The banks are in a predicament too. If they don’t have enough padding through unusually high bank reserves, the government can deem them unfit to continue to run, and it can go in and take the banks over.

The banks certainly don’t want to lose control of their empires, so that’s why they play the government’s game of keeping reserves extra high. But in doing so, there’s that much less money that can go into the economy.

This is a shame too, because the banks are where money gets to have a multiplier effect, and that’s what we need in the economy right now.

You see, when a bank takes in money from you or me and we put money into our bank accounts, the government lets them lend out about eight to 10 times that much money in loans.

So the money the banks have to hoard is really about eight to 10 times less money that can go into the economy. Therein lies the real problem.

Politicians in general don’t know squat about running a business, but it seems they know the least about running any sort of financial business, such as banking or brokerages.

Therefore, they are either doing this out of complete ignorance and thus hurting the economy, or they are doing it purposefully.

The Democrats love big government, so they actually love times like these. After all, if the government got to seize control of banks and other financial institutions in good times, you’d say they were communists.

However, if they help to encourage an economic downturn while appearing to be helping it, then they look like saviors when they come in and take over companies seemingly for our own good. This way, they get to control investment banks, insurance companies, and mortgage companies.

You name it, they get to seize control. But is this really any different from anything that Chavez or Castro would do? No, it’s just that these guys do it publicly and make no apologies about it.

The Democratic way of doing it is to make it seem like they are helping us out and doing it for our own good.

So the question now is how will this affect the currency market when more bad times come?

Money will once again run to the defensive assets like the U.S. dollar, Japanese yen, and the Swiss franc, and it will run away from the riskier assets that it’s been running to when we had the false sense of stability that we’ve recently had.

Don’t get me wrong. In the long term the dollar has some real issues. People need to own foreign currencies. Our government will continue to implement plans that undermine the dollar.

However, in the coming months, you will likely see stocks retreat and economic data finally start to worsen again. When this happens, you will see money pull out of the emerging and developed overseas economies and run back home and hide within the U.S. dollar once again.

Then finally, one day when this is all over, money will once again go back to its long-term course of fleeing the dollar for greener pastures.

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