U.S. Economic Outlook: Why We Need a Recession to Drive Recovery

I honestly can’t believe how many people think the economy is going to recover in short order because the government is going to spend some more money it doesn’t have. As far as I’m concerned the government has been spending a HUGE amount of money and it hasn’t done much good. The last eight years the budget has soared and look at the state of our economy. I’m no prophet but even I can see that this is a dangerous road to allow our politicians to take. I get a little scared at the thought of politicians holding blank cheques with promises to spend. We should be marching in the streets to stop the madness.

Now the “experts” and “economists” say we must allow our government to run massive deficits. I don’t buy it and neither do many of the economists that follow the Austrian School of thought (thank God I’m not alone!). There is no fundamental change coming that can drive a recovery in short order without first having a recession to get rid of the false economic growths we experienced. In fact, for many the recession has not yet hit; It has just begun. Demographics will also play a huge part.

I’m not doomsday preaching. This isn’t the end of the world. It’s merely a financial recession/depression. Life goes on. Not everybody loses their jobs or homes. This is the normal course of things for any economy that perpetrates enough false growth through the abundant use of debt and newly created financial instruments that were unstable and risky at best. It will end. We were not on a sustainable path. How many years can you spend more money than you make before you must change your ways? I guess the answer is debatable.

Here is what we know. The American Economy boomed in the last few years with all the financial instruments that allowed and encouraged cheap borrowing to finance the purchase of that big fancy home. The big fancy home was worth so much money that they had to get creative and create special borrowing programs with small teaser rates. This isn’t news to any of you. The people bought homes and spent money in record amounts. Now they have to pay for it. It’s really simple. A large percent of the population rushed out and borrowed and spent well beyond their means all at the same time. Now they have to stop spending as much and begin to pay for what they have already spent. We needed this correction if we are to experience true economic growth in the future.

I, like most of you, have lost money. Instead of paying down my student debt completely with all excess cash, I was socking cash into an investment account. Talk about bad timing. I was extremely bearish last year, but I read somewhere that historically, most election years turned out positive due to all the rhetoric and promises offered by the politicians running for the Presidency. I knew deep down inside that Obama would win (though I hoped for real change so that Ron Paul could have a chance!) and that he would promise the world to all through his rhetoric on change and hope. I wrongly assumed a lot of people would think everything would be fine and continue spending like it was 1999.

I assumed 2009 is when the Sh!t would first start to hit the fan. I was off by 4 or 5 months, enough to say I was wrong about many things. I thought the USD would fall dramatically (it did, but it also rose dramatically at the end!), gold would rise (it stagnated year over year, though it did soar at one time) and oil would continue to rise (it dropped like a rock near the end of 2008 after a super crazy rise!). As you can tell, my projections don’t hold much water, especially not my timing of them.

So it’s with that caveat that I will attempt to give an outlook for 2009 and beyond. Hint: It is almost the same outlook I gave for 2008. I don’t think this economic madness is over. Deficits, over indebtedness of both country and citizenry, ageing demographics with large social programs and expectations and shaky economic fundamentals are all still very much part of our lives. We need to deal with them head on and not pretend all we need to do is spend our way out of a recession. That said, there is a light at the end of the tunnel: technology and increased living standards for the world.

President Obama

Contrary to what many think, Obama is not the Messiah nor can he walk on water or feed the world with a single loaf of bread. He is but a mere mortal man and should not be worshipped (nor do I think he would want to be worshipped, but we’ve seen a bit of that already!). Obama can do some good with his Presidency and he certainly has the political capital to do so. But please realize there are some unfairly high expectations on him by the people that voted him into Office, he’s just human. I personally wish him all the best in Office! It isn’t an easy job. But what many of the citizens need to realize is that it is YOU that must do the work. Obama may lead, like your boss at work leads - but it is you, the employees/citizens that must do the work in the economy - Not Obama. Stop sitting there watching TV pretending Obama will fix everything for you! We need to shift our economy over to a technologically advanced one with virtually unlimited sustainable energy sources, higher crop yields, higher manufacturing efficiencies, improved living standards for the world, perform new space exploration, etc, etc. Obama can’t do this for us, but he can put policies in place that encourage this to occur quicker. It is going to happen anyways, whether or not he encourages it - but I truly think that this is our way to an economic recovery (it won’t happen overnight!) and it will occur in time.

