Toshio Matsuda, Commentator & Intl Economist

Straight from the Shoulder No.524

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During the two months from when the (market hit) bottom on March 9 until last Friday when I issued a “sell order” (May 11), global stock markets, particularly those in the U.S. and Japan, experienced an exceptional rally because of signs that major U.S. banks, the driving force behind the present recession, were close to being out of danger and that the U.S. economy was breaking free of the recession. Noting that this was a “bad joke,” I said that excessive pessimism and optimism was over, and now true market prices would become evident.

I meant that the market will show its true colors not the dreams or desires (of market participants).

The market will likely fall as various problems arise, including the fiscal deficit created by the Obama administration, the unemployment rate, Social Security (pensions), and Medicare (medical insurance), which will likely undermine faith in the U.S. dollar.

The U.S. fiscal deficit, which was $1.2 trillion (around \120 trillion) when Obama was inaugurated, has ballooned to $1.84 trillion (around \184 trillion). This means that the deficit has increased $60 billion (around \6.0 trillion) over four months. It is only a matter of time before the unemployment rate, which is presently 8.9%, will surpass 10% as the stress test of banks projected an unemployment rate of 9.5% in the near future. The big three (U.S. car manufacturers) will eliminate the equivalent of 2,000 dealerships generating more than 100 thousand employed. On the other hand, working hours have shrunk to 33.2 hours a week, the shortest since World War II, which will further weigh down labor income. Social Security (pensions) and Medicare (medical insurance) expenditures account for more than one-third of the national budget and are growing more than $1.0 trillion (around \100 trillion) a year, making them the largest financial burden. Last week the Obama administration announced that Social Security expenses will surpass Social Security revenues starting in 2017, and the system will go bankrupt in 2037. While Obama’s only trick to reduce expenditures is medical care reform, he is moving forward with a policy of expanding coverage that will costs between $1.0-1.5 trillion (\100-150 trillion) over ten years. Annual reductions in Medicare expenditures of \309 billion (around \31 trillion), which have been criticized as being impossible to implement, are only a drop in the bucket. As for measures to prevent the collapse of the Social Security system, the Obama administration is aiming to raise the eligibility age, eliminate or reduce benefits, and cut costs, but it will be impossible to cover the complete deficit. None of these ideas are new; there are been calls for these measures for many years, but it has been impossible to implement them. Of course since Social Security and Medicare are the greatest responsibilities of the government, they will not go bankrupt since deficits can be covered with taxpayer money. Therefore, President Obama has set his sights on raising taxes on the wealthy in the U.S. Around 75 % of the wealthy in the U.S. are owners of medium- and small-sized business, which possess assets such as leading technology and have been the engines of economic growth. Burdening the risk-taking class with heavy taxes in the midst of the present recession is plucking the bud of growth. While “squeeze it from the wealthy” sounds good, it may likely kill the U.S. economy. Since 1939, Social Security trust funds have only been able to be invested in U.S. government bonds. This is like “a family borrowing money from the family pension fund, continuing to pay growing expenses, and when the time comes for the person to retire, there is only his own IOU in the pension account.” While hard to believe, that is the present U.S.

The way to hasten a recovery in the U.S. economy is not for the government to bail out businesses such as banks but to do nothing, though it may be called responsible, and let businesses fail even if it leads to the worst conditions in history. This has always been my philosophy. At the present rate, the economic recovery is being pushed farther and farther away.