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On the Economy & Obama’s Trillions

FORECASTS & TRENDS E-LETTER
by Gary D. Halbert
September 8, 2009

IN THIS ISSUE:

1.  The Economy – More Signs of Recovery

2.  Is the Recession & Credit Crisis Over?

3.  Obama Adds $2 Trillion to Debt Forecast

4.  Economic Assumptions Still Too Optimistic

5.  What in the World Are They Thinking?

6.  Do They Want Control Even If It Ruins The Economy?

Introduction

In my June 16 E-Letter, I reprinted the non-partisan Congressional Budget Office’s (CBO) projections of annual federal budget deficits over the period from fiscal 2009 to fiscal 2019, which estimated that the national debt will more than double over that 11-year period – not including over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over the next decade.

The White House Office of Management & Budget (OMB), which is partisan, runs budget deficit projections similar to those of the CBO.  The OMB’s deficit projections over the same period, 2009-2019, showed the national debt increasing over $2 trillion less than the CBO’s forecast of $11.11 trillion.  However, on Friday, August 21, the White House quietly announced that the OMB had revised upward its deficit projections to fall in line with the CBO’s.  So, it’s official.

The only good news on the deficit front is that both the CBO and the OMB recently revised downward the fiscal 2009 budget deficit, which closes out at the end of September, from the earlier reported $1.8+ trillion to around “only” $1.6 trillion.  Time to break out the bubbly, right?  Wrong!  We will look at the latest deficit projections as we go along, but the problem is still the same; Obama seems intent on spending this country into financial ruin.

But first, there is more good news on the economic front.  More and more forecasters now believe that GDP has moved into positive territory in the 3Q, and perhaps it has.  Unfortunately, we don’t get our first 3Q GDP estimate until the end of October.  The latest GDP estimate for the 2Q was unchanged at -1.0%, which was better than expected.  I will cover the latest encouraging (and not so encouraging) economic news just below.

The Economy – More Signs of Recovery

We have seen considerably more positive signs than negative over the last month.  Let’s begin with the ISM manufacturing index which rose sharply to 52.9 in August, up from 43.4 in July.  It is the highest reading since June 2007.  A reading above 50 in the ISM index indicates that the economy is recovering.  The ISM “new orders” index jumped 9.6% in August to 64.9, which confirms that inventory rebuilding is intensifying, albeit from very depressed levels.

Durable goods orders jumped 4.9% in July (latest data available) following -1.3% in June. Industrial production increased 0.5% in the same period.  The factory operating rate also increased modestly in July.  Construction spending, however, was still down slightly in July.

The Index of Leading Economic Indicators rose for the fourth consecutive month in July (latest data available) with a rise of 0.6% following a gain of 0.8% in June.  Four consecutive up months in the LEI is quite encouraging, indicating that the worst of the recession is likely behind us, and the economy may move into positive territory before year-end.

The Consumer Confidence Index bounced back in August to 54.1 versus 47.4 in July.  After rising sharply in the spring, the Index drifted lower in June and July so the latest recovery was welcomed.  The University of Michigan Consumer Sentiment Index also closed out higher at the end of August. 

Unfortunately, the rise in consumer confidence that began in the spring has not translated into significantly higher consumer spending.  Retail sales in July fell 0.1%.  Personal consumption expenditures, another measure of consumer spending, were up only 0.2% in July.   Most Americans are still very concerned about the economy, and many are choosing to save rather than spend.  The Commerce Department reports that the personal savings rate rose to 5% of disposable income in the 2Q, the highest rate in over a decade.

On the housing front, there was some good news in the last month.  Pending home sales rose 3.2% in July following a gain of 3.6% in June.  Actual sales of existing homes rose 7.2% in July to an annual rate of 5.24 million units.  Sales of new homes rose 9.6% in July, the largest monthly gain since February 2005.  Much of the increase in home sales in recent months is attributed to the up to $8,000 in tax incentives for first-time home buyers; yet no one knows what will happen when this stimulus program ends later this year.  

