What will it take to break the downward cycle for the U.S. stock market and its economy? Get back to our roots as a country that lives within its means.
The source of the problem is that we have gotten away from the idea of paying only for things we can afford. To close that affordability gap that results from lower income and higher prices, we have borrowed money -- $9.3 trillion in federal debt, a $410 billion federal budget deficit, and $2.5 trillion in consumer borrowing -- which has caused other countries to view the dollar as a distress currency. It's lost 72% of its value since January 2001 -- when it traded at 92 cents to the euro.
Having spent the last two weeks in Europe, that weak currency hurts -- everything seems to be about 50% more expensive there than it is here. Gasoline there is far more expensive than it is in the U.S. -- roughly $9.60 a gallon compared to $4.25 here. And the reason that our stock market is dropping while oil rises is a result of deliberate government policies designed to weaken the dollar and strengthen oil.
The stock market is dropping because big investors are making profitable bets that the dollar will weaken and oil will strengthen. With oil now at close to $140 a barrel and Europe raising interest rates -- possibly to 4.25% to deal with its inflation while the Fed keeps rates at 2% -- the dollar is sure to weaken further and investors are likely to continue to profit from buying oil and selling dollars. Meanwhile, stocks will tank further.
So what will stop this decline? We need to return to living within our financial and energy means. To do this, we need to raise interest rates to control inflation, balance the federal budget, pay off our government and personal debt, eliminate our dependence on foreign energy, and create jobs that pay the middle class enough to afford to live without borrowing huge sums of money.
With 70% of GDP growth coming from consumer spending, companies cannot increase their profits if consumers spend less. And until companies boost their earnings faster than investors expect, stocks will continue their inexorable fall. To break the downward cycle, we need to live within our means.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
Reader Comments (Page 1 of 1)
6-28-2008 @ 9:25AM
Emilio Gomez said...
These comments speak to reality and common sense. Our govenment is setting the example for not living within it's means. Big Oil controls the White House and these companies are reporting obscene profits every quarter while families, businesses, and the economy is being driven into bankruptcy. The Justice department is doing nothing about it, while they are so quick to investigate the first complaints of price increases in other industries. Write your congressman.