EDMOND — Well they finally did it — raised the debt ceiling. Now everything is cool again and we can all go back to enjoying life and watching the economic recovery unfold. Well, maybe not. While everyone was focused on the political circus in Washington and our self-inflicted shot in the foot, it seems that the stock market went back to focusing on things that matter — like a slowing U.S. and global economy and sovereign debt issues that just won’t go away.

When it was announced that a “deal” on debt reduction and the debt ceiling had been reached, the stock market exploded about 150 points to the upside.  Unfortunately, the euphoria lasted about an hour before people realized that the underlying economy continued to deteriorate, and the stock market has been mostly in free-fall since.

While the world was fixated on the debt ceiling debate, first and second quarter GDP figures were released July 29 and they were not pretty. First quarter GDP previously had been reported at a disappointing 1.9 percent when most economists were looking for something more than 3 percent. Remarkably, the market just yawned and nobody seemed to care. Economists started to revise second quarter GDP estimates down to 2.7 percent.

Second quarter GDP actually came in at a shocking 1.3 percent. At this stage of an economic recovery we should be growing at close to 4 percent. But even worse than that, the first quarter GDP figure was revised down from 1.9 percent to a snail pace .4 percent. On top of that, fourth quarter 2011 GDP figures were revised down from 3.1 percent to only 2.35 percent.

This is shocking and quite worrisome. All the money in stimulus and quantitative easing that has been thrown at the economy and that’s it? Almost two years after the recession “officially” ended, the economy still has not recovered back to pre-recession levels. Clearly, QE1 and QE2 have been dismal failures. Maybe government leaders will finally bury Keynesian economic theory.

But at least things are good now because Congress has reached an agreement on how to reduce our deficit, right? Not likely. As I understand it, the compromise calls for $2.4 trillion in spending cuts in the next 10 years. We need at least $4 trillion in 10 years to come anywhere near to keeping the debt level from increasing, and some would argue that is just a start. It doesn’t stop the growth of government debt or reduce it. It just slows down the rate of growth and certainly will not fix the problem.

Many of the cuts being discussed are not cuts from current amounts being spent, but cuts in projected spending increases. As Congressman Ron Paul pointed out, “this is akin to a family ‘saving’ $100,000 in expenses by deciding not to buy a Lamborghini, and instead getting a fully loaded Mercedes, when really their budget dictates that they need to stick with their perfectly serviceable Honda.”

While there is no question that we need to reduce spending, nobody wants to talk about the effect doing so will have on the economy for at least the next decade. As my friend and hedge fund manager John Thomas points out, a $2.4 trillion reduction in government spending in 10 years is 16.6 percent of GDP, or an average of 1.6 percent a year. Unless that is somehow offset by an equivalent amount of growth in the private sector, which is not likely, we will guarantee minimal economic growth for at least that period and worse if anything goes wrong.

The Federal Reserve has a current forecast of 3 percent GDP growth. That is highly unlikely. But even if that somehow happens, taking 1.6 percent away from the economy means a paltry 1.4 percent GDP growth rate. A rate that low will do absolutely nothing to reduce overall unemployment. As the old saying goes, “be careful what you wish for because you just might get it.” I’m not suggesting that cutting government spending is wrong. I’m just suggesting that we need to understand the consequences and not lose the faith along the way.

On top of all this, European sovereign debt problems have not gone away and seem to be getting worse. (See my June 25 Edmond Sun column on Greece.) As I write this, the European Central Bank has just announced that they need to buy more debt from countries such as Greece, Portugal, Spain and Italy. European bonds promptly took a nosedive.

The ECB is basically stuck. Their banks hold so much of weaker country sovereign debt that they can’t afford to let them fail without serious damage to their own capital and solvency. It’s a little like loaning money to your deadbeat brother-in-law.  You know you’re not going to get the money back but you do it to keep peace in the family. But that only goes so far. Unfortunately, in this case there are several other relatives asking for the same thing. The question is how long can it go on?

Keep in mind that an agreement to raise the U.S. debt ceiling and reduce government spending, or kicking the European debt crisis further down the road will not have any effect on the current global economic slowdown. It only provides temporary relief. Once the relief runs out, as it is now, the reality will set in that the global economy continues to slow and government spending cuts involved in any agreement will be yet another negative for the slowing economy to deal with.

What does all this mean for the stock market? While the economy and the stock market are certainly related, they don’t always move together. We may well be experiencing a long overdue correction that may run its course soon, leaving us with a possibility of a year end rally. We’ll see. Economist Dave Rosenberg says that the possibility of the economy going back into recession is clearly back on the table.  Whether it will or not remains to be seen. One thing is for sure right now — we don’t have much room for something more to go wrong. Thanks for reading.



NICK MASSEY is a financial adviser and owner of Householder Group Financial Advisors in Edmond. Massey can be reached at www.nickmassey.com. Securities offered through Securities Service Network Inc., member FINRA/SIPC.