Main Street Financial Solutions Newsletter

We have been getting this question from our clients. The answer is simple – no one really knows!

The biggest difference in my view is that in 2008, there was real concern that the entire worldwide capitalistic system would end with immediate depression, rampant crime and an overall catastrophic breakdown of society – essentially the end of the world as we knew it.

This was averted through the strong actions of governments worldwide and the Federal Reserve. While disaster was averted (please understand I am NOT defending all the policy moves during that time), I feel 2011 could be different because the current worldwide economic malaise could last, perhaps 3-5 years or longer. Also, we were wooed into thinking the economy was getting better in 2009 and 2010 and that happy times were right around the corner. Unfortunately, this was NOT the case.

While capitalism may not be threatened as directly or immediately as it was in 2008, here are my reasons for adopting a cautious outlook regarding the prospects for economic growth worldwide for of the next few years:

The US government is in poorer fiscal shape than they were in 2008 with deficits and the national debt ballooning to record levels.

Europe is a total mess – The “euro” zone currency is grappling with the nearly bankrupt economies of the “PIIGS” countries (Portugal, Ireland, Italy, Greece and Spain) which, without German financial backing, may NOT survive fiscally and may be forced to exit the “Euro”.

Governments worldwide do NOT have the tools available to help the economy break free of low growth or recession. Simply put, there is little or no appetite for another round of government stimulus spending in the US or around the world as budget deficits (noted above) are exploding.

The Federal Reserve has fewer options to help grow the economy. For example, the Federal Reserve uses its power over interest rates and US Treasury purchases to keep interest rates low. However, rates are near zero and the Fed has been buying hundreds of billions of Treasuries (called Quantitative Easing or QE) with little impact of the broader economy. To use a simple metaphor, the Fed has no more bullets left in the revolver.

US and European consumers are still overburdened by debt from all sources, be it credit card, mortgage, student loan, etc. and will need to continue to deleverage over the next 3-5 years or longer. This will lead to continued weak demand (typically consumer spending accounts for 70% of spending in the US).

State governments no longer have the federal government to help bail them out as the federal government tries to get its own fiscal house in order. The states will have to live within their means despite lower revenues (fewer people working/paying taxes) and huge legacy costs from pension and medical guarantees.

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