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April 21, 2009

Obama: the Grand Illusionist
by Michael Pento

President Obama is smooth. He has an incomparable ability to say the correct thing and then doing the exact opposite. For instance, he says the United States cannot continue the boom bust cycle of economic activity and must repent from its proclivity to engender GDP growth off the back of building asset bubbles. He also contends that George W. Bush was disingenuously hiding the size of the true deficit by keeping certain items off budget. In those two statements he is completely correct.

However, he uses the magician's tactic of deflection to sell his economic gimmickry. First Obama directs your attention towards his promise of removing Bush's budget tricks and repudiating his fiscal irresponsibility, but then whips out his smoke and mirrors of trillion dollar deficits and accounting games.

Taking a closer look at how the President arrives at his rosy projection of cutting the deficit to "just" $530 billion by the end of 2013 you find he accomplishes it not by keeping expenditures off budget, like his processor, but by utilizing grossly unrealistic economic growth assumptions.

Mr. Obama assumes the contraction in GDP for 2009 will be only 1.2%. That's a big improvement from the -6.34% annual rate drop of last quarter and far better than the non-partisan Congressional Budget Office's (CBO) prediction of -2.2% growth for 2009. Then from there things get truly surreal. The Obama administration predicts GDP growth for 2010 will rebound to 3.2% and then increase by more than 4% for each of the next three years!

How realistic you ask is a 4% growth rate in GDP for the years 2011-2013? Well, let's look at the past 11 years for some guidance. Starting from the beginning of 1998 thru Q4 of 2008, the average quarterly GDP growth rate was 2.17%. And the average yearly growth rate was just 2.7%. What's truly amazing about the growth rate over the last 11 years (which was well below trend growth of 3%) is that it encompassed two of the biggest manias in the history of the United States -- the equity bubble of the late 90's and real estate bubble in the middle of this decade. You see, once you know the trick it's easy. If you want to make deficits appear smaller, just pretend growth will be higher than what should be responsibly expected. Then simply bury your growth expectations in the fine print.

Perhaps part of Obama's magical act of producing well above trend GDP growth will be to conjure up another asset bubble that equals or rivals that of the previous two. But the sad truth is that whether you use Obama's overly optimistic projections or that of the CBO's, deficits as a percentage of GDP will eclipse 100% of total output by 2019 (a record outside the years just after the end of WWll). But during the post war era we controlled the entire world's manufacturing base and were not facing that wave of entitlement spending which looms straight ahead. Which means the consequences of such an onerous debt will be far dire than what was experienced 65 years ago.

When the veil of illusion is dropped the truth behind what this administration will produce is revealed. Record debt, lack luster growth and robust inflation will be the products of runaway spending and increased government intrusion into the free market. Barack Obama wants you to believe he is a fiscal conservative and that he is providing honesty and transparency in the government. The Administration's trick is to make opacity appear as transparency and mendacity to appear as truth. But their performance is best viewed through gold (not rose) colored glasses.

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Michael Pento
Chief Economist
Delta Global Advisors, Inc.
800-485-1220

With more than 16 years of industry experience, Michael Pento acts as chief economist for Delta Global Advisors and is a contributing writer for GreenFaucet.com. He is a well-established specialist in the Austrian School of economic theory and a regular guest on CNBC and other national media outlets. Mr. Pento has worked on the floor of the N.Y.S.E. as well as serving as vice president of investments for GunnAllen Financial immediately prior to joining Delta Global.

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