Published August 23, 2012
I often tell my children that what they do every day of their lives tells a story about them. I include that the friends they keep reflect positively or negatively on them as well.
I firmly believe that the same can be said about economic and earnings reports released on a weekly basis. Often times, these reports are told in a language that most people aren't familiar with, and as a result they are often dismissed as not relevant and assumed to have no relevance.
You know what you get when you assume. These reports, often deemed boring, tell a story. To understand the story of the world economy in simple terms, one doesn't need a specific background or education. The world economy is often thought to be growing at a "good" pace when you see gross domestic product at about 3%.
If it is growing much faster than that, government rates rise to slow the growth down because very fast growth is interpreted as fueling inflation. If the world economy is growing too slowly, the governments will often lower rates to stimulate the world economy.
Today the story is troubling -- more so than in any other time I can remember. The tool of lowering interest rates is no longer available to us. Rates are basically at zero and we obviously cannot lower them any further.
As goes the United States, so goes the rest of the world. We are a $15 trillion economy. To put that in perspective, the next three largest economies (China, Japan and Germany) in combination equal the size of the U.S. The country can and usually does lift the rest of the world out of world economic slowdowns.
However, having lost our best tool to lift us out of this malaise, what is left? The current plan of printing money through quantitative easing and “Operation Twist" just isn't budging things upward.
Timing has become a problem. Continuing what we are doing will certainly yield the same results: nothing. When you hear headlines and news reports ranging from factory order slowdown in China, India growth less than forecast, U.S. unemployment stuck in the 8% range, oil prices skyrocketing and so on, it matters to you.
It directly affects your 401k plans and puts that pension check you receive each month at risk of being reduced, or worse, eliminated altogether. Most people don't realize that their pension plans don't have enough money to continue paying them out their checks (90% of all private sector pension plans are underfunded and cannot meet their obligations going forward for a sustained period).
If the pool of money in that pension doesn't grow quickly, your lifestyle will dramatically change. The ripple effect to all of us will be more dependence on government entitlement programs.
If you don't believe me, just look on the other side of the Atlantic. When you hear that our economy is growing at 1.5% and if this fiscal cliff occurs in January, the growth will slow much more, it should be directly interpreted by you that your purchasing power and your lifestyle are under assault by the current direction we are on.
As I wrote four months ago, we have one tool left and this administration refuses to use it. The world economy is an engine that needs to be gassed up with free flowing money, not stifled by increased taxes, regulations and fear mongering.
If taxes are reduced on everyone -- and most importantly on corporations -- we will see a quick reversal of our downward spiral. The story that is currently being told about the world economy is not pretty, and it directly reflects on our country and the current administration.
Ed Butowsky is managing partner at Chapwood Investments and an internationally recognized wealth manager.