Columnist.
Stocks collapsed roughly 700 points over two days after the Federal Reserve launched its "Operation Twist." The market correctly perceives that the central bank's plan to swap $400 billion of short-term notes for long-term bonds adds no new reserves to the financial system. So it wasn't QE3, that's for sure. No stimulus. In fact, with the Treasury yield curve flattening, the Fed's sterilized asset swap actually tightened financial markets. The Fed should have listened to the GOP congressional leadership, which in a letter advocated no more stimulus and no more market-subverting interference.
It could almost make your head spin. With an economy on the front end of another recession, President Obama's tax attack on the folks who are most likely to succeed, invest, start new businesses and create jobs is nothing short of staggering. Only liberal-left class-warfare ideology can explain this. In his speech on Monday, Obama laid out $1.5 trillion in tax hikes over 10 years, aimed almost entirely at America's well-to-do. This includes $800 billion from rolling back the top rates in the George W. Bush tax-cut plan, $470 some-odd billion to reduce itemized deductions for upper-bracket payers and -- oh, yes -- a millionaire's tax called the "Buffett Rule."
New York City Mayor Mike Bloomberg, in a radio interview on Friday, warned that high unemployment could lead to widespread rioting. That's right. He actually said that. At a time when European cities have suffered massively from hooliganism, and at a time when U.S. towns like Philadelphia and Kansas City have suffered huge human and commercial tolls from so-called flash riots. For Bloomberg to come out with this statement is irresponsible and incendiary.
Who would have really expected a 300-point stock market plunge on the day after President Obama's so-called jobs speech? Yes, worries over new fears of a Greek default ripped through the markets on Friday. As did fears of an al-Qaida bombing plot on the 10th anniversary of 9/11. But you can't help but think that at least some of the stock plunge is a signal of no economic confidence in Obama's plan. And for that matter, who really expected an unbelievably large $450 billion plan? That's way more than 50 percent of the original $800 stimulus package in 2009 -- which did not work.
No sooner had President Barack Obama shocked the political world with a gloomy economic forecast -- projecting 9.1 percent unemployment for this year and a re-election-killing 9 percent for 2012 -- than the dismal August jobs report arrived showing no gain in non-farm payrolls. That's right, no gain at all. Private jobs increased a scant 17,000, while hours worked and wages actually declined. Obama's economic policies have failed. Are we on the front end of yet another recession? This report alone suggests that we could be, although other data points disagree. But on the eve of President Obama's so-called jobs speech, there's a much bigger question here: Has the U.S. entered into long-term economic decline?
Joshua Shapiro, chief U.S. economist at MFR Inc., delivered my favorite quote on the subject to The New York Times: "If you're in the middle of recession, you just wander around blowing up buildings, and that would be your path to prosperity. And clearly, that's not the case. It's not the case with a natural disaster, either." Echoing this thought, Ian Shepherdson, the chief U.S. economist at High Frequency Economics, bluntly noted on CNBC's website that "no one is made better off by the destruction of their home or workplace." He acknowledged the benefits of reconstruction work, but he dismissed the idea that somehow this is a net win for the economy.
Amidst the financial flight-wave to safety, with stocks plunging, gold soaring and Treasury bond rates collapsing -- and all the European banking fears that go with that -- there's an important sub-theme developing: An almost-forgotten monetary indicator, M2, which is mostly cash, demand-deposit checking accounts, savings deposits and retail money-market funds, has been soaring. According to the St. Louis Fed, M2 is up 24.2 percent at an annual rate over the past two months. Almost out of the blue, that comes to a near $500 billion increase. In rough terms, the M2 explosion breaks down to $165 billion in demand deposits and $335 billion in savings deposits.
Texas Gov. Rick Perry scorched the political pot Tuesday with a red-hot rhetorical attack on Fed-head Ben Bernanke. When asked about the Fed's reopening the monetary spigots, Perry said, "If this guy prints more money between now and the election, I don't know what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas." And that wasn't all. In a more controversial slam, Perry said, "Printing more money to play politics at this particular time in American history is almost treacherous -- or treasonous -- in my opinion." (Italics mine.)
U.S. Federal Reserve Chairman Ben Bernanke's shocking Federal Open Market Committee announcement Tuesday -- that its zero-interest-rate target would be extended for two more years, through the middle of 2013 -- drove Dow stocks up more than 400 points. But this new policy had no stock market carry-over on Wednesday, when the Dow plunged more than 500 points. But we have not heard the last from Bernanke -- not by a long shot. Buried in the last paragraph of this week's surprise FOMC announcement was this huge statement: "The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability."
Damn the torpedoes! Up periscope! Full speed ahead! Ben Bernanke and the Fed to the rescue! In a startling move Tuesday, the FOMC announced that its zero-interest-rate target would be extended for two more years through the middle of 2013, marking the first time the target rate has ever been pegged to a date certain.
