Bob Brinker on Economic Stimulus and Growth Effects

Bob Brinker's comments on the economic stimulus packages and their effects on economic growth. 

Moneytalk with Bob Brinker Commentary for October 28, 2012 Radio Show

The following commentary is from my "Retirement Advisor" writing partner,  David Korn. 

ECONOMIC GROWTH

Brinker Comment: Bob opened the broadcast discussing the new figures on gross domestic product. Bob said his projection has been for a slow-growth economy as defined by a slow rate of growth in real GDP (adjusted for inflation) and we continue to see that with the number for the third quarter coming in at 2.0%. When you couple that number with the first half of the year, you are looking at an annual rate of growth of 1.8% for the first 9 months which is the type of slow growth that Bob thinks we will see for the remainder of the year.

Bob said he is keeping a close eye on the economy because of its slow growth. In fact, the world economy is growing slowly. China is slowing down. Europe has been in the doldrums, with some countries in a recession and some worse, like Greece. In the United States, we are adding jobs, but not fast enough to get the unemployment rate down below 6% which is where the Federal Reserve would like to see it.

EC (David Korn):  In the second quarter, real GDP increased 1.3%. The 2% figure for the third quarter is the advance estimate that is based on source data that is incomplete or subject to further revision. The “second” estimate for the third quarter, based on more complete data, will be released on November 29, 2012. Read the GDP report at this url: http://tinyurl.com/2d5zdv

ECONOMIC STIMULUS

Brinker Comment: Every year that goes by, our country is becoming a more mature economy. And we are dealing with a much more competitive world than we used to. Our exports compete with China, Europe and emerging markets. Bob said in his opinion one of the most stunning things about our economy is that despite al of the things that have been done in the last few years to try and grow the economy, we still are only growing at 1.8% in 2012. Bob pointed out that there have been seven major initiatives since 2008 taken in an effort to stimulate the economy:

1. First, the Federal Reserve brought the fed funds rate down to basically zero. It has been at 0-0.25% since then. And that was one of the most powerful tools the Fed has to stimulate economic growth.
2. Then we had quantitative easing (now known as QE1) which resolved the liquidity crises by flooding the system with a ton of money.
3. Then we had the stimulus package which amounted to roughly $800 billion. And there were some good parts of that such as the tax cuts which put money back into consumer’s pockets.
4. Then we had QE2.
5. The fifth measure was the second stimulus package. This came at the end of 2010 to be effective in 2011. You may recall this involved a 2% tax holiday on the payroll tax. That was the big part of the stimulus package.
6. Then we had operation twist which sold short-term federal reserve holdings to buy longer term maturities. This helped lower long term rates and is one of the reasons you are seeing historic lows in the mortgage market.
7. Finally, we had QE3 which was announced a few weeks ago.

EC: That’s a lot of stimulus. One wonders where we would be without all of the actions by the Fed and Congress. Check out this article entitled, “Without Stimulus Economy Would Collapse” at this url: http://tinyurl.com/8p6tvqg

Brinker Comment: These seven things, two of which were by the federal government and five by the Federal Reserve, were all measures aimed at improving the economy. And here we are at the end of October 2012, and we still have a slow growth economy with real GDP growing at less than 2%. What does this tell us? It tells us there has not been enough demand in the economy to push the growth rate up. And that is why you have seen an unemployment rate that is too high. It is all about demand. Without increased demand, you go nowhere. You can muddle along around 2%, but that cannot produce enough new jobs to get the unemployment rate down and so the wheels keep spinning without the economy going anywhere.

Bob acknowledged that the unemployment rate has come down from 10.1% to 7.8%, but that’s now low enough for the Federal Reserve which has a mandate from Congress to stimulate the economy to get employment maximized, consistent with low inflation. We have low inflation, but we have not been able to get GDP moving such that it would move unemployment to where it would be and create the demand needed.

Bob noted that some of these same problems have happened in Europe and their prescription to deal with it has been “austerity.” How has that worked? Well, in Greece they have come up with an austerity program to stay in the euro and they are essentially in a depression. Although we see Greek citizens rioting in the streets over the austerity program, the reality is if they leave the euro those same people who might receive a pension or other government check will be so sorry if the country is out the euro because their purchasing power could be devalued by as much as 70% on whatever new currency the country is forced to adopt.

Austerity programs are not easy. Just look at Spain’s program. They have an unemployment rate of 25%. That was our unemployment rate during the Great Depression in the 1930s. Austerity is not a recipe for growth. Anyone who tells you otherwise is a clown. If people who want austerity in our country get their way, we will not get growth — we will get contraction in the economy.

EC: I think Bob might have brought this topic up in light of an article in Forbes out this weekend entitled, “Austerity Didn’t Work in ‘37...What about Now?” which you can read at the following url: http://tinyurl.com/9mkw9f2

Kirk's Comment:  I don't think enough attention goes to just how large the deficit is and how much borrowing occurs for every dollar spent.  I like how Bob Brinker has warned about excessive spending for years and I'm doing my part to spread the word.  Read my Seeking Alpha article:

 U.S. Borrowed 31 Cents Of Each $1 Spent In Fiscal 2012:
Final Deficit Is $1.1 Trillion

Caller: If the country wants to bring down unemployment, why not hire tons of people to work on public works projects? The caller said he thought that would be a lot cheaper than raising taxes and it would give people jobs and fix our country’s infrastructure.

Bob said that would require another stimulus package and right now, the word “stimulus” has become a dirty word in Washington. Bob said based on his reading of the political environment in our country right now, there is so much backlash against the idea of another stimulus that it is pretty much a non-starter.

The above commentary is courtesy of my writing partner, David Korn: 

David Korn's Stock Market Commentary, Interpretation of Moneytalk (Bob Brinker Host), Financial Education, Helpful Links, Guest Editorials, and Special Alert E-Mail Service.  Copyright David Korn, L.L.C. 2012

More from David Korn:

• June 10: Review of Bob Brinker's Five (5) Root Causes of a Bear Market

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