Bears, Bulls, Chickens and Pigs: wOw’s Wall Street Weekly with Liz Peek (Week of 7/27) 

Editor’s Note: Liz Peek is a financial columnist and the author of wOw’s SHEconomics.

The stock market continued to celebrate better-than-expected earnings reports this week, climbing 9% for the month of July – one of the best months ever. Maybe higher stock valuations and the growing consensus that housing prices will not, after all, go to zero, will get consumers spending again. While companies boosted profits by cutting expenses to the bone earlier this year, they have yet to see growth in demand. We now need revenue gains, followed by job increases, to keep this market rolling.

We also need to see Americans’ wrath about soaring government spending tame the exuberant fixer-uppers in Congress and the Obama administration. It’s not just taxpayers that are worried about rising U.S. budget deficits. How do we feel about Treasury Secretary Tim Geithner having to promise China’s assistant finance minister (not even the real finance minister) that the U.S. will do everything possible to bring "our fiscal deficits down to a more sustainable level once recovery is firmly established"? Talk about a "Mother, may I?" moment!

The president does not appear to have bought into Geithner’s promised thriftiness. Despite a very clear thumbs-down from Americans on his trillion-dollar health-care legislation, President Obama continues to push for a bill. Polls show that more and more people are not only worried about a prospective change in their existing medical care; they are also worried about the price tag for such an initiative in the midst of a recession. They are right!

The U.S. should be focused on ramping up demand and production in order to generate the tax revenues that will pay down our deficits. The United States is no longer in an impregnable financial position. As in the U.K., from whom we should learn many lessons (the ghastliness of nationalized health care, the ultimate hardship imposed by spending beyond our means, the cost of supporting noncompetitive industries), deficits will ultimately limit what the U.S. can afford. Recently, the U.K. had to cut back defense spending in order to prop up its finances. It was a serious shot across our bow.

In the short run, deficit spending by the U.S. has been warranted by the drastic economic collapse. Boosting outlays through the Stimulus Bill and the actions of the Fed to grow the money supply have been necessary – and helpful. According to ISI, the actions of our government have joined with an unprecedented 698 similar measures undertaken by central banks around the globe, and they have taken hold. There is no question that the world’s economies, almost without exception, are beginning to haul themselves out of a financial ditch. Indications of stabilizing or even rising home prices, declining unemployment claims, improved credit spreads and soaring stock prices all testify to an improving economic outlook both in the U.S. and overseas. Rising government spending has been effective, but it has not been without a cost.

In their ability to pump up demand, all countries are not created equal. The IMF projects the U.S. will spend about 5.6% of our GDP this year boosting the economy, while the figure for Saudi Arabia is 16% and for China it is 12.1%. How can those countries be so aggressive? Because they can afford it. China has more than $2 trillion in foreign reserves and Saudi Arabia has several hundred billion dollars in the bank as well.

We are not so lucky, which is why projections of massive budget deficits cloud the outlook for our country’s growth. We are a debtor nation, and while the world eagerly turns to U.S. government debt when calamity hits, that safe-haven reputation may falter. The stock market stumbled midweek when an especially large sale of Treasury bonds didn’t go well; fortunately the auctions concluded satisfactorily on Thursday. Every time the government comes to market with a large sale now, investors hold their breath.