Wednesday, March 11, 2009

Forecasting the Next Five Years

The most likely course of the next five years currently appears to be an increasingly severe recession at least until the mid-term election, followed by serious reform, recovery, and a new bubble. (No, we never learn.) This picture is not very cherry, but there are several quite conceivable scenarios that are much worse...scenarios that we as a nation have full power either to turn into reality or prevent, depending on the maturity of our collective judgment.

The next couple years look very grim in economic terms because:

  1. everyone has now learned the lesson that we have been living beyond our means and that the elite are taking care of themselves first, the needy second; seeing a storm coming, everyone will be diving for cover;
  2. government responses to the recession have been monetary (bailouts to financial institutions, encouragement to people to buy things they cannot afford) or legal (efforts to keep people in homes they cannot afford) rather than substantive (creating useful work, e.g., rebuilding infrastructure).

Really, folks, does anyone outside of the Washington elite actually think that encouraging people already in debt to spend more money on junk Chinese consumer goods will help this country get back on its feet?

Over the longer term, I will go way out on a limb and make the assumption that individual Americans will start thinking, tighten their belts, plan for a more responsible individual future, and in that way slowly regain their economic balance. The land, after all, is rich, and the population is still fairly well educated. In fact, while jobs are scarce is exactly the time to get yourselves even better educated. Meanwhile, pent-up demand will rise, facilitating (oh, no!) yet another housing bubble. Perhaps by the mid-term election things will be bad enough to get some genuine reformers into Congress, greatly facilitating the renewal of faith in our system and a recovery. (Or, if things get bad enough, giving us the courage to invent a new system.) At the same time, historic inflationary pressure will be building because of the way the Government is printing bailout money to pay off all those rich folks who gambled and deserve to lose (but won't because they run things).

In sum, a real depression over the next couple years seems increasingly likely with each passing day, followed by a recovery and dangerous inflation/housing bubble. That rather depressing prediction is actually the good news. It rests on four questionable assumptions:

1. individual American economic frustration and disgust at Government irresponsibility will not translate into widespread rioting, troops firing on crowds, marshal law, etc.;
2. no foreign enemy will figure out a way to take major advantage of our momentary weakness to create a "whole new ball game;"
3. the FDIC protection of individual bank accounts will remain in place, preventing a run on the banks;
4. food supplies will not be disrupted.

Invalidation of any of those assumptions would create a truly dangerous situation. Fighting in the streets is more of a danger than might be thought. The shocking Federal Government behavior in New Orleans and the use (already!) of local SWAT forces to attack foreclosed homeowners both show the proclivity of government to pour gasoline on fires by immediately resorting to force to solve all problems. No one knows how many members of the elite would really not mind provoking violence in order to find an excuse to enhance their own power, especially when the alternative may become a punitive reform program to reallocate resources from the rich to the people.

The assumption that no foreign enemy will entrap us also rests on shaky ground. If the Afghan insurgency sucks massive U.S. reinforcements into Afghanistan and the insurgents then turn their full efforts toward cutting the supply lines, the U.S. will face a significant threat. Al Qua'ida may also yet figure out a way to take advantage of the convenient U.S. target in Iraq. Even more dangerous is the possibility that the ascendent Israeli extremists will trick the U.S. into a war with Iran. The shocking ease with which the Israeli hardliners in recent days have asserted control over Obama Administration appointments (e.g., chairman of the NIC) illustrates the power of this group.

Even if foreign affairs do not worsen the economic crisis, the response of the Washington elite over the last six months to the recession raises the prospect of another scenario: endless denial. It is beginning to appear increasingly plausible that the elite will never come to grips with the need for responsible reforms, that it will simply continue in denial, trying to protect itself, and allowing the population to struggle along pretty much on its own. This recession is in no sense a normal part of the capitalist business cycle; rather, it is a completely manufactured crisis - manufactured by elite irresponsibility facilitated by intentional efforts by government to facilitate the enriching of the rich combined with individual irresponsibility. Thus, the crisis could be ended fairly rapidly by a turn toward good government; by the same logic, the failure of Washington to clean up its act could prolong this recession for the foreseeable future. The threat of endless Washington corruption and governance for the sake of the rich is probably the greatest danger facing the U.S. today.

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