Track The Turnaround

Is Euro-Pessimism Overdone?

Goldman Sachs economist, Jim O'Neill, shared with Bloomberg today his view that euro pessimism is way overdone. He suggests the obvious contrarian play: bet on a euro rebound.

Of 600 people he addressed at a conference recently, he was struck by the fact that only three predicted the currency would strengthen. He told Bloomberg:

In my experience of being in the foreign exchange market for 29 years, that makes it virtually guaranteed that the euro isn’t going to go down much further.

He suggested the euro could stabilize around $1.20, calling speculation of a euro breakup "ridiculous:"

This is 60 years of history in the making, so the idea that the euro simply falls apart at first test of its credibility, I think it highly unlikely ... it might well be in 20 years time it doesn’t exist but the idea that it’s not going to exist in the next year because the market is worried about Spain and Portugal’s funding requirements is ridiculous.

Contrary to rampant euro-bearishness in the markets and here on Seeking Alpha, I'm also bullish on the euro and European equities, but for additional reasons and over a longer time horizon. Why? Because, as I lay out here, without much fanfare, Europe from an economic policy perspective has become more like the US, while the US has become more like Europe.

Europe, particularly its outer periphery (Eastern Europe, Ireland and the Baltic States), is getting more competitive.

Europe has been making (and has been forced by financial markets to make) some of the hard and necessary policy decisions America is putting off (and which safe-haven flows in financial markets are allowing it to continue putting off). With these trends underway for more than a decade and likely to continue, that means a convergence of equity valuations and currencies.

For a glimpse at how far the US has to go to make the kind of competitive adjustments Europe already has, Zero Hedge has a great comparison chart here with the full article here. It's hardly complete (and ignores the more radically competitive changes made by Eastern Europe, the Baltic States and Ireland) and doesn't even touch on the continent's wide, deep and grossly underutilized pool of human capital, but it's a great start at getting to the real issue in assessing Europe and America's future trajectories.

And there's also the immediate boost the euro's sharp drop provides to European exporters -- it's bolstering Europe's export competitiveness at America's, and the rest of the world's, expense.

Additional Note About the So-called "Flash Crash:" Beyond the technical gobboly-gook and search for culprits, the real story here is that there isn't much underlying support for the US equity "rally" -- there's not much "there" there, i.e. no conviction. The "flash crash" was a very real crash that exposed a fundamental lack of investor confidence in the US market, the overall economy and the outlook, and that's only been reinforced by market activity since then.That seems to be the basic issue a lot of people are dancing around while focusing on the technical and mechanical aspects of the crash. It wasn't just a "flash crash." This car's a lemon and needs a lot more than a technical tune-up.

Tax Revenues Don't Lie: Still No U.S. Recovery

The U.S. Treasury released its latest monthly figures on federal tax revenues and spending. They suggest an economy that remains flat on its back despite year-long, off-and-on "recovery" hoopla.

The following are charts of the 12-month trailing sum of federal tax revenues -- since '81, '03 and last summer, respectively. Total tax revenue collected over the past 12 months is about where it was in 2005 (or 2000, for that matter) -- still roughly 25% (or half a trillion dollars) below its 2008 highs... and it fell over the past month, reversing the previous month's blip.

This data tell me the U.S. economy has not yet recovered -- and this is without adjusting these nominal figures for inflation, in which case things would look even worse. We've had, at best, a dead-cat bounce with, as yet, no clear, solid and sustained signs of upward momentum here.

Some economic statistics, surveys and equity prices are suggesting something different, but tax revenue numbers don't lie: All other things being equal, if economic activity were really growing again, we'd see it here; the economy would be throwing off more income and more tax revenue. Well, it's not, according to these figures.

As I've written previously, what little growth exists is being fuelled by increasingly uncertain growth abroad and government-led support (of health care, education, Wall Street, etc.).

Unconventional Wisdom: Buy Europe. Yes, Europe.

