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For U.S. investors, after the wildest week for the Dow Jones Industrial Average (DJIA) since the 1987 stock market crash, the concern is a valid one: you're concerned that your 401K is going to turn into a "201K."
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It's prudent then -- it's certainly prudent for those investors who don't want to lose their shirt in this stock market -- to take a step back, breathe deeply, and read the analysis of two respected, veteran economists.
Submitted for your review: Economist Paul Krugman, columnist for The New York Times, and a Nobel Prize winner; and Marketwatch.com's Chief Economist Irwin Kellner, who in his 40 years as an economist has seen a recession or two, as well numerous bumpy stock markets.
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First up: Krugman.
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If you watch Fox News, you'd think that the United States' primary problem is the budget deficit.
However, U.S. stock and bond markets, as Krugman points out, are signaling what the real problem is: the U.S. unemployment rate, currently a horribly high 9.1 percent.
Conservatives and other deficit hawks have been warning for years that interest rates on U.S. Government debt are going to soar any time now - look out! Too much debt! Too much debt!
But, as Krugman notes, it hasn't happened. In fact, the reverse is occurring: interest rates are actually plunging to record lows -- and this is occurring despite Standard & Poor's (S&P) downgrade of the U.S. Government's credit rating. The yield on the benchmark 10-year U.S. Treasury note has fallen to 2.26 percent, and there's talk that it may drop to 1.75 percent.
A big deficit, a (controversial) credit downgrade, and the U.S. Government can borrow money for 10 years for 2.26 percent, and the bias is for still lower rates. Now, that's a sign of skyrocketing interest rates and runaway inflation, lol.
Krugman's point: the problem, short-term, is not the debt, or interest rates, or inflation. The problem is a lack of demand, i.e. a lack of jobs -- a condition made worse by the austerity measures imposed by the Tea Party, which won the U.S. debt deal debate.
Because the Tea Party hijacked the debt deal crisis and was able to force federal spending cuts, and cut the deficit without tax increases, the United States now faces the continued lost economic potential of $1 trillion per year -- the economic potential and earnings lost by all of the roughly 14 million unemployed Americans who want work but can not find it.
Krugman's solution: the U.S. economy really needs a short-term fix -- more fiscal stimulus.
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