When Bank of America (BAC) decided to Buy Countrywide last year, I went on record. In my opinion, that was one of the worst mistakes in the history of our Financial Markets. Now, that opinion is starting to prove itself. Review the article here.
Given recent developments, I am going on record again. In my opinion, the decisions of our new administration will lead the US into a Greater Depression. This may be the worst mistake in the history of the United States. The Trillions of dollars spent to buy our way out of this mess will be wasted, and the by-product will stifle the economy for many years to come.
Although the purpose of the resolutions is well intended, the consequences will be more than the country can bear. After a sobering period of demand-side stability, the US Taxpayer will have to pay the price. In addition, the government will not be able to spend these monies every year to employ the 2 million jobs referenced by President Obama in recent days.
Instead, when the spending phase is exhausted those jobs will be lost. A perfect scenario suggests that the private sector would then pick up those laborers. However, a debt burden will linger over the country at the same time. Therein lays the problem. With Social Security and Medicare bringing up the rear, the taxes levied on the wealthiest Americans will skyrocket. This will create a circular trap which limits reinvestment into the economy, and which impedes growth as a result. Those laborers will not be rehired.
In addition, and more importantly, this will happen during the third major down period in US History. Normalized demand ratios decline for the next 16 years, according to my proprietary analysis. This called The Investment Rate, and it is the most accurate leading longer-term stock market and economic indicator ever developed.
Therefore, the result of today's decisions will compound as demand for new investments continues to decline. Accordingly, the United States will be faced with the worst financial crisis it has ever seen.
Here is the timeline:
1. Demand Side stability will surface in the next 6-12 months
2. The Economy will appear to be in a recovery process
3. The Target Rate will begin to increase
4. Taxes will go up
5. Economic recovery will stall
6. The declining demand ratios evidenced by the Investment Rate will prevail.
7. Social Security and Medicare will be front and center
8. The value of the Dollar will decline.
9. Foreign interest in US assets will wane.
10. A Greater Depression will result.
The Mortgage mess was just the beginning. BAC, C, GM, and Chrysler are all on the chopping block today. Over time, this list will grow. This is Contemporary Darwinism at its best. Only the strongest, most nimble companies will survive. We cannot stop this natural selection process. We cannot prop up weak companies. Moreover, we cannot buy our way out of this mess. The more the US spends, the more the taxpayers lose. Fiscal disciplines should be the focus, but that seems to be the last thing on anyone's mind. Didn't we learn that lesson already?