International real estate guru Lief Simon once told me, "the best time to invest is when there's blood in the streets." With all due respect for -- and condolences to -- those who lost their lives in the latest wave of anti-austerity protests in Greece, and their families, Lief had a point.

Contrary to conventional wisdom on the Street and to prevailing opinion here on Seeking Alpha, I believe the European Union will soon represent the kind of business opportunity Ireland did when it was an economic basket case in the 1980s; that Argentina did during its peso crisis in 2001; that Eastern Europe, reeling from the end of Communism, represented in the early 1990s and that Colombia, gripped by ambivalence in its war against the FARC and drug barons, did up until no-nonsense President Uribe came onto the scene.

The expression "it's darkest before the dawn" comes to mind.

Some context: Five years ago, I prepared the following unpublished submission for Fortune Magazine, entitled "The Axis of Upheaval (.pdf)" I wrote the following:

Believe it or not, big free-market reforms might -- just might -- loom over the Japanese, German and French horizons. Ironically, that might just be happening as the U.S. appears to be moving in the other direction -- and poised to accelerate. It's the Axis of Upheaval (think "Vichy" France, and the metaphor kind of works).

For more than a decade the U.S. has lectured each of these countries on the virtues and benefits of freer markets: lower unemployment, faster growth and more innovation. It has gone on and on and on about how to get from Point A to Point B: lower taxes, less regulation and diminished government influence over the economy. For the most part, all that preaching to the unconverted got nowhere. Until now, perhaps.

It's hard to say how far each nation will go; real reform hurts, the payoff is often far off and risk-averse, career politicians risk being voted out by short-sighted voters. But more than a decade of stewing in slow growth, high unemployment and underemployment -- while the U.S. and business-friendly upstarts from Ireland to Lithuania blazed ahead -- has also hurt. There's deep disenchantment in Western Europe and a greater openness to change in each country, and not a decade too soon.

Talk of a "Third Way" between Anglo-Saxon hypercapitalism and Old Europe's quasi-socialism has lost its gusto, as high-technology and globalization have picked winners and losers across Asia, Western and Eastern Europe.

In France, Sarkozy is calling for a sharp drop in the maximum tax level to below 50%, sharp cuts in government spending and red tape and a relaxation of the mandatory 35-hour workweek law, as well as other restrictions on firms that have made businesses reluctant to hire and grow.

In Germany, Merkel and (economic adviser) Kirchhof are urging movement toward a simpler, flatter tax system and an end to labor regulations that make it almost impossible for companies to fire their workers and reluctant to hire new ones.

"We want to give the citizens back their freedom and let them decide for themselves what they want to do with their incomes," says Germany's Kirchhof, who seems to be having a field day saying such un-European things on a regular basis.

It's heady stuff. It could mark the beginning of the biggest policy shift in each of these countries in decades.

The wider context is that Germany, the Netherlands, Denmark, Sweden, Austria, Belgium and Spain -- not to mention flat-tax fire-breathers Poland, Russia, Slovakia and the Baltics -- have all either adopted or are considering flat taxes and public sector cuts. Europe may be moving towards lower and simpler taxes, tanks to tax competition from its new, faster-growing periphery, said a recent report by Goldman Sachs economists in Europe. 

Meanwhile in the U.S., ironically under Republican leadership, government has grown fatter across the board, with federal spending up from 18.4% of U.S. GDP in 2000, before Bush took office, to 20.2% this year (according to the Congressional Budget Office).

That's the biggest surge in government's slice of the economic pie in more than two decades. In the meantime, the U.S. tax code has grown ever more complex, with ever more loopholes and an ever-growing, migraine-inducing mix of phase-ins, phase-outs, sunsets and sunrises. Overall tax levels -- led by the alternative minimum tax and pending expirations of capital-gains and other temporary tax cuts -- are set to rise under current law.

And with some thanks to Katrina, proposed cuts and reforms to insolvency-bound entitlements -- such as Social Security, Medicare and Medicaid -- have been tabled, and overall spending seems all but certain to kick into higher gear. Spending is already up more than a third since 2000.

