To start out the New Year we’d like to suggest a to-do list with the hope that we can make 2011 better than 2010:
1) Recognize that the major problem in Washington is and has always been spending
To understand just how ineffective Washington has become, look no further than the recent debate about the extensions of the Bush tax cuts. Although Democrats and Republicans both know that we can’t afford the tax cuts and that raising taxes when the economy is in such a fragile state would make things much worse, the country had to sit through months of ideological wrangling when the nation’s real and most pressing problem is spending. At the end of the day, the Republicans can claim a small victory regarding the tax cut extensions, but all that was really accomplished was the addition of even more debt to our national balance sheet and to speed up the day of reckoning when we will eventually have to deal with the consequences of all this debt. Up to now we have basically destroyed the economy on Uncle Sam’s credit card. While some members of Congress are starting to introduce inspiring legislation, such as Ron Paul’s “Audit the Fed” movement, until we, as a nation, begin to recognize and tackle the root of our problems, which is plain and simply too much spending, we will end up continuing the downward spiral towards defaulting on our debt or the destruction the dollar.
2) Remember how we got here in order to find a solution
When the financial crisis first hit, our elected politicians chose to save the insolvent baking system by putting up taxpayer money to buy securities. We are now two years into the crisis and broken companies like Fannie Mae and Freddie Mac are still asking for and receiving billions for dollars from the government. We have wrote about the unintended consequences of the government entering the financial markets extensively on this blog for over two years now so we will not go into detail today. Basically, as expected, while the bailouts may have been effective in stabilizing the financial sector, they have come at a steep price since we are not seeing real demand return and are experiencing a very weak labor market. The country’s unemployment rate has been at an elevated 10% level for over two years and things will only get worse as people reach the critical 99 week mark when unemployment benefits are exhausted and no additional extensions are planned. People are tired and scared and want their government to start being held accountable for its actions.
3) Study Argentina and Japan’s experience with a debt crisis
Until recently, we have been using Japan’s two decade long fight with deflation as our metaphor for current and future economic policies. Unfortunately due to a corrupt and ineffective government in Washington, the United States’ economic decline is starting to instead resemble Argentina’s economic collapse, which started in 1998 and landed Argentina in a depression by the end of 2000. What began as a recession in Argentina, mushroomed into a full-fledged depression due to bad economic and monetary policies. In our opinion, the Obama administration and Congress are on the precipice of following Argentina’s disastrous economic and monetary policy decisions. Just like Argentina in 2000, the US must begin to at least attempt to pay down its debt and reduce its budget deficit from 3 different revenue sources: taxing, borrowing, and inflating. Any sensible person realizes that we cannot tax our way out of $13 trillion debt or sustain existing entitlement programs, much less a government run health care system. The government can also borrow money by selling government backed securities but eventually those investors will demand higher interest due to the increased risk of a government default. The only feasible alternative for the government is to monetize or inflate the debt. Just like Argentina in 2000, the elite in our government are driving economic policy in an attempt to preserve power.
4) Protect yourself from the possibility of further dollar devaluation
During a crisis, the political class is not concerned that there is a record amount of people now receiving food stamps or unable to find jobs. The political class is only concerned with preserving its own power and if that means creating an illusion of prosperity by propping prices up and engineering inflation then so be it. Never mind the fact the inflation taxes the poorest in our society who will not be able to afford price increases on basic necessities. In Argentina, after the politicians were allowed to make matters worse from the 2000- 2002 period, 2002 turned out to be an utter disaster economically as the peso suffered a huge depreciation to the tune of 80%, which then raised prices on imports and caused severe inflation. Many businesses closed or went bankrupt, bank accounts were frozen in an attempt to stem the currency devaluation, many imported products became virtually inaccessible and unemployment was devastating. One can only imagine what would happen if the dollar lost 80% of its value and suddenly all of the things we buy on a daily basis doubled or tripled in price. Today, due to the mistakes made in dealing with its own financial crisis, Argentina has to watch as its neighbor Brazil enjoys strong growth and prosperity and quickly overtakes it as the main economic power in South America. This fate could be exactly where the US is heading.
5) Get reacquainted with your new government
The Republican win last month will have implications on just about every industry group both global and domestic. Leading up to the election, you didn’t have to be a political strategist to know that the country was moving to the right as the first two years of the Obama Administration were coming to a close. If the past year saw the US economy stabilize, then hopefully 2011 will see us make the right decisions as a nation so that we ALL can enjoy some level of comfort and prosperity. While some are beginning to understand that debt is not actually money, most in Congress still think that the economy can get stimulated enough by additional spending (or at least until the next election) simply by cutting taxes or raising the debt ceiling again. The last thing the US needs right now is another economist or so- called financial expert telling us that we need to go into further debt to fix our problems. What we do need right now is a leader who can inspire us to make sacrifices and the difficult choices that will have to be made. Soon there is going to be an entire generation of young people who will pretty much have to put their careers on hold because of the gross mishandling of our economy. The leader this country needs is going to have to inspire these young people into jobs or service they never would have thought they'd be involved in. Before any of this can happen though, we the people must continue to educate ourselves and learn from our mistakes both financially and politically. We need to keep the pressure on Washington, our state, and local leaders so they know that we are watching them and will hold them accountable. Sometimes our elected officials need to be reminded that our government was set up to work for “We the People”, and not the 5 biggest banks on Wall Street so when all else fails, send your representatives an email.
6) Get your news from multiple sources
Take your family and friends to see movies like “Inside Job” or the many other great documentaries now available which show just how we got into this mess and now Washington is dealing with the crisis. Also, it’s pretty obvious that major news outlets have become more entertainment than actual news sources, so get your news from as many different sources as possible. For many of us, we go to the same website or pick up the same newspaper every day, so we end up getting relatively the same views on issues depending on the political ideology of the source. The more informed and mobilized we are as a nation, the more we can hold Washington accountable to make decisions that are in the best interest of the long term health of the country.
Aside from the commercialism of the holidays it does give us a moment to reflect on the good in our lives. As we read so many of the horrible headlines of people losing their jobs, homes and life savings, we are thankful that we live in a country that has always put its neediest first. This basic principal must not change and we as citizens must strive to understand and listen to those in our society who need the most help. Best wishes to everyone for a healthy and happy 2011.
