Editor’s note: This is the first of a weekly series of columns produced by the Blanchard Economic Research Unit for WorldNetDaily.com. Look for this news analysis every Monday exclusively in WorldNetDaily.com.
Bill Clinton inherited a strong nation with a growing economy, a bull market in stocks and few serious threats from overseas. Over the past eight years, he has undone all that. America is weak and now vulnerable to several foreign threats; the Nasdaq just turned in its worst year in history; and the economy is on the verge of a hard landing.
It is customary in business and elsewhere for an employee or officer of a company to maintain a record of the duties and pitfalls of his or her job to present to an eventual replacement (hopefully in the event of a promotion!). That record is referred to as a “turnover file.”
George W. Bush’s turnover file is going to be quite thick.
For the first time in 20 years, a U.S. president will hand over the leadership of a nation much worse off than when he entered office. The next president will find a deteriorating economic outlook, a bear market in stocks, a huge tax burden, a bloated federal government, a record trade deficit, a growing number of citizens falling deeper into debt, ongoing Social Security and Medicare problems and a nation considerably less safe and secure. For individual investors, the lesson here is that historically, it has been very difficult for financial assets to thrive in such conditions.
In fact, the scenario that appears to be unfolding today is not unlike that which existed during much of the 1970s, when America was racked by stagflation, one oil crisis after another, miles and miles of wasteful government “red tape” and a deteriorating international situation. Because that decade saw two truly nasty bear markets in stocks and gold prices rising from under $100 per ounce to over $800 per ounce, investors today should closely examine the conditions that George W. Bush is inheriting from Bill Clinton.
President-elect Bush will enter office hamstrung at home with questions over the legitimacy of his election, a divided Congress and a downturn in the economy. These difficulties for the world’s dominant power will accelerate global realignment and spark increased tension and the potential for conflict.
–The Next U.S. President and the Law of Unintended Consequences
Strafor.com Global Forecast for 2001
The chances are good that (George W. Bush) will be one of the most feeble American leaders the world has seen in more than a century — a leader who will be residing over a deeply divided public, an equally divided Congress, and a political environment that has been horribly poisoned by post-election shenanigans.
–Mark Mitchell, “Either Way, A Bad Precedent,” Far Eastern Economic Review
Clinton and Gore will bequeath to Bush a multitude of significant domestic and foreign problems and a disturbingly polarized nation. Only purely partisan Democrats could relish the irony of Clinton luxuriating for eight years in a robust economy and military he inherited from Reagan-Bush and then squandering both just in time for a hapless Republican to take the fall for them.
Clinton is retiring with a nation convinced that budget surpluses will abound in the foreseeable future. Yet, these surpluses depend on economic growth, and signs are pointing toward a major slowdown.
Tensions are on the rise throughout the globe: between China and Taiwan … in the Middle East … Iraq, aided by the absence of U.N. weapons inspectors, continues its development of weapons of mass destruction … and Russia warns that we are an arrogant superpower.
As a parting shot, Clinton and Gore … have fostered the illusion that Bush was the culprit, adding further fuel to the divisive embers that threaten the fabric of our society. In short, Clinton and Gore are leaving Bush and Cheney with a monumental mess on a multitude of matters.
–David Limbaugh, Bush’s Daunting Challenges
The return of stagflation
During the 1992 election, Bill Clinton’s battle cry was, “It’s the economy stupid!” He was fortunate enough to inherit the economy at a perfect time in the business cycle: just after America had fully recovered from a recession. Unfortunately, for George W. Bush, he may be inheriting the economy just as a “perfect storm” is forming.
The Bush administration will soon find itself having to revive a U.S. economy suffering from the combined effects of an oil/gas price shock and a severe bear market in the Nasdaq stock market.
For most of 2000, the Fed was worried about inflation, due to rising oil prices and nine years of uninterrupted growth. Now, almost suddenly, the Fed is worried about a slowdown in the economy. The only problem is that oil prices are unlikely to decline further, and they could still climb significantly higher, especially in the event of a crisis in the Middle East. Expensive energy has hit the U.S. like a double-whammy: raising the cost of living (inflation) and acting just like a tax increase on the economy. In one word: stagflation.
