Wednesday, March 25, 2009

When $10,000,000,000,000 ain't enough

A couple of interesting things to consider about the Great Recession:
  • The recent sharp rise in the markets has been the steepest two-week gain since 1938.
  • Such steep rises are indicative of bear market rallies. Between 1929-1932 there were nine rallies of 15% or more, averaging about two-weeks per rally. In the recession from 1937 and 1942 there were another nine rallies of 15% or more averaging almost 3 months each.
So, have we bottomed out yet? No one knows but history would suggest we haven't.

Frontline had another excellent program on last night. This one focused on the national debt, something I've posted about before. As you know, I support President Obama on most of his initiatives but I believe NOTHING is worse for the economic future and social stability of this country than public debt.

The basic story, according to Frontline, is that President Reagan authorized a large tax cut immediately after assuming office in 1981. Only a couple of years later, however, he was forced to raise taxes due the ballooning national deficit. President Bush the First infamously stated: "Read my lips. No new taxes." But he was forced to raise taxes in order to control the federal deficit. This was political suicide and it was a lesson President Bush the W took to heart.

President Dubya proceeded to preside over a skyrocketing rate of federal programs, particularly Medicare Part D, which will cost this country many trillions of dollars going forward. Dubya started not one but two wars. Dubya cut taxes several times without consideration of the deficit.

Now, President Obama inherits record deficits and the worst economic crisis of the last two generations. This crisis began in late 2007, long before Obama was even leading Hillary Clinton in the polls. But, the Obama solution is to run up the largest deficits in history.

According to Frontline, we have only another 8 - 10 years before the public debt crisis dwarfs even our present economic mess.

"By 2017 the national debt is projected to be more than the entire economic output of the country. That hasn't happened since 1947. In ten years, according to the budget plan, the debt will have more than doubled to over than $23 trillion."

This is crazy. In an attempt to keep the financial system from completely collapsing - which it would certainly do if we did nothing - we are going to burden this society with an unmanageable amount of public debt. My opinion is that in the long run this will lead to a far worse situation.

If everything fell apart - largely due to the ill-logical "spend and don't tax or regulate" philosophy of the Dubya Administration - we would likely be in another Depression. BUT, we would be able to come out of the chaos of that without being saddled with a doubling of the national debt.

Instead, to stave off the possible Depression, Obama will mortgage our children's economic future with the hope that we will return to prosperity to such an extent revenues will become positive again and we will reduce the largest deficit in human history. It is a bold gamble. It will result in worse economic times and probably the demise of the US dollar as the standard of world currency.

At that point this nation will no longer lead the world. We have avoided the hard realities of our lazy, soft, fearful, convenience worshipping "American-way-of-life" once too many times. And it looks like Obama will get the bulk of the blame.

Under such conditions, gold at the current $900+ level might look very cheap.

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