Luminaries from Old Europe and Japan might eventually be lecturing us on the virtues of economic reform. Welcome to the Twilight Zone.

The economic reform gap between Europe and the U.S. has only grown wider since those words were written. In the time since then, French President Nicolas Sarkozy and German Chancellor Angela Merkel, along with a number of other European states, have taking serious steps toward liberating their labor markets and their overall economies. This historic U-Turn was well under way before the current European crisis.

That crisis is now putting reform into overdrive. Greece, along with Ireland, Portugal and Spain are now being forced by financial markets to get less bloated and more lean -- to get competitive -- fast. Much of Eastern Europe, still fresh with memories of Communism and still appreciative of the virtues of capitalism, was rabidly market-oriented to begin with and was becoming only more so with time up to the crisis. Countries such as Romania and the Baltic States registered some of the biggest business-climate improvements in the world over the past decade.

In the meantime, the U.S. has grown fatter and dumber, with a debt burden that's ballooned to above 300% of GDP by some measures, a deficit currently near 100% of GDP and an estimated half of the population now dependent in some way on government largesse. European welfare states have been moving in our direction, and we've been moving in theirs.

The following two lists tell the tale. They're rankings of countries that registered the biggest improvement in economic freedom over the past ten years and past five years, as measured by the Heritage Foundation-Wall Street Journal Index of Economic Freedom (rankings run on a scale from "100%-most economically free" to "0%-least free").

As far as change in the business climate, the U.S. ranked well below most European countries in both time periods (coming in with a net loss of economic freedom over the past five years). Greece showed greater improvement.... and that was before the crisis.

Improvement in Economic Freedom Score: 2000 to 2010
(in percentage points)
Romania	12.1
Denmark	9.6
Finland	9.5
Malta	8.9
Lithuania	8.4
Sweden	7.3
France	6.8
Belgium	6.6
Slovenia	6.4
Armenia	6.2
Croatia	5.6
Germany	5.4
Ireland	5.2
Estonia	4.8
The Netherlands	4.6
Switzerland	4.3
Spain	3.7
Poland	3.2
Austria	3.2
Latvia	2.8
Greece	1.7
Hungary	1.7
United States	1.6

Improvement in Economic Freedom Score: 2005 to 2010
(in percentage points)
Montenegro	63.6
Serbia	56.9
Romania	12.1
Macedonia	9.6
Albania	8.2
Bosnia and Herzegovina	7.4
Croatia	7.3
Czech Republic	5.2
Slovenia	5.1
Norway	4.9
France	3.7
Greece	3.7
Poland	3.6
Germany	3
Slovakia	2.9
Austria	2.8
Finland	2.8
Denmark	2.6
Sweden	2.6
Hungary	2.6
Spain	2.6
The Netherlands	2.1
Portugal	2
Switzerland	1.8
Belgium	1.1
Ireland	0.5
Bulgaria	0
Liechtenstein	0
Latvia	-0.1
Lithuania	-0.2
Estonia	-0.5
Armenia	-0.6
Luxembourg	-0.9
Malta	-1.7
United States	-1.9

I used the Index scores and World Bank data on per capita income to construct an assessment of country "valuation" (you'll find a visual hereand here) where countries are assessed based on how much economic freedom they offer "for the buck." (this is 2007 data, but still generally applies). As opposed to the still-grossly-overvalued U.S., the UK is fairly valued, Estonia, Latvia, Romania and Bulgaria are significantly undervalued and Denmark, Switzerland, the Netherlands, Finland, Belgium, Germany, Spain, Portugal, Hungary, Poland, Croatia, and Sweden, significantly less overvalued than the U.S. In markets where everything is relative, that points to a stronger euro over a weaker dollar, and stronger European equity valuations relative to U.S. valuations.

The financial crisis is forcing greater European reform, while recurring safe-haven flows into U.S. Treasuries are buying the U.S. more time and rope to hang itself.

Olivier Sarkozy, Co-head and Managing Director of the Carlyle Group, the world's biggest private-equity form (and half-brother to French President Sarkozy), said it best at this week's Bloomberg Hedge Fund & Investors Summit.

