Tag Archives: economy

The State of the Union: The Path to Tyranny continues

An essay this weekend at Politico looks at the similarities between the fall of the Roman Republic and the United States today. I was asked by a friend to give my opinion.

The parallels between the fall of the Roman republic and our country are so numerous. Decline of virtue. Loosening morals. Redistribution of wealth. Multiplicity and mutability of laws. Ignorance and disdain for religion and the Constitution (way of the elders). Debt and monetary devaluation. Panem et circenses.

In The Path To Tyranny (2010), I wrote, “As of 2009, the federal debt held by the public was 55 percent of GDP,[1080] a large but manageable amount. The debt was just 41 percent at the end of 2008 and the 40-year average is 36 percent. The problem though lies in the future, not the present. By 2035, the debt is projected to be between 79 and 181 percent of GDP and, by 2080, it is predicted to be between 283 and 716 percent of GDP. The United States is clearly on the road to bankruptcy if the situation does not improve. Given that the deterioration intensifies just after 2020, we have just ten years to fix our government. Ten years may sound like a long time, but barring a real revolution, one with guns and violence, governments rarely change that quickly. It has taken the progressives and modern liberals a hundred years to produce our large government, but we have just one-tenth the time to reverse the trend. Not just stop new spending programs, but actually reduce the current commitments of the U.S. government.”

Unfortunately, we have kicked the can down the road for the last four years. If anything, the fiscal problems have gotten worse, not better, and the political situation has certainly gotten worse.

What scared me most, short term, is that this economic recovery officially started five years ago. As far as recoveries go, this one is a little long in the tooth. Some time, we will experience another recession. Deficits will go from the current $700-$800 million up to $2 trillion or so. Starting from such a weak economy to begin with, it this recession hits sooner rather than later, the lower and middle classes will be hit hard and will demand action from the government. It is in the throes of such economic despair and political incompetence that power accumulates in a single hand. I truly believe we are just one recession away from seeing a Caesar in our country. The apparatus is already in place (executive orders, non-enforcement of the law, NSA spying, etc.). One good crisis is all that is needed.

Fortunately, I don’t see anyone on the horizon with the charisma and skills to be this Caesar. Caesar was a great man, a great warrior, great politician, and great speaker. Obama is none of those, though some think he speaks well. If he had been competent, he could have done even more damage. God bless incompetence. Hillary Clinton is no Caesar either. Fortunately, I don’t see one, but then I am not predicting a potential rise of a new Caesar in the immediate future. It won’t happen until after the next recession has run a number of years. Think of the German economic misery of the 1920s that gave rise to Hitler. It takes many years before the people give up hope and give up their freedoms. As I wrote four years ago, I am looking for such an event to take place around 2020, if we don’t fix our problems, which so far we have only made worse.

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Obamanomics = Failure!

S&P/Case-Shiller signals double dip in housing:

U.S. home prices fell in March for the eighth straight month, confirming the beleaguered housing market has entered a double-dip recession, according to a closely followed index released Tuesday

U.S. consumer confidence declines in May:

Consumer confidence fell in May as Americans grew slightly more pessimistic about future job prospects and business conditions, according to a closely followed survey.

Chicago manufacturing gauge nosedives:

A Chicago-area manufacturing gauge dropped by the largest amount in nearly two-and-half years in May, in a further sign that the rise in oil prices and the Japanese earthquake have affected activity.

Currency devaluation’s effect on the markets and the importance of diversification

With commodities rallying across the board this year (most are up between 20% and 100%), copper is at an all-time high, palladium at a 10-year high, oil near its two-year highs, and the Treasuries falling, traders are obviously look for real assets.

The realest assets are commodities, but behind those are shares in companies that produce real goods and earn real profits. We tend to look at those profits in Dollar terms, but they really aren’t. A company making a 10% margin is making a 10% margin in the goods it sells, not in Dollars. In other words, a company could sell 90% of its goods to breakeven and hold the other 10% of the goods produced as profit instead of converting it into Dollars. Or that extra 10% could be converted into gold, silver, or whatever it wants, as long as it has a place to store the profits. Therefore, as long as a company continues to sell, the devaluation of currencies should affect it less than non-performing assets, such as Treasuries which will get hit by rising interest rates and inflation.