Now that Obama has taken over the reigns we must wait and see what happens. In fiscal terms, I expect Obama to take us FURTHER down the road Bush already had us on: Can you say DEFICIT? There will be huge deficits that will loom over our economy! This isn’t a revelation - everyone knows this. Really, in terms of economics, he is following many of the same economic policies every politician loves to follow: namely the Keynesian ones that give them a reason to spend wildly on anything and increase social programs (buy those votes with the voters money! Every politician does it!). This will create a set of challenges and don’t work out as planned - essentially it’s just a big waste of money that can hurt us.

We don’t know which of his campaign promises he will follow through on and which he won’t (raising taxes? let’s hope he tosses that one in the garbage.). Nonetheless, his flip flopping should be entertaining to watch. “Are you not entertained?” (that’s a great quote from Gladiator!).

Politically speaking, I do expect him to do a much better job on foreign relations than Bush. That’s about the extent of it. I think his policies on fiscal spending and those “stimulus plans” will be mostly disastrous, really. But hey, at least we may end a few of these drawn out costly wars and make some friends in the world. Though Obama appears to be much better on foreign relations, there are still many areas around the world that could spark problems and setbacks for us. But I can see some positive, just not on the economic front during the next few years. :) Spend our way out of a recession… HAHAHAHA. They’re just joking… right? We can put policies in place to help usher in an energy revolution and a technological revolution - but ultimately it is the people and the corporations that must follow through and actually do it - a President can’t do it for us.

USD

I truly believe the USD will fall in value. Now I must add something here: Although the USD will fall in value, many other currencies will also be falling! You must look at the devaluation of the USD in terms of buying power to truly see the effects (and please don’t blindly trust the government inflation statistics). Yes, there has been asset deflation recently and that may continue a little while longer - but ultimately it is the day to day costs of living that will begin to rise as the dollar falls. Inflation will hit - maybe not this year - but it will hit in a big massive way. Many are worried about deflation. One thing is certain: Our system does a good job at causing inflation - especially when the Fed and the Government are trying to do everything in their power to cause inflation! That is exactly what I expect to happen in the long term.

Price of Oil

I expect the price of oil to go much lower in the short term as the economy shows its true colours. Then I expect the price of oil to skyrocket due to lower oil production worldwide. Long term - I’m bullish this commodity. There will be shortages. In the super long term I expect the economy to change over to more sustainable methods of energy, like solar, but this is still a long way away thought the shift is now beginning. But until we have switched, I expect the price of oil to play a huge role. In fact, a high oil price only helps us change to other energy sources quicker. I think this may be a good year to find some entry points in some quality oil companies (and solar ones too!).

Gold

I expect gold to soar as the fiat currencies of the world begin to stumble and the economies show signs of worsening. Honestly, it’s been said by a million people recently so I don’t need to say more.

Economy

Several times through the next several years I expect there to be false signs of a recovery. Ultimately I don’t think we can have a real recovery until 2012 or later. I saw a great video last year that I can’t seem to find anymore - the video included a chart showing the sub prime loan debt problem and the commercial debt problem and we are only halfway through. The economy is just beginning to unwind and the chain reaction of layoffs has only begun.

There are too many loans being reset for the next few years to be completely out of the woods. Then there are the demographic issues which have yet to be raised and discussed. Increased social programs under Bush and Obama will only hurt the economy further under the strain of the Boomer’s pending retirement (yes, pending). I’m not saying we won’t have a recovery - just that it will be difficult with the Boomer’s beginning to retire and the younger Boomer’s will be SAVING aggressively for retirement (and paying down the debts) - especially since their retirement portfolios have been turned from 401k’s into 201k’s or worse.

