Why the Markets Don’t Buy Obama’s Four-trillion Deficit Cut

 

Why don’t the markets believe him?

Yesterday, President Obama said that he would cut $4.0 trillion from annual deficits over the next 12 years. He plans to raise taxes and cut government spending.

The stock market hardly budged. The U.S. dollar and U.S. Treasuries hardly moved. You’d think all three would rally on the news of trillions to be cut from our debt.

Gold, which has been rising in price for the past 10 years as the greenback has declined in value, actually rose in price yesterday. One would think that, on hearing that the government is finally doing something about its debt nightmare, the precious metals would fall in price. The opposite happened.

So why did the markets yawn?

Maybe the markets don’t believe that the Republicans will work with Obama on his proposed $4.0 trillion in deficit cuts, or maybe they feel Obama will not be in power in two years to see them through.

But here’s the real reason we got yawns from the markets yesterday on the proposed trillions of dollars in deficit cuts:

As we all know, the U.S. debt will sit at $14.29 trillion by about May 16, 2011. The Obama Administration predicts that the government will pile on another $3.8 trillion in debt over the next five years (a number I find far too conservative). When you add the two together, we will be sitting on $18.09 trillion in debt by 2016.

We’d surely surpass $20.0 trillion to $21.0 trillion in debt by 2020—150% of GDP in a rising interest rate environment.

But those numbers don’t take into consideration interest rates rising at the pace I believe they will rise, unexpected natural catastrophes, wars, or economic deterioration as opposed to economic growth. Bottom line: the picture could get much worse; maybe downright ugly.

Economic analysis: More people are employed by government in the U.S. today than by the U.S. manufacturing and U.S. construction industry combined. Take a trillion from high-income earners and they will spend less, hurting the economy. Cut expenses by trillions and you will get more unemployment, hurting the economy. It’s one of those “damned if you, damned if don’t” situations, and the markets know it all too well.

Michael’s Personal Notes:

I couldn’t believe Obama’s words yesterday. They are a mimic of what we have been saying here in PROFIT CONFIDENTIAL for two years. In announcing the proposed $4.0 trillion in deficit cuts, the President said:

“If our creditors start worrying that we may be unable to pay back our debts, it could drive up interest rates for everyone who borrows money, making it harder for business to expand and hire.” Obama gets it now, but…

http://www.profitconfidential.com/stock-market-advice/why-the-markets-don%e2%80%99t-buy-obama%e2%80%99s-four-trillion-deficit-cut/?utm_source=rss&utm_medium=rss&utm_campaign=why-the-markets-don%25e2%2580%2599t-buy-obama%25e2%2580%2599s-four-trillion-deficit-cut