The 10 Most Pressing Questions About the U.S. Economy – And Their Answers

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Will the economy lapse into a double-dip recession? What can be done about the soaring U.S. budget deficit? What's next for the stock market?

These are just a few of the tough questions facing investors. And there may be no one better to offer answers, insight, and advice than Money Morning Contributing Editor Shah Gilani.

A retired hedge-fund manger, Gilani has routinely been there to shepherd investors through blinding market uncertainty. He's used his contacts on Wall Street to give Money Morning readers the inside scoop on the collapse of American International Group Inc. (NYSE: AIG), the May 6 "Flash Crash," and most recently the "Mortgagegate" scandal that currently threatens to undermine the fragile U.S. recovery.

Indeed, Gilani has been a tireless advocate for investors and a prescient market maven. That's why Money Morning's editors recently sat down with Gilani to talk about today's most pressing issues and discover what he expects for financial markets in the months and years ahead.

In the partial transcript of that interview below, Gilani discusses why it's a good time to invest in stocks, what steps should be taken to fix the U.S. economy, and whether or not gold prices have peaked.

In short, the U.S. government has failed the public as a matter of course, but there is still a way out of our current economic malaise and ample opportunity for investors to profit.

Money Morning: Is now a good time to invest in stocks? Why or why not?

Shah Gilani: It's not a good time to invest in stocks – it's a great time. While economic numbers in the United States are uninspiring in terms of growth, they have inspired the U.S. Federal Reserve to pursue an expansive monetary policy.

If the Fed is successful in keeping rates down while the economy slogs toward recovery and jobs growth, two things will happen:

1) Fixed-income investors will exit their low-yielding bond holdings and chase appreciation and total return prospects in the equities markets.

2) If we have growth here in the United States – since we're behind the global curve – the rest of the world will already be humming along. That means price pressures and inflation. That's better for stocks and bad for bonds. That's going to propel equities to extraordinary heights.

(Q): Does gold have more room to run from here?

Gilani: Yes, there's more room for gold prices to head higher. Countries around the globe continue to devalue their currencies in a race to be export driven machines. Additionally, the growing threat of inflation is another reason gold will continue to be a momentum trade.

(Q): Is U.S. President Barack Obama getting the job done?

Gilani: No. The president has blown a historic opportunity to lead the country. Ramming healthcare down America's throat left everyone on both sides of the argument with a terrible taste in their mouths. It was the nail in the coffin of bipartisanship. The President should have moved immediately on financial reform, making the economy and a safe investing environment the basis of recovery. He had the wind in his sails, but he chose to sail onto the rocks of healthcare instead of pursuing financial reform. He's lost a lot of supporters and a lot of credibility.

(Q): What should be done to fix the economy?

Gilani: The government should change the tax system to favor small business development. It should cut taxes on dividends to a flat 10% to encourage corporate profits to be paid out to capital investors. That will increase equity investing and savings, both of which will supply cheap capital for business growth and employment. However, the government should only allow the flat rate tax for the portion of dividends that are non-leveraged; in other words, don't let corporations borrow to pay dividends. If they make profits and pay dividends from those profits, they will be strong companies, safe investments, and the basis for a sound, productive economy.

(Q): How concerned are you about the budget deficit?

Gilani: I'm very concerned about the budget deficit. If there is no real, transparent address of runaway government spending, the U.S. economy will become third rate – perhaps within five to seven years.

(Q): What are the chances that the U.S. economy will lapse into a double-dip recession?

Gilani: Unfortunately, the dice are in the hands of government and not the private sector. Until politicians decide that they are the problem and that big government is crowding out entrepreneurship and free enterprise, there's a chance the U.S. economy will backslide into a double-dip recession. Throwing money at banks and artificially keeping interest rates low, but not incentivizing capital formation and small business development, could keep us out of a double-dip, but it doesn't guarantee we won't end up like Japan and suffer for the next two decades.

(Q): What one thing needs to be done to fix the jobs picture?

Gilani: Reduce the tax burden on businesses and employers when they demonstrate they are bringing on and keeping new hires.

(Q): Does the U.S. economy need more stimulus?

Gilani: No. It's like the government wants the Fed to re-kindle a fire that has just been doused with flame retardant chemicals. It's not going to work because there's not enough kindling and too much retardant. Stimulus should take the form of reduced tax burdens, less wasteful spending, fewer pet projects. Wasteful government stimulus projects misallocate scarce capital resources. They only serve to line the pockets of special interest groups who lobby for them and the "consultant" middlemen who broker the deals.

