As I sit here on Martin Luther King Day and watching all of the celebrations, I can't help but think about the future of this country with everything that is happening in the past 2 days. As previously mentioned, I am a fan of Barack Obama. I think he really is a natural born leader and also a very intelligent person willing to work with others. Over the past few weeks, we've seen Obama appointing some really top notch (although Clinton Era) people to power. The thought is obviously if we can put the smartest people in charge, we will have good results. Certainly, most people are looking forward to the new administration after 8 years of Bush. The first 4 years were certainly the worst governance in my lifetime. I think Bush actually got better in his second term, but the first 4 years were so bad that the harmful effect didn't really unveil themselves to the full extent until the second 4 years. And in terms of economics, they didn't show up until near the end of the second term.
Unfortunately, as much as I like Obama, I see a lot of bleak things coming up in the next few years. I think that with a less confrontational approach in foreign policy, Obama will bring a lot of good will for America. At the same time, the hope that Obama brings to minorities and young people in this country will in many ways improve our society. However, I also think that we are heading for a long period of tough economic times. I wish nothing but the best for Obama and I don't think McCain and most other presidential candidates would do much better, so this is not a slight against our incoming president.
Looking at some of the proposals being talked about by the congress, it's clear that democrat party would like to push through a huge stimulus package that would dramatically increase the size of the government. At the same time, we have already seen the Fed effectively cutting the benchmark rate to 0% and guaranteeing the debt of every bank that asked for it. It seems like the entire economic team was taken over by Goldman Sachs this past year. And with the exception of Paul Volcker, the new economic team looks like same school of money-printing, big stimulus/big budget economists. So, what is likely to happen is a lot more bail outs in the next year of the banks and the major industries. It's quite interesting that GMAC is getting rescued just as they are introducing the no-money down offer again to increase sales. The reason they are going under is due to this irresponsible lending practice to people who simply shouldn't be buying cars. Looking at what Japan did in the 90s to rescue their economy, we are basically going down the same path. Unfortunately, Japan was in a better economic situation than we are now, because they were the major manufacturing center, whereas our entire economy is based on service and consumption. Japanese economy didn't get better until the massive growth of the Chinese economy really started to affect the entire PacRIM. I see that in the best case scenario, we will be in along period of economic downturn like the 90s Japan until when the emerging market recovers to the point that they can drive world economic growth. So, why do I think this is going to happen?
Well, I think the theory behind lowering interest rate is to increase lending and liquidity so that people will buy more and business will be able to expand. In our case, we are at the point that a lot of ordinary people are in so much debt that they shouldn't be allowed to borrow more money to buy things. Businesses should not be expanding when the economy is already doing so badly. Who is going to buy newer/more expensive products when they are already broke. The economy needs to retract a little bit, so that people will be spending only what they make (not what they borrow) and the businesses that are not competitive should be allowed to collapse. So, lowering interest rate should help the economy when people have good jobs (there can afford to buy things) and businesses can expand to make more money from consumers. However, when everyone is loosing jobs and in debt, it's absolutely insane to keeping on pumping money into the system. What's really happening is that our currency will depreciate as more money becomes available. And I think a lot of us are already starting to feel inflation. Currently, things do appear cheaper in Gap, H&M and Old Navy because they have a lot of excessive inventory they need to sell. Once they realize people can't afford to buy clothing anymore, they will order less from manufacturers in third world and things will get more expensive again. And in the long run, this kind of money-printing policy will simply cause so much inflation that our savings will generally be wiped out. By bailing everyone out, the government can ensure that the nominal value of our saving will not lower, but the purchasing power of our saving will dwindle to nothing. And unfortunately, banks knowing that they will be bailed out will continuously act irresponsibly (like BofA buying Merrill) and totally ruin our economy. Once China and Middle East figures out that there is no way we can ever pay them back, they will cut their losses and then where are we going to get our money from?
As Obama is coming to power, I wish somehow that he will realize that the best thing is to let the country have a couple of years of really bad recession. Let people start saving up again, balance the budget, let the unprofitable businesses collapse and things will turn around only after that. We are only at the beginning stage of a big recession. We are seeing banks that survived all the major recessions falling apart at the current time. If we let the market work and not interfere with bigger gov't, we might still turn around the economy before the end of the term. Nobody ever wants to be the guy in power when a recession happens, so gov't always tries to interfere to prevent a recession from happening. We have reached the point that we can't postpone a major recession anymore. The population has faith in you, Mr. Obama, not the Fed Chairman, not treasury secretary, and especially not the wall street people that run our financial system ripping out average joes. Resist what these people are telling you. They didn't see that this was coming. If they didn't know back earlier last year that we will end up where we are now; if they didn't know the problem was the entire mortgage market (not just the subprime market), how would they know what the cure is? I think you are a great leader elected to lead the country at one of the most difficult situations. There are not easy way out of this, but following the advise to print more money and have bigger government is not the way to go.
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