Western Europe is in a way going through a more realistic process than we are here in the United States. They are addressing the issues - they're being forced by the markets to address structural issues and problems. That's producing an environment that will eventually create a better investment opportunity than what exists here (in the U.S.).

Given the wide and deep pool of underemployed and underutilized human capital across the continent, held back from its potential productivity for decades by bad policy, the opportunity is vast indeed.

Buy Europe -- ETFs and currencies -- especially if you have a longer than average investment time horizon... and a strong stomach. Some interesting leads and background to start with can be found here.

Greenspan: Treasury Bond Yield Spike Is The "Canary in the Coal Mine"

Alan Greenspan, the performer formerly known as "Maestro," warns in a Bloomberg interview today that the recent spike in Treasuries could be "the canary in the coal mine."

In other words, lenders to Uncle Sam are getting nervous, and the U.S. government's days of falling and low borrowing costs may be nearing an end.

These are his remarks immediately following the "canary in a coal mine" comment:

Download VOICE0522_004

Duh. Greenspan warns that if the 10-year yield moves "aggressively" above 4%, that will be "a signal we're in some difficulties." The yield has surged from 3.65% to above 3.9% over the past week. Mortgage rates are beginning to follow, which won't help the still-sick housing market.

Greenspan's policy mistakes and damaged credibility aside, it's important to remember just how highly regarded an economic forecaster Greenspan is, especially before his time at the Fed, and that he was early in wondering out loud whether the "New Economy" hype was a bubble; we're talking 1996.
                                                                                                                                                                                                                                                                                                                                                                                                                           In the Bloomberg interview, the former Fed chairman said he sees solid signs the economy is gaining momentum, but that growth is threatened by the "huge overhang of federal debt, which we have never seen before...I am very much concerned about the fiscal situation."

He predicted that with short-term economic growth picking up, job growth would soon pick up, but so would growth of the labor force as discouraged workers are encouraged by improving hiring prospects to get back in the game -- which means the unemployment rate won't fall much over the course of the year.

The full interview is scheduled to be broadcast tonight on Bloomberg's "Political Capital."

Is Uncle Sam's Credit Card About to Be Taken Away?

..or his credit limit slashed?

10-year Treasury yields have spiked dramatically in the aftermath of the passage of America's health care reform act -- a massive new entitlement that will add at least $1 trillion in federal spending committed over the next 10 years, beyond the estimated $90 trillion gap America already faces between what it has promised and what it has prepared for going forward.

10-year Treuasry bond yields over the past two days are up at their sharpest pace in more than a year, with reports that the last rounds of Treasury auctions went quite badly.



With the Federal Reserve scheduled to pull back from its emergency lending plan for the economy, bond market guru Bill Gross saying Treasury Bonds "have seen their best days," the Fed's independence and credibility as a rock of stability badly damaged, a newly expanded American underclass in the making, credit markets becoming less accommodating of fiscal mismanagement in capitals across the Western world, emerging markets becoming a more compelling alternative (both as investments and borrowers), we have the makings of a perfect storm brewing in the Treasury market.

The big question is whether this yield spike is a reaction to improving growth prospects, or whether we're on the cusp of something very big and very nasty here.

For more than a decade, the U.S. government has enjoyed easy credit delivered in significant part by a Treasury bond market that hasn't been reactive to the growing bipartisan fiscal irresponsibility of the U.S. government. Washington has demonstrated absolutely no serious intent, beyond hollow rhetoric and token measures, to reverse course, set budget priorities and live within its means.

With even Standard & Poors and Moody's -- typically late -- issuing warnings about America's credit rating, the bond market's complacency might be about to end with a return of the vigilantes, and the passage of the health care reform act could be the catalyst.

Are we approaching a critical mass of anxiety about Uncle Sam's ability to pay his bills? If so, we may be about to see what a real financial crisis looks like. For historical reference, see Argentina, Russia, Greece, the UK in the 1970's and the UK now.

