Solitude Blog

“I am from the government and I am here to help.” This statement is scarier then the brilliant Alfred Hitchcock’s “Psycho.” Be warned, Norman Bates Is on the loose and he has trillions to spend. 2009 will be a unique period for world markets. Led by the United States, governments around the world will borrow, print, and spend incredible amounts of money never before seen in history in order to restore confidence, liquidity, and credit to the marketplace. By my analysis, the results of these actions will be mixed at the very best and by my humble assessment, a total failure. On January 12, 2009 I made a post titled “The Last Capitalist.” As briefly as I could, I wrote that free markets and the ideas that led to the last 25 years of prosperity were being thrown over the side due to our current economic pain and that only a select few were speaking out against the massive government spending (wasting) that was going on in order to stimulate the economy. Their plan is doomed to failure and as a solutions oriented guy, I provided a better alternative. Of course, the President and the Congress ignored the last capitalists like me and will spend more money then ever before, providing little to no help to our ailing economy. Now we are stuck paying interest on that money for the rest of our lives most likely.

While the government has meddled in the economy for decades, it has reached a high point recently. For example, the government has encouraged risky loans for decades, accelerating the process to the breaking point during the last few years. I would argue that this means there never really was a free market in housing, and therefore the housing collapse was not a direct result of the free market at all, but a complicated confluence of events that started with government intervention. For example, the rising price of oil contributed to consumers pulling back their spending and hurting their ability to afford their homes. Had government not made it illegal to drill for more oil, perhaps the price might never have been as high as it was. This is another government induced problem that should have never existed in energy markets, but the government interfered and we had $148 dollars a barrel before the whole economy broke and demand crashed. This is not to say however that any government involvement invalidates the market as free. The government provides FDIC insurance for bank deposits, and I would never argue this is an assault on the free market. So, like most things, it depends. All government involvement is not created equal obviously but most of the time it is bad, very bad.

It seems to me that we are facing two possible outcomes. One is that we take this short hiatus from the free market for a few years and muddle along, we come to our senses, institute broad based tax cuts, reform government spending, mainly entitlements, and begin to tackle issues like energy and immigration which have long term financial implications. The second option is that government led by an incompetent congress institutes so many taxes, regulations, and restrictions on capital and capital formation that businesses not only ship more jobs overseas, but actually move their entire operations abroad depriving the country of needed tax revenue. We are given phony tax rebates (not rate reductions) that do nothing to create long term jobs and suffer for 15 to 20 years under a mountain of debt that strains our budgets amid skyrocketing social security and Medicare obligations. Growth is nowhere to be found in this scenario.

The outcome could lie between these two points, but my estimation is that we will be much closer to one then the other. Obviously, the second option is not a good one. Of course, even the incompetent US Congress should come to their senses before we reach thunderdome, but the numbers are unavoidable. Taxes either have to go up, or benefits have to come down. It is that simple. It will be politically impossible for almost anyone to tell the American people that they need to receive fewer entitlements, but that is exactly what must be done. Despite this reality, I believe it will not be done and therefore am betting on tax hikes that will hurt our growth and competitiveness further. Luckily, we have time to solve these long term financial problems as we have a lot of money to waste before we break. I hope we see the light in time. I mention it in this post because I believe it is vital to understand how inflation, government spending, and debt could plunge us into a 1.5% growth rate for a decade or more and a stock market that doesn’t revisit 2007 highs for 20 years. Oh yeah, and crippling inflation. Just ask Japan, they have seen this up close and personal with their stock market. I will revisit these long term issues in future posts, but I thought it wise to plant the seed now.