My friend calls and asks, "Mike, whaddya think now?" Here's what I said...

My friend who's a stockbroker called me up earlier and asked what I thought now that all this stuff has transpired.

Here's what I said.

First of all I said that austerity is not dead. (I put up a post on this earlier.) You can forget about it. I've been seeing a bunch of stuff about how this is the beginning of the end of austerity, but I think that's wishful, no, naïve, thinking. There's no way that the "Powers that Be," the elites, the oligarchs, whatever you want to call them, are going to relinquish their absolute hold on power. No effen way. And we cannot "take it back by force." You can forget that, too. Law enforcement, the military, the entire national security apparatus is controlled by them. This is not 1776 and we're gonna wage some guerrilla war against our oppressors. I don't care how many guns you have (Texans) if they want us on lockdown they will have us on lockdown.

Okay, sorry, I'm digressing a bit.

With austerity the European economic slow motion train wreck continues. That means the euro goes lower. That is the "counterbalance" to declining internal demand. The euro goes lower because European exporters (read: German and to a lesser extent, French firms) make price cutting an ongoing thing. Sure, they'll take a break once in a while, like now, because sales are booming at these lower exchange rates, but soon consumers (i.e. Americans) will want better deals or, the Japanese and China will force that to happen by undercutting the Germans.

So, the euro  is going down, slowly. There's no "getting harder to get" bullshit. (Although  for the Greeks the  euro truly is getting harder to get, unfortunately.) Anyway it's always about price and not quantity. People should know that.

Next, in the U.S. the key number is $4 trillion. Matt Franko and I have been saying this for five years. Four trillion is the top line spending of the Federal Government. We have not been under that since 2008 and since 2009 (the first year we topped $4 trillion gross spending) the stock market and economy have been rising/growing.

The deficit?

Forget it. Those who have been focusing on that have been wrong. You'd think that a $1.2 TRILLION REDUCTION in the deficit since 2012 would have made them scratch their heads and wonder about their predictions by now, but they keep on going. I'll say this again (and Matt Franko has said it here a million times), the deficit is EX POST. It's what's left over after everyone spends/earns/pays taxes.

That means we don't even know what the deficit is going to be unless the government first spends its money. It's that top line expenditure that flows to income and investment. It goes to firms and individuals who then and only then know what their tax liability is going to be. What's left AFTER that is the deficit. The deficit (or surplus) is the savings (or deficit) of the non-government. We cannot predict what effect savings will have on the economy other than to say the ACT of saving was a demand leakage. On the other hand, what the government spends will ALWAYS have an effect because that is DEMAND by definition and it is immediate.

I'll even go one step further. I'll say that the government can and likely will, go into SURPLUS and it still won't cause a recession. Why? Because the private sector can handle much more debt now than was the case back in 2007. Back in 2007 total monthly debt service payments as a percentage of disposable income was over 18%--a post WWII record. (Maybe an absolute record, too, I don't know.) Now, total  debt service as a percent of disposable income is down around 15%. That may not seem like much of a difference, but the current debt burden is at 30 year low. That means the private sector can "finance" much smaller government deficits and even a surplus (maybe even a big one) before getting into trouble.

Therefore, the economy will grow, maybe not strongly, but it will grow. And stocks will go up. That will frustrate a lot of people, I am sure. This will all be interspersed with mini-panics about Greece and Europe (and maybe China, too), but you have to be a buyer of those panics. As long as the government keeps spending its $4 trillion annually, that'll be enough to float the boats and allow the S&P companies to make their $1.8 trillion or so in profits.

Oh yeah, there  is one caveat: at some point we will have to deal with the debt ceiling again. We haven't had to do that because tax revenues are going gangbusters and Jack Lew has the  Treasury's coffers flush with cash, but that will not go on forever. At some point as the economy stays tepid, tax  revenues will become insufficient to allow the government to continue operating under the debt ceiling. That's when things could get rocky. Who knows? We could even have our own, "mini-Greece" over here. We came close a couple of times and the "moron content" of Washington has grown exponentially since then.

