Why the economy continues to stall

The continued rise of joblessness and the extension of the recession both have the same root problem, and it’s not a lack of government “stimulus”.  Despite the happy talk from the White House, investors remain on the sideline, especially in the US.  Why?  As a Bloomberg poll shows, American investors don’t trust Barack Obama and believe him to be socializing the American economy:

In Europe and Asia, 87 percent of respondents say they view Obama positively, compared with just 49 percent in the U.S. His standing among American investors is even lower on economic matters: only a quarter of U.S. poll respondents rate his economic policies as “good” or “excellent,” compared with more than half in Europe and Asia.

Obama’s “stratospheric favorability ratings” outside the U.S. after five months in office are related to attitudes about his predecessor, former President George W. Bush, says J. Ann Selzer, the president of Selzer & Co., a Des Moines, Iowa-based polling firm that conducted the survey.

“It speaks as much to the visceral distaste for George Bush outside of the U.S,” she says. In Europe and Asia, more than four of five poll respondents choose Obama over Bush as the president offering better economic leadership. In the U.S., investors pick Bush, 43 percent to 41 percent.

The difference between Obama’s personal ratings and his economic ratings are significant in both domestic and international respondents.  International investors overwhelmingly like Obama, but his ratings on economic policies drop perhaps more than 30 points abroad, and get cut in half at home.  Unfortunately for Obama, foreign investors aren’t flooding cash into the American economy either, thanks to both the strains in their own economies as well as concerns over debt strategies.

For American investors, the issue is more cut-and-dried:

The views of Chris Gurkovic, a 36-year-old strategist for First Brokers Securities LLC in Jersey City, are typical of many U.S. poll respondents. He says bailouts of the auto and financial industries and Obama’s health-care proposals are making Americans like him nervous about the government’s role in the economy, and rates the president “very unfavorably” in the survey.

“I feel that we’re becoming a socialist nation,” Gurkovic says. “It’s not a step in the right direction; the big-government policies kind of scare me.”

The political bankruptcies of GM and Chrysler certainly served as an object lesson on risk in Obamanomics.  The government threatened senior investors in both companies to cut better deals for its union allies, a move which I warned at the time would keep investors on the sidelines a long, long time before accepting any more risk.  Investors appear to have learned that they could no longer rely on the rule of law to protect their legitimate interests in companies deemed “too big to fail” by the White House.

If investors cannot rely on the rule of law in determining risk, they start employing risk-averse strategies for their money.  The result is economic stagnation, as the venture capital needed to create new jobs never appears.  Without that dynamism in the American economy, there can be no growth.

Investors have taken the rational lesson from Barack Obama’s actions in the first six months of his presidency.  Let’s hope voters do as well.

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