The Labor Department announced last Friday that the US unemployment rate jumped to 9.7% in August, up from 9.4% in July, and above pre-report expectations.  In August, the official number of unemployed persons increased by 216,000.  The Labor Dept. also reported that there are now  14.9 million unemployed Americans, and this number is likely headed even higher in the months ahead.

Is the Recession & Credit Crisis Over?

In the 30 years that I have been writing about the markets and the economy, a “recession” has consistently been defined as two or more consecutive quarters of negative growth in GDP (or GNP back in the old days).  Likewise, two consecutive positive quarters meant that the recession was over.  Be that as it may, if the initial GDP report for the 3Q is even mildly positive (which we won’t get until the end of October), you’re going to hear virtually everyone declare that the recession is over – whether or not that proves to be the case.

While I remain a bit skeptical, most of my trusted sources believe at this point that 3Q GDP will be at least mildly positive, and that the 4Q will be as well, in large part due to inventory rebuilding.  But most of these same sources are not predicting a strong recovery in the economy.  Some believe that there is still a real chance that we will slip back into recession in late 2010 or 2011, especially if consumers continue to save rather than spend.

As for the credit crisis, I think it is fair to say that it is no longer a crisis.  But as anyone who is trying to get credit for a business knows, the banks are still not lending remotely as they were before the subprime blowup occurred.  New lines of credit are few and far between.  Many banks still have too many bad loans on their books, so they’re not looking for new ones.

According to the FDIC, 84 US banks have failed so far in 2009, a record pace.  So while it may be safe to say that the credit “crisis” is over, we are still far from being out of the woods.  There are now 416 banks on the FDIC’s “problem list” (up from 305 in March), so there will continue to be multiple bank failures every month for some time to come.

Then there’s the 800-pound gorilla in the room – the Fed.  At some point, the Fed will have to unload the $2+ trillion in questionable securities and toxic assets on its balance sheet.  The Fed can’t continue to print money (“quantitative easing”) indefinitely; likewise, it will have to shrink the money supply at some point; and finally, short and medium-term interest rates will have to be allowed to rise somewhere down the road, especially if the economy rebounds.

Obviously, no one short of Ben Bernanke knows when this will happen.  My best sources believe that because of the deflationary forces created by deleveraging, the Fed has at least a year to maintain its current stimulative policies without risking higher inflation.  Similarly, they believe the Fed can wait a year or so before having to begin unloading assets and trim its balance sheet.

Virtually, everyone I read in the financial/investment world agrees that the Fed faces a daunting challenge when the time comes to unload these assets.  This problem, above all, will continue to hold the threat of a double-dip recession over the economy and the markets.  We all need to keep this in mind even if the economy goes positive for a few quarters.

Obama Adds $2 Trillion to Debt Forecast

In my June 16 E-Letter, I reprinted the non-partisan Congressional Budget Office’s (CBO) projections of annual federal budget deficits over the period from fiscal 2009 to fiscal 2019, which showed the national debt more than doubling over that 11-year period.

2009

 

$1.845

trillion

 

2015

 

$785

billion

2010

 

$1.379

trillion

 

2016

 

$895

billion

2011

 

$970

billion

 

2017

 

$945

billion

2012

 

$658

billion

 

2018

 

$1.023

trillion

2013

 

$672

billion

 

2019

 

$1.189

trillion

2014

 

$749

billion

         


TOTAL  $11.11 Trillion

As noted in the Introduction, both the CBO and the White House Office of Management & Budget (OMB) recently reduced the budget deficit forecast for fiscal 2009 from the $1.845 trillion noted in the table above to apprx. $1.6 trillion.  So, the $11.11 trillion shown above would now be reduced to apprx. $10.87 trillion (if the latest projections prove to be correct).

Note that this astronomical amount does not include over $1 trillion for nationalized health care (if it passes) and several trillion more that will be required to rescue Social Security, Medicare and Medicaid over next decade as the Baby Boomers retire.  Nor does it include the existing national debt of $11.7 trillion.  The $10.87 trillion is merely the sum of annual budget deficits over the 11 years from 2009 to 2019.

