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Posts Tagged ‘State of the Union’

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Just like former President Jimmy Carter, President Obama is doing his best to gift the White House to the Republicans through misguided economic and foreign policies. Nothing from his State of the Union speech signals substantive change for the country.

An economy can grow through either increased productivity or increased government spending fueled by borrowed money. Since 2007, productivity in the U.S. has been growing at half of its historical rate. That means the modest economic gains we’ve experienced were fueled largely by an unprecedented increase in Federal government borrowing and by the printing of money by the Federal Reserve. And the piper will have to be paid in 2016.

Since 2007, the Federal government debt has increased 110% to almost $19 trillion. The debt outstanding has soared from 63% of GDP to 105%. Annually, the Federal government is currently spending around $1 trillion more than it takes in. The U.S. now ranks 11th highest in government debt to output among all the nations in the world.

The fiscal gap, the difference between the present value of all the Federal government’s projected financial obligations and its future tax receipts, now totals $230 trillion…or $721,000 per citizen. The fiscal gap includes such unfunded future obligations as Social Security, Medicare, and the food stamp program (now the Supplementary Nutrition Assistance Program). The fiscal gap is twelve times the national debt and to close the gap we would have to have either a 60% increase in Federal taxes or a permanent 40% cut in transfer payments.
Major nations are now dis-investing in U.S. government debt. So how has the debt spending been sustained? The U.S. treasury securities held by the Federal Reserve have gone from $800 billion in 2007 to $2.5 trillion today. The Federal Reserve has been printing money faster than a third-world dictator.

Where is the economy today?

Inflation adjusted median household and family income is down at least 8% from 2007, and more for blacks and Latinos. The individual poverty rate has climbed by 20% and household income inequality is growing nearly 40% faster since 2007 then in the preceding 7 years.

Transfer payments such as Social Security, Medicaid, food stamps and other welfare benefits are the fastest growing component of personal income. Half of the gain in personal consumption expenditures since 2007 has been funded by deficit-financed transfer payments.
The growth rates in both real per capita personal income and real GDP have fallen more than one-third since 2007.

The stock market has peaked and cracks are appearing. The margin debt is at an all-time high despite a rock-bottom volume of trading. The Schilling PE ratio is nearly 70% above normal and rising interest rates will stop companies from buying back their stock to inflate its value.
Labor force participation is falling and the number of discouraged workers rising. Real hourly wages have been flat since 2007. Home ownership has dropped to its lowest rate since 1965 and rising mortgage rates will do little to change this.

Rising interest rates, falling exports due to a strong dollar, weakening markets for Federal debt, deflating of commodity markets, and a stock market decline add up to a shaky U.S. economy going into the November elections.

The President offers no substantive answers to these challenges.
Dr. John E. Stapleford
Director,   CEPA

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