When economic events become mysterious and somewhat counter-intuitive, it’s useful to drill down to see what is really going on. One such instance of this is the stock market. At this writing the Dow average is bumping up against 13,000 – within hailing distance of its high point in 2008, before the sub-prime mortgage crisis and the subsequent financial crash that vaulted Mr. Obama into the presidency.
A rising stock market seems counter-intuitive right now, because there are so many serious economic problems in the USA, as well as the world. The European Union is shaky because of some members’ fiscal-irresponsibility – notably Greece, but others as well. In January, Fitch Ratings downgraded the sovereign credit ratings of Belgium, Cyprus, Italy, Slovenia and Spain, citing their vulnerability to monetary and financial shocks. The Euro is in serious trouble, and the willingness of Germany and France – the EU’s two fiscally strongest members – to prop up weaker members is an open question. Almost daily, it seems, we read that concerns over the European situation are depressing the US economy.
Financial conditions in the USA, while not as dire as in Europe, are still not good. Much has been made of lower unemployment rates over the last few months. But a closer examination reveals that the jobless rate has diminished mainly because hundreds of thousands of workers who have stopped looking for jobs are no longer included in the unemployment calculation – i.e., 1 - (# working) ÷ (total # of workers). When a person stops looking, he is subtracted from the total number of workers – i.e., the denominator of the employed fraction. A smaller denominator makes that fraction increase in value, causing the unemployed fraction to diminish. In the limit (as mathematicians like to say), if all unemployed people stopped looking for work, unemployment would = 0%.
Current figures are difficult to find, but as of June 2011, the total number of people working had fallen by nearly 2 million since Mr. Obama’s inauguration. The fraction working, out of the total population, had also shrunk from 60.3% to 58.4% over the same span of time. The true unemployment rate stands close to 15% – and as high as 20%, by some estimates – if discouraged, part-time and underemployed workers are included in the calculation.
No political attempts to spin the situation positively can overcome the negativity of these figures. Millions of families – some of them in my circle of acquaintance – are scratching along with the man of the house either out of work or significantly underemployed. I cannot recall a time when so many friends and acquaintances have been unemployed. For good measure, gasoline prices have doubled since Mr. Obama’s term of office began. It is a very grim time for working people – especially for young minority men. In an article published in January 2010, Sam Sanders wrote:
“More than half of black males between the ages of 16 and 19 are unemployed, according to the U.S. Bureau of Labor Statistics. And that's only counting those seeking work. Economists say legions of other young black men — nobody knows how many — have given up looking... Academics believe fewer than 14 in 100 young black men actually have jobs. Washington, D.C., has the worst teen employment rate in the country, according to the Bureau of Labor Statistics.”
The situation on the federal-budget front is also very bad – disastrous, in fact. All attempts to control federal expenditures and deficits have failed, despite showdowns that threatened to close the government at various junctures during the past year. Democrats – including both President Obama and his Democrat-controlled Senate – are determined to compel Republicans to raise taxes on “the rich” as the price of reducing the annual deficit ($1.5 trillion), while Republicans, in control of the House of Representatives, are equally determined to roll back federal expenditures and resist higher taxes.
Harry Reid’s Senate has not passed a budget for three full years. Mr. Obama unveiled his own budget for FY2013 this week. It calls for expenditures of $3.8 trillion and deficits above $1 trillion as far as the eye can see. Generally, “reductions” are illusory cuts of items that were not scheduled to be funded in the first place. Mr. Obama’s budget also assumes significant rises in tax-rates on higher-income people, as well as on capital-gains and dividend income. According to his own projections, the federal debt would stand near $25 trillion by the year 2022. The current debt passed 100% of GDP in recent weeks. We are in uncharted territory on the federal debt. No one knows what it means to the country’s future.
Despite all this, our stock market keeps moving steadily upward. In the six weeks since January 1, the Dow Industrials average has risen 5.41% (as of COB, Feb. 14). Why is this happening? As usual, several factors seem to be at work. Let’s look at some of them, briefly.
Supporters of President Obama have trumpeted the lower unemployment figures, claiming that markets are reacting positively to the improved employment situation. To some degree, this may be true. But it is always important to remember that stocks are a “futures” market. As such, that market reflects either the optimism or pessimism of investors for the longer term – although the length of that term is not knowable, since it reflects the collective “mind” of the country’s investors. Economists less laudatory of Mr. Obama’s tax-and-spend proclivities say the market is actually reacting to the prospect of his defeat in the November elections. A Republican president could reasonably be expected to remove the threat of higher taxes and uncontrolled federal spending. Business could then invest and expand without the uncertainties embodied by the left-leaning Obama administration. (I lean toward the latter explanation.)
A second, oft-overlooked explanation for the market’s counter-intuitive upward movement goes to the old adage: follow the money. Economists and politicians frequently mention that American businesses are “sitting on” upwards of $2 trillion in cash that they could invest in business expansion. That they are not doing so is the cause of much frustration in the Obama administration, from the president on down. Mr. Obama has denounced the unwillingness of business to invest in the country’s “future,” on more than one occasion. Obviously, though, business does not trust Mr. Obama, so they are sitting on the cash.
This raises the secondary question: where is the money? It must be somewhere. Presumably it’s not buried in the back yard, or stuffed under the seats of small-businessmen’s pickup trucks. It might as well be, of course, as there is no sense in putting it in a savings account. The account at my bank pays 1/4% annual interest. If you have $1,000 on account, you’ll get $2.50 interest for the year. (Yeehah!) At that rate, you’re not even keeping up with inflation. Obviously, there’s no future there.
Of course, businesspeople are a little smarter than that. My conclusion is that most of that money is now in the stock and bond markets, awaiting more favorable times to finance business expansion. Both markets are booming. Infusion of some $2 trillion would help to explain why they continue to trade at high levels in the midst of very questionable economic conditions.
What will happen if Barack Obama throws a Hail Mary and pulls out a re-election miracle? Your guess is as good as mine. A lot would depend on what kind of Congress he brings in for his second term. I doubt if the economic prospect for the next four years would be a very good one.
My view is more optimistic than this, however. We gambled on a virtually unknown, charismatic figure who “looked presidential” (as one radio talk-show caller put it). He promised to “fundamentally change” the country without defining that change. The gamble failed, and we are well and truly in the soup now. But I still have faith in the good sense of the American people not to make the same mistake twice.
To all my compatriots I say: Work, write, speak out, take action, let your voices be heard! Above all, do not listen to the media chorus proclaiming that Mr. Obama’s re-election is inevitable. He can be stopped. For the sake of generations unborn, he must be.