Monetary Cards on the Table

August 19, 2010 at 7:32 PM

In a commentary about a month ago, I described how the economic world seemed to be drifting into two opposing camps: the Washington-based “Stimulators,” who insist that more government debt is the best means to end the financial crisis, and the Berlin- and London-based “Austerians,” who argue that debt is the crisis itself. If recent economic data and currency movements can be considered votes of confidence, then the Stimulators should be sweating. Moreover, these recent signals should provide economic analysts and investors with a road map for the future.

To start, the latest economic news for the US has been bleak. Although 2Q GDP figures show the economy to be “expanding” by 2.4%, the pace is little more than half the average rate over the previous two quarters. What’s worse, US debt levels are expanding faster than GDP.

As everyone with a credit card knows, it’s easy to expand spending if you charge it. But even this borrowed growth has failed to make a meaningful dent in persistent US unemployment. The just-released July payroll report shows the American economy shed another 131 thousand jobs, marking three full years of private sector layoffs.

Almost lost in the news is the disappointing reversal of US trade flows, which in May unexpectedly widened to the highest level in 18 months. In other words, the weaknesses that pushed our economy into crisis in the first place show no sign of abating.

In countries which have decided that further government economic stimulation will produce more harm than good, the story is markedly different.

The remainder of this article and even more in-depth analysis of other investment topics are available in the August edition of my newsletter, The Global Investor.The current issue takes a look at economic developments in China and Canada, and gives overviews of two companies we think have great potential in this changing world. The esteemed John Browne also provides some thoughts on the just-passed Financial Regulation law.