[Our good friend Doug Behnfield – by far the savviest financial advisor we know — was hard at work Sunday, prepping an ultra-rare 1972 Citroen he’s restoring for a $10,000 paint job in Florida. He had just fixed the air conditioner in his wife’s Cayenne – a day’s work that would have cost him $1,200 if the Boulder Porsche dealership had done it. He had also just put the finishing touches on the essay below. It explains why America is in for some very hard times as we work off debts that have been accumulating for decades. Doug is no pessimist, however. Far from it. He says that although we face a deflationary depression that will exact big sacrifices from all of us, America will be better for it, able to return to the core strengths that made the country great. RA]
Genius survives the test of time. Beethoven, the Beatles. The Brothers Grimm, Hans Christian Anderson. T. Rowe Price, Bob Farrell. Stan Salvigsen and David Rosenberg. The Pied Piper by the Brothers Grimm describes the consequences of stiffing the creditor — in this case the rat exterminator paid in florins — after a job well done. The Village of Hamelin loses all of her children (except for the crippled boy who can’t keep up) when the piper lures them to a cave that is sealed up by an avalanche. Grim indeed.
Today our Nation is facing the mother of all due bills now that we’ve had our heads extricated from the sand by the Tea Party. Congress and the President have settled on a fiscal restructuring plan that calls for $2.4 trillion in savings over the next decade, an increase in the debt ceiling and the creation of a congressional committee to recommend long-term fiscal reforms. The legislation acknowledges that we need not condemn all of our children to the suffocating fate of a national debt gone crazy. We must decide to pay the cumulative bill for post-WWII profligacy that started with unfunded entitlements and ended in an orgy of debt and structural deficits.
So, apparently, we are going to war. Shared sacrifice is demanded by the greatest and most powerful representative democracy in human history. A war to prevent our Nation from becoming a Banana Republic. Or Greece. Albert Einstein supposedly said that the most powerful force in the universe was the compound interest table. It must certainly be more powerful than the Third Reich, and we defeated them. The effort will require committing a substantial portion of the nation’s wealth if we are again going to avoid speaking German. We are now beginning the process of radically cutting spending and increasing revenues to eliminate our budget deficits.
Spending cuts, layoffs and revenue increases are occurring at the state and local level first, resulting in an enormous fiscal drag — and the Federal Government has not even gotten started yet. The war to reduce our nation’s collective debt will keep us in a depression for a long time. But the children will survive and, it is hoped, the able-bodied among us will not be boarding troop ships.
Moving to the Center
Since the most recent election, we’ve had total gridlock at the federal legislative level in budgeting matters and raising the debt ceiling. But that is to be expected. The framers of the Constitution intentionally built in a six-year election cycle and lifetime Supreme Court appointments so that political change did not occur too quickly. Get over it. We are still inside the first year of a secular political move to the center. And remember, there is no place for polarizing, fringe ideology when headed for war. One for all, and all for one!
The American people are in remarkable agreement when it comes to the need for spending cuts and revenue increases, but the leaders at the federal level are trapped by the length of the election cycle.
The terrified citizens flocked to plead with the town councilors to free them from the plague of rats. But the council had, for a long time, been sitting in the Mayor’s room, trying to think of a plan. Then, in walk Tom Coburn and the Gang of Six (preceded by the Simpson/Bowles Commission). We are going to pay up and avoid becoming a failed nation. It seems, however that we are entering a recession at the same time, based on the most recent GDP report and all of the miserable economic data that had preceded it. Recessions are certainly not the ideal time for fiscal drag, but that is Mother Nature for you. Investors should be aware of the deflationary implications of a credit collapse: It is good for bonds, though not for anything else. And the deflation should be all the more powerful because global supply of goods and services has tremendous upward momentum. Think China and India, industrial technology and telecommunications technology. The money supply has a lot of capacity to keep up with and instead it will be shrinking like crazy.
Very Japanese
All very Japanese. Except for the fact that while Japan has labored through its credit collapse for the last 20 years, during the first 17, the global economy was expanding like mad. Even though Japan was the third largest economy, their depression did not rub off on the rest of the world. That is unlikely to be the case this time for many reasons. The United States is big enough to precipitate a global slowdown. And events in Europe, the Mideast and China seem to be contributing to deflationary forces as well. We must think beyond the debt ceiling debate. Resistance is futile. The fiscal drag is coming, albeit with the delay that Thomas Jefferson and the boys had in mind. S&P will not downgrade us, since one more stupid mistake like that will put them out of business. Meanwhile, a Deal, however incomplete, will not mean a stock market rally of any magnitude because paying the piper is not a growth strategy.
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Dan:
whether or not you are right, those “up there” certainly think so and see the danger.
Just now, OBamba is announcing his violent extremism initiative, to help head of exactly that next step in discontent.
With the ever present spying, one could even end up on their radar just for a post like yours.
Certainly no different than Ron Paul bumper stickers leading to people being classified as extremists/potential terrorists, as became known in Mississippi not that long ago