2010 Q4

The Money Planner – Q4 2010

Greetings Clients and Friends!

I hope this finds you well! The Money Planner's goal is to provide items of use and interest as you plan your financial future. Please share with your friends and colleagues as you feel appropriate.

The election is over. No more campaign commercials for another 2 years! How will the election results affect your investments? Here is one view:

Divided Congress Bodes Well for Economy

If the recent past is any indication, the American economy will prosper in the next few years with the new Congress divided between the two parties.

“Since 1970, the levers of federal government — the White House, Senate and House of Representatives — have been in the hands of one party, whether Republican or Democrat, 30 percent of the time,” observes Bloomberg News columnist Kevin Hassett.

“By most any measure, the U.S. economy has been healthier the other 70 percent of the time.”

Since 1981, median GDP has increased 3.3 percent in years when Washington was divided — as it will be now with Republicans in control of the House and Democrats controlling the Senate and White House — and 2.8 percent when it was unified.

Median unemployment has been 6.1 percent under one-party rule since 1970, and 5.7 percent when rule is divided. Since 1993, the spread is even greater — 6 percent compared to 4.9 percent.

Divided rule has proved a boon for the stock market as well. Since 1970, the Standard & Poor’s 500 Index has risen at a median rate of 13.5 percent per year when Washington is divided, and just 9 percent when it is unified. Since 1993, the spread is again greater — 19.5 percent compared to 9 percent. - American Enterprise Institute

The most recent example of this effect is 1994 when a Republican Congress emerged with a Democrat President and the stock market went of a 6 year run-up.

There are other considerations this year. Last quarters MoneyPlanner explored the US debt, which is approaching the highs (as a % of GDP) seen after WWII. If the new Congress reduces spending and begins to lower the debt (as was done after the war) it will be a positive for the economy. I will be keeping an eye on the budget process Congress will begin in January where the spending plans will unfold.

Another potential problem tied to the debt is the supply of money (US $). The Federal Reserve controls how many dollars are in circulation. If the Fed creates too many dollars inflation results (more $ required to buy goods). A sizeable portion of the debt has been bought by the Fed.

The Process of Monetizing Debt:

Congress spends more than it takes in in tax revenue. The Treasury issues bonds (IOU's) and sells them to make up the difference (deficit). Citizens, Foreigners, or other countries buy the bonds. The Federal Reserve may also buy bonds. When the Fed buys bonds, it just creates dollars to do so, thus increasing the money supply.

Inflation and a devalued dollar has become a worldwide concern since the dollar is used as a worldwide currency (crude oil is bought and sold with dollars). Following are some examples of Financial leaders expressing concern, including one member of the Federal Reserve.

Brazil's Finance Minister Guido Mantega on Thursday reportedly criticized the U.S. Federal Reserve's decision to launch another round of quantitative easing. Mantega told reporters that the plan by the Fed to purchase $600 billion in bonds will create more imbalances globally, and that it won't produce what the U.S. needs, which are jobs, he said. - Carla Mozee, MarketWatch, 11/4/2010