Why the Election Will Dictate Which Way America Goes
Monday, November 5th, 2012
By George Leong, B.Comm. for Profit Confidential
The outcome of Tuesday night will be critical not only for the direction of the country on both the political and economic front, but also on the direction of foreign policy.
The latest national poll by CNN has the race to the White House at a dead heat, with Obama at 48% and Romney at 47%. In the key Ohio race, support for Obama has fallen from 52% on October 2 to the current 50%, but that two percent could be enough to win back the White House.
At this point, I don’t really care who wins, but something will need to be done about job creation, the $16.2 trillion in U.S. debt, and the pending “fiscal cliff.”
Whether you are a Democrat or a Republican, you know that we need job creation. The October non-farm job creation report showed 171,000 new jobs, which was better than expected; but there is a long way to go, as the job creation reading is too low to drive the unemployment rate down. The unemployment rate is well below the four-percent level in 2006 and 2007.
Obama and Romney have different strategies for lowering the unemployment rate and driving job creation. While Obama wants to extend the Bush-era tax cuts to those making under $250,000 a year, which represents the majority of working Americans, Romney wants the cuts to apply to all income earners. While I’m not here to take a side, the importance of the tax cuts are critical to the low- to middle-class Americans. Without the extra cash, this key spending group will likely be hesitant to spend, which in turn would restrict the money flow into the retail sector and, ultimately, restrict the economic recovery and job creation.
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Moreover, the current lack of focus on the pending fiscal cliff on January 1 is worrisome, but I expect nothing will be done until the election is over. The problem is that a significant cut in fiscal spending due to the automatic budget cuts could make the economy worse, according to the Congressional Budget Office (CBO). The CBO predicts the U.S. economy could contract by 0.5% in 2013 if the spending is curtailed, and this would affect job creation. (Source: Congressional Budget Office, last accessed November 2, 2012.)
Of course, there are assumptions about the budget and how to cut it while being cautious to not stall the economic recovery and impact job creation. For instance, defense spending is expected to be reduced, but with a potential mess brewing in Syria and Iran, the emergence of another conflict involving America could push the country of the path to economic recovery. And then there’s the military build-up in China, to which I know America will not turn a blind eye.
There is also the issue of the effectiveness of QE3—the third round of quantitative easing put forth by the Federal Reserve. (Read my views on this in “QE3 and the Rich: What Stocks Will Benefit?”) So far, quantitative easing has done little to drive job creation and the economy. The Fed is spending $40.0 billion a month to buy mortgage-backed securities to lower the financing rates and help to drive the economy and job creation. Yet the current yield on the 10-year Treasury stands at 1.76%, versus 1.84% prior to the establishment of QE3. Something isn’t working. The uncertainty is that if Romney wins, it is speculated that he will dump Ben Bernanke and handpick his own Wall Street crony.
So there are plenty of uncertainties, but tomorrow, we will see what direction America takes.
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