James Quinn, "Financial Sense": "Likely Future Events"

February 10, 2009. “We enter 2009 and the Presidency of Barack Obama with citizens pessimistic about the future of our country. The public has lost faith in government, financial institutions, and religious institutions. Distrust of politicians, bankers, CEO’s, financial advisors, and moral leadership is well founded. The popular culture of over hyping public figures and then tearing them down has led to everyone and everything being discredited. The personal and public choices that will be required in the next few years will be harsh. Moral courage and leadership is what is needed. As I watch the likes of Barney Frank, Nancy Pelosi, Rush Limbaugh, and Sean Hannity work their rhetorical magic, it is clear that we have a major deficit in wisdom, courage and leadership.

Instead of analyzing how we got here and how we want the country to be in ten years, when this crisis has past, we are focused only on specific right wing or left wing agendas and how to position ourselves for the next election cycle. The short sightedness of our current leadership will lead to the next more dangerous phase of this crisis. Congress will pass a stimulus bill with wave pools, Frisbee golf courses, digital TV coupons, tax incentives to borrow money and buy houses and cars, and billions more of pork in the next week. The bill is being sold as an infrastructure bill despite the fact that only 5% of the bill is for infrastructure. President Obama will sign it. The second helping of TARP will be dished out to banks, insurance companies, automakers, and people who bought more house than they could afford.

It is tough to predict what will happen in the next week, let alone the next decade. Here are my best guesses:

1. The stimulus bill will grow to $900 billion (this is how Senators & Representatives compromise) and be passed on party lines, with virtual Democratic Senators Specter and Collins showing their true colors and providing the deciding votes. President Obama will use fear tactics, convincing the non-thinkers that inhabit most of America that not passing this bloated pig of a bill will result in a permanent Depression. I’d love to find out which economists told him this would happen. Every dime of this stimulus package will be borrowed from foreign countries and be paid for by increased taxes on future generations. An unfunded tax decrease or spending increase is a tax increase for our children and grandchildren.

2. Timothy Geithner, our TurboTax expert Treasury Secretary, will introduce the sixth variation of the TARP program since we were told it had to be done to save the world from collapse. It will not do what needs to be done. Smoke and mirrors will not pay off debt. The bankrupt financial institutions and corporations (Citigroup, Bank of America, General Motors, Chrysler) must be put into receivership and their shareholders wiped out. Good banks should take over from bad banks. Corporations with sound management and viable business plans should prosper. Corporations that sell every product at a loss, financed by its subsidiary at a further loss, must go out of business.

3. We are in the midst of a Global recession. Every country in the world is decreasing their interest rates, trying to devalue their currency, protecting domestic businesses, and subsidizing domestic employment. Every politician on the planet is playing to their constituents with protectionist rhetoric and actions. There are Buy American clauses in the stimulus package. French President Sarkozy has been ratcheting up protectionist ideas. Calling your biggest lender a currency manipulator months before you will need to borrow an additional $2 trillion is probably not a bright idea. Our new Treasury Secretary did just that last week. Protectionist measures will lead to retaliation and a worsening global economy.

4. The Federal Reserve has doubled their balance sheet in the last year. They’ve done this by printing $1 trillion. They will double their balance sheet again if that is what it takes to generate inflation. They have bought toxic assets from banks but will not reveal the banks or assets they’ve bought, to the public. They work for taxpayers, not vice versa. Pundits on CNBC casually say that the Fed can just print money and everything will be OK. Their words prove that the Federal Reserve System is just the BIGGEST PONZI SCHEME ever perpetrated on the U.S. public by bankers in conspiracy with government. The Federal Reserve chairman Bernanke did not see this crisis coming. He thought we had a strong housing market, when any impartial observer, such as Robert Shiller, proved that we were three standard deviations too high. Mr. Bernanke will succeed in igniting inflation. He will not see it coming and as a political animal, will not pull the punch bowl away before the party gets going. Inflation will get out of control within three years.

5. The annual deficit for 2009 will exceed $2 trillion. The government bean counters haven’t realized that people without jobs don’t pay taxes and companies with no profits don’t pay taxes. When you bring in less tax income, increase spending, and send out tax rebates to all Americans, deficits tend to rise. In the next two years the National Debt will exceed $15 trillion. GDP is headed in the opposite direction and will drop below $14 trillion in 2009. At this rate of increase, we’ll be approaching the debt to GDP ratio of 120% reached during WW II by the end of the Obama Presidency. This increase in debt combined with the enormous printing of dollars by the Federal Reserve will drive the value of the dollar down. The only question is whether it will go down slowly or violently.

