For those of us who believe in limited government, free markets, and fiscal responsibility, these are troubling times. Over the past twelve months we have witnessed events that would have been almost unimaginable a year ago. Faced with a perceived “credit crisis”, and the inevitable effects of years of unrestrained, unsustainable borrowing and spending, the federal government, with no consitutional authority to do so, has orchestrated a series of bailouts and financial interventions that make the New Deal look like child’s play. And now we are told that something more “bold” and “dramatic” is needed, and on the way.
One of the most troubling aspects of all this, for the few of us who are objecting to it, is how few of us there are. For the traditional left, increasing the power and scope of the federal government is perfectly acceptable. For them, the answer to nearly any problem is to increase the size, power and scope of government. Centrally planned economies and all manner of governmental social and economic engineering are part of what they have advocated for decades, so no protest is heard from them. But what of the so-called right? In this “crisis”, their true colors have been revealed. Most of those who call themselves “conservative” not only do not oppose this wholesale rejection of American values, they beg for it. These policies were instituted and implemented by a Republican adminstration, and the principal beneficiaries have been on Wall Street.
Those so-called conservatives who historically howled in opposition to social spending and welfare, are now just more pigs at the federal trough. Lining up for their corporate welfare, they have forfeited any moral authority to ever again object to individual welfare.
So where will all this lead us?
Our national debt will soar by trillions of dollars. At this level it is impossible that it can ever be repaid, except by monetizing it. The power and scope of the federal government will grow and continue to crowd out or liberties and our independence. By summer I predict that at least two major banks will be, for all intents and purposes, nationalized (although semantics will try to disguise that fact). To deal with rising unemployment, the federal government will create millions of make-work jobs. Think of the DMV, on a massive new scale. To pay for this, trillions of new dollars will be created out of thin air, and added to the national credit card.
By Fall, at the latest, our foreign lenders will no longer be willing to finance our extravagance for such meager returns. The demand for Treasury debt will vanish, and the interest the public will be required to pay will begin to spike up.
As the worthlessness of the dollar becomes evident, the price of gold will rise. I expect it will be $2,000/oz by the end of the year.
Corporate earnings in 2009 will be dismal. The equity markets will slide, with the S&P 500 falling below 600, and the Dow below 6,000 (albeit with some wild, but short-lived, “sucker rallies” along the way). The long-anticipated investor capitulation may occur, which could send the indices much lower than that.
The economic slowdown will continue, no matter how much the federal government tries to prevent it. But while the velocity of money will continue to slow, the sheer volume of it will continue to grow. The deflationary pressures of recession will be overcome by the inflationary pressures of an out of control money supply. Nothwithstanding high unemployment, inflation will begin, then will accelerate. More people will be out of work, yet prices will begin to climb. Stagflation, on steroids.
With each event of economic deterioration the Federal Reserve, the Treasury, the Congress and the President, will take increasingly radical steps aimed at stopping it, while a frightened public (and a frightened Wall Street) demands action. And every thing the government does will only make the problem worse.
Perhaps this will all end with a national return to sanity before the worst case scenario unfolds. That worst case scenario includes a revaluation of the currency, a tyrannical central economic authority, and eventually the eruption of that thing that centralized militaristic governments do best. It guarantees full employment, stifles criticism of the state and is the mother of all bailouts.
There is another way, of course. We could just accept the fact that recessions are normal parts of economic cycles, and are absolutely necessary following long periods of unsustainable “growth.” We could repent from our borrow and spend ways, and return to traditional values of thrift, moderation and frugality. We could allow interest rates to rise, promoting saving again. Those savings could be deposited into banks, which could loan the money as capital to deserving businesses. We could eliminate fractional reserve banking, and the securitization of bank debt. Community bankers would only make loans that they were confident could be repaid.
Most of all, the government could get out of the way and let the recession happen. Bankrupt businesses should fail. Malivestment should be liquidated. Home prices should fall to the levels that they would have been at now but for the insane monetary policy of 2001-2003 and the greedfest that followed. The government and the quasi-governmental masters of our currency could stop manipulating interest rates and money supply in a reckless effort to prop up inflated, unsustainable real estate and stock market asset values. We should take our medicine, suffer the pain, then rebuild a sound economy, based on real savings and the creation of real wealth. The longer we wait, and the more we try to postpone the inevitable reckoning, the worse it will eventually be.
But, sadly, that won’t happen. Instead, the prudent will be required to pay the debts of the imprudent. Businesses will be kept alive, no matter how much they deserve to fail, as long as they represent significant political constituencies. As with seemingly any perceived problem in America these days, the citizens will look to Washington, and ask the government to fix it, and save them. No matter the cost or consequences.
I am afraid that the USA in 2010 will look much different from the USA today. And I don’t expect the change to be for the better.
Let’s all hope I’m wrong.