Economy

It’s official.  The US has already been in a recession for a year!  As the average recession is only 10 months, we are already in a worst than average downturn.  It’s hard to say how long it will take us to get out of this slump as things seem to get worst every week but at least we know that everyone is going to do everything possible to keep this great country to a downright collapse.

The National Bureau of Economic Research (NBER) declared today that since December of last year, the 73-month economic expansion has ended.  The current recession, which many expected to last till at least the middle of next year, will be at least the third longest recession since the great depression (the other two are 16-month cycles in mid 1970s and early 1980s).

It’s interested to note that the NBER doesn’t use the widely known measure of “two consecutive decline in gross domestic product” as the measure of a recession.  Instead, it looks for a decline in economic activity as a true measure.  Personally, I think that while it’s probably more flexible, it sounds sort of subjective to me.  However, the NBER is a prestigious private research institute that is regarded as the arbiter of U.S. recessions so I guess they know what they are doing.

I’m watching Jim Rogers, a legendary investor is on CNBC right now and he put in a good perspective on his views of bailouts.  According to him (and this is not word for word but hopefully captures the meaning):

The system is setup so incompetent companies fail and competent ones buy them. This starts everything over from a position of strength. What we are doing right now is taking money from the competent ones, then giving it to the incompetent ones and telling the competent companies that they are going to compete with you.

It’s tough to say whether the bailouts will turn out good or not, but what he said made a lot of sense. He also referenced Japan and that we are doing similar things to what they did, which didn’t work. To be more specific, Japan is still recovering after 28 years. Yikes!

Let’s see what happens to the bailout!

Yesterday’s market was very interesting.  While every other market rallied because of China’s announcement on its’ stimulus plan, the United States indices stumbled.  This make Tuesday’s market overseas interesting because markets around the world usually follow the United States’ lead.  It’s no question that the US has been the global leader because of its economic power and willingness to lead, but will this continue?

Financial Power and Influence
Before the financial crisis, most of the major financial powerhouses were residing in United States.  With 2 of the biggest investment banks now gone and most of the financial banks in the United States majority injured (did you see Citigroup’s stock price?), it is tough to say what will happen once its all said and done.

Government Economic Policy
The US has arguably the most sophisticated system in handling fiscal policies and the country.  Before the financial crisis, everyone would say that the country has been doing a pretty good job at taming inflation and spurring economic growth.  However, these days, it’s not as clear that our government knows what they are doing.  China’s stimulus plan creates jobs, cuts taxes and creates growth.  The United States’ plan?  It gets people putting more money into failing banks, buying more TVs and maybe some iPods too.

Currency
Throughout history, the US dollar has been the currency in the world.  It is commonly accepted to be one of the only currency that most countries accepted.  Transacting business in the US dollar was considered to be a powerful statement back in the days.  These days however as the US government borrowed massive amounts of money from China, the US dollar is simply over owned.

Another huge threat to the US currency is the creation of the Euro.  In the old days, there just weren’t a currency backed by a stronger economy.  Now with a currency handled and governed by the European Union, there is now a currency that is also widely used around the world.

Going Back to Stocks
So are stock markets still going to follow the United States’ lead, meaning that if our markets go up, they will and vice versa?  We will see.  I really hope so.

Over the weekend, China has announced it’s own version of the economic stimulus plan.  Unlike the US’s plan that gave taxpayers $116 billion dollars, China’s plan is expected to total $586 billion.  It’s good to be rich I’d say!  Also unlike the US’s plan that gives taxpayers control of how it will be spent, the Chinese will be using the billions of dollars to speed up existing infrastructure projects and social welfare.

Last year, China’s economic growth was 11.9 percent but in the most recent third quarter numbers, it has decreased to only be 9 percent.  While this type of number would be celebrated in other countries, it’s not good news for China who need to create jobs for millions of new workers and current workers who has be used to rapidly rising incomes.

What’s more worry some is the fact that while exports has been growing 20 percent annually, next year’s exports might grind to a halt.

This bill includes projects like low-cost housing, something that is desperately needed in a country that still has a huge gap between the rich and the poor.  Also on the list of improvements are increased spending on rural infrastructure, railways, roads and airports.  Other areas like health and education will also be covered in this plan, as well as environmental protection and technology.

The goal is to increase the income levels of both urban and rural area for the workers.  On the business front, commercial banks will be less restricted by having no capital requirements so they can channel more lending to important projects.

Lastly, something I really welcome is that there will be tax cuts by $17.5 billion for enterprises.

While our economic stimulus plan gives everyone a bunch of money to buy useless products like TVs, China’s stimulus plan creates government projects, improves technology and infractructure, create jobs and includes a tax cut.

Maybe it’s time we learn a thing or two from the Chinese.