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Economic Update Daryl Montgomery February 17, 2011 Copyright 2011, All Rights Reserved The contents of this presentation are not intended as a recommendation to buy or sell any security. Fiscal State of U.S. • National Debt: $14.1 trillion State and Local Debt $2.9 trillion Unfunded liabilities $112 trillion • Debt to GDP ratio 97%. • 2010 Budget Deficit $1.29 trillion. GAO refused to certify audit. • Obama Admin’s Budget Deficit projections: $1.65 trillion in 2011(CBO $1.5 trillion) $1.10 trillion in 2012 $7.21 trillion in next decade (will be higher) • 2010 Trade Deficit was $498 billion. Budget Deficit U.S. was on some type of Gold Standard left of Red Line Total Federal Outlays: 1900-2010 Right of Green Line Era of Keynesian Economics Economic ‘Growth’ • Current GDP estimates: - up 3.2% in Q4 2010 - up 2.6% in Q3 2010 • GDP by year: - up 2.9% in 2010 - down 2.6% in 2009 - flat 0.0% in 2008 (was 3.3% before 3 revisions) • Fiscal year 2010, GDP was up $635 billion after $1290 billion in federal deficit spending. • 16% of U.S. GDP is government spending from borrowed/printed money Employment Picture • February Employment Report: - 36,000 jobs created, yet number of unemployed decreased by 600,000 - this reduced unemployment by 0.4% to 9.0% - 2.8 million unemployed not counted (marginally attached), increase of 300,000. • Alternative unemployment figure was 16.1% • Benchmark changes revised total employment down by 483,000 (seasonally adj.) for December • Weekly claims 383,000 (438,000 unadjusted). These are self correcting. Unemployment Post-War Recessions Long-Term Unemployment 1949-2010 Weekly Claims Fed Policy • Fed maintains ZIRP policy since Dec 2008. • Fed on 2nd round of Quantitative Easing (QE) – a form of money printing (buying treasuries). • UK, EU and Japan also engaging in QE. • U.S. QE 1 was from Nov 2008 (announced date) to March 2010. • Fed was recycling QE1purchases last summer. • Fed announced QE2 in November - $600 billion in new bonds, $300 billion matured bonds. QE2 supposed to end in June. Fed Balance Sheet ADJUSTED MONETARY BASE – Measure of Future Inflation Non-Borrowed Reserves Adjusted Total Reserves MZM Money Supply Currency in Circulation Commercial Bank Loans: 1974-2010 Inflation is Here • Global food prices hit an all-time high in January. • ISM Prices Paid was 81.5 in January, highest number in report by far (50 is neutral). Similar in UK. • U.S. clothing prices to rise 10% in spring. Cotton just hit a 150 year high. • Gold hit all-time high of $1422 in December. • Copper just hit all-time high of $4.60. Consumers More Confident? • There are 2 surveys – Conference Board, Michigan • Conference Board number reaches an almost 3-year high of 65.6 in January after TV ratings service Nielsen takes over the survey. Nielsen seems to be producing much higher numbers. • Bloomberg reports confidence “Surges” based on Michigan survey rising to 75.1 from 74.2. Change is well within error rate of survey. • Consumer Credit fell 1.6% in 2010, 4.4% in 2009. Revolving debt rose in Dec. first since August 2008. Global Risks • Currency crisis in Europe - Greece received more money when Ireland was bailed out. - Ireland’s $120 billion bailout enough? - Portugal and Spain are next • Middle East unrest can spread and affect oil • U.S. Debt Ceiling of $14.3 trillion needs to be raised soon. • China raising interest rates.