Rising energy prices and the bear market in stocks have taken a toll on business and wealth creation in America.
Clearly, just as occurred in the 1970s, the Fed is playing a guessing game about economic conditions. Many variables could mess up their equations. This is nothing new; it is the natural result of stagflation. In the 1970s, when the Fed was faced with a similar set of circumstances, they guessed wrong, were too accommodative in terms of monetary policy, and threw gasoline on the inflation fire. Make no mistake: The same thing is in danger of happening today. If the Fed cuts rates too much, they run the risk of igniting inflation — and inflation is like toothpaste. Once it is out, it is awfully hard to get it back into the tube!
Experts agree that the economic conditions that Bill Clinton is bequeathing to George W. Bush are anything but positive:
The fuel that propelled the boom is running out, and the excesses of recent years are going to be exposed as the economy weakens and the tech bubble deflates. Investors should not assume that things would unfold in an orderly fashion.
–Bank credit analyst
The economy was a good friend to the Clinton administration and it is just not going to be as friendly to the next administration.
–Mark Zandi, chief economist, Economy.com
But economic indicators do not inspire confidence. The stock market is swooning, private debt exceeds the country’s GDP, and energy prices are at their highest level since the Persian Gulf War. The economy is more vulnerable than ever to external — or internal — shocks.
–“Global Economic Outlook Neither Merry nor Bright,” Stratfor.com
A Bear Market in Stocks
Most investors have come to realize that the steep decline in the Nasdaq is more than a short-term correction. The year 2000 will go down as the worst year in the Nasdaq ever. The Dow-Jones Industrial Average and the S&P 500 were also down for the year. Most importantly for President Bush and individual investors, the bear market in the Nasdaq may be far from over, and it may just be getting started in the other two indices.
In order to get an idea of what to expect in the future, it is useful to take a look at what caused the carnage in the first place:
A series of rate hikes by the Fed played a major role in the downfall of the Nasdaq, but interest rates obviously don’t tell the whole story, because the Nasdaq fell nearly 50 percent from its highs while the Dow and S&P 500 fell much less.
Earnings reports played the chief role in the Nasdaq fall. Many companies had no earnings to report, so the “Internet-tech bubble” burst. Companies like Pets.com and Furniture.com, once the darlings of Wall Street, simply ceased to exist. Even so-called “blue chip” Internet firms took huge hits. In late December 2000, Yahoo was down 88 percent from its peak. Investors were playing a grown-up game of musical chairs and, suddenly, everyone was afraid they wouldn’t have a chair when the music stopped. So, they sat down. Lots of folks didn’t have a chair.
The price of oil skyrocketed to well over $30 per barrel. Natural gas prices skyrocketed also. The complete absence of an energy policy over the last eight years, combined with almost non-existent U.S. exploration, left America vulnerable to OPEC. We even started importing 750,000 barrels of oil per day from Saddam Hussein. Despite assurances that oil no longer mattered and Labor Department manipulation of inflation gauges to hide the effects of oil prices from voters, the high oil prices did hit American consumers and investors — hard. The impact of inflation on real economic growth was clearly illustrated for the first time in 20 years. Inflation due to higher energy prices robbed our wealth once again. The result was a stagnant economy, lower earnings and a bear market in stocks.
Investors were rudely re-introduced to the impact of international tensions on the financial markets when the crisis in the Middle East bubbled over and the USS Cole was bombed by terrorists. The renewed violence in Israel and the re-emergence of terrorism as a threat to the United States racked the financial markets.
Finally, the added anxiety created by the legal challenges that followed the outcome of the presidential election played a major role in shutting down the bulls on Wall Street.
Now that we’ve looked back on the recent past, we should take a look forward to see what the prospects for the stock market could be in 2001:
Interest rates are about the only factor that are likely to help the stock market in 2001. In a surprise move that would seem to signal the level of concern over the economy, the Fed eased rates just after New Year’s. However, looking forward, should the Fed not meet Wall Street’s expectations, the effects could still be ugly. If inflation fears return, the Fed may not lower rates for long, or they may not lower them as much as Wall Street is hoping.
