The real stimulus has been the $1.3 trillion yearly deficits we've been running.
San Ramon, CA (PRWEB) January 29, 2013
Investor optimism regarding the stock market has now returned to levels not seen since the end of 2007 and the beginning of 2000. In other words, this is the time to determine what are acceptable losses in stocks, not how much more should be bought.
Despite the optimism, there is a relatively high probability that there will be a recession this year. The tax increases (Federal plus some states such as California) will reduce U.S. workers’ income by approximately 2.8%. In addition, there will surely be at least some budget cuts. Most investors are not aware of the fact that there has been a mammoth stimulus program going on since 2009. No, not the official stimulus bill that Congress passed that year which totaled a measly $780 billion or so. The real stimulus has been the $1.3+ trillion yearly deficits the government has been running. Each year since 2009 the government has borrowed and spent over 8% of the entire United States GDP. Subtract those numbers and measure where the private economy would be standing on its own. While most agree the country desperately needs to begin reducing these deficits, every dollar not spent will reduce economic growth.
Combining the new tax increases with even modest deficit reduction should reduce GDP by 2-3% in 2013 according to Morey. With a base GDP growth rate of 2%, there is a likelihood of a modest recession. This recession could turn into something much worse than modest should serious problems resurface from Europe, or should Japan finally implode from their historically high debts.
But while a modest recession in which GDP shrinks by only .5-1% for a few quarters may be the most likely scenario, Morey warns about one huge risk that isn’t getting much coverage these days: the economic response to the next recession. The two primary methods governments use to help pull the economy out of recession are to lower interest rates and have Congress approve larger deficits. Unfortunately, these “bullets” were shot long ago. What happens when entering a recession with no room to lower rates and the country is reducing deficits? What else can be done to get out of recession when the consumers and government are still saddled with far too much debt? Of course, the Fed will pretend to come to the rescue with more of their “extraordinary” measures. But quantitative easing, even when we have QE–Infinity like we do now, has already been tried with at best limited success. The Fed will claim otherwise, but there will be nothing they can do.
As a result, the next recession could last much longer than most anticipate. Since it may now be upon us, it is sad to see investors finally piling into stocks. Unfortunately, those who are driving the market higher right now are mostly those who sold out at the bottom in the spring of 2009. They sold low and are now buying high, which is investment history repeating itself once again.
To recieve more of Mr. Morey's analysis of the 2013 recession he predicts and solutions to controlling risk in this current economic environment, please feel free to view the video on the website and /or contact Jeff Warren .
Richard Morey is President of Secure Retirement, a fee only Registered Investment Advisor in California's Bay Area. Richard directs the investments for hundreds of families' retirement accounts. Secure Retirement practices the principles of active, disciplined management of clients' retirement accounts to safeguard their money regardless of market conditions. To access more economic and investment reports and commentary by Mr. Morey, please visit http://www.secureretire.com.