(Q): Should Pres. Bush's tax cuts be extended to all?

Gilani: No. Draw a line in the sand that separates the superrich from the rest of us. $250,000 is not rich. Make it $5,000,000. Don't cut taxes for the superrich – raise them. If you're making $5,000,000 a year you owe this country something back. And, at the same time, completely eliminate the "death tax." Why take anything from anyone after they are dead? They've already paid their taxes.

(Q): China: friend or foe?

Gilani: China is the best friend we have. Because the saying goes, keep your friends close and your enemies closer.

[Editor's Note: Shah Gilani, a retired hedge-fund manager and renowned financial-crisis expert, walks the walk. In a recent Money Morning exposé, Gilani warned that high-frequency traders (HFT) were artificially pumping up market-volume numbers, meaning stocks were extremely susceptible to a downdraft.

When that downdraft came, Gilani was ready - and so were subscribers to his new advisory service: The Capital Wave Forecast. The next morning, because of that market move, investors were up 186% on a short-term euro play, and more than 300% on a call-option play on the VIX volatility index.

Gilani shows investors the monster "capital waves" now forming, and carefully demonstrates how to profit from every one.

But he doesn't stop there. He's also the consummate risk manager. As the article above demonstrates, Gilani also makes sure to highlight the market pitfalls that can ruin years of careful investing and saving.

Take a moment to check out Gilani's capital-wave-investing strategy - and the
profit opportunities that he's watching as a result. And take a look at some of his most-recent essays, which are available free of charge. You can access those essays by clicking here.]

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Join the conversation. Click here to jump to comments…

  1. sharon ehrhardt | October 21, 2010

    $250,000 sounds rich to me. I disagree with most of your conclutions. USA will not prosper again until investing abroad is made less attractive than investing at home. We need to produce on our own shores. Without good jobs for ordinary people and more balanced income distribution we are headed to join the 3rd world.

    • Chameleon | October 21, 2010

      "Without good jobs for ordinary people and more balanced income distribution we are headed to join the 3rd world" is a correct statement……which is exactly what Shah Gilani's answer to the question of how to fix the economy provides – how to stimulate jobs in the U.S. We live in a global economy whether we like it or not. Your statements that "we need to produce on our own shores" and "make investing abroad less attractive" are nothing more than that…..just pie-in-the-sky statements that don't take the global economy into consideration and don't provide specific ideas on how to achieve these noble goals. My guess is that you feel the government should take care of you…e.g. "let those making more than $200K/$250K pay for the rest of us…they can afford it". Those sentiments make me mourn for the country we used to be……where folks had more pride than to depend on the government for their livelihood….and they didn't feel the need to punish those who've worked hard their entire lives to achieve a level of financial stability.

  2. germinator | October 21, 2010

    Well, Obama might have "rammed" healthcare down our throats. But Bush rammed the Iraq war down our throats. And Clinton rammed… well. Let's just say that I would rather dine on a forced diet of healthcare than of war. And please, don't pretend to be so naive. All politics is a power game. And to suggest that Obama scuttled the GOP dream of bipartisanship is absurd on its face. Bipartisanship was and always will dissipate at the hands of domestic realpolitik.

  3. jj | October 21, 2010

    Good interview.What about cap gains?How about giving stock investors the same deal as housing.A $250K/500K per 2 years tax free.Or get rid of the housing incentive and just reduce long term cap gains to 10%.Of course some socialist states,like California,with it's confiscatory 10% cap gains tax need to lower much more.

  4. Bob | October 22, 2010

    Sharon, you've got it backwards. You state "USA will not prosper again until investing abroad is made less attractive than investing at home". Rather, what will reallly work is if we as a people make investing at home more attractive than investing abroad. We do this by improving ourselves, we can't blame others abroad for improving themselves. It is called global competition.

  5. raja navlani | October 22, 2010

    capitalism has entered new era of information age.access to information has changed the dynamics of finance,so the whole world is experiencing un precedented upheavals.at this stage we need to patch-up socialistic patterns to our economy by creating more jobs and cheap healthcare for public.it will sound protectionism but necessary for economic recovery and social harmony.

