Conservative Logic

An economic guide to politics, designed for post-Baby Boomers

Disaster

Posted by A Hamilton on March 22, 2009

I’m back.

It’s been almost a year since my last post. A lot has changed, personally and politically.

I have a new wife and a new mortgage. And my political philosophy — as documented on this blog — remains unchanged.

These things are good.

Obama is President. He has used the current economic downturn to grow government in historic and unprecedented ways, imposing policies that will inevitably result in greater burdens for the younger generation, and ultimately directly threaten the Amrican dream. I never thought it would get so bad so fast.

These things are bad.

In just over two months, between the TARP, the automotive bailout, the “stimulus” bill, and the bloated federal budget itself, Obama has increased the size of government spending by more than 30%. That’s more than George W. Bush spent in over eight years fighting the war in Iraq.

And there’s more. In addition to spending more, the government has printed money at an unprecedented rate. Here’s a quick look:

 

Money Supply

 

What does it mean? In short, it means that much, much more money is chasing a fixed quantity of goods and services.

Now, add this to the fact that the “stimulus” bill (plus, stimulus bill #2, coming soon!) — really a pork barrel of incredible proportions — will primarily start to impact the economy in 2010-2011, and we’re in for some serious problems. By that time, the economy will be on the upswing. The impact of additional government spending is likely to overheat the economy. Couple that to the money supply growth and we’re looking at the potential for extraordinary inflation, like we haven’t seen since the 1970s.

Welcome back, Carter years.

And by the way –guess who is paying for all this extra spending?

Not your parents. Not your grandparents. Not the 30%+ of the country that doesn’t pay taxes.

Yes — you guessed it. You are. Specifically, younger Americans. Because right now, we’re borrowing the money for all this government growth (primarily from the Chinese). Eventually, we’re going to have to pay it back. This won’t happen for years…. And by that time, the political leadership and the generation that incurred the debt will be comfortably retired, paying minimal taxes (actually, paying ZERO taxes, if Obama fulfills his campaign promises). The burden will fall on you. And it’s going to be crushing.

How do I know this?

You see, we’re racking up so much debt that even the “rich” won’t be able to cover the costs of paying it back. Right now, the top 5% of income earners in the US pay about 60% of all US income taxes. Even if we tax 100% of their income, at some point they can’t pay enough to fund the government. Then the tax man comes for you.

And by the way, taxing 100% of income over, say, $250,000 (Obama’s typical “rich” bogey) will basically shut down small business — and shut down the economy in turn. Why? Because most small businesses are set up as S-corps. If you raise individual income taxes, you effectively raise taxes on small business, which generates most of the growth (and employment) in our economy. Eliminate their profits, you eliminate their ability to invest in growing their businesses. Which effectively rips the heart out of our economy.

This is an epic economic disaster in the making, unfolding before our eyes.

Add to that Obama’s moves to increase protectionism, to add another effective tax on industry by imposing cap-and-trade (which incidentally, will also increase inflationary pressure), not to mention Congress’ apparent willingness to legislate bills of attainder to target high earners (bonus earners at companies that have accepted TARP money) and you have a situation where government is basically declaring war on business. Seriously.

But what about my “American Dream”?

Think about it for a second. Some day, you want to become rich, don’t you? But to grow your wealth, you’re going to need to make over $250,000 at some point. But how can you do this if the government is taxing away everything you earn above that level? Marginal taxes for people making north of $250,000 can already be well over 60% when factoring in state, local, city, federal, and other government taxes and fees. They’ll continue to rise as the need to repay the debt becomes more urgent, and as the size of government continues to swell as entitlement programs grow and metastasize.

What we’re looking at here is the end of the American dream. And above it all hovers the threat of inflation, which (if you’re not smart) will destroy what little wealth you’ve managed to create.

Tactical solutions

So, what can you do about it?

From a purely tactical standpoint, if you have any wealth or savings, don’t leave it exposed to inflation. Invest in assets that have constant real value if inflation hits.

It’s also a great time to borrow big, believe it or not. Interest rates are at an historic low. So now is a actually a good time to get a mortgage, assuming you’re in for the long term and can wait out any short term depreciation in property value. Borrowing at 5% when inflation is running rampant is a great trade if you can make it.

More later

More on all of these things later. There is a lot going on…. Too much for a single blog post. But keep one thing in mind:

Our government wants us to be afraid right now. That’s how they are selling their tonic of unprecedented govenment growth and intervention in the private sector. But if economic history tells us anything, it’s that recovery happens quickly after markets fail. That’s the entire economic history of the 19th century, and most of the 20th. Most economic collapses correct themselves within a year or two. That’s the dynamism of capitalism. The exception, of course, is the Great Depression — where government intervention prolonged the economic downturn.

Despite govenment policies that have the effect of undermining confidence in markets, creating uncertainty around the future role and burden of government on business, not to mention rewarding failure by sustaining business models that don’t work, I suspect we’ll be coming out of this economic downturn within twelve months. But we need to be concerned about what comes next.

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