The Economy Stinks... but it can still get worse

These are tough times. That’s a fact. There have been tougher, but most people haven’t seen something like this in a long time, if ever. Financial markets and the economy are kind of hard to predict in the first place, after all they are always changing, but this one seems to be the craziest of all.

Granted, there are some good things going on. The market has experienced a minor rally the last several weeks. This is not a result of the stimulus being IN the market, but rather the normal cycle of the market and the promise of the stimulus money coming into the system. From all of the different things that I have read it sounds like this will push forward a little rocky, but on a positive track, for the next year or so.

Nothing like being a little ‘iffy’ to keep you on your toes.

However there are so many unnatural and unpredictable variables that are exterior to the normal system. Quite frankly there are things happening on a scale and magnitude that no one has ever tried before. The fact that they are being done to the main economic engine of the world only leaves everyone that much more speculative and hesitant. Some of these things are counter acting. For instance the TARP and other bank bailout funds were intended to loosen up credit markets and allow the flow of credit, however increased measures and ex post facto rules implemented by the government on those loans has many banks focused on how to get out of them. This only serves to bring you back to where you were previously. It also means that banks end up holding money they could have lent because there is so much uncertainty still. At the same time there aren’t that many people seeking loans right now because there is so much concern and uncertainty about their own jobs and positions, or they are hesitant to start a new business because it is just not a good time to take a risk.

Because money isn’t flowing the Fed has flooded the market with cash on the scale of TRILLIONS of dollars. The idea is that if you put more cash into the system then the system can support any bank runs or cash demands and it helps to ease tensions. This can be useful to a point, but as I have pointed out repeated, it has consequences.

To top off the whole thing you have a new budget that is about to be pushed through that pushes spending 90% over and above what the government is going to take in, with deep red ink going on for a decade and never coming into line. Every family knows that to run a small deficit in an emergency is understandable, but it has to be dealt with as soon as possible and it can’t go on forever. To plan for a decade of spending where your best year will see expenditures exceeding revenue by 30% is… quite frankly irresponsible on such a scale that it is almost unbelievable. The numbers are appalling if not incomprehensible in real terms.

To put it simply, people don’t know what is going to happen because uncontrolled spending on this scale hasn’t been seen in peace times. Ever.

From what I have seen and read from a variety of sources I personally anticipate something along these lines.

A rocky year in a slight upward direction as the stimulus money comes into the system and the measures that have been taken over the last six month have their minimal positive affect. However, the gross amounts of money going into the system will have a significant negative effect in the form of rising inflation. The increased debt burden of the federal government will push interest rates higher by necessity. The scale of all of this only magnifies the problem. Double digit inflation coupled with double digit interest rates are not impossibilities. We will hit double digit unemployment, in fact some states are already there, but I would expect to see some states go as high as 15-20%. Stories will begin to come out of the massive corruption and fraud being committed against the American people through the TARP and stimulus packages. Corruption in the hundreds of billions of dollars. Already there are more than 20 criminal investigations of fraud in TARP related bailouts, but this is just the smallest tip of the ice berg. As more and more baby boomers go onto the Social Security and Medicare rolls, entitlement spending is going to become the new chief concern as underestimates in real numbers push us further into the red. Just like your personal budget, you plan to spend so much and save so much but things rarely go according to plan. The projected deficits aren’t going to be close to reality. Either a cap and trade system and/or nationalized healthcare will get pushed through. One of these by itself would be a budget crushing blow, but the combination of the two could push the economy into an all out depression. Instead of learning from their mistakes the administration and congress will double and triple down like gamblers on a losing streak, just waiting for the next move to be enough. Upper income tax rates will go up 15-20%, only further hampering recovery.

It’s hard to say where the bottom is going to be.

I hate to be this gloom and doom. I really do. It’s just hard to see an upside when you have this kind of aggressive and reckless stupidity going on. This long term budget is completely unsustainable. These actions that have had limited benefit will not be without repercussions. I wish I could speak with more optimism, but the data just isn’t there.

When President Obama came into office and tried to push his stimulus package through he touted this as the worst economy since the Great Depression. That might have been a self fulfilling prophecy.

Let’s just hope it doesn’t turn out to be an understatement.

I tried, but I just can’t end it like that.

The answer is the same as I have been saying for months. Stop pumping money into the system. Reign in the Fed. Pull back some of the cash. Let the markets adjust. Cut income tax rates by 30% across the board. Cut capital gains rates by at least 30%, if not suspend them entirely. Dissolve Fannie and Freddie. Stop the bailouts. Cut government spending 10% this year and 5% a year for the next 3-5 years to slowly get people out of the public sector and back into the private sector. Cut every department. Make Secretaries actually prove their administrative skills by maximizing the benefit for the public’s cost. Open up the OCS (Outer Continental Shelf) to drilling. Open up restricted areas in Alaska, CO and Utah.

It’s worked before. It can work again. Free markets work… if you let them.