For now, however, it'll be steady as she goes. Just as I laid out I think and we'll be keeping an eye on the all important spending numbers here at Mike Norman Economics. Just keep tunin' in.

My podcast for today. Stocks, budget, outlook.

Podcast for March 17. Politics. Stock stall. Outlook.

Why I think things are not as bad as 8 days ago.

Anyone who has been following my comments for the past year knows that I have been warning about a sharp stock market and economic downturn for a while. The warnings go back to the midterm elections, which saw historic gains by the Republicans and most notably, lots of Tea Party candidates.

The fact that they embraced a set of very destructive beliefs--in fiscal austerity, dismantling of social safety nets, anti-environment, anti-labor, etc--made me feel that we would begin to head off in a new and dangerous direction.

In January of this year I released my 2011 Yearly Outlook and I predicted weakness in the second half and beyond. This was before Goldman, Morgan Stanley, JP Morgan Chase or anyone else.

I also spoke about the potential turbulence that could come about as a result of the debt ceiling debate and I even raised the possibility of a U.S. default. In addition I predicted that the rating agencies would downgrade the America's credit rating, and I said this going all the way back to 2007.

All of these things came true.

The question is, what now?

Unfortunately, I don't see a broad-based embrace of MMT or similar policies that would put us back on the right track. The Austerians remain firmly in charge both here and around the world. If anything, the movement in this direction has accelerated though I do admit that there has been a small bit of progress in getting the MMT message out thanks to our little community of dedicated believers, some of whom contribute to this blog.

The gloomy longer-term outlook aside, the market turmoil that we're seeing now just doesn't seem justified to me. The selling appears to be completely indiscriminate and utterly panicky, when it should be time to breath a sigh of relief.

That's right, I said breath a sigh of relief.

The reason I say this is because the storm may be over, at least for now. We got the debt ceiling increase and we got it with no concomitant cuts in spending, at least until 2013. That's good thing. If we hadn't got the debt ceiling increase the government would have been forced into operating in "balanced budget mode," meaning that $130 bln per month of income would have been sucked out of the economy.

By the same logic, the fact that we didn't get spending cuts is also good, because with the economy as weak as it is and with unemployment so high, spending cuts would have been a killer. At least we don't have to worry about this for the next two years and by then we could have a completely different government from top to bottom for all we know.

These are good outcomes and they are real--they're a reality at this moment.

But that's not the end of the story. Other good things have happened. We see oil prices 8-month lows and that will translate into lower gasoline prices at the pump. Consumers will see some much needed cost savings and they'll be able to use that extra money on other stuff instead of gas. Commodity prices in general have come down and that's a positive, too.

Bank lending is also finally starting to pick up. Total loans and leases at commercial banks are now at the highest level of the year, up some $100 bln from the March lows and loans outstanding are nearly positive on a year-over-year basis for the first time since the crisis began three years ago.

In addition, there is talk of a jobs stimulus and the president is also asking for an extension of the payroll tax cut. By the way, the payroll tax cut was a measure first recommended by the MMT community way back in 2008.

Finally, interest rates have fallen to historic low levels and that happened despite the idiotic and terribly misinformed downgrade issued by S&P. It hurt our pride as Americans to see that AAA go, but now it's done. We will do our mourning and get over it like any loss and then we will realize how stupid and immaterial the credit rating agencies are. What happened following the downgrade anyway? Bonds rallied and interest rates plummeted. That was the market expressing a huge, "no confidence" vote on S&P.

Maybe the best thing of all is that we see more and more of MMT getting out there in the blogs and being talked about, usually without attribution and usually coming under attack. But hey, bad publicity is still better than no publicity as they say. We'll take it and we'll defend ourselves. (And we do it intelligently and well!)

Bottom line, there is hope. Things are less bad than they were just a month ago. Actually, they're less bad than they were just 8 days ago. My outlook has shifted a bit and I don't think this wanton selling is justified. We may still be in the storm, but we've just entered a clear patch and I think that clear patch will persist for a while until the rest of the storm comes along. And maybe, just maybe, it'll pass us by.