During a period like this, with stocks plunging almost on a daily basis, it's clear that fear and shock are ruling the roost. But fear can be overdone. As someone who has been around awhile and has seen many sell-offs, let me offer some advice: Do not panic. Market corrections come and go. They are not the end of the world. Most times, they are actually healthy. The S&P downgrade is a fiscal warning, not an economic event. And the growing fear of U.S. recession may not pan out. There are still plusses out there, believe it or not.
There he goes again. Out on the campaign trail, President Obama is proposing more federal spending as his answer to sluggish growth and jobs. That won't do it, Mr. President. He wants more infrastructure spending, undoubtedly in the form of an infrastructure bank. That's a terrible idea. It's borrowed from Latin America, where bloated and corrupt bureaucratic construction agencies have helped bankrupt any number of countries in the past. He wants to lengthen 99-week unemployment insurance, although numerous studies have shown that continuous unemployment benefits are associated with higher unemployment.
Stocks and bond yields are sinking, as Wall Street disses the debt deal and instead focuses on a likely double-dip recession. Everyone is gloomy. But is this pessimism getting a little overbaked? Granted, the economy is sputtering, with less than 1 percent growth in the first half of the year. But if there is a recession in the cards, it will be the first time one occurs when the yield curve is steeply positive (an ultra-easy Fed) and corporate profits are strong.
Standard & Poor's government-credit-ratings guru David Beers played his cards close to the vest on the topic of a U.S. downgrade in our CNBC interview this week. However, this head of S&P's global sovereign-ratings business -- with a staff of 80 covering 126 countries -- issued three strong warnings to the debt-ceiling negotiators in Washington. Beers avoided direct comments on any of the key debt-limit plans. But when I asked him about joint congressional committees that would report back with additional budget savings at the end of the year, he said, "Well, naturally, it's going to raise questions ... we would have to look at the balance of incentives and disincentives that might increase or decrease the probability of that type of approach being effective."
There are a lot of known unknowns about the new "Gang of Six" budget proposal. But conservatives should hold back from trashing it. Why? There's a large, pro-growth tax-reform piece in the plan that would lower tax rates across the board. This is a stunning reversal of the Obama Democrats' soak-the-rich, class-warfare campaign. The best part of the Gang of Six plan is a reduction in the top personal tax rate from 35 percent to a range of 23 percent to 29 percent. For businesses, the rate would drop in the same manner. And the corporate tax would be territorial rather than global, thereby avoiding the double tax on foreign earnings of U.S. companies. Finally, the plan would abolish the $1.7 trillion alternative minimum tax. That's huge. It's another pro-growth tax reform.
As uncertain and unruly and disheveled as the debt-ceiling debate may be, there are still good grounds to reach a deal. It could help the economy. It could keep the policy ball moving in the direction of smaller government. It could add a key business tax incentive for economic growth. And it could even stabilize the dollar. There really are two problems here: First is raising the debt ceiling to avoid default. (That's a real good idea.) Second is stuffing enough spending and deficit reduction into the deal to accommodate the newly militant demands of S&P and Moody's, which want roughly $4 trillion in cuts over 10 years in order to keep our AAA rating.
There are a lot of pieces to the debt-ceiling deal. There are the taxes upon taxes, as The Wall Street Journal editors describe it. That's the roughly $1 trillion in new Obama taxes on top of what he's already signed into law. It's an economy and jobs killer. Then there's the entitlement piece, which may be more interesting since Obama is apparently open to extending the Social Security and Medicare retirement age and using the so-called chained-Consumer Price Index, which would lower cost-of-living adjustments (and increase income-tax thresholds). Whether the president is serious about these entitlement measures, no one knows. It's noteworthy that he's at least talking about them, although he's linking them to higher taxes.
Here's a question: Why is repealing the Bush tax cuts such a constant obsession for the Democratic Party? Especially the top rates for the most successful earners and small-business entrepreneurs? It seems this is the Democratic answer for every single issue, every problem, every debate. This, of course, saddens me enormously.
Did the International Energy Agency (IEA) just deliver the oil equivalent of Quantitative Easing 3? The decision to release 2 million barrels per day of emergency oil reserves -- with the U.S. covering half from its strategic petroleum reserve -- is surely aimed at the sputtering economies of the U.S. and Europe following an onslaught of bad economic statistics and forecasts. This includes a gloomy Fed forecast that Ben Bernanke unveiled less than 24 hours before the energy news hit the tape. I wonder if all this was coordinated.
Former Minnesota governor Tim Pawlenty turned out a blockbuster economic-growth plan this past week, including deep cuts in taxes, spending and regulations. It's really the first Reaganesque supply-side growth plan from any of the GOP presidential contenders. And he caps it all off with a defense of optimism as he charges ahead with a national economic growth goal of 5 percent. That's right: 5 percent. Pawlenty calls this target aspirational. OK, fine. But deeper down, he's basically saying no to the declinists and pessimists who seem to populate the economic landscape these days. Big government doesn't work. Let's try something different.