Given that September is the end of fiscal 2009, the talk is now focused on record budget deficits for the 10 years from 2010 to 2019.  Never mind that the 2009 deficit will be apprx. $1.6 trillion, almost four times larger than our previous worst deficit in history, which was $438 billion in fiscal 2008 under President Bush.

If you take out the $1.845 trillion 2009 deficit from the table above, the CBO deficit estimate for 2010-2019 is $9.02 trillion.  This is $9 trillion that we will add to the national debt over the next 10 years, based on Obama’s budget projections.  Yet for months now, the Obama administration has taken flack because its own OMB has maintained that the 2010-2019 deficits would only total apprx. $7 trillion.  But that has recently changed.

Now if you’re the President of the United States, and you have some news that is not flattering to release to the public (especially in a recession), you might decide to quietly release that news at the end of the day on a Friday, and hope that it doesn’t get much play on the weekend news shows.  That is exactly what happened on Friday, August 21.

At the end of the day on Friday, August 21, a senior White House official announced that the Office of Management & Budget had revised its deficit forecasts for 2010-2019 from $7 trillion to apprx. $9 trillion.  At long last, that puts Obama’s forecast in line with the CBO’s forecast.

Obama Administration officials acknowledged that they relied on overly optimistic assumptions about the economy when they forecast in March that President Barack Obama’s budget plans would generate deficits of $7.1 trillion over the next 10 years. After factoring in the severity of the recession and the prospect of a more sluggish recovery, the White House concluded that the budget outlook is significantly worse and revised the 10-year tally of deficits to $9.05 trillion.

Some in the media welcomed the presumably more accurate deficit forecast; some even went so far as to note that such huge spending will be just fine, such as liberal commentator Paul Krugman of the New York Times.  Others, however, were quite critical and seriously questioned how the Obama Administration could have been off by $2 trillion in its forecast.

The conservative Weekly Standard published a scathing article on August 31.  Here are some excerpts:

What’s $2 Trillion Among Friends?

$2,000,000,000,000. That’s the amount by which the Obama administration raised its ten-year estimate of the nation’s budget deficit from the one it made only a few months ago. Now, $2 trillion is a lot of money. But even more significant is the fact that this revision represents almost a 30 percent increase -- no tiny percentage of the earlier $7 trillion figure. It seems that expenses are higher -- up 24 percent this year, the largest increase since the height of the Korean War -- than originally estimated, and revenues are lower. The resulting deficit, says Peter Orszag, Obama’s budget director, is ‘higher than desirable’. He might have added that the administration’s critics had it right when they claimed that the earlier estimate represented a turn around the dance floor with that old seductress, Rosy Scenario.

There’s worse: the new estimate assumes that Medicare and Medicaid spending will be cut by $622 billion, even though Congress has made it known that it is reluctant to make any such cut. Then there is the $600 billion in revenue included for the sale of [carbon] emission permits, despite the fact that the House has given away so many permits in order to buy support for the cap-and-trade emission-reduction that the program will produce at most $450 billion. Those two items alone come to almost another trillion dollars in red ink. Throw in another trillion-plus for Obamacare, and it is no surprise that senior economist Bill Gale, at the liberal Brookings Institute, says that the deficit will hit over $10 trillion over the next decade, a figure he finds ‘deeply alarming’.

This year, the deficit will come to 11.2 percent of GDP, and by 2019 the [national] debt will be equal to 76 percent of the [projected] value of the nation’s output of goods and services, almost double the 41 percent when Obama took control of the nation’s finances. No problem, say White House economists. Unsustainable, says Warren Buffett, among others.”

Economic Assumptions Still Too Optimistic

Warren Buffet is absolutely correct.  Whether it’s $7 trillion or $9 trillion, it’s way too much and unsustainable.  Over the next five years alone, 2010-2014, the debt swells by $4.5 trillion.  In fact, these projections could actually be too low based on the economic forecasts used in the projections.  I should point out that this is not just an Obama phenomenon.  White House budgets, whoever was president, have been laced with optimism, and no president has forecast a recession in these 10-year projections.

