David Ramsey's Weblog

July 14, 2010

So the Great Slide has begun

Filed under: Economics and Financial — David Ramsey @ 9:42 am

The DJIA is off its 2010 highs by about 1000 points at the moment, having been about 1600 down at its worst a few weeks ago. Right now we seem to be in a minor covering rally. I expect the rally to continue initially, based especially on earnings from more salary cuts, more wage cuts, and more layoffs that have happened. But under the hood we see a far darker picture.

Sales tax receipts are down, despite major efforts to both increase sales tax rates and increase the categories of items taxable, especially in hard hit states like California. The fact that sales tax receipts are down from last year, which was supposed to be the “bottom” of the recession, should tell any thinking person that this recession is far from over. There remains much more pain to absorb.

Now it appears that the plan of the Federal Reserve is to use taxpayer money to stretch out this collapse over a long enough time that it does not frighten people, yet that same action makes those taxpayers more and more beholden to the very banks they have bailed out. This situation will not be tolerated and people will become far angrier than those currently in power seem to believe. I don’t know where this will manifest itself but the most likely outcome is a major shift at the ballot box. However, if the ballot box proves inadequate to effect the sorts of changes that our population truly wants, then people may seize upon other mechanisms, some not seen in this country for a long time.

And this is where the existing politicians don’t seem to “get it”, from either side of the aisle. Each side wants to continue the tax-and-spend policies, just varying in degree. The Republicans talk about curtailing the budget but they never do. Their actions during the Bush administration prove that. The largest segment of the US federal budget is entitlement payments. Eliminate all of the discretionary spending, even the entire Department of Defense, and you still have about 70% of the spending still in place. Now I firmly believe we can cut the Department of Defense but cutting DOD won’t close a $1.4 trillion deficit in any meaningful way short of total disarmament, and I’m sorry, I don’t believe in total disarmament and anyone who does is simply a lunatic.

So that leaves entitlements. China recently fired a shot at the US government’s metaphorical bow when China Downgraded US Debt. This was downplayed by numerous mainstream commentators but China has also been the biggest purchaser of US debt over the last few years. If China refuses to buy, will the rest of the world accept more paper from the empire in exchange for real goods and services? What if the rest of the world refuses? This situation exposes the weaknesses of and the dangers inherent in a heavily debt laden economy.

And it is this debt, coupled with still record private debt, that is stopping the US consumer from purchasing in any large degree, as demonstrated by the fall in sales tax receipts. Until this debt is brought under control and the US middle class finally sees some wage and salary growth versus the elite rich gorging themselves on billions in unwarranted bonuses, we will not have a recovery. And most people don’t seem to understand that simple fact. Deficit based spending is simply future demand pulled forward. Once that is done, that future demand is then lost. So what do you do about that future in a month or a year? The prescription of the Keynesians is always to pull even more future demand forward. There are limits to that sort of foolishness and we appear to be reaching them.

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