The next few weeks will tell whether we are at a turning point -- a real one.

A Dovish Fed: President Obama Casts His Vote

President Obama has chosen San Francisco Fed President Janet Yellen and two other likely inflation doves to fill the three openings on the Federal Reserve's Board of Governors. That's another sign that if a serious monetary policy conflict arises in the future -- between the Federal Reserve's goal of mitigating unemployment and preventing economic instablity -- the central bank will focus on the former at the expense of the latter.

The policy bias will be to keep goosing the economy first and worry about the long-term damage later. In other words, the status quo.

As the Wall Street Journal reports in a good summary, Yellen never cast a dissenting vote against the prevailing winds in her time as a member of the Board of Governors previously. She walked hand in hand with Alan Greenspan as the then-Fed chief took the U.S. into today's financial abyss with easy money policy.

In a speech last month Dr. Yellen said:

Some people worry that sustained federal budget deficits and the huge increase in the Federal Reserve’s lending and stimulus programs could eventually lead to high inflation. Others take the opposite view, arguing that economic slack and downward pressure on wages and prices are pushing inflation down. I would put myself squarely in the second camp.

Yellen said she favored the Fed's current easy-money stance:

Such accommodative policy is appropriate, in my view, because the economy is operating well below its potential and inflation is undesirably low. I believe this is not the time to be removing monetary stimulus.

Citing the example of long-running deflation in Japan in her speech last month, she said:

There’s no evidence that big government deficits cause high inflation in advanced economies with independent central banks, such as the Fed...I believe that the more worrisome challenge for price stability over the next few years stems primarily from the sizable amount of slack in the economy.

President Obama's latest selections improve odds the Fed will put (or will be pressured to put) price stability (making sure inflation stays dead) on the back burner (especially as the 2010 and 2012 elections approach) in a way that invites eventual disaster -- a risk I warned about here.

We face the risk of a repeat of past policy mistakes: "Meet the new boss. Same as the old boss."

Invest (or divest) accordingly.

A Preview of the Stagflation Threat

The announced, surprise resignation of Federal Reserve vice-chairman Donald Kohn, a Greenspan protégé, will offer an early sign of just how committed (or not) President Obama is to the Fed's inflation-fighting mission. For the moment, let's put aside any speculation over why Kohn might have resigned.

We're going to find out, sooner rather than later, whether the badly bloodied Fed chairman Ben Bernanke will have the support he may need from the White House to head off a potential stagflation threat (already taking shape in the UK), or whether his authority (such as it is) will be (further) compromised.

President Obama's selection of a replacement for Kohn and the other two empty slots on the Fed's seven-seat Board of Governors, will be a key sign of the extent to which the U.S. central bank will be bolstered or undermined in its mandate to put long-run stability ahead of short-run temptations to boost growth at long-term expense. It's already a failure on that front. The question is whether its past failure will be compounded going forward.

As I wrote in an earlier piece, the Fed faces its own "New Normal" of reduced credibility and clout amid an ongoing economic slump -- a combination that could bring its inflation-fighting credibility into serious doubt and inflation expectations to levels we haven't seen since the late 1970's:

With America's unemployment rate likely to stay in double-digits for some time, a bigger permanent American underclass in the making, economic growth poky and government-inflated at best, no clear signs over the horizon of any significant commitment to improve economic growth the old fashioned way -- to "earn it" by improving the business climate ("It's the Business Climate, Stupid") -- D.C. more widely derided than it has been in decades, and an historically debt-heavy government that will be under ever more pressure to inflate its financial problems away, the Federal Reserve is and will be under the gun in a way it hasn't been since Paul Volcker headed the Fed through the energy crisis of the late 70's and early 80's.

