Gloom and Doom on the Economy

What is going on with the economy? On the one hand, GDP is growing at 3.5 to 4.0 percent a year. On the other hand, Americans are saving nothing and racking up huge debts by borrowing against their home equity. On the one hand we have a huge balance of payments deficit; on the other hand the dollar is up about 10 percent against the Euro in the past year. American consumers are buying confidently, yet 43 percent of Americans think we are in a recession, according to Brian S. Wesbury

The uncertainty can be laid to the door of the two big things that the government has done over the past four years. First of all it has flooded the world with dollars to prevent deflation and meltdown in the wake of the Great Bear Market of 2000 to 2003. Secondly it enacted a significant tax cut that cut the tax rate on investment returns for all businesses in the United States.

Three years later we are now in the period of adjustment where we will learn whether these two bold initiatives actually worked. Has the Fed’s anti-deflation policy led to an unsustainable real estate bubble that will soon burst and bring the rest of the economy down with it? Will the tax rate cuts really bring long-term benefits to the economy without deficits as far as the eye can see?

Stay tuned, and place your bets. This time next year we will know whether the gambles paid off or whether they will end in tears.