Earnings are likely to continue to disappoint in Q1 as there is nothing happening in the economy to indicate that the dismal earnings picture will improve any time soon. This factor, more than any other, caused the carnage in 2000 and will take the blame for poor performance in 2001 also.
We can only hope that the price of oil stays under control in 2001. Unfortunately, there is a great deal of uncertainty surrounding the future of the oil market. U.S. consumption is likely to be very high as this winter is turning into a severe one. On the supply side, OPEC is due to meet soon and the talk is of production cuts not increases.
It is tempting to dismiss the global impacts of an oil shock. Yet the record of history argues very much to the contrary. Each of the previous three oil shocks — 1973, 1979 and 1990 — actually triggered global recessions. History does not look kindly on the view that an oil shock is a non-event for the global economy. My greatest concern for world financial markets is that an oil shock is inherently stagflationary — it both cuts output and increases inflation. Many of today’s investors were still in diapers during the great stagflation of the 1970s. Those who weren’t will never forget the darkest period in modern financial market history.
–Stephen Roach, Morgan Stanley Dean Witter
Of course, the wild card in the oil market is the Middle East situation and the Arab-Israeli conflict. Saddam Hussein is re-asserting himself and influencing the Arab-Israeli situation. Iran and Iraq have even set aside their differences to funnel arms to anti-Israeli forces, and Iran continues its massive arms build-up. Syrian forces are dangerously arrayed close to Israeli forces along the Lebanese borders. Of course, Israel is where the powder keg rests. For the first time in a very long time, there is open talk on both sides of a wider Arab-Israeli War.
The presidential election is over, but its effects certainly are not, and the controversy will likely haunt the Bush administration for some time. This will create internal political conflict and uncertainty, two things the stock market hates.
Noted experts agree that the outlook for stocks is stormy and the flu that the Nasdaq suffered from is likely to spread to the Dow in 2001. The most disturbing statement came from one of the most respected newsletter writers on Wall Street, Richard Russell, who predicts that “the Dow-Jones Industrial is headed from its current levels over 10,000 to as low as 3,000 to 4,000. We’re already seeing clear signs that the U.S. economy is turning down. The dollar also is topping out. With so many dollars held abroad, a flight from greenbacks could be very bad for U.S. financial assets. My instincts tell me that we could be in another eight-year bear cycle, with the final low not seen until 2005, and the waterfall decline still two, three or four years ahead.”
To sum things up, the factors that contributed to the bear market debacle in the Nasdaq during 2000 all remain in place as we enter 2001. There is really very little any president can do to influence the stock market, but Bush may still get blamed for it!
The return of big government and a huge tax burden
Bill Clinton assigned Al Gore the task of “reinventing government.” As a result, government has grown out of control. Not surprisingly, the nation’s tax burden has grown right along with it.
Clinton claims that he eliminated 300,000 federal jobs. What he doesn’t want you to know is that 75 percent of those jobs were in the Department of Defense! Since 1993, the federal government’s monthly payroll has gone from $5.9 billion to $7.4 billion. Overall federal outlays have reached an astounding $1.8 trillion — 20 percent of our GDP and an increase of 50 percent over 1990 levels! Keep in mind that during this same period, defense spending fell 49 percent to just 16 percent of total federal spending.
Federal regulation has also increased as the government has grown. In 2000, 54 federal agencies with more than 130,000 employees spent $18.7 billion writing and enforcing federal regulations. The Competitive Enterprise Institute estimates that the total federal regulatory burden costs Americans $700 billion, or about $7,500 per year for every typical American family. The General Accounting Office acknowledges that the Code of Federal Regulations increased by 29,000 pages under Bill Clinton. Unfortunately, it is much easier to enact government regulations than it is rescind them, so big government will be like a weight tied to the stagnating economy.