Bearish Short Term (Next 3 to 5 years), Bullish Long Term

So there you have it. I’m bearish on the economy overall for the next several years. It may surprise you but I’m very bullish over the long-term! Why? Technology and improving living standards for all! Even throughout this economic downturn there will be many technological, scientific and medical breakthroughs that will continue to progress mankind forward and opportunities can and will be found. Ultimately we must not forget that the world is growing (population wise) and so too will the economy. Some areas that will be good: Agricultural, Mining, Science and Technology, Energy (sustainable), Medicine, Real Estate and Space Exploration.

Our present world can’t increase the living standards for all by purely relying on oil - look at what the price of oil did as it appeared some countries would be rapidly industrializing! We just don’t have enough oil capacity at present to allow the entire world to develop rapidly. But with a shift to sustainable energy methods - the world will develop quicker than you or I can imagine - and there are billions of people around the world that ultimately would love to own a nice home, vehicle and computer (and the other toys that come with the Western lifestyle).

The American Dream - done in a sustainable way - is quickly becoming the World Dream. We have a lot of work to do. When the World begins to industrialize we will finally have some more customers for all our technology - then maybe we won’t be burdened with the “damned if you do, damned if you don’t” conundrum of spending more than we earn to sustain our economy. Maybe then we can live within our means and still enjoy a comfortable existence. The future can be very bright. And here’s to hoping we avoid major conflicts that will only serve as major setbacks. Cheers.

Comments

[Carl Spackler:]

Right on! Economics is merely the study of the natural order of systems, and just like the occasional storm blows the weak branches off the trees to encourage stronger growth, economic storms do the same thing. The US government is trying to prop up weak businesses and weak endeavours with tax payer money, but in the end weak endeavors always fold. Their enthusiasm to put off the inevitable will just prolong the pain. Our government should look at ways speed the closure of these weak businesses and throw money at those that are succeeding. By giving money to the weak industries and businesses, we deprive the strong companies pricing power that they would have enjoyed if those weak players had disappeared. What we get is continued weakness. It would be better if we could quickly wash out the weak players, get the pain behind us quickly and allow the remaining companies and industries to grow.

A good example is in the auto business. We are seeking to keep every automaker alive. Wouldn't GM or Ford be healthier if Chrysler were dead. By that same measure, would not GM be better is Ford and Chrysler were dead. They would gain some pricing power and it would lessen the competitive pressure on them. They could sell more cars and hire more people, etc... The key is to speed the economic recovery up, not to fight nature and reshape it. It is just like the berms and dikes in New Orleans, the more we try to reshape nature on our behalf, the bigger the debacle we will experience!

Jan 26 12:27 PM

[socrateazz:]

Do not put too much faith in solar... The energy to make solar panels will take over four years to recoup under good situations. How long do solar panels last? A ten year life is what I expect! How much energy into installation and upkeep? I would be surprised if they paid off money or energy wise over a life time. I think there is more potential in heat pump technology saving energy. Not just the air type currently used but the heat sink geotechnology. I think a hybrid heat pump that operated through outside air between 35 degrees and 80 degrees farenheit and through geothermal sources otherwise would minimize energy use for the amount of heating and cooling required. I think too many folks are overvaluing technology. Technologies main value is in reducing the costs in producing needs. Some of those fixes will be temporary. For instance roundup herbacide. wonderful product but the effectiveness at killing weeds has droped dramatically over the years. weed populations are becoming immune to such. If a replacement is found great. What if none is found? What can be done? Some new technology will be found and used. betting an economy on such is rediculous! The economy needs to be based on needs and supplying them. And on wants and having supply and demand of such being roughly balanced. And that should be done by regulating monies in the hands of consumers. The balance of trade between countries should
be about equal over time. The value of their currencies should handle that problem. If not then some kind of import tax should be inacted.

