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1/12/09
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Friends and Colleagues,
Whoa Nellie...this is a fine mess we are in! This week, Scott Anderson of Wells Fargo Economics helps us put the current state of the economy in perspective.
First, some good news? from Anderson
Anderson tells us that there is a lot of “hope” surrounding the economic stimulus package planned by the Obama administration. He wonders, however, whether the proposed $775 billion spending & tax cut package will put our economy back on track. He notes that this package is equivalent to one full year of normal federal government spending! Anderson projects that the most likely outcome is a return to at least some modest GDP growth in the 2nd half of 2009.
What have we lost?
According to Federal Reserve data through Q3 2008, household real estate wealth declined by $2.5 trillion from its peak. In addition, household stock market wealth declined by a similar $2.7 trillion from its peak. Thus the grand total decline in household wealth through Q3 2008 was about $5.3 trillion!
How long will it take to earn that back?
Anderson projects that given November’s private savings rate of 2.8% and the latest level of disposable income of approximately $10.7 trillion, it would take 17.6 years to replace that lost wealth!
His projection is based on some pretty dark assumptions:
1. No future appreciation in housing prices.
2. No future appreciation in the stock market.
3. No rate of return on our savings.
As noted, these are pretty dark assumptions; however, Anderson argues that they may not be so far off the mark given:
1. The markets continued declining in the 4th Quarter.
2. The current risk-free rate of return is roughly zero.
3. Most analysts are predicting flat to declining housing values for some years to come.
Regardless of the assumptions, Anderson's point is well taken - The US consumer's spending power isn't what it used to be, and it will be a long road back.
So what about the stimulus package?
Based on the Congressional Budget Office estimates, we can expect a FY 2009 deficit of $1.2 trillion. We can also expect an FY 2010 deficit of $703 billion before the Obama stimulus package is added in. Assuming the $775 billion package passes, then the total deficit over the next two years would be $2.7 billion!!
This means the deficit will be from 11% to 13% of GDP this fiscal year. This will be the highest it has been since WWII, when Federal deficits ranged from 14% to 30%.
The previous post-war peak was 6% of GDP in 1983 under the Reagan Administration.
Inflation targeting on the horizon?
Since the Fed slashed the Fed funds rate virtually to zero, Anderson tells us that they will need a new measure to guide their targets. The Paul Volcker era was about monetary targeting. Alan Greenspan changed the Fed focus to interest rate targeting, but given how low rates are, those days appear to be numbered. The FOMC recently hinted that inflation targeting may become the new way for policy makers to gauge monetary policy.
Crazy?...Maybe, but food for thought nonetheless, as the Fed embarks upon quantitative easing & deflation becomes a far more pressing concern.
As always, as this year unfolds, stay tuned......
THOUGHT FOR THE WEEK
Rebuilding our wealth....
Could it be that we are witnessing the dawn of a new era?
Our baby-boomer world has been all about "me" and the key question, "What can I get away with?". Political leaders have shown us that it's OK to spend more than we have, and that we can do wrong and never take ownership. Our role models have included icons like Gordon Gecko from the film Wall Street, who told us that "Greed is good!"
Our greed and lack of accountability have led us into this economic fiasco. But there are signs that we are changing....
We are changing when we forgo buying that new flat-screen TV for the craziest of reasons.... because we can't afford it. We are changing when, like Tim Tebow, QB of my Florida Gators, we take full ownership when we mess up. We are changing when, like USC coach Pete Carroll, we use our personal time to quietly give back to others when no one is looking.
We all created this economic mess with our attitudes. In the days and weeks ahead, may we each shift our focus away from our declining financial health. May we instead turn our attention to building our true wealth by making regular deposits of integrity, good deeds, and concern for others.
Have a good week.
David Rosenthal, MAI
President & CEO
Curtis-Rosenthal, Inc.
drosenthal@curtisrosenthal.com
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