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BEING STREET SMART

by Sy Harding 

Kicking the Can! May 13, 2011.

The economic catch phrase of the year has become ‘kicking the can down the road’, applied to all the problems that are not being solved, but are simply kicked further down the road.

It’s an apt description, as it is exactly what’s happening.

But what else could we expect?

After all, the election is only 18 months away, and it’s well known in Washington that the most important factor coming into an election is the state of the economy at the time. So as elections approach it’s normal for Washington to not only postpone any tough decisions until after the election, but to do whatever it can to make sure the economy and stock market are in good shape when election time rolls around.

However, it’s different this time. Normally the economy and stock market perform poorly in the first two years of the Four-Year Presidential Cycle, as Washington allows any needed correction of excesses to take place then, rather than risk them taking place in the last year or two before the election.

But the economy and stock market have been positive for the first two years of this cycle, with substantial stimulus efforts already expended to keep them positive.

So the question is whether kicking the problems further down the road can continue for the full four years without a hitch, that is for another 18 months until election time arrives.

It’s a lot to expect, and the indications are not promising.

For instance, the European debt crisis has popped up again to threaten economies and roil markets.

It first appeared a year ago when it became clear that Greece would not be able to meet upcoming payments on its massive government debt. Fears rose that the crisis could spread to other European countries with high debt levels, and global stock markets began to decline on the concerns. So the central bank of the European Union, and the International Monetary Fund, joined forces to kick the problem down the road by providing loans that would allow Greece to make its upcoming debt payments.

The crisis returned and the EU and IMF gave the problem another kick down the road, and then another. When it appeared last week that Greece was again on the verge of default, the EU and IMF came up with another $100 billion in proposed loans that will hopefully delay a potential default until late next year.

Meanwhile, as feared, the debt crisis did spread, to Ireland and Portugal. This week the IMF released a report saying it does not expect the bailout loans made so far will end Europe’s debt crisis, saying “Strong policy responses have successfully contained the financial troubles in the euro area periphery so far, but contagion to the core euro area, and then onward to other European countries, remains a tangible downside risk.”

Yet already we see the growing economic problems created by the austerity programs imposed on countries as requirements for the loans. Greece is experiencing labor strikes and public uprisings to protest the cuts in government jobs and benefits, while it was announced this week that the Greek economy has already dropped back into recession, with back-to-back quarters of negative GDP.

Meanwhile, nations which have been the leading economies, including Brazil, Russia, India, China, and Hong Kong, have seen their stock markets topped out since November, apparently in anticipation that their reversal of previous stimulus programs will result in economic slowdowns.

It is a potential warning for the U.S., where kicking cans down the road has been the most pronounced.

When the U.S. economic recovery stalled a year ago, and the stock market began to tumble, the Fed panicked and kicked the problem down the road with another round of quantitative easing (QE2).

Meanwhile, ‘austerity’ measures that will also be required in the U.S. to halt and reverse its record federal and state budget deficits, have been stalled by any means possible, no doubt hopefully until after next year’s elections.

Some of those delaying tactics have a look of desperation. An Associated Press article this week notes that the city of Newark, NJ, staring into a budget abyss, sold 16 city buildings to developers and investors, including the Newark Symphony Hall and police and fire headquarters. The article refers to proposals by state governments and/or municipalities in Wisconsin, Louisiana, Ohio, Pennsylvania, and Massachusetts to sell power plants, prisons, toll-roads, and government office buildings.

Such efforts provide a one-time chunk of cash, but give up the assets, and toll-road income, and require making lease payments to remain in the buildings.

But they do kick the problem down the road.

In Washington, Congress remains at an impasse on when and how to begin cutting the record federal budget deficits, with proposals from both sides seemingly intending to kick the can down the road with relatively small cuts in each of the next two years, and more substantial cuts delayed to the years thereafter.

Maybe they can continue to kick the problems down the road without a hitch. Let’s hope so.

Because Congress and regulators also realize that new regulations and control over the major ‘too-big-to-fail’ financial institutions must be put in place before the next financial crisis, but are also kicking that can down the road into the future, recently even removing and postponing some of the key new regulatory reforms hammered out only a year ago.

Sy Harding is president of Asset Management Research Corp, and editor of www.StreetSmartReport.com, and the free market blog, www.streetsmartpost.com.

These reports reflect our opinions and are based on our best judgment, but no warranty is given or implied as to their accuracy. Past performance does not guarantee future performance.

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