Another cost of big government is our mushrooming tax burden. For the average American household, taxes exceed the costs of food, clothing, shelter and transportation — combined. Since Clinton took office, the amount of money the federal government has collected each year from its citizens has grown by $100 billion. In fact, government tax collections have outpaced the rate of inflation by a whopping 250 percent. According to the National Center for Policy Analysis, federal taxes consume 25.9 percent of the average American family’s income, and state and local taxes abscond with another 13.1 percent.
But the most telling statistic that illustrates the growing tax burden and size of government is this information from NCPA: The federal government’s take from personal income taxes is at an all-time high — 9.6 percent of Gross Domestic Product. The previous record was 9.4 percent of GDP — in 1944, at the height of World War II.
That’s right, the federal government’s share of money taken out of our economy is higher under Clinton than it was when America was creating the “arsenal of democracy” to save the world in the greatest conflict in the history of mankind! And, remember, defense spending is down 49 percent since Clinton got in office.
Big government, high taxes, heavy regulation — they all have a huge cost for our economy, a cost that hasn’t been felt yet, but which will be felt under the new Bush administration. Just like the Nixon, Ford and Carter administrations suffered under the aftermath of the Johnson administration’s excesses, President Bush is inheriting a mess:
Most economists now agree President Lyndon Johnson’s exorbitantly expensive Great Society initiatives paved the way for eventual stagflation under President Jimmy Carter. Big government undermines economic growth. And a sluggish economy results in poorly performing equities markets.
- After the Dow Jones Industrial Average increased 10-fold during the period 1942-1966, President Johnson launched his Great Society — halting progress and bringing stock gains to a standstill for 17 years.
- After peaking at nearly 1,000 in early 1966, the Dow suddenly shifted into idle — or, on an inflation-adjusted basis, fell 70 percent between 1966 and 1982.
- While government spending bloomed … unemployment rose … inflation shot up from 1 percent to 13 percent, interest rates soared and the economy was in recession one out of every four years.
In addition, taxes and regulation exploded.
It was not until President Ronald Reagan rolled back the Great Society experiment and cut taxes substantially that the stock market and the economy took off once again.
–Brian S. Wesbury, “Caveat Investor: Surplus Politics Is Bad News for Stock Market,” Investor’s Business Daily, Sept. 26, 2000
Today, many economists worry that the huge growth of federal spending and regulation, accompanied by an unprecedented tax burden, will derail our economy and keep the stock market stagnant for years. A look at today’s economic conditions would lead one to believe that is exactly what is happening.
The trade deficit
Bill Clinton is leaving the United States the largest trade deficit we have ever seen. This “forgotten” deficit is neither desirable nor sustainable.
The deficit significantly increased in each year of the Clinton administration — growing from $39 billion to $360 billion — an increase of nearly 1,000 percent.
The United States is essentially living on borrowed money and borrowed time:
This cannot go on forever. In the long run, you cannot borrow $400 billion a year from abroad. It may not be a problem for the next two years, but it is probably a problem in the next five years. We’re basically selling off the country to foreigners.
–David Wyss, chief economist, Standard & Poors
The reason that we have been able to sustain the trade deficit as long as we have is because foreigners, who have made a lot of money selling goods to Americans, have then invested much of that money into U.S. stocks and Treasury securities. But the bear market in stocks and approaching “hard landing” may change all that as foreigners become less attracted to our sluggish markets.
Worse yet, large foreign holdings of our Treasury securities put our entire financial system at risk. Among the holders of Treasuries are foreign governments, including Red China, the 3rd largest holder of our Treasury securities, with over $105 billion in holdings. This leaves our financial system vulnerable in the event of a dispute:
Foreign governments increased official dollar holdings from $432 billion in 1989 to about one trillion in 1999. At some future point, large dollar holders, such as Japan and China, could threaten to sell dollars or shift them into euros and other currencies, as bargaining leverage against the United States related to trade or national security issues. One Japanese prime minister has publicly spoken of the temptation to sell dollars, and Chinese military strategists have published studies about integrated warfare with the United States, including financial markets.
