Friday, January 23, 2009

The Coming Depression: Oh, the Horror!

The more I look at Obama’s plan and this $825 billion dollar “stimulus” the more I feel like Col Kurtz in the movie Apocalypse Now when he muttered “the horror, the horror”. I predict that by the time they pass this bill, expected in mid-February, it will be greater than $1 Trillion dollars. I also predict that this number will be increased and we will have a second round come this Summer when it is realized this first round plus last Fall's bailout is not stopping the hemorrhaging. And why should it? It's the wrong medicine.

The catalyst of today’s scare was an article I read on the WSJ that touched on the question: Who pays for the debt? Who, specifically, buys the T-bills that even enable us to go into debt in the first place? The usual suspects were mentioned including the Chinese, Japan, and the Saudis.

When foreign nation governments and foreign individual investors buy T-bills they do so because they view it as a safe investment. However, there may, and I stress may, come a point where they no longer view it that way. The assumption America makes is that foreign money streaming in to buy Treasury’s at rates that are historically low is simply a given.

But, at some point, T-Bills mature and have to be paid in full. At some point, foreign investors may require a higher yield and higher interest rates for investing in American securities. Like any investment, investors seek the highest possible return. If foreigners do these things they may withdraw their money, they may require higher interest rates to lend to America’s debt.

At the end of the day, this is a potentially nightmare scenario. This could negatively impact the dollar of the value, increase inflation, make it harder for America to borrow, and actually make American securities almost like Junk bonds. The other option is that America could simply fire up the printing presses and simply print more money. This, however, serves to fuel inflation and lessen the value of American securities and their attractiveness because investors are primarily concerned with the real rate of return, which is the interest rate minus the inflation rate. If that is negative, investors tend to send their money elsewhere.

I used to think these alarmist scenarios were not possible. Sort of like a Y2K or man lives in the woods because of the coming nuclear holocaust or something like that. But I don’t consider the scenario laid out above to be that far-fetched anymore. Especially if pork policies like what we see now are pursued. These policies are not simulative. They are pork, pure and simple. They are intended to grow the economy from the “bottoms up” rather than through stimulating investment, which is needed to create sustainable jobs. The money we are indebting ourselves with now will dissipate as it goes through the economy. It is not akin to teaching a man to fish it is more akin to simply giving him fish and nothing more.

Unless the people America elected rethink what they’re doing and become more deliberate and careful, we are seriously headed for a major depression.

Wednesday, January 21, 2009

My Worst Nightmare

An article today by former Clinton advisor Dick Morris more accurately captures my worst fears about Obama than anything I could have put together. I hope it's not going to be this bad but I actually believe it will. I suspect we will see 12% to 15% unemployment rates and inflation in double digits by Summer 2010. I am not as hopeful as Morris is that Obama will get blamed. I tend to believe that Obama, like Roosevelt, will get away with his failures under the guise of his perceived care for the forgotten little man.

Let this be an early warning for posterity sake. I see nothing in Obama's current policies that could lead me to any other conclusions about the future. The only hope I have is that I do actually see some normalcy in a few of his advisors. Notwithstanding, I believe this is essentially what we have to look forward to...

The Obama presidency: Here comes socialism
By Dick Morris
Posted: 01/20/09 06:12 PM [ET]

2009-2010 will rank with 1913-14, 1933-36, 1964-65 and 1981-82 as years that will permanently change our government, politics and lives. Just as the stars were aligned for Wilson, Roosevelt, Johnson and Reagan, they are aligned for Obama. Simply put, we enter his administration as free-enterprise, market-dominated, laissez-faire America. We will shortly become like Germany, France, the United Kingdom, or Sweden — a socialist democracy in which the government dominates the economy, determines private-sector priorities and offers a vastly expanded range of services to many more people at much higher taxes.

Obama will accomplish his agenda of “reform” under the rubric of “recovery.” Using the electoral mandate bestowed on a Democratic Congress by restless voters and the economic power given his administration by terrified Americans, he will change our country fundamentally in the name of lifting the depression. His stimulus packages won’t do much to shorten the downturn — although they will make it less painful — but they will do a great deal to change our nation.

In implementing his agenda, Barack Obama will emulate the example of Franklin D. Roosevelt. (Not the liberal mythology of the New Deal, but the actuality of what it accomplished.) When FDR took office, he was enormously successful in averting a total collapse of the banking system and the economy. But his New Deal measures only succeeded in lowering the unemployment rate from 23 percent in 1933, when he took office, to 13 percent in the summer of 1937. It never went lower. And his policies of over-regulation generated such business uncertainty that they triggered a second-term recession. Unemployment in 1938 rose to 17 percent and, in 1940, on the verge of the war-driven recovery, stood at 15 percent. (These data and the real story of Hoover’s and Roosevelt’s missteps, uncolored by ideology, are available in The Forgotten Man by Amity Shlaes, copyright 2007.)

