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Debt Mountain Casts Shadow on a Sunny Outlook

Irwin M. Stelzer

Now is a good time to see where we have come during the year that is ending. Some things haven’t changed very much, or so it might seem. When the year began, households reported that 142m Americans held jobs: right now, 143m are in work. The labour force participation rate—the portion of workers in the labour market—was 63.7% when we were sleeping off New Year’s Eve hangovers, and now stands at 63.6%.

Fortunately, the labour market has done more than stabilise after a long period of deterioration: it has improved modestly.

The unemployment rate fell during the year to 7.7%, the lowest level since December 2008 and down from 8.3% in January of this year. The number of unemployed dropped from 12.8m to 12m. (These and other figures are courtesy of the Manhattan Institute’s Diana Furchtgott-Roth, who has no responsibility for my interpretations of the numbers.)

The even better news comes from the housing market, the automobile sector, the consumer, and share prices. Home sales and prices improved enough to drive homebuilder sentiment to its highest level since 2006. The annualised rate of existing home sales last month was a bit over 5m, almost 9% higher than in the first month of this year and the highest in three years. Inventory of unsold homes is down, and prices are up by about 17%. Estate agents are complaining about a lack of inventory, and builders about the difficulty of finding skilled construction labourers. Gazumping rears its wonderful head from Miami to New York City, especially at the high end of the market, where record low mortgage rates are available to buyers with premium credit ratings.

Car makers are also cheerier than they were at the start of the year. Sales of cars and light trucks rose by about 15% during the year. That contributed to a better-than-expected revision of the estimate of third-quarter GDP growth, from 2.7% to 3.1%. The revised figure is below the first quarter’s 4.1%, but above the feeble 1.3% in the second quarter.

Perhaps most significant has been the upward revision in personal consumption expenditures. It seems that the end of huge lay-offs has encouraged those who have not been made redundant to feel more secure. Consumer confidence bounced around during the year, but is ending at an index level of about 74 after starting the year at close to 65, a 14% jump. That this improvement in confidence occurred in the face of an appalling display of intransigence and name-calling by the president and Republican congressional leaders is a tribute to the average American’s ability to ignore politics during the key final stages of the college and professional football seasons.

The year also saw two important developments on the policy front. Ben Bernanke’s Federal Reserve Board decided to set its sights on reducing the unemployment rate, and promised to keep interest rates at zero until the rate came down from its current level of 7.7% to at least 6.5%. Or longer, if the decline in unemployment proved to be due to a fall-off in those who had been looking for work but became too discouraged to continue. That made it likely that zero or, perhaps, 1% interest rates would prevail until 2017—bad news for savers and pensioners, good news for profligate debtors, including the US government, all of whom face the possibility of paying off their debts with cheap, depreciated dollars—default by another name.

So it should come as no surprise that the price of gold, believed to have some intrinsic quality as an inflation hedge, is ending the year about 4% above where it was when 2012 began. Or that the dollar is down against the euro and sterling, even though those are the currencies of economies in recession while America’s is growing. If the printing presses run at top speed, can inflation be far behind? So far, no sign of that dreaded currency depreciator as investors in the US refuse to panic even though the Fed and other central banks have decided to downplay their roles as inflation fighters and turn their hands and powers to stimulating their economies.

That is nothing less than a policy revolution and, as The Wall Street Journal points out: “Revolutions are rarely victimless . . . Expect long-dated bonds to suffer and currencies to fall as central banks compete on stimulus.” Robert Samuelson, an economist and author of The Great Inflation and its Aftermath, adds in a column: “The Fed has tried this before and failed—with disastrous consequences.” Partly because the Fed’s zero interest rate policy prevents investors from earning anything approaching satisfactory returns on bonds, their hunt for yield led them to buy shares: as we approach Christmas the Standard & Poor’s 500 share-price index is up about 14% from the first trading day of 2012.

The monetary policy gurus created a revolution; their fiscal policy counterparts created year-long uncertainty. They decided it is too tough to cut spending significantly, or to reform taxes to increase the taxman’s take without stifling growth. The year opened with the nation on the brink of what Bernanke was the first to call “the fiscal cliff.” It ended with the nation staring into an abyss—a debt/GDP ratio so high that growth becomes impossible. It is now likely that we will add $1trillion to our debt mountain in every remaining year of the Obama administration, as we did this year. President Obama has refused to entertain any significant cuts in spending, as that word is ordinarily used.

So the economy has inched forward this year, with the labour market improving, the economy growing modestly, and consumers increasingly optimistic. Shareholders have done well. But the tone of our politics remains rancorous, with fiscal policy on course to produce endless deficits. The Fed has announced a revolution in monetary policy, a borrow-now-and-pay-later programme to accommodate the politicians by buying their IOUs.

Next week: what all of this portends for 2013. Meanwhile, even in the absence of peace on earth, do enjoy this season of goodwill.

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