The winds of a global slowdown are blowing strong. Japanese numbers have been weak and the BOJ warned on Thursday that it expects Japanese growth to slow next year as some of the stimulus evaporates. The numbers out of Europe have been better than expected but only in the stronger economies; the peripheries remain weak. The PIIGS’s credit stress has eased somewhat as the Chinese purchase of Spanish debt helped provide some optimism. We point this out because it was the Chinese who decided against buying Greek debt in early December that began the real European debt crisis.
Today’s consumer confidence numbers in the U.S. have caused concern that the U.S. economy remains very fragile, even though we do not give much credence to that University of Michigan survey.
In an interview with Judith Woodruff that’s airing on Bloomberg television today, Sir Alan Greenspan advised that the Bush tax cuts should be allowed to expire. We have not heard the entire interview–only read excerpts–so we are only responding to his key points. Greenspan, who has been wrong for so long is most likely wrong again. We know that he will say that he has always maintained that tax cuts should always be met with spending cuts–his view of PAY-GO. The concept of PAY-GO is based on the concept that every tax cut has to be paid for with spending cuts by Congress. This worked well under President Clinton when the Congress was controlled by the Republicans, so the split-party government created responsibility on the part of both parties. With Geithner and others pushing for the Europeans to forgo austerity until the global recovery is more secure, we find it ill-conceived for Greenspan to be spouting austerity in the U.S.
Christina Romer, the chair of the Council of Economic Advisors (CEA) and the president’s economic tsar, made her academic reputation with her work on the impact of taxes on GDP growth. One result of her work was that a 1 percent increase in taxes relative to GDP results in a loss of 3 percent of growth. This raises serious questions about the coming impact of the tax increases coming in 2011 due to the expiration of the Bush tax cuts. We won’t know the full impact because most of the increases are supposed to be directed against the wealthiest tax payers and we are unsure of Romer’s work in regards to taxes on the rich. If any of our readers can add to our knowledge in this it will be greatly appreciated but we are alert to the FOMC’s most recent fears and Geithner’s cajoling of the Europeans on their austerity measures. If the tax rises that begin in 2011 are greater than 1 percent of the economy, we would expect Romer to raise her voice in opposition to the tax increase.
The inflation/deflation argument is in full force, and, as the FED warned, deflation is not an option. Many are looking at the recent slide in GOLD prices and the selloff in commodity currencies as proof of deflation. There may be some truth to that, but from our standpoint the GOLD break has more to do with the EURO rally. Many investors ran into the GOLD/EURO cross as they feared the demise of the EURO. Now that there has been some stabilization in the eurozone, the safe haven crosses are unwinding. Major support levels are being tested in many of the previous haven plays,and, as we often suggest, get your technicals in order and look for levels to acquire the trades that will perform well when the FED and administration throw caution to the wind and do everything possible to prevent deflation and economic contraction from taking hold. Sir Alan, please gracefully exit the stage.