This Day On The Street
Continue to site
ADVERTISEMENT
This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here

Former US Budget Director Predicts Economic Doom

Former Reagan Administration Budget Director David Stockman created a stir this week while promoting his new book, which predicts the U.S. economy is headed for a hard fall -- largely because of its fiscal and monetary policies.

These words of warning, which Stockman details in "The Great Deformation: The Corruption of Capitalism in America," come in direct contrast to the growing mood of optimism on Wall Street. Several financial commentators sharply criticized Stockman for his "Chicken Little" predictions. Prophets of doom are never particularly popular when the market's still making money, though that's when words of caution can be most useful. Here is a review of some of Stockman's concerns:
  1. Deficit spending is unsustainable. Economist Paul Krugman has taken Stockman to task for complaining about deficits, since Stockman oversaw huge deficit increases as Reagan's budget director. Still, Stockman is entitled to change his mind about deficits, and more to the point, the wisdom of deficit spending is really a matter of circumstances. Modest deficits to goose a sluggish economy can be useful. What every President except Clinton has failed to do in the last 40 years is bring the budget back into surplus during economic expansions. As a result, deficits have gotten steadily larger over time, and the accumulated debt total has continued to build.
  2. A "warfare state" is being built on top of a welfare state. One criticism of social programs is that they create continuing obligations which become increasingly hard to meet, and military spending takes on a similar momentum. The wars in Afghanistan and Iraq were instrumental in setting the latest cycle of deficit increases in motion, and with potential nuclear threats from Iran and North Korea, it will be hard to cut back on defense now -- unless more people start to view the deficit itself as a national defense concern.
  3. Fed policies have created an asset bubble. By lowering interest rates on everything from savings accounts to long bonds, the Fed has created an investment climate in which stocks seem like the only worthwhile game in town. With CD, savings, and money market rates losing ground to inflation, investors are more likely to turn to riskier alternatives in search of higher returns. As a result, stock prices have soared, but could the market sustain these levels without low interest rates? Until the Fed's stimulative policies generate enough earnings growth to support today's stock valuations, the fast-rising market will look more and more like a bubble.

Stockman's concerns are valid, but his predicted outcomes don't necessarily have to come true. If the private sector of the economy finally gets moving, and if the government takes advantage of that stronger economy to backtrack to more conservative fiscal and monetary policies, then the stimulative measures of high deficits and low interest rates may pay off. Still, Stockman's words serve as a warning for what could happen if all those "ifs" don't fall into place.

Check Out Our Best Services for Investors

Action Alerts PLUS

Portfolio Manager Jim Cramer and Director of Research Jack Mohr reveal their investment tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
Quant Ratings

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
Stocks Under $10

David Peltier uncovers low dollar stocks with serious upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
14-Days Free
Only $9.95
14-Days Free
Dividend Stock Advisor

David Peltier identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Updates with exact steps to take - BUY, HOLD, SELL
Trifecta Stocks

Every recommendation goes through 3 layers of intense scrutiny—quantitative, fundamental and technical analysis—to maximize profit potential and minimize risk.

Product Features:
  • Model Portfolio
  • Intra Day Trade alerts
  • Access to Quant Ratings
Options Profits

Our options trading pros provide over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • Actionable options commentary and news
  • Real-time trading community
SYM TRADE IT LAST %CHG

Markets

Chart of I:DJI
DOW 17,689.86 -56.12 -0.32%
S&P 500 2,103.84 -4.79 -0.23%
NASDAQ 5,128.2810 -0.5040 -0.01%

Free Reports

Top Rated Stocks Top Rated Funds Top Rated ETFs