Market Watch: Economic forecast stays sunny in 2015

More wealth was created in the United States in 2014 than in any other year in history. The success of the stock market, coupled with the enormous amount of cash in businesses and banks, provides corporations and individuals with excellent avenues for financing to expand businesses. The dollar is strong again. Consumers are benefiting from lower fuel costs, and the nation’s unemployment statistics continue to improve.

The country is also in a position to set right its finances. Should Congress get the federal government’s spending under control and cease borrowing from the public to cover the cost of operations, the economy should continue to prosper, and the stock market should continue to reward us. The U.S. economy is poised to produce increases in asset values for several years to come.

It seems as if all of this increase in wealth is paper wealth and not “real” wealth. Gold, silver and precious metals are substantially down in price. Where does real estate fit into the picture?

Last year’s record wealth increase was almost entirely from paper assets such as stocks and bonds. Gold and silver are currently depressed, and they are excellent buying opportunities. The increase in the value of paper wealth is an indication of the public’s expectations of future returns on their investment. This optimistic attitude is due to interest rates remaining at all-time lows. Borrowing money is the most important expense in real estate transactions. Great economic expansions are preceded by increases in capacity provided by real estate development. The relative cost of business expansion is as cheap as it has been in several years. The outlook for real estate development is excellent.

Does the investor face any potential disasters in 2015 from the markets?

Probably not. There are difficulties all around the world that do not currently exist in America. If we can keep our nose clean and our foot on the economic gas pedal and get this tremendous increase in government regulations under control, we should have good sledding in 2015 and 2016. The record amount of cash held by businesses can be spent for either expansion or taxes. Expansion not only provides tax breaks but also increases capacity, improves morale and aids in productivity increases.

How can we balance the current optimistic outlook with the potential for disaster?

We cannot provide the balance. The market is emotional, and market values swing with human emotions. Now we are optimistic. Now we are well financed. Now we have the first opportunity since the early 1990s for Congress to get our act together. Some outstanding economic thinkers disagree. James Rickards, author of “Currency Wars” and “The Death of Money” presents sound mathematical proofs that we are standing atop a major disaster, primarily due to two things: There is no backing for our money, such as gold and silver, as mandated by the Constitution, and our overwhelming federal debt is so huge that we must borrow money just to pay interest on that debt. These thinkers have excellent points. The mathematical soundness of their proofs cannot be argued. But what they don’t take into consideration is that we can improve by getting our act together fiscally, and we are slowly getting there with, perhaps, great opportunity to consummate the task because of a more conservative fiscal outlook in the new Congress.

Increases in the debt ceiling allow deficit spending to continue. Market Watch pointed out in 2014 that when debt increases were voted upon, 70% of that time the Republicans were in power. Republicans are in power again, so why should anybody believe we would get our fiscal act together?

All we have is hope. There is no reason to believe there will be significant changes in the way we are governed over the next decade or two. We are likely to continue to have booms and busts in the market. As investors, it is in our best interest to “ride the waves” when the market is going up, as it is today. As importantly, we should realize when another bubble is coming, get liquid and sit on the sidelines while markets deteriorate. There is no real answer to what we might expect economically from Republicans being in power because both parties are culpable in our excessive spending and borrowing.

Summary
It is a shame the U.S. economy is prospering partially because of miserable economic conditions in much of the world. The dollar’s big rise in value lately is a result of currency conversion into the safer dollar and dollar-based investments. Greater demand for the dollar has increased its value against the rest of the world’s currencies and has helped fund the government’s deficit by purchasing U.S. debt.

All America has right now is what she has always had: opportunity. Again, we taxpayers and voters have an opportunity to upright the ship. We are in a position to prosper for another several generations. If we fail to do so, we will be mired in the ups and downs of the stock market and the pain it causes families, much as we have been the last 40 years.

It is a difficult balancing act we face as a country. The imbalance between citizens who work and pay taxes and citizens who don’t work or pay taxes is at an all-time high. Historically in democracies, groups of people who depend on the public continue to vote for politicians who will help them in their efforts not to work. Historically, those economies fail, and when they fail, there is tremendous social upheaval, as James Madison pointed out at the Constitutional Convention.

Can America escape this social unrest? Can we prosper for another century like we have for the last two? Based upon current demographics and the behavior of our politicians the last several decades, it looks like we will not meet the challenge. But as optimistic Americans, we are best off to continue putting one foot in front of the other, doing what we have to do to get our elected representatives to make every vote be dictated by the Constitution and keeping our fingers crossed.

Carpe Diem.

George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker.