Uncertainty reigns – in America, Asia, and, most importantly, Europe. Anyone who has been following the government’s bungling over the past few years knows that national policymakers will continue making bad economic decisions. But we don’t know what wrong policies they will be implementing. Just this week, the Fed extended “Operation Twist” in order to maintain long-term interest rates low. It has spent trillions of money to stimulate the economy. This includes large loans to Wall Street friends. What have we gotten from this? Is unemployment down to pre-recession levels? Has income and wealth improved for most citizens? Or has consumer confidence grown? ………? All of these questions would result in a huge “NO”. Real and calculated unemployment is still high. In May, 69,000 jobs were created. GDP only grew by 1.9% annually in the first quarter. Median income dropped 7.7% between 2007 and 2010 and net worth fell 39% for families with middle incomes. When adjusted for inflation, the average net worth has returned to 1992 levels. The median wage is lower than it was a decade ago. Wall Street CEOs are one of few groups that are doing well. Their pay increased 20% in 2011.
Overseas: Business activity in the Euro-zone declined for five consecutive months, while Chinese manufacturing activity has decreased. Francois Hollande, France’s new president, has proposed policies that will make it worse. His legislative cronies and he want to lower the retirement age, increase the marginal tax rate for the wealthy from 41% to 75% and hire more government workers. They also want to spend more money to stimulate growth. The prize for the most obscene economic policy would be a huge win.
MarketWatch reports that the fiscal cliff, which will take effect in January, will increase taxes by $500 billion and reduce federal spending by $130 million. Uncertainty over Congress’s ability to prevent this, and the future of Europe’s crisis management will continue to hinder business investment and job creation in the months ahead. Don’t be surprised if the unemployment situation doesn’t improve in the near future.
Despite the grim economic news, real estate is still a good investment. In some areas, where there are good schools and close proximity to major employment centers, building permits increased in May. Home values are also rising. The New York Times reported that prices in Phoenix rose 25% between April 2011 and April 2012. However, prices are still far below their peak. There are many stories of bidding wars for houses because there is not enough inventory. Over 10 million Americans still have negative equity in their homes. Many home buyers are also investors. My opinion is that the prognosis for real property will remain poor until unemployment falls, median wages rise, and shadow inventory is disposed of by banks.
More consequences could result in a country going bankrupt, we are learning now. European officials are discussing the possibility of capital controls being implemented. This would restrict the amount that individuals can withdraw from ATMs or transfer to foreign countries. “Sovereign Man,” a news site in Italy, reports that a bank frozen all accounts with approval from Italy’s regulator. It did this starting May 31. This meant that there were no ATM withdrawals or bill payments. If they suspect anyone of tax fraud, Greece will take money from citizens’ bank accounts. This is why $125 million leaves the Greek banking system each day. Governments can steal capital controls.
Are capital controls possible in the United States? Absolutely. It is unlikely that this will happen in the near future, but it is worth keeping an eye on the situation. The government will take ever more drastic decisions as the economy declines and becomes uncertain.
Adam Mcbrian, a California-based commercial and residential note buyer, is Alan. He will be looking at commercial notes for properties such as restaurants, office buildings, and retail storefronts.