US economy vs. government

The underlying economy is much more important than the Federal Open Market Committee.

By Stock Traders Daily Apr 15, 2013 4:46PM

Image: Taxes (© Thinkstock/SuperStock)There is a metaphoric war being waged right now between the underlying economy and the federal government.

The Fed has being trying to avert economic weakness by all means, but that conflict has also put many investors at risk -- which in many ways also reflects the unwitting enthusiasms that existed before the Internet bubble burst, and before the credit crisis was considered a problem.

Not unlike two Greek Gods fighting at the top of a distant mountain peak, this war between the real economy and the government will likely have a material impact on all of us, so it is important that we know exactly what is happening in the underlying economy.

I believe we can see what the government is doing, we know the tax hikes, we know the stimulus efforts and I have already calculated that data for clients of Stock Traders Daily, so the focus here will be on the underlying economy part of the issue.


Economies are defined by the people that exist within those economies. This has been true since the very first economies were documented in history, but those economies were not nearly as advanced as ours. 

Today, we hear that institutions govern the markets, we hear of these multi-billion dollar funds taking huge stakes in companies and we realize that we are just a pawn in the game.  That is true when we take only ourselves into account, but when we include everybody else something amazing happens, the balance of power shifts, and the people actually far dominate the funds that at first glance seem to be in control.  The only reason they even have any power is because we have given it to them.


That makes people the most important thing in our economy as well, and there are two specific ways people influence the economy: spending and investing.

My conclusions suggest that each of these has very different influences, with investing being the most important in my judgment.  The investing decisions of the public largely determine economic cycles according to my observations, and spending only acts like a chaos-like boundary around those pre-defined cycles.  More specifically, the rate of change in the investment patterns of individuals is exactly what governs longer term economic cycles, and the spending variable when compared to the economy allows for oscillations not unlike those we see in stock-market charts, except in this case it is around longer term investing cycles.


Even more specifically, the money already invested today cannot be considered to be a growth catalyst to the economy or the stock market, so an even more refined approach is to focus solely on the rate of change of new money able to be invested into the U.S. economy, and in that way we would be able to determine the future natural health or weakness that will exist.  This will help us identify why past economic cycles were like they were and, if done correctly, it will also give us foresight into what economic cycles might look like in the future too.


In fact, it is this exact quality that makes the study I have conducted so important.  My model, The Investment Rate, suggests the natural state of our economy is one of severe weakness, like during the Great Depression and Stagflation. I know some people will balk at that statement, given where the stock market is, but in the 1970s the markets experienced 50% declines and 100% recoveries too; that weakness lasted for 10 years and we are not even through with six in this down period. 

In addition, according to The Investment Rate, this down period is much longer than the prior two -- so declines like what we saw during Stagflation can happen again and are likely to.  In addition, the rate of change in this third major down period in U.S. History also becomes much more negatively sloped after 2012, that means right now, and it is that which we must consider when making our evaluation of the true underlying economy.


According to the Investment Rate the natural cycles of our economy suggest we are in the third major down period in American history. But it also tells us the conditions worsen naturally for the next few years at least.  This is happening on one side of the battle between the economy and the government, while the FOMC fits in there somewhere too, but it is there that this battle becomes clouded and investors become confused.


The purpose of this article was to disclose that The Investment Rate tells us that the rate of change in the decline for new investments declines even more measurably starting after 2012 -- so that investors can more accurately assess the added risks that exist.  I will simply leave the other side of the battle with a question: do you really think the Government (including FOMC) is stimulating the economy?



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