Goldilocks and the Three Economic Outlooks

Originally published by Politic365 here.

Depending on whom you ask, our economy is either on the right track or about to fall into a black hole.

CNBC, WSJ, Bloomberg, IBD, etc., etc. all have their opinions on the current state of the economy, our financial markets, and their theories on the future.  Ask political leaders from either side of the aisle, and you’ll hear their best used car salesman-esque talking point on how their plan will save the world while their opponents’ plan will ensure the Mayans were wrong, but not by much.

What makes the economy look so peachy? 

U.S. companies’ financial statements are overflowing with liquidity.  Cash is king and shows the strength of sales and profits.  U.S. stocks have rallied recently hitting multi-month highs.  German stocks are at a five-year high as other European stocks have risen steadily showing that improvements aren’t isolated to the U.S.

Despite all of the partisan rhetoric, we are expecting greater clarity on taxes out of Washington.  There might be some closed corporate loopholes (although, I highly doubt it since they allow for the heavily-lobbied-for incentives that help fund campaigns), but we should at least know what the future holds, one way or another.

U.S. home sales are up across the board, signifying new confidence in the turn of the housing market and an end to the effects of 2008; the U.S. trade deficit has fallen, giving rise to increased exports and more sales abroad; Europe’s financial Band-Aid seems to be working while Greece’s credit rating has jumped five ticks; and, China’s downturn seems to be bottoming out.

The outlook calls for nothing but rainbows and lollipops…. well, according to some.

What makes the economy look so terrible? 

Many of the same points, actually.  U.S. companies are carrying their cash around in wheelbarrows because they’re afraid to use it on anything else.  That means less money for expansion, capital goods, and jobs.  They have no idea where Washington’s headed, nor the economy.

The dollar is down against other currencies, increasing our debt costs and our ability to purchase goods abroad.  Europe’s Band-Aid is just that and any rational person knows it.  The fiscal policies of the problem states will have to make drastic changes to keep the European Union together and it seems unlikely that that will happen.  Parts of our own country, such as Detroit and the entire state of CA, have such serious financial problems that they’re begging for their own GM-style bailout.

Corporate and personal taxes are likely to go up as part of Democratic political efforts, which is part of the reason businesses are hoarding cash and wealthy people are not spending like they could, while government spending will likely drop from Republicans getting a little of what they want.  When corporate, personal, and government spending drops, it impacts the economy.

Our seemingly unlimited stimulus has caused and will continue to cause increased inflation and national debt, further devaluing the dollar and the incomes of all Americans, as well as increasing the amount our country sends to overseas lenders.

As stocks improve, even temporarily, and the Fed continues its easy money practices, we see moves away from commodities and gold, as well as investors moving away from bonds, which some are predicting could crash the bond market.  The economic implications could be massive.

The economy is going to hell in a hand basket…well, according to some.

Like Goldilocks, our politicians seem to like it right down the middle

According to the “Goldilocks theory,” the best chances for long-term growth is when the economy is not too hot to cause an unstable bubble or too cold to cause government intervention.

Many have opined that we’re now in a “Bad Goldilocks” era of stagnation with a lot of mini ups and downs, but no real economic growth or improvement.

With a seemingly unlimited supply of fiscal quick fixes, our economy isn’t likely to disintegrate anytime soon.

However, unfortunately for anyone who wants to make some real money out there, we aren’t likely to see financial flash mob dancing in the streets anytime soon either.

JUSTIN VELEZ-HAGAN is Senior Contributing Writer and Commentator for Politic365.com.  He is also an Adjunct Instructor of Economics at the University of Maryland-University College and the National Executive Director of The National Puerto Rican Chamber of Commerce.  He can be reached at Justin@Politic365.com.