(By the way, all presidential administrations produce these 10-year forecasts on spending, revenues and the budget deficits/surpluses, even though they won’t be in office 10 years from now.)

Consider the latest OMB projections for growth in GDP in the next several years in real terms, exclusive of inflation. The White House projects that GDP will grow by 3.8% in 2011 and climb above 4% a year for the next three years, followed by two years above 3%. This is far higher than historical norms; the economy has not seen such a period of growth since the 1960s.

And we can almost be assured of at least one more recession, if not two, over the next 10 years, what with the government running massive deficits every single year.  Remember, the Fed will have to unload some $2 trillion in troubled assets at some point in the next few years.  And, most forecasters agree that at some point, foreigners are going to curtail US dollar purchases, which will likely drive interest rates higher, at the least, or a currency crisis at the worst.

Excessive Obama optimism is not limited to economic growth. Despite the enormous monetary stimulus pumped out by the Federal Reserve in 2008-2009, bank credit that is widely regarded as potentially inflationary, the Obama administration assumes that inflation will actually decline from 2.1% in 2008 to 1.5% in 2009 and then to 1.3% in 2010 and 2011, and not rise above 1.8% through 2019.  While it is true that inflation is declining now, thanks largely to the big drop in energy prices over the last year, we are almost certain to see higher inflation down the road.

What in the World Are They Thinking?

Most Americans that keep up with the economy and rising government spending, even remotely, are very alarmed about the exploding debt that President Obama has proposed for the next decade.  Many of us wonder, what in the world could they be thinking?  Do they want to purposely wreck the US economy?  Frankly, I’m beginning to think so, as I will discuss later on. 

Here is a snapshot of how many liberals on the left think about the perpetual rise in government spending and exploding deficits over the next decade.  What follows is an August 23 editorial in the New York Times by liberal commentator Paul Krugman.  He boldly attempts to explain why Obama’s massive spending and deficits won’t be a problem.  He is wrong, of course, and I have inserted many bracketed words to help his column be more readable. I will elaborate afterward:

“How big is $9 trillion?

There’s been some hysteria [no kidding] about the [Obama] administration’s new estimate that the cumulative deficit will be $9 trillion over the next decade. Don’t get me wrong: this is bad. But it’s being treated as an inconceivable sum, far beyond anything that could possibly be handled. And it isn’t. [really?]

What you have to bear in mind is that the economy — and hence the federal tax base — is enormous, too. Right now GDP is around $14 trillion [annually]. If economic growth averages 2.5% a year, which has been the norm, and inflation is 2% a year, which is the target (and which the bond market seems to believe), GDP will be around $22 trillion a decade from now. So we’re talking about adding debt that’s equal to around 40% of GDP [this figure is bogus – see comments below].

Right now, even if we do run these [trillion dollar annual] deficits, federal debt as a share of GDP will be substantially less than it was at the end of World War II. It will also be substantially less than, say, debt in several European countries in the mid to late 1990s.  (There are some technical issues in comparing these various numbers — gross debt versus net (mainly about Social Security) and overall government debt versus federal, but they don’t change the basic picture.)

Again, the debt outlook is bad. But we’re not looking at something inconceivable, impossible to deal with; we’re looking at debt levels that a number of advanced countries, the US included, have had in the past, and dealt with.”

Wow!  So record trillion dollar deficits don’t matter, Mr. Krugman?  There are so many ways to debunk this article, I almost don’t know where to start.  Let’s first look at Krugman’s most egregious misrepresentation.  In the second paragraph, he states that the $9 trillion in new debt will be only 40% of GDP by 2019.  What he fails to note is that we already have $11.7 trillion in national debt today.  If we add another $9 trillion, the debt will be $20.7 trillion – or 94% of GDP – by 2019!!  Nice try, Mr. Krugman.

