The Economic Prognosis is Not Good in the U.S., China or Europe

Posted by PITHOCRATES - April 22nd, 2012

Week in Review

For those of you who think the U.S. economy is picking up don’t get your hopes up.  The same goes for the Europeans.  And anywhere governments actively interfere with market forces.  They can provide a little succor.  But their efforts provide only temporary relief from reality.  And what is that reality?  That Keynesian economics and state capitalism do not work.  And that government meddling makes things worse in the long run.  Which is no secret.  Investors know what’s going on.  And aren’t fooled by the self-congratulatory praise the politicians heap upon themselves (see Analysis: Spluttering economies to curtail earnings horizon by Mike Dolan posted 4/18/2012 on Reuters).

Exuberant global markets have taken a reality check this month on chronic U.S., Chinese and European growth concerns, and investors should hold companies’ relatively rosy profit outlooks up for scrutiny too…

Macroeconomic hopes hinge on a U.S. recovery gaining more traction, a soft landing of Chinese growth to about 7.5 percent from the double digits of the past decade and a resolution of euro zone’s systemic sovereign debt and banking problems.

All three of these, however, were in doubt again in April and the anxiety knocked some 5 percent off MSCI’s world equity index from their March peaks. That leaves stocks still up 8 percent on the year but, just like last year, the price momentum and direction seems to have stalled.

Even though bouts of central bank money-printing and cheap lending in the United States, Europe and elsewhere periodically offer a fillip, as the European Central Bank’s money flood did again spectacularly in the first quarter, the effect on the real economy and market prices tends to fade fast…

What’s more, ThomsonReuters data shows that margin gains from cost-cutting in jobs, pay and other expenses was a significant part of the U.S. profit recovery since 2009 but that this route to bottom-line improvement is reaching its limits.

The major economies aren’t improving.  All of those government fixes didn’t fix anything.  Printing money just put more inflation into the pipeline.  And increased prices.  You ever notice the boxes of cereal getting smaller?  The bags of chips getting smaller?  They’re getting smaller because of inflation.  Unable to raise prices anymore because people can’t afford them they’ve held prices steady.  And shrunk the portion size.  Making consumers spend more in the long run to buy the same quantities as before.  Or simply go with less.  This is the result of all that money printing.

In business you don’t solve problems on the cost side.  You solve them on the revenue side.  For healthy revenue can pay for anything.  Even the worst cost management.  That’s why during good economic times the focus is on revenue.  Not cost cutting.  During good times companies hire people and expand production.  To grow revenue.  It’s during recessions when they lay off people and cut costs.  Temporary provisions to make it through the recession.  And when they emerge from these recessions they start hiring people and expanding production again.  To grow revenue.  So when margin gains are due to cost-cutting and NOT revenue growth you’re still in a recession.  No matter what the numbers say.  And no one is optimistic about the future economy.  Businesses.  Or investors.

Now would be a good time for governments everywhere to acknowledge their failures.  And let the Invisible Hand take control of the economy again.  For the longer they wait the harder it will be for the Invisible Hand to do its magic.  And the longer and more painful the recovery.  It’s time we drop the ‘state’ from capitalism.  And replace it with ‘free market’.  And trust in the free market.  Like we did during the Industrial Revolution.  Like we did when we abandoned FDR’s New Deal during World War II.  And like Margaret Thatcher and Ronald Reagan did during the Eighties.  All periods of incredible economic growth.  That no period of state capitalism ever equaled.

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