Economics, and specifically the economy, will be the dominant issue in the ’08 race. I believe that because I’m aware of the toxic waste keeping the economy afloat that nobody seems to want to talk about. I’m a long term optimist due to the effect of accelerating change on productivity but here is my list of facts that bode ill for ’08.
- The housing correction is just getting started. Trillions of dollars of homeowner wealth will vanish.
- The economy is 70% consumer spending. Home ownership is 70%.
- Opacity of derivatives markets. Things are now so complicated that nobody really knows what sort of dysfunction lies beneath the surface.
- Consumer indebtedness. People have been spending more than they earn for quite a while. That is not sustainable.
- Monolines – Insurance companies that back bonds are starting to flail due to unprecedented foreclosures. If they go down ratings on munies fall and pension funds are forced to sell (bad for stocks)
- Credit bubble which we’ve been blowing for 20+ years is about to pop and if you believe Hayek/Mises things are about to get ugly. This explains the housing bubble and current credit squeeze.
- Government spending (state and local is 10% of the economy) is going to fall as tax revenues fall in a recession.
- Commercial real estate is starting to fall. This was a bright spot until recently.
- Even if the Fed can bail out financial markets it will do so using inflation (hence my preference for gold). Higher prices mean less discretionary spending which bodes ill for the economy.
- Recessions are a natural part of the business cycle and we’re way overdue
- Home equity lines of credit and loans are evaporating
- Credit card delinquencies are rising.
- I could go on but you get the picture
I’m going to predict an Obama victory for the sake of argument. Here is his problem: We’re probably going to be in an unusually nasty recession when he’s being inaugurated next year and presidential approval ratings are roughly equal to consumer sentiment. Of course the president doesn’t have much of an effect on business (credit?) cycles in a $14 Trillion economy but that is the way the cookie crumbles.
Obama is probably going to make the economy a huge part of his campaign as the economy slides which will give Americans hope that everything will be puppies and roses as soon as he takes the helm of this rusty ship. Assuming this isn’t a repeat of the ’70s (or, dare I say it, 30s) we should be well on the road to recovery which bodes well for a 2nd Obama term, all things equal.
I said that I’m an optimist due to the effect of accelerating change on productivity. Accelerating change is a branch of future studies that nobody is really looking at in terms of economics yet. Kurzweil has a good chapter on it but it deserves a entire book. My take is that accelerating change will start to seriously ramp up productivity. The problem is that we don’t have the ability to train workers fast enough to take advantage of what should be a wealth boom for more than just the privileged few. The growing wealth divide is currently blamed on tax cuts. That may be the case but I think it is also due to the accelerating economic changes we’re witnessing due to the internet and off shore outsourcing.
Nearly every time we see a sell off in the markets (DOW is off 2% as I write this) Gold goes down with it. But gold seems to go down about half as much as equities, the assumption is that the smaller decline is due to the belief that the Fed is now cutting rates (using inflation) to prop up the stock market and maybe because it’s a destination in a flight to safety.
Asia Times has a good multi-part series on the inflation/deflation debate here. They’re in the hyperinflation camp. For the deflationary angle check out this post from Mish at Global Economic Analysis.