If the definition of insanity is trying the same things over and over again and expecting different results, then the men in the white suits need to go to the White House right away.
The “jobs plan” that U.S. President Barack Obama and his administration revealed last week was – and is – a laundry list of the same old solutions that didn’t work the first time around.
Indeed, the question that has to be asked is: If an $800-billion (U.S.) fiscal package unveiled two years ago couldn’t start the economic growth engine, and a series of tax cuts introduced late last year couldn’t get the motor to run, and QE2 proved to be a complete dud relative to QE1, then what on earth is $450-billion of short-term “stimulus” going to accomplish?
Put it this way. Assuming that the House Republicans do not accept the Obama spending measures, and half of the tax relief goes not into increased spending but rather into bolstering savings and reducing consumers’ debt, then we are talking about a grand total of $35-billion of net new stimulus from Mr. Obama’s plan.
At an annual rate, that is a 0.2-per-cent boost to baseline GDP growth. In other words: much ado about nothing.
Here is what a drive toward sustainable economic growth in the United States would include:
• Making everyone pay a flat tax of 20 per cent and getting rid of the rest of the tax code.
• Going back to the drawing board on Obamacare. It’s a job killer.
• Extending the retirement age for Social Security.
• Taking these savings and embarking on an energy infrastructure program that would build massive wind and solar farms and give large incentives to gas producers to produce gas while switching a big portion of electricity generation to gas turbines from coal-fired.
To be sure, the measures unveiled last week, if passed, will have some impact – just not in the right places.
In the most recent National Federation of Independent Business survey, 36 per cent of small firms cited government regulation and taxation as their top concerns versus 4 per cent for the cost of labour – and yet this ballyhooed fiscal package seems bent on focusing on the wrong remedy for stimulating employment growth.
Simply getting out of the way and cutting the red tape would be a far more effective solution and wouldn’t cost the taxpayer anything.
The reality is, while some stimulus could help mitigate the economic downturn, it is very likely too little too late to save the U.S. economy from another recession.
Look for the economy to get worse. A hard-nosed Republican will likely get elected next year – just like Ronald Reagan replacing Jimmy Carter.
In the meantime, the market will likely go down another 15 to 20 per cent. It could be worse if Europe falls apart.
Germany holds the key to the situation and the German DAX index has not recovered from its early August lows. German investors know Europe better than U.S. investors; the latter still think they are going to miraculously muddle through. Germans apparently do not.
What are the havens for investors? While there is no such thing as a sure thing, a focus on defensive dividend-paying blue chips is appropriate. Emerging-market debt with a yield in excess of 6 per cent is attractive as well.
Corporate bonds are priced for a recession much more than the stock market is. Farmland has limited supply, unlike paper currencies, and remains in a full-fledged bull market with prices in the U.S. Midwest up a solid 17 per cent in the past year.
Gold remains a solid bet – it is the one currency that cannot be devalued by government printing presses. The mining stocks also look tempting at current prices, recognizing that in the past they have been, for the most part, lousy businesses.