6. The U.S. has been dependent on Japan, China, and the Oil exporting countries to purchase our debt in the last ten years. Japan has entered recession and will need to stimulate their economy. Social unrest is growing as factories shut down in China. The government has begun domestic stimulus programs and will need more. Oil revenues have dropped 70% in the last year for the oil exporting countries. With their own domestic issues and U.S. Treasuries yielding 3% to 3.5% and U.S. annual funding needs of $2 trillion, demand is likely to wane. The only possibility is dramatically higher rates. High interest rates devastate a heavily indebted country.

7. Oil prices below $40 a barrel will lead to a deepening of this crisis in the not too distant future. At these prices it is no longer profitable to develop alternative fuels and search for new supply. Rigs are being shutdown, deepwater projects cancelled, shale and oil sands projects being delayed, and natural gas exploration dramatically scaled back. The fact remains that the world has reached peak oil supply. The Saudi wells are 50 years old and are depleting rapidly. Mexico’s Cantarall oil field is in rapid decline and Mexico, the supplier of 12% of U.S. supply, will become a net importer in five years. The drastic decline in oil revenue will further exacerbate social unrest in a country on our border. The complete lack of a comprehensive energy plan will result in oil prices exceeding $200 a barrel in the next five years. Politicians will blame oil companies and the Arab countries, further alienating us from the world.

8. The Military Industrial Complex will grow stronger. We have no intentions of leaving Iraq and we will double our presence in Afghanistan. The Defense (should be called Offense) budget will increase. We will be told that the Russian threat is growing. We will be told that China has aggressive intentions and that Iran threatens the Middle East. The public will go along because they don’t think for themselves. We will be told that the Defense industry generates American jobs. As the government identifies false threats, they will take away more rights and liberties in the name of protecting us. It will be gradual and almost unnoticeable to the Average American, but it is happening. A stronger more powerful Military will want to prove itself. They will be itching for action. When you are a hammer, everything looks like a nail.

9. Boomer leaders are always sure, and often wrong. They are dogmatic and cocky. They utter the words catastrophe, without specifying what will happen if you don’t follow their plan. They say that we will enter a permanent decline if we don’t spend our way out of a situation that was caused by spending too much. Boomer followers are so shallow and self involved that they will put reason aside and believe that we can spend our way out of this. The easy sound bite solution is what they are looking for. The word sacrifice does not exist in their vocabulary. The well being of future generations is of no interest to them. The day trading, house flipping, BMW driving Boomers are looking for the next big thing. The danger is that the next big thing could be a major war. They are too old to fight, but they are not too old to send others to their death.

10. The stimulus package and TARP 6 plan will be implemented. The economy will not improve. By the Fall, Obama and the Democratic led Congress will push through trillions more in spending. The dollar will continue to fall versus gold. As the deficits grow and foreigners buy less and less of our debt, interest rates will rise. Oil will gradually rise as long as no external event causes it to spike. Protectionism will increase, leading to declining world trade. When we have not pulled out of this downturn in 2010, people will realize we are in a Depression and politicians have lied to them again. Social unrest will grow. Riots are likely to break out in poor urban areas. Governments always react to internal strife by seeking an external threat.

11. The external threat could be anything. Russia could invade Ukraine. Israel could attack Iran. When oil reaches $200 a barrel, disputes over drilling rights in the Arctic with Russia or China could cause a confrontation. Oil is the lifeblood of our society. If major shortages occur in the U.S. it would bring the country to a grinding halt. The panic would be so drastic that our Leaders will use every means at their disposal to get more oil. With the most powerful military on the planet at their disposal, and itching for a fight, our Leaders will manufacture a reason to go to war in order to secure oil supplies. The problem with waging a major war is that you need troops to sacrifice. The volunteer army will not do. When the government tries to reinstitute the draft, the fabric of this country will be torn to shreds. This will be where I get off this merry-go-round ride.

12. In ten years my sons will be 25, 22, and 20. They will not be sacrificing their lives for oil, bankers, corrupt politicians, and Defense industry CEOs. If I see the future developing as I fear, I will move my family out of this country to a place where individual liberties are respected, sound fiscal policy is practiced, and people can live in peace. I don’t know if that place exists, but I’ll be looking.

The good news is that every modern Crisis has been followed by a new High. Of course, in every modern U.S. Crisis we had a strong leader. Will Barack Obama be that strong leader? If no strong wise leader emerges, could we follow the path of the Roman Empire? Can we as individuals change the course of history? I don’t know the answers to these questions. It is up to each of us to analyze the facts and act accordingly. A recent song by The Fray, 'You Found Me', asks the question we will all need to answer:

‘Where were you,
When everything was falling apart?’”

- James Quinn, http://www.financialsense.com/editorials/quinn/2009/0210.html