Jan 26 12:52 PM

[Moon Kil Woong:]

There can be no recovery until job losses reverse. It's as simple as that.

Also you are 100% on that a recession is a natural cycle and allows 1) a realignment in jobs 2) a culling of bad companies 3) removes asset bubbles and excesses 4) is needed for sustainable recoveries.

Government makes a natural cycle worse either this time around or some other time following it. The 2001 dot com bust led to easing of bank accounting requirements and unnaturally low rates. This has made this recession a real frightening one. Will big bailouts and government intervention this time make the next one even worse?

It seems that the current Fed and Treasury are completely incabable of asking or answering that question. They are turning out to be very poor guardians of our economy. They are more like demonic agents of chaos, encouraging short term pachwork economic fixes at the cost of long term economic health.

Jan 26 02:29 PM

[Robert Nabloid:]

Socrateazz, I would suggest you do some research on a company called Stirling Energy Systems. They make power using a Stirling engine and solar concentrating panels and it is actually on par or BELOW the traditional cost of electric production... We are already doing it economically and this company has multi-billion dollar contracts. This isn't even new tech, we are just finally getting around to using some of it. Lifespan is much, much longer than 10 years with this system.

Constructe, I must agree, recessions are made worse by government intervention and in some cases they wouldn't have occurred had there been no government/Fed Reserve intervention in the first place. I also agree, the Fed and Treasury can't even fathom asking that question of themselves... They are a detriment to our economy.... but who among us can eliminate them from interfering? Certainly not the man of "change" who puts in place the same old same old... some of them are new faces but they all come from the same school of thought. It's a sham to call it change. Yes, there will be some changes, duh... but it's still government on the road to getting bigger and interfering more in our day to day lives. Sad, really.

Jan 28 06:35 PM

[Monticello ...:]

Great blog!

I agree. We need to create a sustainable economic core, which features technologically-advanc... energy breakthroughs, and, we must face the unpleasant reality that salaries are going to fall for most of us, because we can only compete on the world stage with salaries which are competitive.

I'm also concerned about the size and scope of the President's proposed budget, and, we all know the stock market is having a hard time digesting this bad news.

Eight years of Bushian madness, coupled with the present reality, make for some sobering challenges.

I'm sailing overseas to start a small tourism-related business, because, I have no debt, I own the sailboat I live on, and, I refuse to suffer because some stupid politicians have left us with a giant debt bomb. I intend to make a new life in a part of the world where people save a decent portion of their income every month.

Suffering is a choice.

I say this because we are all worn out from eight years of foreign wars, and all the corrupt cronyism that marked the reign of King George.

While we all know that no President can save us from some fate, at least this cuurent one seems to genuinely care about the national well-being. If he doesn't get it right in four years, by at least turning things in a more positive direction, then we will peacefully fire him and replace him with another leader who can manage our national resources more carefully.

As for me, I'd like to see no more Washington DC bail-outs for inept and greedy corporate slugs. Let the morons who helped greedy consumers and the greedy politicians who enabled the whole mess fall on their collective self-made swords!

Carpe Diem, my fellow American citizens.

We have an economy to rebuild. I choose to do my part overseas, because I've paid my dues and my taxes here for a long time, and, I'll continue to pay my lawfully-required taxes here at home, but, alas, I feel the call of the wind and the waves; and tropical breezes are soon going to be my constant companion.

Meanwhile check out a website called Hydrogen Garage. And, get involved in making alcohol fuel for yourself. Don't be a slave to the Babylonian Beast. (LOL) Get into the fray and show your fellow citizens your entrepreneurial spirit.

We showed the world our ingenuity and our courage by landing the first human being on the moon.

We can overcome these new challenges, and, we will.

Be the changes you wish to see in the world...

Shame our leaders into more positive behavior by living frugally and investing wisely.

Carry on fellow fools! (LOL)

Mar 05 04:11 PM