Diary of a Financier

The Great See-Saw Adventure

In Economics on Thu 9 Feb 2012 at 07:50

Last night, I tweeted a video of Austan Goolsbee, who makes an important point:

‘GDP growth has been moderate, but the private sector is growing almost 5% a year. It may seem ironic that these numbers are still showing growth being high, but the real reason the overall numbers don’t show the economy growing much is actually because of the shrinkage of government.’

Mr. Goolsbee elucidates the careful balance in which the American economy finds itself. Regulators are trying to manage fiscal consolidation with heed toward economic stabilization. Such is the delicate see-saw at the end of our disinflationary playground.

Markets will continue to trade in a broad range until the 2000-201x bear market comes to pass. Reflation currently has asset values ballooning toward highs again; I hope you’ve heard by now. Even consumer balance sheets have improved, with both the household savings rate and the consumer debt service-to-income ratio at the healthiest levels Americans haven’t seen since the mid-1990s. Indeed, the private sector looks vigorous too. EPS and Revs will keep climbing through this quarter, but the macro reality will anchor prices and growth expectations. From consumer to corporate, the non-government economy is heavily subsidized, hence a contraction in government spending will offset the nominal progress once quarterly macro data puts the net-net into perspective (2q12).

There’s a reason why SPX components’ PEG registers 1.5 vs. 1.1 historical average (low growth outlook). It all comes down to the Great See-Saw. The economy can’t accelerate too fast because Washington DC sits atop an H-bomb of interest rate risk; the economy can’t contract because of the ginormous federal debt.

Chief among these contraction concerns, the CBO has tasked Congress with reducing the US Budget Deficit from 8.7% in 2011 (actual), to 7.1% in 2012, to 4.7% in 2013. There stands the next wall of worry for late Summer 2012.

–Romeo (hattip Seeking Alpha Market Currents)

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