doom letter #2

consumers of doom,

The thing I have noticed most so far in 2009 is the creepy Barack Obama cult of personality being created in America. Go to any mall, and you will see stylized pictures of him on posters and t-shirts. Talk to almost any supporter, and you will hear an utter lack of intellectual curiosity. Consume mainstream news, and you will find little challenge to whether or not he can right the ship. I think this year will be the uphill battle to get people to realize that the federal government is not the solution and won’t be the solution.

It doesn’t matter how pretty the guy in charge talks. It doesn’t matter how much stimulus is pumped out. Things will not turn around in the way they have in the past. The best we can hope for is a more realistic assumption about our new economic limitations. Since politicians aren’t so good at telling the truth, especially if the truth hurts, I think the uphill battle won’t start from the top. People will have to start picking up on some ideas. They will need to take note of the news that matters.

Our federal debt has to be financed by someone, somewhere. If investors can suddenly look to equity markets on the upswing in the first half of this year, a lot of the money that was part of late-2008’s flight to safety – a time in which US treasury securities became in such high demand that investors were willing to take a small guaranteed loss to hold them – will dry up and interest rates will have to correct (upward) on new debt issuance. This means that 2009 could be the first year that interest payments on the federal debt could exceed defense spending. The less likely but more doom-laden possibility would be that our debt sale would fail. What I mean is that rich people could refuse to buy treasury bills when the government tries to sell them. If this happens – and I don’t think it will but there are others out there mentioning the possibility – the federal government would either have to just print money without the debt to back it up or they would have to balance the budget. One contribution to this problem could be a tax holiday on payroll taxes (medicare and social security) which would cut down on the amount of surplus money being diverted to the regular budget.

I don’t expect the battle to be won this year. In fact, I think people will want to hold things together for as long as possible and a short term rebound could possibly be “in the works.” One thing I have learned is that you can never underestimate a capitalist’s desire to continue making money. In the very short term, anything can happen. They are unleashing the next round of TARP funds as soon as possible – that is assuming congress continues to avoid taking any responsibility for the actions of government.

I am sure democrats want to get this through so that when TARP fails they can call it a Bush program through and through. I am also sure that they will pin all of this economic mess on Bush. I completely disagree with that analysis. Bush has done a lot to maintain the illusion of the American way of life by running huge deficits, rubber stamping the Greenspan Fed Theory with the appointment of Bernake and generally encouraging the American people to consume and keep buying homes at over-inflated prices. The economy was as good as it could possibly be and the only thing Obama will be able to do is keep the same thing going with the same old bubbles or a new one.

I now believe that America is a mature economy that is essentially incapable of continued growth (see Japan). On top of this there are additional concerns that reverberate which I have mentioned here and elsewhere – namely peak oil, the national debt and collective indifference in our collective consciousness. The uphill battle will be to chip away at some of this nonsense. I doubt it will lead to everyone agreeing with me, but hopefully it will slowly change the way we are addressing things.

Grow food and shoot straight,

mike