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Mark's Market Blog

11-14-09: The Government Hires Everyone!

By Mark Lawrence

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The market shot up this week to new highs for 2009. We're early in a short term run-up, I expect the market to continue up for a couple more weeks, although perhaps not quite this quickly. We can expect to bounce off an S&P of about 1125-1150 a couple times before we punch through. I will not be surprised to see the S&P nearing 1200 by Christmas. I remain highly skeptical about this market, but the Fed and Obama continue to dump money into it, and I expect it will continue to go up for a bit longer. In the long run, markets always have their way.

S&P 500 March 9 2009 to November 13 2009

The deficit for October is in, $176B. Here's the thing: lately we're throwing around all these numbers of billions and trillions of dollars, and I'm afraid we're all getting a bit immune to them. So let me put this in a simpler perspective: if you're an average taxpayer, last month the government borrowed $1200 in your name. If you make more than $50,000 per year, then the government borrowed a bit more than that, in your name. Or your grandchildrens', depends on how you look at it. If you had an adult child not paying rent, eating your food, and running up $1200+ per month on your credit card, they would get home to a note, "Your stuff is at the YMCA."

A report released Wednesday by the Pew Center on the States says California, Arizona, Florida, Illinois, Michigan, Nevada, New Jersey, Oregon, Rhode Island and Wisconsin are at risk of fiscal calamity. That could mean higher taxes, more layoffs of government employees, increasingly crowded classrooms and fewer services in states that account for more than one-third of America's population and economic output. Most of the states face rising unemployment and high home foreclosure rates, and their tax revenues have dropped by double-digit percentages.

Sith Lord Lloyd Blankfien, Chairman of Goldman Sachs, grew tired of the negative PR his company has been taking recently and decided to speak out. Monday we heard "We're doing God's work." Tuesday we got "Goldman employees are more productive than you." Yesterday we got "We pretty much stuck to our investment-banking knitting." Pretty heady stuff from a guy who's company was technically bankrupt a year ago and survives and will give out $20B in bonuses this year due to Federal largesse. By the way, in 1998, investment banking was 40% of their business. In Q3 2009 it was 7%; roughly 80% of their profits last quarter were from trading on their 0% interest loans from the Fed. These guys are evil (that last was an editorial opinion) and desperately need to be taken down.

A clinical trial published online in ACS' Journal of Proteome Research found that eating about an ounce and a half of dark chocolate a day for two weeks reduced levels of stress hormones in the bodies of people feeling highly stressed.

Economist Gary Shilling has calculated that 58 percent of the population is dependent on the government for "major parts of their income," including teachers, soldiers, bureaucrats, and other government employees; welfare and Social Security recipients; government pensioners; public housing beneficiaries; and people who work for government contractors. By 2018, Shilling estimates, an astounding 67 percent of Americans could be dependent on the government for their livelihood. The implications aren't comforting.

The growing-government phenomenon transcends party politics. In 1950, the starting point for Shilling's analysis, just 29 percent of the nation depended on government for its income. By 1980, that had risen to 61 percent, higher than it is today. The military got larger and defense spending grew as America took up its role as a superpower. Baby boomer kids required many more teachers. The number of Americans receiving pay outs from Social Security, enacted in 1935, increased 10-fold. Food stamps and other safety-net programs of the 1960s and '70s began to reach millions of Americans.

From 1980 to 2000, Americans became less dependent on government. California and other states cut their budgets and reduced spending. The military got smaller after the Cold War ended. Welfare reform in the 1990s kicked many people off the dole. And the private sector boomed during those two decades, accounting for a larger share of the labor force. By 2000, the portion of the population dependent on government had drifted down to 54 percent. But it reversed course after that, and it seems poised to keep going up. The recession destroyed more than 8 million jobs, so the government has employed an increased share of Americans. The other big change since 2000 has been a near tripling of food-stamp recipients, as low earners got left out of the housing and stock-market booms and then suffered worse during the recession.

The next big shift will come as baby boomers begin to retire, boosting the number of Social Security recipients 27 percent by 2018 and threatening the solvency of the program. Shilling predicts that economic growth will be so weak for the next several years that without government support, the unemployment rate will rise to 23 percent in 2018. Since that's politically intolerable, government will continue to spend money to create jobs with nearly 25 million additional Americans employed as a direct outcome of government spending by 2018.

If that happens, more than two thirds of the nation will owe their livelihood to the government, which is unsustainable for a number of reasons. It will require federal deficits far larger than the $1.4 trillion bogy we've got now, which is already alarmingly high. If irate voters don't rein in America's debt binge, market forces will, perhaps because foreigners will stop lending us the money or the rates they demand will rise and effectively bankrupt the country. Higher taxes would help solve the problem, and are probably inevitable, but enacting them on rich people alone won't be enough. At some point not too far off, the U.S. government will have to close the vast gap between its income and its spending, and the pain will be widespread.

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