Contracting Economies; Take a Lesson from the U.K.

The economy shrank at a worse-than-expected 6.1 percent pace at the start of this year as sharp cutbacks by businesses and the biggest drop in U.S. exports in 40 years overwhelmed a rebound in consumer spending.

The Commerce Department’s report, released Wednesday, dashed hopes that the recession’s grip on the country loosened in the first quarter. Economists surveyed by Thomson Reuters expected a 5 percent annualized decline.

The national jobless rate is now at a quarter-century high of 8.5 percent and is expected to hit 10 percent by the end of this year. It will probably rise a bit higher in early 2010 before starting to slowly drift downward. Still, the Fed predicts unemployment will stay elevated into 2011, and economists don’t think it will return to normal — around a 5 percent jobless rate — until 2013.

I predict it to get much worse if we pass amnesty, universal health care and continue this spending to increase the public sector and ignore the private sector.  In order for us to pull ourselves out of this mess we must focus on tax cuts, manufacturing companies, energy and other private sector companies that create and produce.

Forbes estimates that in 2009 The United States will see a dip in GDP growth of nearly 3% overall and only an increase of <2% in 2010.

That is not a positive net effect and due to the fact that we no longer produce as a country and our imports heavily outweigh our exports, we will maintain a very stagnant if not depressing economy for years to come.

In fact, the countries that will experience the most growth in the next two years are the emerging economies of India, China, South Africa, Brazil, Saudi Arabia, and Malaysia.  Russia, Thailand, Australia, and Israel should also fare pretty well.

Barack Obama could take a lesson from Britain if he wanted to learn a thing or two about history and economics simultaneously.

When New Labour came to power in the U.K., the party inherited a strong economy.  During Margaret Thatcher’s tenure as PM, she was able to retire Britain’s national debt and abolish its income tax.  But, after more than a decade of retaining power, New Labour has binged on spending and has put England’s economy in ruins.

The national debt since the New Labour party took control has risen to over 49% of GDP and still growing.  The budget deficit is deepening, the tax yield is falling and therefore taxes are increasing, and unemployment is at historic levels.

The only markets in Britain’s economy that have seen job growth in the last 10 years are the public sector, the banking and financial services industry and construction… Sound familiar?

New Labour continues to spend money that the country does not have and it continues to implement heavy restrictions and regulations on the economy.  The debt to GDP ratio continuously rises, as has America’s since the 1970s (after we rid ourselves of the gold standard).  The United Kingdom and The United States have both made pacts with the devil, whereby, they have played with the economy and fiddled by implementing heavy government regulations as well as “sauteing the books” just enough to distort the markets and create devastating bubbles and hybrid securities that grew tentacles throughout all sectors of the free markets.

Now think about what happened with ENRON, do we remember SOX compliance?  SOX compliance, otherwise known as Sarbanes-Oxley, is still used today and it has created major profit losses at companies due to the red tape and number of auditors required to implement it.  The jobs created by SOX are similar to that of the U.K., where 1.25 million public-sector jobs were created along with pension plans.

Growth in public-sector jobs, though, ultimately depends on growth in tax revenues from the private sector, which contracts – this becomes a vicious circle.  At some point the private sector will contract so much because of the dominance of the public sector that the public sector will be unable to survive with a lack of adequate funding.

This spells disaster for years to come…

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