Saturday, January 2, 2010

Happy New Year

Yesterday I was interviewed by one of the local TV stations which wanted to know my new year's predictions. Here is what I said about my 2010 outlook. First, the employment picture will not either improve noticeably or get worse. Granted the recession may be over technically but there is no private sector recovery. GDP is made up of government spending, private consumption and investment expenditures. When you look at the composition of GDP growth, it is mainly in the government sector. Since government spending is financed either through borrowing or taxation, in either event it decreases private expenditures. Government borrowing raises the cost of private funds (crowding out) while taxation decreases the amount the private sector can spend. Consequently, until we see a recovery in private expenditures and investment, we will continue to have little real growth. Moreover, employment will stay stagnant until the uncertainty surrounding this administration is removed. As long as health care is unresolved and cap and trade sits out there, then businesses will not know their costs making it impossible to plan for the future. As a result, even though we have come out of every post-war recession like gangbusters with economic growth of around 6 percent, no one expects growth much over 2 percent for 2010. Second, one result of the recession is to make all of us re-evaluated our choices. My parents were products of the Great Depression. They hated debt. One reason I went to the University of Georgia is because they did not have enough money to send me to Purdue where my big brother was a junior. Since they did not borrow money, I had to go to a place where they could afford the tuition. Well one of the adjustments made during a recession is that households and businesses pay down debt. This is called deleveraging. As households get out of debt they will be reluctant to jump right back in and borrow more. What we will see is less consumer borrowing which translates to slower growth. Third, we have looming out there all of the trillions of dollars that the government has borrowed, printed and spent over the past two years. That has got to result in higher rates of inflation that will further debase our already weak currency. Our government is doing the opposite of deleveraging. Rather it is getting deeper in debt. This started with George Bush who demonstrated the fallacy of compassionate conservatism. We got tax cuts, but a new prescription drug entitlement, war expenditures, two "stimulus" bills and TARP. I wrote after the election that if you liked Bush you will love Obama. Most people thought I was on drugs. Yet one year later it has come to past with more reckless spending, zero fiscal responsibility and zero monetary control. We now have a government without adult supervision and are on the path to financial ruin. Yet I remain optimistic and will detail that optimism in the coming year.

1 comment:

Anonymous said...

I like the writing style and the sense of humor.