But in the name of a largely unsuccessful effort to end the Depression, Roosevelt passed crucial and permanent reforms that have dominated our lives ever since, including Social Security, the creation of the Securities and Exchange Commission, unionization under the Wagner Act, the federal minimum wage and a host of other fundamental changes.

Obama’s record will be similar, although less wise and more destructive. He will begin by passing every program for which liberals have lusted for decades, from alternative-energy sources to school renovations, infrastructure repairs and technology enhancements. These are all good programs, but they normally would be stretched out for years. But freed of any constraint on the deficit — indeed, empowered by a mandate to raise it as high as possible — Obama will do them all rather quickly.

But it is not his spending that will transform our political system, it is his tax and welfare policies. In the name of short-term stimulus, he will give every American family (who makes less than $200,000) a welfare check of $1,000 euphemistically called a refundable tax credit. And he will so sharply cut taxes on the middle class and the poor that the number of Americans who pay no federal income tax will rise from the current one-third of all households to more than half. In the process, he will create a permanent electoral majority that does not pay taxes, but counts on ever-expanding welfare checks from the government. The dependency on the dole, formerly limited in pre-Clinton days to 14 million women and children on Aid to Families with Dependent Children, will now grow to a clear majority of the American population.

Will he raise taxes? Why should he? With a congressional mandate to run the deficit up as high as need be, there is no reason to raise taxes now and risk aggravating the depression. Instead, Obama will follow the opposite of the Reagan strategy. Reagan cut taxes and increased the deficit so that liberals could not increase spending. Obama will raise spending and increase the deficit so that conservatives cannot cut taxes. And, when the economy is restored, he will raise taxes with impunity, since the only people who will have to pay them would be rich Republicans.

In the name of stabilizing the banking system, Obama will nationalize it. Using Troubled Asset Relief Program funds to write generous checks to needy financial institutions, his administration will demand preferred stock in exchange. Preferred stock gets dividends before common stockholders do. With the massive debt these companies will owe to the government, they will only be able to afford dividends for preferred stockholders — the government, not private investors. So who will buy common stock? And the government will demand that its bills be paid before any profits that might materialize are reinvested in the financial institution, so how will the value of the stocks ever grow? Devoid of private investors, these institutions will fall ever more under government control.

Obama will begin the process by limiting executive compensation. Then he will urge restructuring and lowering of home mortgages in danger of default (as the feds have already done with Citibank).

Then will come guidance on the loans to make and government instructions on the types of enterprises to favor. God grant that some Blagojevich type is not in charge of the program, using his power to line his pockets. The United States will find itself with an economic system comparable to that of Japan, where the all-powerful bureaucracy at MITI (Ministry of International Trade and Industry) manages the economy, often making mistakes like giving mainframe computers priority over the development of laptops.

But it is the healthcare system that will experience the most dramatic and traumatic of changes. The current debate between erecting a Medicare-like governmental single payer or channeling coverage through private insurance misses the essential point. Without a lot more doctors, nurses, clinics, equipment and hospital beds, health resources will be strained to the breaking point. The people and equipment that now serve 250 million Americans and largely neglect all but the emergency needs of the other 50 million will now have to serve everyone. And, as government imposes ever more Draconian price controls and income limits on doctors, the supply of practitioners and equipment will decline as the demand escalates. Price increases will be out of the question, so the government will impose healthcare rationing, denying the older and sicker among us the care they need and even barring them from paying for it themselves. (Rationing based on income and price will be seen as immoral.)

And Obama will move to change permanently the partisan balance in America. He will move quickly to legalize all those who have been in America for five years, albeit illegally, and to smooth their paths to citizenship and voting. He will weaken border controls in an attempt to hike the Latino vote as high as he can in order to make red states like Texas into blue states like California. By the time he is finished, Latinos and African-Americans will cast a combined 30 percent of the vote. If they go by top-heavy margins for the Democrats, as they did in 2008, it will assure Democratic domination (until they move up the economic ladder and become good Republicans).

And he will enact the check-off card system for determining labor union representation, repealing the secret ballot in union elections. The result will be to raise the proportion of the labor force in unions up to the high teens from the current level of about 12 percent.

Finally, he will use the expansive powers of the Federal Communications Commission to impose “local” control and ownership of radio stations and to impose the “fairness doctrine” on talk radio. The effect will be to drive talk radio to the Internet, fundamentally change its economics, and retard its growth for years hence.

But none of these changes will cure the depression. It will end when the private sector works through the high debt levels that triggered the collapse in the first place. And, then, the large stimulus package deficits will likely lead to rapid inflation, probably necessitating a second recession to cure it.

So Obama’s name will be mud by 2012 and probably by 2010 as well. And the Republican Party will make big gains and regain much of its lost power.

But it will be too late to reverse the socialism of much of the economy, the demographic change in the electorate, the rationing of healthcare by the government, the surge of unionization and the crippling of talk radio.