A good friend of mine sent me this video and it got me to thinking about what the next 4 years will really be like from an economic perspective. I am generally not a gloom and doomer, conspiracy theorist, or all around crackpot...ok, maybe a gloomy conspiracy crackpot, but definitely NOT a doomer theorist, besides, doom science is beyond the scope of this blog. I do, however, think we need to plan accordingly for what may be a major shift in our economy as a result of significant policy overhauls.
The transformation to socialism has been ongoing since the day President Reagan left office, but the rate of change has accelerated in recent months and will now be full steam ahead without any free market capitalists left in government to put the brakes on.
The automaker bailout failed this week because an odd alignment of interests occured. The few free market republicans left on capital hill are still around until this lame duck session ends and are doing the right thing in opposing this nonesense. The dems on the other hand were offended that the CEOs all flew in on their own private jets and so they wanted to stick it to the rich guys by wagging their fingers and telling them to come back in two weeks and beg again. Had the executives all carpooled from Detroit in a hybrid they would have left on Friday with fat checks in hand. Be rest assured that after January 20th, the money will freely flow, but in exchange for big government consessions, either in the form of even more regulatory oversight or outright control of the companies.
And that is only the beginning. The level of government intrusion into our lives will reach levels not seen since FDR and the New Deal. Why? Because the very people responsible for this mess in the first place are the ones now in control of everything. They refuse to look in the mirror and simply chant their mantra "failed policies of the last 8 years...", implying this is all President Bush's fault.
The facts are that the first 6 years of the last 8 were a remarkable illustration of the power of free markets. Across the board tax cuts led to an investment cycle that pulled us out of the mire caused by the market instability in the aftermath of 9/11. Revenues to the government INCREASED as a result because economic activity increased the tax base. Unemployment was at record lows. During this time however, government spending outpaced revenue growth. Republicans, in an effort to shake the media created image of cold conservatism, joined the democrats in creating all kinds of new things to spend money on.
How we got here...
Combined with a low interest rate environment and 'free' government money, getting a mortgage was as easy as talking Nancy Pelosi into a facelift, leading to the latest investment bubble: the housing market. FannieMae and FreddieMac were at the forefront of the lending craze, using their government endorsed powers to fan the flames. FNM and FRE were run by democrats that gave money to Chris Dodd and Barney Frank, more democrats, who repeatedly blocked attempts to control the risks assumed by FNM and FRE. Remember, FNM and FRE are goverment sponsored entities, not private companies, so the backing they recieve from the government gave them an unfair competitive advantage over other financial institutions. Due to a combination of this artificial edge and the pressure people like Barney Frank put on banks to make riskier loans in the name of "fair housing", led to overleveraged portfolios which were packaged and sold as securities to investment firms like Bear Stearns, Lehman Brothers, and Merrill Lynch. Do any of those names sound familiar? This has caused a withdrawal of available credit because other firms have stopped lending in an effort to shore up their own balance sheets. Its a domino effect that has led to less capital flowing through the marketplace, which has caused people to sell stocks to raise cash or to head off future capital gains tax increases, which has led to a 50% decline in the stock market. Domino after domino falling, all started by the first domino pushed over...government interference in the lending marketplace. Yet no matter how clear the evidence is, politicians continue to grandstand in front of the cameras, blaming everyone but where the blame should be...squarely on their own shoulders.
Where do we go from here?
Since those that presided over all of this are still in power, now strengthend by larger majorities and a president that will rubber stamp anything they want to do, we need to be ready for some hard times. I am an optimist in general, so I am not one to say the sky is falling. But we need to expect a tighter labor market, higher prices, and tighter credit. Labor will be tight because higher taxes on corporations and small businesses will lead to smaller growth and fewer new hires. Prices will increase because input costs, including taxes, energy and labor will rise. With less reinvestment capital available, the crunch on credit will continue. When the supply of credit decreases, interest rates rise, causing borrowing to be more expensive. This adminiatration's stated goal of eliminating the coal industry by making it unprofitable, its unwillingness to drill domestically, and its refusal to pursue nuclear energy will by default lead to higher energy prices. This recent decline in oil prices is a direct result of the public outcry to produce more energy and the expiration of the offshore drilling ban combined with the overall slowdown in demand. No doubt this ban will be reinstated and Washington DC is now going to be full of deaf ears beholden to the radical environmental lobby. Their solution will usually include some type of price controls or "windfall profits tax" which will lead to shortages.
The result of all of this will be much higher unemployment, double digit inflation and mortgage rates, and long lines at the gas pumps. We haven't had things that good since Jimmy Carter was president! Now, don't get me wrong, I hope none of this happens. I hope that Obama changes his socialist ways and promotes the benefits of the free market. I hope that Nancy Pelosi and Harry Reid will stop trying to tear down the system that has created the greatest economy in the history of the world and replacing it with a system that has failed every time its been tried. I also wish I had washboard abs, but we can't have everything we want. Maybe I could get a referral for Pelosi's surgeon...
With all of this gloomy conspiracy crackpot talk, you may be asking yourself what a guy like me is doing to plan for this...mainly so you can do the opposite. I think its extremely important to get out of debt as soon as possible. Build up an emergency fund of a few months of living expenses in case there is any interruption in employment. Do not use credit cards for Christmas. Use creativity instead of cash (unless you are sending me a gift, then cash is acceptible). Live within your means...a novel idea untried in America for quite some time. I am just offering these as suggestions for making the transition from liberty to socialism as seamless as possible. It is by no means complete nor is it meant to instill fear or panic in you. Now excuse me while I go buy guns and canned food before its all gone.