Actually -- the risk is greater today. Paul Volcker had the absolute backing of then-President Ronald Reagan to do what it took to keep inflation under control (including jacking up interest rates into the double digits). Also, the U.S. was in a better financial position (a debt-to-GDP ratio of 30% versus today's 100%). Volcker had bigger pro-votes in the Senate than Bernanke appears likely to get. President Obama's current support notwithstanding, Bernanke can't count on that support tomorrow when political push comes to shove. President Obama no longer has Reagan-sized level of popularity, and the President's party -- predisposed to putting short-term growth ahead of inflation control and long-term stability during the best of times -- can be expected to put more pressure on the Fed to be more loose than it would otherwise be, especially as the 2010 and 2012 elections approach.

I've recommended focusing on the spread between between U.S. Treasuries and the inflation-protected variety (TIPS) and the spread between yields on U.S. Treasuries and similarly dated German bunds as key measures of the Fed's credibility gap going forward. The core idea is to at least consider trading that gap as the signs become clearer: short long-dated Treasuries, go long on German bunds (PIMCO's leading on this one), Inflation protected Treasuries and commodity-based indices and ETFs.

As Michael Franzese of Wunderlich Securities in New York told Bloomberg earlier this month, it's troubling that the yield curve has been steepening over the past few weeks amid more signs the "recovery" has either stalled, reversed or was fraudulent to begin with:

“The steep yield curve is starting to reflect signs of stagflation...The short end will remain tied to the fed funds. Yet we are seeing inflation signs and, as a result, long-dated maturities are getting hurt.”

President Obama, through his selection of a replacement for Mr. Kohn and for the other three empty slots on the Fed's board, will give us an early sign of whether these concerns are fully justified.

Employment Stabilizes...For Now

We're going to see a positive employment report tomorrow. It's a no-brainer at this point:

• Last week's U.S. GDP report showed the first real pick up in business investment since the crisis started.
• The monthly ADP private-sector payrolls report today showed its smallest loss since the low points of the financial crisis.
• The last monthly payrolls report showed continued growth in temporary jobs.
• Share prices for Manpower, Kelly Services and other staffing firms have jumped more than 20% over the past three months and have doubled over the past year.

But an inflection point has already been priced in -- there won't be a strong market reaction tomorrow absent some other development -- and the real question is how much organic growth we'll see going forward as government support peters out, inventories get back in sync with demand and pent-up demand is satisfied.

The drama going forward is what will happen in the second half of 2010 and first half of 2011 as the crutches disappear (assuming they'll be taken away) and how much of this has (or hasn't) been priced into the markets.

The recent pickup in weekly jobless claims is an early sign that growth is unlikely to be strong and consistent enough to offset productivity gains and bolster demand for workers.

It's the Business Climate, Stupid

President Obama said in his State of the Union Address that he wants to bolster job growth. Well, there's no mystery about how to accomplish that.

Crack open the recently released 2010 Index of Economic Freedom, note the strong link between economic freedom and prosperity and read about the examples of Hong Kong, Singapore, Australia, New Zealand and Ireland, which were ranked as the world's most attractive places to do business. Note other examples such as Turkey, Montenegro, Poland, Croatia and Qatar -- nations credited with significantly reducing home-grown, man-made barriers to business investment and economic growth -- and how they've prospered.

Specifically, these countries get credit for giving their citizens more freedom to work, produce, consume and invest, "with that freedom more protected and less restricted by the government."

In the meantime, the U.S., which got dropped from the rankings of the world's freest countries, got dinged for:

1. Burdensome top tax rates, exceeding international averages
2. Excessive government spending -- spending that's directly and indirectly displacing private-sector activity and growth
3. The 2002 Sarbanes–Oxley Act, which significantly increased disclosure and accounting requirements for small firms and reduced IPO activity
4. Government interventions in financial markets and the automotive sector and speculation about more change (the wrong kind) in the future -- changes that have increased price distortions, reduced market efficiency and raised concerns about the security of private property and the integrity of business contracts.
5. Uncertainties created by changes to regulation and policy that have discouraged entrepreneurship and job creation.

"The U.S. government’s interventionist responses to the financial and economic crisis that began in 2008 have significantly undermined economic freedom and long-term prospects for economic growth," the report concludes.