–Dr. Ernest H. Preeg, The Hudson Institute,
“The Trade Deficit, the Dollar and the U.S. National Interest”
More and more observers are worried about the potential impact of the trade deficit and about the fact that much of the deficit is with Red China. In fact, America’s trade deficit with Red China set a record for a deficit with one nation:
Mr. Speaker, America’s trade deficit for September hit $35 billion for one month, $35 billion. America is heading for a $420 billion, one-year trade deficit. Unbelievable. If this continues, America will have a crash that will make 1929 look like a fender-bender. What is even worse, China is now taking $100 billion of cash out of our economy, buying missiles, and pointing them at us. Beam us up, all of us. We must be stupid. Ronald Reagan almost destroyed communism, and the Clinton administration has reinvented it, is now subsidizing it, and is now stabilizing it.
–Rep. James A. Traficant, D-Ohio, speaking before the House of Representatives, Dec. 5, 2000
If foreigners sell off U.S. Treasuries, the impact would be substantial. It would result in a steep rise in interest rates, a collapse in the bond market, a dive in stocks, a rapidly sinking dollar and monetary inflation. Clearly, the Bush economic team must do something about the trade deficit before it gets out of hand.
The debt bubble
During the past decade, most U.S. investors were able to make a lot of money in the stock market. However, many new investors lacked the skill or knowledge to successfully navigate the stock market, especially for the long-term. Exuberant over short-term gains, many became greedy. Borrowing against everything from their homes to their 401(k) accounts, they began setting themselves up for major losses. The national savings rate dwindled to record lows while private debt soared to record highs.
Many Americans will not be able to repay their debt or pay their bills because their equity portfolios have dried up and they have no savings to fall back on to support their lifestyles. Consumer debt, which includes credit card debt and margin debt, is at an all-time high and personal bankruptcies have set new records in both of the past two years. Unfortunately, the only thing that will bring margin debt down to historical averages is a fall in the stock market.
(Margin debt) still represents a huge debt load overhanging the market. Historically speaking, we should expect at least half of it to be unwound in the next bear market. If this is the bear market, we have a long way to go.
–James Stack, InvesTech market analyst
Even observers from the left of the political spectrum seem to be wary of Bill Clinton’s economic legacy:
But a stratospheric rise in stock prices and a debt-financed consumption spree make a mortgaged legacy. Clinton will hand over to his successor the most precarious financial pyramid of the postwar period.
–Robert Pollin, The New Left Review
The mountain of debt poses a serious threat to the U.S. economy — a threat that President Bush and his economic advisers will somehow have to deal with.
Social Security and Medicare
Bill Clinton entered office pledging to “save Social Security and Medicare.” Instead, he left these problems for the next administration to tackle. By failing to act on Social Security and Medicare, Clinton may have exacerbated the entire problem and made any possible solution more painful.
In the not-too-distant future, the work force contributing to these programs will be about 1/3 the size of the retired population drawing benefits. Because of that, these two programs are simply unsustainable in their present form.
Medicare’s problems are especially acute. Medicare’s Health Insurance Trust Fund is already paying out more in benefits than it is collecting in taxes. Some analysts predict that Medicare will become insolvent in 2008 if something is not done to fix it.
Meanwhile, Bill Clinton has triumphantly declared victory over the nation’s federal budget deficit when he knows that federal receipts have been augmented by money from the so-called Social Security Trust Fund — a fund that was supposed to be set aside for the future of the program, but which is instead full of IOUs from the federal government as it pays current expenses with Trust Fund money.
While the problems with Social Security and Medicare may seem years away, solutions need to be arrived at soon and they will not be painless. Some combination of tax increases and benefit rollbacks are likely, something most economists and public policy makers have not entered into their forecasting calculus.
A dangerous world
While national security issues have faded into the background, Bill Clinton’s failings almost guarantee that they will come to the fore once again. The United States is neither as strong nor as secure today as it was 8 years ago. This is the first time since the 1930s that an American president has actually made America less secure during his term in office.