Second, it’s a lame attempt to compare the economy today with the period just after World War II.  We had the most robust economic growth in history just after WWII when we were rebuilding Europe, veterans were buying homes, durable goods, cars, etc. as never before and our manufactured goods faced very little foreign competition.  May I remind you, Mr. Krugman, that we are not in that position today!

Third, why should we all just assume that the US economy will average 2.5% annual growth over the next 10 years, despite doubling the national debt, just because it is some historical average?  As discussed earlier, we will almost certainly see another recession in the next decade, as foreign buyers of our massive debt may require higher interest rates or dump the US dollar. 

Do you honestly believe the US economy will grow by 2.5% annually for the next 10 years when consumer spending is stagnant and Americans are increasing savings at the highest rate in over a decade?  We’ve just been through the worst financial crisis since the Great Depression, and we are very likely looking at several years of below-trend economic growth.  On top of that, if we spend the $9 trillion, taxes will have to go up on almost all Americans at some point, which is also bad for the economy.

Like your liberal cronies, you make these assumptions and leave out certain facts to justify your belief that bigger government and higher taxes are the answer to all of our problems.  Mr. Krugman, take a look at Social Security, Medicare and Medicaid – and more recently President Bush’s prescription drug program.  Give me one example of how these government-run programs have been anything but a fiscal disaster.  You can’t.

Finally, Mr. Krugman (in case you happen to read this), let me say that I enjoy reading your columns and watching you on the TV talk shows.  You give me insight and understanding as to the thinking of those on the far left.

Do They Want Control Even If It Ruins The Economy?

As noted earlier, I have thought about this question for many years.  Why do the liberals want the government to control most everything in the economy and our lives?  While members of Congress have the best healthcare in the world, they will have dozens of family members and friends and countless colleagues that will be subject to the House healthcare bill, if it is passed.  So why are they so hell-bent on passing it?

The answer can only come down to two questions.  Question #1: Do they really believe that their proposed national heathcare program is the very best we can offer the American people? And if so, why doesn’t Congress adopt it for themselves?  Or Question #2: Is this really just a massive power grab that puts the government in control of our healthcare and our lives?

President Obama would like us to believe that nothing will change if healthcare reform is passed - that if you like your current insurance plan, you can keep it.  But that is patently false and abundantly clear if you read the onerous House healthcare bill, or even just the highlights that are readily available on the Internet.  If they ram this down our throats, I firmly believe that the quality of our healthcare will suffer and the costs will far exceed any estimates being put forth by President Obama and the Democrats.

At the end of the day, I have to conclude that nationalizing healthcare (one-sixth of the US economy) is nothing more than a giant power grab by the liberals.  In addition, if our government racks up $10+ trillion in cumulative deficits over the next 10 years, as Obama proposes, we are on our way to financial ruin.

Bill Clinton never scared me; he was too much of a political animal to swerve too far from the center.  Unfortunately, the same could be said of George W. Bush, who routinely strayed from his supposedly conservative principles.  Not so with President Obama.  Sadly, many of those who voted for him did not do their homework or they would have known that he is a left-wing ideologue, as I warned in these pages last year.

Sorry to end on such a negative note, but it is what it is.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES

Federal deficits to bankrupt America
http://washingtontimes.com/news/2009/sep/04/looking-behind-the-curtain/

ObamaCare’s Crippling Deficits
http://online.wsj.com/article/SB10001424052970203585004574393110640864526.html

Massachusetts & the ObamaCare Mistake
http://www.realclearpolitics.com/articles/2009/09/05/obamacare_increases_costs_wait_times_98176.html

Obama Cannot Escape Hard Choices in September
http://www.realclearpolitics.com/articles/2009/09/07/obama_cannot_escape_hard_choices_in_september_98192.html

When Does the Spending Charade End?
http://www.ibdeditorial.com/IBDArticles.aspx?id=336955542241664


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Forecasts & Trends E-Letter is published by Halbert Wealth Management, Inc. Gary D. Halbert is the president and CEO of Halbert Wealth Management, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, Halbert Wealth Management, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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