I have been amazed at the attitude I've seen in financial markets lately. Too many people think the world is about to collapse in a dystopia of inflation, deflation, debt and disunity.
Which is crazy. Yes, there might be a recession coming. But it will likely be a brief one. This is not 1931, at worst it's 1937. Actually it's more like 1975, when the world was trying to overcome the first Arab Oil Shock and President Ford produced buttons saying “Whip Inflation Now.”
Rather than being reflected in higher inflation, this oil shock has taken a sock at incomes. Instead of losing money directly through the money in your pocket, losing its value before you could spend it, you've been losing it directly by losing a job, taking a cut in pay or benefits, or being unable to find a new job.
All of which tells me the situation today is not nearly so scary. People are a lot more scared for a much smaller reason than they were in 1975. Yet we got past it.
If I were the President, I'd be coming up with a fairly simple program:
- The Bush Tax Cuts are expiring. Period. They're responsible for a big part of our current deficit. They're ending on schedule, December 31, 2012.
We need to pay for the wars. Here's a $10/barrel tax on all petroleum production, to help pay for it. And here are 30-year bonds, war bonds, inflation-adjusted plus 3%, which we're going to market to people for retirement and college accounts. Makes a great place for that university endowment, a good play for any pension manager.
Here's an infrastructure bank. We're going to combine public and private financing sources to rebuild our infrastructure and make it more competitive. We're going to spend the money and we're going to guarantee the bonds, tying them to the profits coming from the projects.
Here's QE3. We're going to keep creating new demand and new money until we get a little inflation and get that corporate money out of the mattresses where it's presently stashed.
Some of this requires legislative action, which won't happen. But we're close enough to the next election to make it the focus of that election. I think that in a competition between FDR and Andrew Mellon, FDR still wins, both on the merits and because he's the optimist. This is also the kind of program that will unite the Democratic Party. Focus on jobs and make firm plans to pay down the debt that S&P can use to get our credit rating back where it belongs.
Of course, I'm not the President. But a lot of the present pessimism is driven by the idea that there is no leadership in Europe or America, and that the “loyal opposition” is worse. That's the real comparison between now and the 1930s, this attitude among financial elites that something is fundamentally wrong with democracy and we need a dictator to save us from ourselves.
I don't like that attitude, not one little bit. We've run through this theme constantly, throughout America's history, and one would think Wall Street would have the plot down by now. Capitalism and democracy work because they are flexible, because they adjust to changing circumstances better than any other system yet devised by man.
I think ye bears of little faith are going to be disappointed again.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.