Whoever Wins the Election Will Not Change the Bigger Picture

Today is Election Day. The campaigns of the two candidates have been focusing on the economy of the United States. Whoever wins tonight will be saddled with the responsibility of reviving the economy of the country. Both candidates have reiterated that he is the better person to create jobs and to improve the economy of the United States.

Recently, signs of recovery of the world economy seem to be surfacing, and investors in the stock market are once again looking forward to another bull market. Such optimism has been engenered by the majority of polls; governments worldwide are commited to an unprecedented program of policies to restore growth and to reform the international financial system. The financial system is showing signs of repair. Growth is now underway. Seemingly, everyone has painted a rosy picture of the economic recovery.


Undoubtedly, governments worldwide are pulling out all the stops to stimulate economic growth and recovery. But try as they may, no recovery is going to happen anytime soon. There are several reasons why the economic recovery will not be sustainable:

1. The future ofUS dollar is not promising. A while ago, Cheng Siwei of China bluntly told the press that if the United States kept printing money to buy bonds, it would lead to inflation, and sooner or later the US dollar would fall hard, if not collapse. It was a clear warning from the Chinese government that it would not watch the demise of the US dollar without taking some drastic measures, one of which is the issue of bonds of its own in yuan currency. This is China's most recent move to challenge the US dollar. This move to protect its dollar asset does not bode well for long-term economic recovery. In other words, the Chinese government will sell its $2 trillion dollar asset as soon as an opportunity arises.

2. The key indicators of real economic growth are negative. Unemployment, for example, is still rising. Economists would argue that the job number will always lag behind economic growth. How could the economy be growing if fewer people are earning money? If this is a "jobless recovery," the recovery will not be sustainable over the long haul.

3. The US economy is based on consumer spending. Consumer spending is disappointing; many consumers are over their heads in debt, and they need to pay off their debt before they can spend again.

4. Currently, most stocks are still trading at nearly 20 times earnings with yield as low as 3 percent. In other words, the bear market is far from over. If stock prices don't go up, they will go down. Without a booming stock market, where will be the booming economy?


5. Despite all the stimulus plans, credit is contracting, not expanding as the government would like to see. Consumers are not borrowing, because they do not have the means, and banks are not lending, because of the high risk involved. Credit crunching means more savings and fewer sales, and fewer sales would mean fewer jobs. It is a vicious cycle created by debt and decades of reckless spending.
6. The last straw that breaks the camel's back will probably be inflation. The government is not going to balance the budget, and debt will continue to escalate. If the government cuts spending, there will be fewer jobs; if the government continues to spend, there will be more debt. There is no easy solution to the debt crisis. Most probably it will continue to print more money in the short term for more bailouts and bankruptcies. The inevitable result is inflation. To curb inflation, the Federal Reserve will have to walk a tightrope with a tightening monetary policy: if it tightens too fast and too much, it will abort the economic recovery, but if it loosens too much and too long, it will let inflation run wild. It is a no-win situation for the Federal Reserve. Inflation will come sooner or later; it is just a matter of time. When it does, the cconomy will collapse.

Whichever way you look at the economic scenario, it is not promising for any recovery anytime soon. The root of the problem is that everybody wants a quick fix to avoid a depression at any cost. Maybe a deep depression is what we need for the ultimate economic recovery, which has everything to do with debt.

Whoever wins the election tonight will not be able to change the bigger picture -- the current economic scenario. Creating more jobs may be only a flash in the pan, but it will not create the fire to change the debt-ridden economy.

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Stephen Lau