  6. anish poojara | October 22, 2010

    Everyone in USA just dodges the China question.

    US has transfered 1 billion jobs to China and now its citizens are jobless, homeless and poor.

    Yet you want Chinese goods. Americans are their own enemies. They look for short term gains and then their children pay the price.

    And as to the war on terror – Iraq and Afganisthan are just pawns. To win the game you have to checkmate the king and his address is ISI, Islamabad, Pakistan. And ISI is USA's friend in the war on terror. You will never win till you realize this.

  7. Greg | October 22, 2010

    Much work needs to be done here in the U.S. Simplify the tax code, get regulations right and not over-regulate for political expediency. How about follow our Constitution for a novel idea? And how about we use our own resources (keeping our money HERE) while we seek other economcally vailble sources and getting the infrastructure in place? How about making unions illegal for public employees – that would trim some budgets and improve productivity I bet. And we as a nation need to realize why we use China – cheap labor! So, if you want a job here in the USA, we have to rethink our wages: Unons and otherwise.

  8. bud | October 24, 2010

    A sitting president should not be able to campaign for the election or re-election of any registered voter for any Independent or U.S. political party. All transportation and expenses should be denied. Second, term limints for congressional seats and appointed secretaries to cabinet posts and deputies should be included. All pay for these people should be cut in half immediately with no perks and earmarks and should be eliminated, even the ones in progress. Campaign funding, if allowed, should be reduced and donated to one fund and spread equally to all registered applicantes. This would be a good start.

  9. Stan | October 24, 2010

    @Greg: Very well said! We need less government, less regulation, fewer entitlements. Unions may have had a place in our country in the past but now they are dragging us down. Supply and demand should tell you what your job is worth, not a union. And I think a flat tax is fair; let everyone pay the same rate (15%?) whether they make $20,000 or $5,000,000. Why should you pay a higher rate just because you work harder and make more money than your neighbor? The higher income earners are the ones CREATING the jobs so don't tax them more, let them keep creating.

  10. Matt | October 24, 2010

    It is true that we live in a global economy and those who produce for less are rewarded with our dollars. We have been in a spiral of working less and enjoying the good things in life for less. It's time we take a dose of what the rest of the world is doing and just simply work hard for a living no matter what the job. Teach our children a work ethic and pear down big government so we can enjoy the fruits of our labor. We can take can of our children and elderly. It's embarrassing that we have allowed the govt to do that for us through expensive entitlements. Quite whining Americans we've made our own bed….

  11. Duncan | October 24, 2010

    I am of the impression that the US costs for employees are too expensive (salary, insurance, etc). Is this correct? The only path out of this dilemma is to reduce US employees' salaries….but, the cost of living (mortgage, insurance, food delivered in supermarkets, housing, insane commute and auto costs) makes the idea of reducing US citizens salaries a path to stagflation/deflation. I am pretty realistic…..the top 10% of the most intelligent people in India and China exceeds the entire US workforce. Is this a race to just outsource all US jobs and have Americans sitting on their thumbs? I'm going to hold up a sign on the corner that says: "Will work for pragmatic leadership".

  12. PEDRO MOHR | October 24, 2010

    I agree with most of above but politics is waste of time if just contest between demos and repubs cause both put up presidents not worth having.ng but not worth electing.They are worth jailing and usually should be or better but the president is too high and mighty to depose .Better like in Australia with a Prime Minister and no president and Prime Minister was eliminated with no trouble at all-no blood letting no extra election.The party saw it needed doing and did it.USA would be better off with such a system and Prime Minister is not mister high and mighty either.Needs to be an Inspector General to keep him in check and Inspector can not be fired by Prime Minister or President.Inspector can force Prime or President to show and prove his birth place unlike today USA

  13. VIJAY NAYYAR | October 25, 2010

    STOP GIVING AID TO WORLD BANK AND OTHER COUNTRIES

    USE THE MONEY TO TO SPEND IN AMERICA FOR CREATING WORK OR SUBSIDISING
    INDUSTRY TO STOP IMPORTS

    MAKE YOUR COUNTRY RICH

    HARNESS YOUR MEN MATERIAL TO RAISE PRODUCTIVITY

    IT IS FOR AMERICA AS THERE ARE NO SHOR CUTS

    YOUR TO RICH IS INTERESTED ONLY IN SPECULATION TO MAKE QUICK MONEY

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