The Democrats take over the White House on 19 January 2009, but they’re walking into the biggest mess of all time.
The Democrats take over the White House on 20 January 2009, but they’re walking into the biggest mess of all time, courtesy of Dubya, Greenspan and Wall Street. Specifically, how to fix the economy, assuming Dubya doesn’t bomb Iran and the economy first.
Obama has ten weeks to think about it, and hope things don’t get worse in the meantime, a big ‘if’. The Dow fell over 5% on election day, though there may be a short rally in the run-up to the year-end, but come Inaugaration Day they’ll be looking to head south again on the prediction of many, starting around February…
The fact is that 2009 is looking dreadful everywhere in the world, except for Abu Dhabi – “Abu What?” It’s already a year of global slump, unemployment, bankruptcy and broken dreams before it’s even started. Yet during the campaign, McCain lost because he said nothing on the crisis, but ran to Washington to “help” Dubya when he should have stayed on the campaign trail and put some distance between them both.
Obama on the other hand has given definite policies on the personal tax front: tax relief for the lowest paid, where cancelling $500 p.a. taxes payable will take 10 million out of tax; tax cuts for the next 20%, or those earning between $37,600 and $66,400, worth an estimated $1,118 per taxpayer; tax on those earning over $250k will rise, including an increase in CGT from 15% to 20% – “Our free market was never meant to be a free licence to take whatever you can get, however you can get it.”
And higher taxes on multi-nationals that outsource jobs abroad – a difficult one, that one, but a bit of a vote-winner, perhaps. Whereas he could afford the luxury of letting the Credit Crunch wrap Dubya up in barbed wire during the election campaign, it’s his problem now, along with some other big issues, such as the future of Detroit’s Big Three, if they’ve got one.
First, the Credit Crunch will not be solved by the TARP $850 billion so-called bail-out: it will need nearer $2 trillion. Fine, blame it on Dubya and repass the bill quickly. The real problem though is the fact that the banks just have to deleverage, and that means the Treasury’s dollars will save the banking system but won’t necessarily kick-start lending, so the recession will be longer and deeper than commonly realised.
So there will be an economic stimulus package, or two or three or more, and of some size and scope, everything from food stamps to mortgage help and tax rebates to anything else that can keep Helicopter Bernanke showering dollars incontinently all over the continent. It’s a policy of just throw money at the reluctant broad until she performs, but there’s not much else anyone can do, other than let a severe slump work it’s way through, but that’s just not the American way.
So how does all this get paid for? Simple: inflation. A politician looks at inflation in a different way from an economist or a businessman: if you take those aged less than 52, they have up to twelve elections or so left in them and they are bringing up the future voters, whereas those aged over 52 have an average of only five elections left and they’re retiring and children are off their hands. So inflation lifts the younger ones off the rock of their mortgages and other debts but clobbers the pensions and savings of the oldies. As Keynes said: “In the long run we are all dead”…
As the Credit Crunch on Wall Street moves to Recession on Main Street, none of this helps the other big problem, Motown, which has already got its begging-bowl out. They say they need a mere $75 billion, but if you believe that you might as well be a black and white Oreo cookie.
Inflation is the enemy of manufacturing, however, because when inflation equals the margins earned by industry, then that industry cannot earn enough cash to restock its vital raw materials and other supplies as their prices rise. What should Obama, a Chicagoan implant, do for his next big neighbour-in -trouble? Answer: let it go bust, and the money “saved” should go into rebuilding new industries and a new future in the area.
Banks are broke if they run out of money at 5.30 p.m., but industries take 30 years or more to die, and Detroit has been dying for a long time now. Remember 1979? Chrysler was bust and received Federal guarantees of $1.5 billion, but it’s going bust again, along this time with GM and possibly Ford. Detroit has long been overtaken by the Japanese, who have built new factories in Louisiana and North Carolina and other states and are flourishing because they build cars people want to buy at a price they are prepared to pay.
And the only way to downsize the onerous healthcare and pension liabilities and salvage what’s worth keeping in Detroit, which isn’t much, is through the bankruptcy route. And if you did bail out the motor industry, then the airlines and others will be knocking on the front door of 1600 Pennsylvania Avenue quicker than Captain Obama can send out a Mayday call.
Obama and his economic advisers are going to have to come up with some really smart ideas to save the economy in this perfect storm. The year 2009 is set to be truly dreadful: it will go down as the Year of the Great Stagflation. Obama has little option but to adopt the Keynesian approach and throw masses of money at the problem, as if throwing petrol on the Bonfire of the Dreadful Decade of Unregulated Greed.
What Smart Ideas Have You Got for President-elect Obama?