Keynesian Economics

Today’s chart is all about you – the American taxpayer… the American consumer.

Because here at Dent Research, we’re unwavering in our assertion that it’s everyday people who drive the economy… not ivory tower policy wonks, armchair economists nor central banksters!

Get this…

This morning, I read an article referring to the Swiss National Bank’s surprise de-pegging move, in which the author asked a most asinine question:

“…what if central banks become as unpredictable and fallible as they are powerful?”

To me, the only errant words in that question are “what if” and “become.”

Because, in my eyes, we’re already there!

Keynesian thought, we’ve long said, seems well-intentioned. It says: “…let the private sector drive, but give central banks and governments an ‘emergency brake’ — and a spare tank of ‘nitrous oxide’ — to buffer out the extreme edges of the business cycle’s ups and downs.”

It’s easy to forget that central banks are supposed to raise interest rates and reduce the money supply when the economy is running hot. Because in most of our recent memories, we can only recall central banks’ bold promises (i.e. Draghi’s “whatever it takes”) to save the economy, accompanied by huge money-where-their-mouth-is stimulus packages (i.e. like the one everyone expects the ECB to announce tomorrow).

True, central banks have been an undeniably significant factor in financial markets since 2008 — employing a heavier hand and even more so when compared to Adam Smith’s invisible hand.

But we still believe there’s a limit to the central banks’ ability to control markets and economies as if they were simple mechanisms, like a thermostat controls a heating and cooling system.

Consumer spending still accounts for around 70% of economic output in developed countries. That means when everyday people buy everyday things… this is what drives economic growth through periods of expansion and contraction.

And that brings me to the chart I want to share with you today. It comes from a fellow market analyst, Tom McClellan of McClellan Financial Publications, whose work I greatly respect.

In Tom’s words:

“History proves that when Washington, D.C. takes too big of a bite out of the economy, the stock market suffers and thus so does the economy.”

Take a look…

Image Chart SP 500

See larger image

By this indicator — which is simply the U.S. government’s Federal Tax Receipts divided by U.S. GDP — economic recessions loom near once the government’s tax-take amounts to 18% of the economy.

The reason? Simple…

As U.S. citizens fork over a larger share of their wages and capital gains to the government… a smaller share of the pie is left available for private sector investment and consumption.

As we’ve always said: “It’s you — the consumer — who drives the economy.”

And so it’s only natural to be a bit concerned that it’s the consumer that’s funneling more tax dollars to Uncle Sam.

Like any indicator, don’t expect a recession to begin within moments of hitting that 18% threshold. Still, I think this is a great chart to keep in the backs of our minds as we navigate choppy waters in 2015.

Adam-ODell2

 

 

 

 

Adam

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Categories: Economy

About Author

Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.