There are not many happy about the coming March 1 automatic cuts in the budget. The exaggerated clamor has raised the specter of damaging our national defense, reducing free education for young children, the reduction of air safety officers and food inspectors, and other services we've grown accustomed to from Uncle Sam. But, where it cuts to the quick is the possible reduction in spending and therefore GDP of up to 0.5% this year, with the expectation of another 0.5% each year for the 9 years following. The positive payoff is the reduction of the federal budget deficit by 5% a year. This is called beng between a rock and a hard place. Add that cut to the renewed charge of a 2% payroll tax on individuals earning up to $114,000 a year-- and you reduce GDP by another 0.6% according to estimates I've seen. That adds up to a combined drag on economic activity of possibly 1.1% at a time where the nation's economy is growing modestly at a rate of 1.7% to 2.00%. When you subtract 1.1% from 2 % you get growth at best of 0.9%-- definitely not enough to drive the unemployment rate down to the 6.5% level. Then, you factor in what is definitely a worrisome depressant to economic growth-- the rise in the cost of a gallon of gasoline to $5.00 a gallon in some parts of the U.S.-- has cut into consumer spending and usually a warning sign of a slowdown to come. In past cycles, when gasoline a gallon rose to $5.00 it usually signaled the sputtering of a recover. Or, motorists stopped driving quite as much, using less gasoline-- as took place during the summer of 2008, when crude oil hit a peak of $147 a barrel. George Soros went short crude oil at $138 and long gold at $900 an ounce, a quite spectacular trade. And, then we had the financial crisis, the recession, the market meltdown. It's a dangerous time for President Obama and for investors, who have enjoyed the rise back to very nearly the historic peak for the Dow of 14,100.
There are not many happy about the coming March 1 automatic cuts in the budget. The exaggerated clamor has raised the specter of damaging our national defense, reducing free education for young children, the reduction of air safety officers and food inspectors, and other services we've grown accustomed to from Uncle Sam. But, where it cuts to the quick is the possible reduction in spending and therefore GDP of up to 0.5% this year, with the expectation of another 0.5% each year for the 9 years following. The positive payoff is the reduction of the federal budget deficit by 5% a year. This is called beng between a rock and a hard place. Add that cut to the renewed charge of a 2% payroll tax on individuals earning up to $114,000 a year-- and you reduce GDP by another 0.6% according to estimates I've seen. That adds up to a combined drag on economic activity of possibly 1.1% at a time where the nation's economy is growing modestly at a rate of 1.7% to 2.00%. When you subtract 1.1% from 2 % you get growth at best of 0.9%-- definitely not enough to drive the unemployment rate down to the 6.5% level. Then, you factor in what is definitely a worrisome depressant to economic growth-- the rise in the cost of a gallon of gasoline to $5.00 a gallon in some parts of the U.S.-- has cut into consumer spending and usually a warning sign of a slowdown to come. In past cycles, when gasoline a gallon rose to $5.00 it usually signaled the sputtering of a recover. Or, motorists stopped driving quite as much, using less gasoline-- as took place during the summer of 2008, when crude oil hit a peak of $147 a barrel. George Soros went short crude oil at $138 and long gold at $900 an ounce, a quite spectacular trade. And, then we had the financial crisis, the recession, the market meltdown. It's a dangerous time for President Obama and for investors, who have enjoyed the rise back to very nearly the historic peak for the Dow of 14,100.