Uncle Sol Starting a thought farm

I Gotta Wear Shades

Some interesting things have been happening of late that I wanted to share my thoughts on. Recently I've been quite concerned that the amount of deficit spending our congress and president have availed themselves of would lead to a systemic crash, the likes of which would make the Great Depression look like a cake walk. I believed this would happen because the well would eventually run dry.

Look at what is happening in Greece right now. No one wants to lend them money and their treasury bonds are on par with war-torn Pakistan. Junk. But Greece, though important to the European economy and troublesome to the fate of the Euro, is not anywhere near the size player that the U.S. is in the world economy. You know the saying, the bigger they are...

I was concerned because I didn't see any scenario playing out where our beloved politicians would pull back the reigns before it was too late. I didn't see them mustering the political will to just say, "no". But now, I wonder, if it just might be happening. The housing subsidy, granting new home buyers up to $8000 in tax breaks for buying a new home and $6,500 for non-first-time-buyers, is actually coming to an end. The papers are now starting to warn of the impacts of expanding the stimulus. And Wall Street might just give the politicos the scapegoat they need to end the madness.

Even today, Ben Bernake said, “Achieving long-term fiscal sustainability will be difficult, but the costs of failing to do so could be very high,” Bernanke said in remarks prepared for a speech today to a White House commission on the budget deficit. “Increasing levels of government debt relative to the size of the economy can lead to higher interest rates, which inhibit capital formation and productivity growth -- and might even put the current economic recovery at risk."

So now, even members of the old guard are beginning to have their doubts as to the wisdom of the current course of action. I can no longer say that I would be entirely awestruck were I to start hearing the politicos and media cheerleaders start trumpeting the line that they need to get out of the way and let the mess the Wall Street banks made clean itself out of the system. Now, that said, I didn't say it wouldn't surprise me, and I don't think it will happen.

I expect that the stimulus will be pulled back for now. And the economy will screech to a grinding halt. Property prices will fall dramatically again (I'm guessing another 25% or so). The commercial real estate bubble, which has been sitting at it's apex will finally burst. People will stop buying things again (with the money they are saving by not paying their mortgages, having caught on to the fact that banks aren't foreclosing). Unemployment will soar again. Then the politicians will start shaking in their boots and start pumping the stimulus prime once again. If they're lucky, the mess in Europe will still be going on and the renewed acceleration in deficit spending won't detonate the U.S. treasuries market. Yet.

The trouble with all of this is that the current deficit spending and the future re-acceleration of it that I predict do nothing but delay the inevitable. There is a ton of misallocated investment out there that needs to fail so that its pieces can be put to productive use once again and the economy can actually recover. All of this stimulus has made it worse. The future stimulus I project will make it worse still.

What we have here are two options. One option is to stop the madness and take the medicine. The economy will fall dramatically for a little bit of time, I'd say between a year and two years, and then it will finally start to climb out of the gutter on a new and healthy footing. The other option is to continue the stimulus madness until the point where the world calls us on our debt and causes a complete system crash, marking an end of the American Empire and the kind of life we've all grown accustomed to.

Of course, while I present this as a dichotomy, there are shades of options between these two extremes. We could spend the next several decades stopping and starting stimulus programs to forestall the pain, hoping for some new magic internet 2.0 type technology which will employ millions of people in some new industry that doesn't currently exist, and grind away in the doldrums in the interim. It's possible that we could keep halting these borrowing spurts before the treasury markets decide to call bull. I don't think it's likely, but it is certainly possible.

The one thing I can say for certain is this supposed "recovery" our politicians are talking about right now is not happening. And it won't happen for a long way off.

"The future's so bright..."

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