Here's what should be done:

1. Prioritize (for once) what the federal government does and slash government spending accordingly (easily done, right?)
2. Simplify the tax code and reduce taxes in a broad-based, even handed fashion that leaves it to the market to most efficiently pick winners and losers.
3. Stop scaring the banking system. One reason so many banks are restricting credit and holding so much in reserves is their uncertainty about what will happen to the economy and financial industry regulation.
4. Stop scaring small businesses: Suspend the most burdensome and time consuming provisions of the Sarbanes-Oxley Act when it comes to small business.
5. Make the temporary 2001 and 2003 income tax cuts permanent. The prospect of an automatic tax increase out there does not help business decisionmakers on the margins.
6. Increase human capital. When it comes to job growth, it takes two to tango -- a job opening and somebody qualified to fill it. Too many Americans are unqualified to fill 21st century jobs. Encourage (or rather, stop discouraging) states and cities that are trying to make the public K-12 system perform better, like the private sector, and compete for its clients (students, in theory). Read: more charter schools, more school choice. This costs nothing, on net, except some well spent political capital. The potential gain to the economy would be enormous. According to McKinsey and Company, the ongoing dysfunction of our public K-12 system costs our economy $2.3 trillion a year in lost human potential, and that's likely an underestimate. Granted, that's more of a long-term benefit, but necessary if we're to restore this economy's vitality in the long-run.
7. Reduce uncertainty. Stop scaring the markets with frequent, ever-changing policy prescriptions and announcements. Give businesses a more stable playing field. They need to be more confident about taking risky long-term decisions to expand their operations.

For each of these prescriptions, the president will find plenty of support from Republicans and moderate Democrats who understand how an economy works and, more importantly (for them), how much their political careers and legacies depend on getting it right.

While I've been skeptical about this "recovery" and its direction, recent events, including the President's change of focus, make me more optimistic about the U.S. economy's long-term prospects. What makes me most optimistic is that America's politicians and policymakers are losing their margin for policy error and folly.

We're facing sky-high deficits and debt, a refreshed and lengthening track record of bad policy and its consequences, a rising pile of economic casualties from those bad decisions and a growing litany of U.S. multinationals reporting intentions to scale down operations here and expand them abroad.

The financial crisis is just the latest in a 20-year string of bubbles whose implosions have exposed a long-running rot or hollowing out of the U.S. economy -- a development that preceded the crisis itself.

Generating economic growth the old fashioned way -- by earning it and improving the business climate -- is becoming one of the few options left as financial markets grow nervous about public sector debt in the U.S. and worldwide.

Mario Gabelli of GAMCO Investors puts it well:

To create the next Google, the next YouTube, the next great startup, you have to give entrepreneurs the clarity and conviction that they can make money.

Listen carefully, and you'll find -- reading between the lines -- that this is being acknowledged more widely by the political class in both parties, including President Obama. The only question is, how long will it be before this option -- inconvenient and painful for many politicians -- becomes the only viable one left to them.

Where's the Growth? Not in Top-Line Sales

Bloomberg released some revealing stats yesterday showing little growth in top-line revenue growth over the past year outside financials and tech.

According to Bloomberg, year-over-year sales growth among companies within the S&P 500 has averaged 15.7%, but exclude financials and that number collapses to 2.2%. Take out Apple (AAPL) (even leaving in the rest of the tech) and that number shrivels to 0.5%.

Those last two numbers are below the 12-month rate of inflation (according to the consumer price index). That means the corporate sector represented by the S&P has actually shrunk. Given that small businesses have clearly fared even worse, the entire U.S. economy has clearly shrunk in real terms over the past year.

Recovery hype, inventory corrections, great drama over the coming Apple tablet and somersaults at CNBC notwithstanding, there's no growth in the U.S. economy outside government-supported finance and tech (read: Apple).

Earnings growth within the S&P over the past year has been driven primarily by cost cutting, growth outside the U.S. and DC's gigantic subsidies of the financial sector.

The bottom line is that there hasn't been much of a top line over the past year.