I realize that it has been over two months since my last post, since then there's been a lot of events transpiring in the world that could have been capitalized on in an investment/trading sense. I'll briefly go over the events I believe hold the key to unravelling a solution to other problems in this interconnected global economy.
To begin with, Europe is not in the same position they were two months ago, it is really up to you to decide if they have progressed towards a solution to their lasting issues or if they went even further away from a solution, I'd argue the former. Closer to home, The United States is drawing ever closer to their day of reckoning, they will have to deal with political issues as well as economic ones both surrounding ways to foster growth and maintain the budget in their country while remaining a dominant economic power in the global community. I believe these two economic power houses hold the key to a stabilized economy in which business people will be able to thrive, and nations can achieve growth.
I was speaking to my friend this morning as I watched Federal Reserve Chairman Ben Bernanke speak about the status of economic growth in the US. I will go on record and say that I believe that the work Bernanke has been doing is the best anyone could do given the situation he inherited from his predecessors. I would also like to add that the minds governing the great nation of US should act smarter than they are. At the very least they should be more open to ideas, or better versed in history and the consequences of their action (or lack thereof). Anyway, during Bernankes address to congress this morning, (17/07/2012) I discussed with my friend how incompetent and irresponsible they were being. Without a doubt those people elected are intellectual economic minds, but they seem to be completely unaware of the consequences of their political games, they even openly say that they're confident that they wont do anything concerning the current fiscal concerns brought forth by the Fed chair man till November, and the onus on protecting the economy of the free world from turning upside down is completely on Bernanke and his monetary capabilities..
Let me back track for a bit... At the end of 2012, the United States of America faces what Fed Chairman Ben Bernanke describes as a "fiscal cliff" that is the simultaneous onset of tax increases and government spending cuts that will be triggered on Jan. 1 unless Congress acts. Combined, the policies would take $7 trillion out of the economy over 10 years -- about $500 billion of which would occur in 2013 which accounts of roughly 4.5% of the nations GDP. Now this problem is dynamic in nature in that, if the nation is allowed to go over this "fiscal cliff", economic growth in the US will slow down severely and the nation as well as others dependent on US (Virtually everyone else in the world) WILL enter another recession(on the heels of the recovery from the credit crisis in 2007-2009.) Now, there's also the perceived problem of United States' budget deficit; if you remember in August of 2011 the US faced a credit rating downgrade that sent capital markets tumbling thanks in part to a debt ceiling increase, or lack of a definitive move from congress in regards to that(there is a clear pattern here). There is no question that US debt must be taken care of, it is not wise to run a country on such high debt as we see in parts of Europe, but would that justify sending nations into another recession in as little as five years? is it reminiscent of the great depression of the 1930's??
Who really knows the solution? I am by no means an economic genius so I cannot render a solution that is unique, nor guaranteed to work. But listening to congress question our friend Ben this morning showed me one thing... That even though they all agree that there's a problem, and it needs to be fixed and they're all saying more or less the same thing, with exceptions to some **** Interesting characters****, They have no plan to come together to remedy an issue that could spiral the world into a situation reminiscent of the 1930's. A congressman brought up a great point today, in which I think the solution lies. He said that President Obama proposed a bill that would serve as fiscal stimulus in the short run to ensure that the economy survives and continues to grow, but in the long run enacts strict austerity** (for lack of a better word) in order to reduce the mountain of debt in the US. Bernanke alluded to something similar in his address to congress. This bill was not passed nor agreed upon simply because this is an election year and the Liberals do not have a clear majority in the congress, Republicans cannot afford President Obama to be right and win votes on his ability to solve the United States biggest economic problem because their candidate will be at a disadvantage (My view on politics: they're the same any way, regardless of who wins they'll find a way to screw over the people who put them in for 4-5 years... but I'm just a political pessimist... thanks a lot Jamie). Instead they continue to bicker and argue over whether or not Ben Bernanke should add more monetary stimulus to the economy, the effectiveness and effects of which is topic for another 3 posts.
To that point, given the events that have happened, and the likeliness of no fiscal policy being put in until after November (presidential elections) , if any thing is going to prevent the US from shedding 4.5% of GDP, Bernanke has little choice but to implement more monetary stimulus, he must weigh the pro of circulating more money in the system and possible creating the wealth effect to increase consumption, lending, employment and spending versus the con of increasing the money in the system and causing inflationary pressure and devaluing their precious US dollar. How much monetary policy will affect the economy can be questioned, but anyone who studied macroeconomics will tell you that maximum effect on the economy only happens when fiscal and monetary policy work hand in hand as we will see again when I discuss European issues.
I caught my self rambling so I'll end it here. My next post will discuss the European point brought up earlier in the post, I also want to discuss where I'll be putting my money and why I think it will work for you. If you have an opinion about this I'd love to hear it. Till then....
This is my trading book !