Actually, stocks tend to do well during periods of inflation, as long as the economy does well too. If a company’s costs rise, it simply passes along all or most of that to its customers. So if costs rise 10%, a company raises its selling price by the same amount to maintain its margin. As long as all countries experience the same inflation, there will little effect on the company. If we are seeing a worldwide currency devaluation, as I believe, stocks should rise as long as the economy holds up. Of course, commodities will likely do best, but stocks won’t be far behind. They’ll continue to earn a real rate of return of 4% to 7% or so. Bonds though will get double hit by rising interest rates and devaluation. Buying a bond yielding 4% today will yield a negative return if inflation exceeds that amount. And rising interest rates will reduce the Present Value of the bond too.

I would add a major caveat to all this: there is a chance of a major economic decline. With government’s deep in debt and many cutting back, the economy could suffer. Whether we see sub-par growth for the next generation or a double-dip recession remains to be seen. But if this economic decline occurs, stocks will get hit, of course. Commodities will also fall. Industrial commodities, such as copper and oil, may do even worse than stocks while precious metals will hold up better, but they too are likely to decline as they did during the 2008 market crash.

I’m not an economic adviser, but I always recommend diversification. Unless you have a lot of time to spend analyzing the market and become very good at it, chances are you won’t be able to “beat the market.” In fact, even the experts have a hard doing so and, statistically speaking, it has not been proven that anybody can beat the market (those that appear to do so may just be black swans). So own some stocks, some bonds, some commodities, and hold some cash. How much in each depends on your age and risk tolerance. You will not make a killing by diversifying, but in this political and economic environment, protecting your money is paramount. And with the future so uncertain, diversification is the only way to be sure your wealth won’t disappear in a market crash or rally, if governments go bankrupt or become solvent, or if the economy strengthens or weakens. No single investment will perform well in all the possible situations. Remember gold’s decline in 2008 or the larger decline from 1981 to 1998. Cash could be eaten up by inflation. Treasuries by rising interest rates. Stocks by an economic decline. But it is very unlikely that all four will decline together.

For example, learn more about Harry Browne’s Permanent Portfolio. I don’t necessarily recommend his portfolio as is. Much depends on your age and risk tolerance and ability to purchase these funds/instruments. But it certainly gives you a clearer picture of the importance of diversification.

Big government is producing high unemployment and stagnant wages.

Marketwatch reports Salaries and wages are rising, but not by much. Even that subdued headline is upbeat when you read some of the details:

Want some more bad news? Average wages today are lower than a decade ago when adjusted for inflation, according to an analysis earlier this year by the Economic Policy Institute.

For high school graduates, median inflation-adjusted wages were $626 per week in 2009, compared with $629 in 2000. If you assume a worker gets paid for a full year that totals $32,552 in 2009, down from $32,708 in 2000.

For college graduates, weekly wages were $1,025 in 2009, compared with $1,030 in 2000, according to EPI. Over one year, that works out to $53,300 last year, down from $53,560 in 2000.

Additionally, the official unemployment rate was just 4.0% back in 2000. Today, it stands at 9.5%. So not only are working Americans earning less, many more are unemployed and earning nothing.

The American dream is dying. But why? I again return to this chart, first posted here.

As is clearly evident in that chart, the government’s intrusion in our economy is at historically high levels. In this recent recession, government spending has hit all new unforeseen levels. But even prior to that, the 90s and 2000s, a period under both Republican and Democratic Presidents and Congresses, saw government spending excluding defense bouncing around the 30% level. Even that much-lauded decline in government spending under President Bill Clinton and the Republican Congress, only saw non-defense government spending decline from 31.87% in 1991 to 28.95% in 2000, a 2.92% decline. By comparison, non-defense government spending rose a 4.86% in 2009 alone. A supposedly major accomplishment that took ten years to achieve was obliterated in less than a year.

While non-defense government spending at 28.95% may look appealing now that the figure is about nine percentage point higher, non-defense government spending had never exceeded that level prior to 1982. While many talk about the small government days of Bill Clinton and the Republican Revolution of 1994, remember that FDR, LBJ, and Jimmy Carter all spent less excluding defense (which is wildly volatile depending largely on external affairs) than the U.S.’s recent best.

Our experiment with government intervention in society is failing. Government control over a third of the economy has produced high unemployment and stagnant wages. For decades, the United States enjoyed small government and prospered as a results. It is no coincidence that our recent weakness is the result of an overly large and burdensome government.