When George Bush handed the presidency to Bill Clinton, what did he get? A world so pacified that for the first year or more of his administration, Clinton didn’t even have to pay attention to world affairs. Saddam was bottled up, Russia was on its knees. Yugoslavia was restive, but so far, not disturbing the peace of the world. … China was weak and shamed by its Tiananmen Square slaughter in front of the world’s media. The military operation against Iraq showed the world that American firepower could subdue a regional power with relatively little sacrifice on our part. Now look around us. … Thanks to Clinton/Gore, by the time children now in school come to adulthood, the world will be far closer to its complexion before Reagan. Eight years … has served to make the world a much more dangerous place. Is there a single potential enemy to U.S. interests that is not many times stronger and more confident now than they were before 1992?
–Sam Schulman, “The Clinton Legacy: A World in Flames,” The Jewish World Review
A survey of the world scene spotlights U.S. policy failures in almost every corner of the globe. … The world bequeathed to (George W. Bush) by Bill Clinton is one made more dangerous because of opportunities missed since George W.’s father relinquished the presidency in 1993.
–George Melloan, “Clinton’s Foreign Policy Blunders Need Correction,” The Wall Street Journal, Nov. 28, 2000
(Our military) has been neglected by the Clinton-Gore administration to the point it cannot respond adequately to a two-front war. No longer is the United States militarily invulnerable. It is now enticing invitation for attack. And there are determined enemies out there just nuts enough to give it a try.
–John L. Perry, “Lost Out There in the Chads”
President Bush will face an array of brewing crises around the globe:
- The Arab-Israeli Conflict. When Clinton entered office, the Arabs and Israelis were probably closer to reaching a lasting peace than ever. Today, for the first time in a generation, the two sides once again speak openly of going to war.
- Rogue Nations. No fewer than 20 nations now have ballistic missile programs. Even Iraq has restarted its program. Iran and North Korea could soon deploy Intercontinental Ballistic Missiles capable of reaching America from their shores. Libya is believed to be near to deployment of ballistic missiles capable of striking all of Western Europe.
- Red China. While Clinton befriended the Chinese, they stole our nuclear secrets, declared us enemy No. 1, repeatedly threatened to invade Taiwan, and embarked upon a huge conventional and nuclear arms build-up.
- Russia. Despite the fact that Russia defaulted on foreign debt payments, they have managed to scrape together enough money to modernize their military. Perhaps they did so with cash from arms sales to nations like Iran and Red China.
- Latin America. As Clinton leaves office, a Chinese shipping company is in control of port facilities at both ends of the Panama Canal, Cuba has signed a defense agreement with Red China and Marxist rebels and drug lords are close to gaining complete control over Colombia in a bloody civil war.
- Terrorism. The recent attack on the USS Cole and the attacks on two American embassies in Africa in July 1998 drove home the point that America still faces brutal enemies who will stop at nothing to attack our citizens.
The fact that these issues exist is alarming enough, but even more alarming is our inability to deal with them. Take a look at the list of defense cuts on Clinton’s watch:
700,000 active-duty military personnel
290,000 reserve personnel
8 Army divisions
2000 tactical combat aircraft
232 strategic bombers
13 fleet ballistic missile submarines
232 Sea Launched Ballistic Missiles
500 Intercontinental Ballistic Missiles
4 aircraft carriers and their air wings
121 surface combatants and fast attack submarines
The Clinton administration’s propensity for cutting defense spending could jeopardize America’s ability to meet its security commitments if a crisis were to develop, for example, in both the Persian Gulf and Asia.
–The Heritage Foundation
Our ability to deal with the growing threats has been severely degraded. America should be prepared for the years to come and so should individual investors. The next eight years will likely be quite different from the past eight years.
The Blanchard Economic Research Unit is the research division of Blanchard and Company, Inc., America’s largest retail dealer in gold, silver, and platinum bullion, as well as rare coins and other hard asset investments. The Unit analyzes a variety of economic topics that affect the investment markets. It also examines geo-political and strategic issues and events that have historically impacted the precious metals markets and the financial world. Through an extensive network of contacts around the globe, the Unit provides periodic forecasts to help Blanchard and Company’s clients anticipate changes and events before they occur. In addition to the bulletins and special reports available on this site, the Unit publishes the Market Alert newsletter. For more information, call Blanchard and Company at 1-800-880-4653.