Being Street Smart

Sy Harding

Kicking The Can! May 13, 2011.

The economic catch phrase of the year has become ‘kicking the can down theroad’, applied to all the problems that are not being solved, but are simplykicked further down the road.

It’s an apt description, as it is exactly what’s happening.

But what else could we expect?

After all, the election is only 18 months away, and it’s well known inWashington that the most important factor coming into an election is the stateof the economy at the time. So it’s normal for Washington to do whatever itmust to make sure the economy and stock market are in good shape when electiontime rolls around again.

However, it’s different this time. Normally the economy and stock marketperform poorly in the first two years of the Four-Year Presidential Cycle, asWashington allows any needed correction of excesses to take place then, ratherthan take a chance on them taking place in the last year or two before theelection.

But the economy and stock market have been positive for the first two yearsof this cycle, with substantial stimulus efforts already expended to keep thempositive.

So the question is whether kicking the problems further down the road cancontinue for the full four years without a hitch, that is for another 18 monthsuntil election time arrives.

It’s a lot to expect, and the indications are not promising.

For instance, the European debt crisis has popped up again to threateneconomies and roil markets.

It first appeared a year ago when it became clear that Greece would not beable to meet upcoming payments on its massive government debt. Fears rose thatthe crisis could spread to other European countries with high debt levels, andglobal stock markets began to decline on the concerns. So the central bank ofthe European Union, and the International Monetary Fund, joined forces to kickthe problem down the road by providing loans that would allow Greece to makeits upcoming debt payments.

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The crisis returned and the EU and IMF gave the problem another kick downthe road, and then another. When it appeared last week that Greece was again onthe verge of default, the EU and IMF came up with another 0 billion in proposedloans that will hopefully delay a potential default until late next year.

Meanwhile, as feared, the debt crisis did spread, to Ireland and Portugal.This week the IMF released a report saying it does not expect the bailout loansmade so far will end Europe’s debt crisis, saying “Strong policy responses havesuccessfully contained the financial troubles in the euro area periphery sofar, but contagion to the core euro area, and then onward to other Europeancountries, remains a tangible downside risk.”

Yet already we see the growing economic problems created by the austerityprograms imposed on countries as requirements for the loans. Greece isexperiencing labor strikes and public uprisings to protest the cuts ingovernment jobs and benefits, while it was announced this week that the Greekeconomy has already dropped back into recession, with back-to-back quarters ofnegative GDP.

Meanwhile, nations which have been the leading economies, including Brazil,Russia, India, China, and Hong Kong, have seen their stock markets topped outsince November, apparently in anticipation that their reversal of previousstimulus programs will result in economic slowdowns.

It is a potential warning for the U.S., where kicking cans down the road hasbeen the most pronounced.

When the U.S. economic recovery stalled a year ago, and the stock marketbegan to tumble, the Fed panicked and kicked the problem down the road withanother round of quantitative easing (QE2).

Meanwhile, ‘austerity’ measures that will also be required in the U.S. tohalt and reverse its record federal and state budget deficits, have beenstalled by any means possible, no doubt hopefully until after next year’selections.

Some of those delaying tactics have a look of desperation. An AssociatedPress article this week notes that the city of Newark, NJ, staring into abudget abyss, sold 16 city buildings to developers and investors, including theNewark Symphony Hall and police and fire headquarters. The article refers toproposals by state governments and/or municipalities in Wisconsin, Louisiana,Ohio, Pennsylvania, and Massachusetts to sell power plants, prisons,toll-roads, and government office buildings.

Such efforts provide a one-time chunk of cash, but give up the assets, andtoll-road income, and require making lease payments to remain in thebuildings.

But they do kick the problem down the road.

In Washington, Congress remains at an impasse on when and how to begincutting the record federal budget deficits, with proposals from both sidesseemingly intending to kick the can down the road with relatively small cuts ineach of the next two years, and more substantial cuts delayed to the yearsthereafter.

Maybe they can continue to kick the problems down the road without a hitch.Let’s hope so.

Because Congress and regulators also realize that new regulations andcontrol over the major ‘too-big-to-fail’ financial institutions must be put inplace before the next financial crisis, but are also kicking that can down theroad into the future, recently even removing and postponing some of the key newregulatory reforms hammered out only a year ago.

Sy Harding is editor of the Street Smart Report, and the free market blog,www.streetsmartpost.com.

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