Monday, November 10, 2008

Ghost of Herbert Hoover

There is a lot of froth about president elect Barack Obama facing the conditions faced by Roosevelt in 1932. It is time to restore the precepts of the New Deal and have a new ‘New Deal’ or so they say.

In fact the conditions faced today are those faced by Herbert Hoover in the winter of 1930 and his actions it is agreed stopped nothing and led to an exhausted economic bottom in 1932 when Roosevelt took over.

The Global money supply in the form of US credit instruments has collapsed. Trillions have simply disappeared. Every creditor is now looking for a new lender to replace the deal that just collapsed. And the underwriting method of reselling has blown up in everyone’s face because every new deal has an underwriter hole to fill.

A couple of trillion has been printed to stabilize the Global banking system. This has not been inflationary for the simple reason that it is merely replacing money invested in loans and lost over the past several years. When the banks cannot get their money back from the borrowers then the government must step in and fill the gap. And recall that it was government policy and serious regulatory blindness that was the cause of this train wreck.

Today we hear that the Chinese government is putting nearly a trillion of their reserves into their economy. This is very good news because they have just been handed a pause in their economic development in which they can monetize and grow the internal economy. If the world does not need Chinese goods for a year or two, then the Chinese certainly do.

This is a great time to introduce a proper pension system that reflects the cost of living and to establish western style social nets to stabilize the labor market. They have a good chance to come through this with a stronger and better regulated economy. The same holds true for India.

That leaves us with the huge consumption economies of the West. Wrong decisions now can accelerate this collapse and could easily wipe out half of the Globe’s purchasing power. We have already lost a lot and we could double that loss if the example of Herbert Hoover is followed. The problem is that the next round of losses will be borne by industry and their dependent workers.

We are now seeing how big a problem we have with the entire US auto industry looking for help. After all, they are in the finance business.

After they are patched up, it will be the turn of the workers who are also going to get hit very hard. Sorry folks, but we can expect unemployment numbers to hit two million over the next few months.

Right now the rush is on to keep the economies turning over. Once that is stabilized, and the banking system has discovered exactly where they stand in about another nine months, we can expect credit to begin increasing. That will allow the economy to start a slow rebuild back to good health over the next five years.

Increased taxes will make it worse. Protection will be disastrous. The best policy is to lend low cost money to the economic engines were needed because the banks cannot do so for a while. And otherwise stimulate social programs and perhaps reorganize the medical system which is the countries biggest single business problem.

To put this in perspective: Canada uses ten percent of its GNP to deliver satisfactory health care to the entire population. And if you have money it is possible to queue jump but is obviously not admitted.

The USA uses 15% of its GNP to supply health care to two thirds of its population while abandoning the other third at great economic cost in terms of lost tax revenue.

The point that I am making is that even a worse system than created by Canada is likely going to save the US GNP a third of their health budget and increase life expectancy. And it will not stop the rich from paying for special treatment.

The bulk of that extra healthcare money has and is been siphoned of by the financial gamers who brought you sub prime mortgages and securitization. I have understood for sometime that the systemic corruption is built into the system and have never yelled. Considering the disaster Wall Street delivered, it is time to confront the health care industry.

I do not think that the economy can be turned around before the fall, but then it could be recovering very quickly once consumers find that they will be surviving and their confidence returns. If you have cash invest wisely because we are entering one of the get wealth creation eras of human history.

In a way, the energy market vacuumed out global liquidity and now that the pricing has fallen back and governments have topped up the reserves of the banking industry, we can restore credit in general. All the high risk loans have been drained out of the system providing a much less vulnerable banking system. A wave of massive investment in energy resources is now fully underway and will hopefully restructure the industry. Expect LNG conversion to be a priority since it has already been implemented by Schwarzenegger in California.

Massive investment in energy will stimulate the US economy and lead us out of this rat hole.

So forget about the New Deal for a while even though there is plenty to do. The merchants of financial excess are all dead and will not be back for a long time. The US economy is shifting direction and it is best to nudge it in the optimal direction.

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