Sunday, May 2, 2010

Be Careful What You Wish For

By all accounts, the Republicans are going to have a good year come November 2010.  I'd like to point out that this may turn out to be a disaster disguised as a blessing.  There are a lot of people like me who believe that our economy is on the verge of a collapse much worse than the one we just went through.  I believe that the Federal Government has been throwing money into a deep dark abyss in hopes of jump starting an ailing economy.  Why do I think the economy is failing?  Let me count the ways:

1.  Huge bailouts rewarding bad behavior on Wall Street have kept alive institutions that should have been allowed to fail.
2.  Relaxed accounting rules that have allowed banks to hide their insolvency by masking billions of bad debts on their books.
3.  A housing market with rising foreclosures and staving off further collapse in prices only because of government tax incentives, low interest rates and Fannie and Freddie buying up over 95% of all mortgages in the US.
4.  Jobless "recovery" with unemployment high and anticipated to stay that way for years.
5.  $787 billion in a stimulus package that failed to create jobs, and only added to the deficit.
6.  Annual budget deficits in excess of a trillion dollars a year for as far as the eye can see, adding to a national debt that is approaching 13 trillion dollars.  We are the next Greece!
7.  We're one failed Treasury auction (foreigners lose confidence and stop buying our debt) away from rising interest rates on our borrowing and a huge rise in interest payments as a percentage of our national budget.
8.  Unfunded entitlement programs like Social Security and Medicare coming due, going cash flow negative, and the government passing new entitlements instead of reining in costs on existing ones.
9.  A new stock market bubble in the making based on speculation by big banks with money borrowed from the Fed at near zero interest rates, and with an implied bailout when it all goes kablooey 'cause they're too big to fail.  That bubble  will eventually burst and destroy trillions in phantom "wealth".  The banks will be saved by Uncle Sam.  Joe Sixpack, to the extent that he gets sucked in to the apparent rally in stocks, will be on his own as will the pension funds that pay his retirement.
10.  States and municipalities on the verge of bankruptcy.
11.  A government so broken by corruption, bad policy, and addiction to special interest campaign financing that they can only be part of the problem instead of part of the solution.

I could go on.  No, really.  That's not just a rhetorical phrase. I really could go on for a while.  But I want to get to my point. 

Mervyn King is the Governor of The Bank of England.  They're about to have an election over in the UK, and the Conservative Party is looking like they're going to push the Labor Party out of power.  Mr King said recently that whoever wins the next election will be OUT of power for a generation.  I was confused when I read that.  Doesn't he mean they'll be IN power for a generation?  No.  He meant OUT of power.  Things are so bad in Britain today that the new government will have to institute austerity measures to salvage the economy that will be so Draconian that they will quickly lose power to whomever will promise less pain to the electorate.  The unfortunate peddlers of austerity, ie. the grownups, will subsequently be banished from power for a generation. 

I said above that the US was the next Greece.  That's not entirely true.  First will come Portugal, Spain, Italy, Ireland, Iceland (there already), and the UK.  But make no mistake.  The United States holds a place well near the front of the line.  Our day will come as well.  If the present administration can hold the illusion together until November, they may inherit the biggest political windfall one could imagine.

Picture this.  An economy struggles to recover.  The administration does all it can to create the illusion of success just around the corner.  November comes and the Republicans reap huge gains due to voter outrage over the Healthcare bill and a myriad of other insults suffered at the hands of this administration.  Then, whether due to fiscally responsible and necessarily austere policies by a Republican Congress, or simply to the inevitable breakdown of the economic illusion, the economy goes off a cliff.  The Democrats blame the Republicans, an economically naive and hurting electorate buy the story, and we see Obama re-elected in 2012 with a bigger majority than he has today, and it's the fast track to a socialist America.

Now I'm not saying this scenario is inescapable.  But it is not impossible either.  I hope I'm wrong.  But expectations have a way of disappointing us.  We need to be very careful what we wish for.