Market Overview

Summers: Spend More or Economy Will Tank


Larry Summers is worried. On Sunday, the former Treasury Secretary and Obama administration aide warned that the United States was at risk of entering a Japanese-style lost decade.

Summers believes there is a way out: cutting payroll taxes, Reuters reported.

Cutting payroll taxes might boost the U.S. economy, as workers have more cash in their paychecks to spend.

Summers also wants reduced payroll taxes for employers. With reduced payroll taxes, companies may be more apt to hire additional workers.

The total cost of the Summers plan would be $200 billion. A small price to pay for preventing economic stagnation, the Harvard professor argued.

However, skeptics may be wondering if the nation really needs to cut payroll taxes at the present time. Certainly, unemployment remains high, but the Federal debt is over $14 trillion and with the refusal of congress to raise the debt ceiling, the U.S. is teetering on the precipice of bankruptcy.

Back in 2009, Summers was instrumental in the the American Recovery and Reinvestment Act. That fiscal stimulus package poured nearly $1 trillion into the American economy.

Yet, despite rosy projections from White House economists like Summers, unemployment remains high. Would the economy be worse today if the stimulus had not occurred, or was that money wasted? If it was wasted, does the nation really need to spend another $200 billion on a payroll tax cut?

Still, the Republican party has generally favored tax cuts in any circumstance. It seems likely that Summers could get what he wants.

Action Items

Bullish: Traders who believe that the Summers plan is likely to be adopted and that it will boost the U.S. economy might want to consider the following trades:

  • Buy iShares Silver Trust (NYSE: SLV) in a short play on the dollar. If the federal debt level continues to rise, the U.S. dollar may soften. Traders may run to the precious metals like silver and SLV may do well.
  • Buy ProShares Ultra Dow 30 (NYSE: DDM) in a long play on the Dow Jones. If a payroll tax cut is adopted and the economy improves, the market may rally and DDM may benefit.

Bearish: Traders who believe that the U.S. economy is in for a rough future (with or without the payroll tax cut) may consider taking positions in the following:

  • ProShares UltraShort Dow 30 (NYSE: DXD) is a short play on the Dow Jones. The Dow may decline if the U.S. economy enters a Japanese-style lost decade.
  • PowerShares DB US Dollar Bullish Index (NYSE: UUP) is a long play on the dollar. The U.S. dollar may strengthen if the economy weakens, as traders seek a safe-haven.

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