How economically screwed are we?

Take it with a grain of salt.

Nobody can predict the future with any great specificity.

However, the Obama/Democrat majority definitely creates a far more negative environment.

even IF we get out of this debt mess...
Peak Oil (the end of cheap energy) will be the 900 pound gorilla ready to crush any economic recovery...
oh and...
the world's $100 trillion fossil fuel based machinery will need to be replaced...
good luck with that...
but hey...
have a nice day, everybody!

abundance faith hope love joy peace to all...
Forgive God...

"But the data seem very, very grim to my layman's eyes."

Every piece of data looks grim to your eyes - layman's or not.

You readily admit to having no knowledge of economic matters, no training in economic matters, and a poor grasp of math. Yet every single time you come across a piece of bad economic speculation ("news" isn;t the right word - its all speculation) you immediately post it and fret that the end is nigh.

I read your blog because you write about interesting religious topics and have an interesting POV on those matters. But you insist on entertaining the silliest economic worries under the sun.

Foolish consistency may be the hobgoblin of little minds but really, your ability to simultaneous believe that we're going to use up all of our oil and that economic activity will grind to a halt is impressive indeed. The fact that these two things are inversely correlated doesn;t matter - they're both really bad so they must be twue!

First, the good news: Barack Obama likely isn’t going to have anywhere near the spending power to meddle with the economy in the ways he says he wants. If I read these charts properly, the Treasury is in the position of having to jam on the accelerator while the brakes have frozen up. Even if he tried to do a Keynes and spend our way out of this, the Treasury Department would have to offer astronomical interest rates in order to attract such capital as is still out there.

Now the bad news. Pyrrho’s got this one right; they’ll have to start printing money in a pretty big way. The problem is that it’s not going to do a whole He!l of a lot of good. Consumers are way overextended, the banks are still not going to be lending all that much (due to the garbage loans that are going to be on their books for years upon years), and lots of financial “assets” (including those 401(k)s) are turning out to be so much wastepaper. Deflation versus inflation, and I make no cash bets as to which one will win.

Politically speaking, Obama’s going to wind up wishing he’d lost. He’s going up against a number of very, very liberal Congressional committee chairmen, all of whom are going to want to go monkey-ga-ga on spending for their pet projects—national health insurance and the like. Also, watch for a number of states, New York and California chief among them, to come to DC with their hands stuck out. Obama and Company are going to be mighty hard-pressed to deny them help, particularly New York.

Watch for taxes to go up, in all sorts of disguised ways. A boost in the income limit for FICA and a rise in corporate rates are good bets. And watch for the fix to the Alternative Minimum Tax to go bye-bye; it simply raises too much money. Heck, I wouldn’t even be surprised to see someone suggest a Value-Added Tax (VAT) on top of it all.

I’m not going to try to predict “how screwed are we”. All I’m going to say is that I think this one is going to get very, very rough and last a long, long time. We’ve got a God-awful lot of debt to clear away, and that’s not even considering the Entitlement Explosion that’s not too far off.

Your servant,

Lord Karth

Yes, things are bad. Yes, I'm worried that our government will run out of borrowers to finance our crazy spending. The economy is going down the tank. And I've been in a funk all week about that and other things going on in this country that I don't want to bring up on this thread.

However, I'm also convinced that we are a strong country and can weather this. We will tighten our belts, and it will be good for us. To the extent that we become stronger communities, help each other out, look out for the common good and work together, we will make it through. We have to. There is no other choice.

"They own the White House, the Senate and the House, yet part of their plan to fix the country is ... to go after Bush."

Yeah, this makes almost as much sense as the GOP impeachment of Bill Clinton.

The availability of capital, or the declining availability of capital for borrowing, is a huge worry. But it may be just the pitchfork-in-the-butt prompt that the USA needs to stop spending so much money. And I mean this with respect to the governments as well as individuals.

As for the coming entitlement explosion - it would not surprise me a bit if, before the next presidential election, Congress and the President actually pass legislation to roll back entitlement spending. Not because they want to, of course - they're Democrats - but because they have to. I do not see a situation whereby the federal government can have revenues of more than $3 trillion per year, even by increasing taxes, because the economy is going to be shrinking for a while. If tax rates go up, the recession will actually be worse, and federal revenues shall likely stagnate or fall.

It's going to be a rough ride - probably four or five years before things start getting better.

I think I'll follow its excellent advice and laugh at the doomsday chorus.

It only makes sense to laugh at the 'doomsday chorus' when the preponderance of the evidence favors your case. Usually, people who make statements like this are incapable of even marshalling evidence, for or against, and simply engage in ad hominem attacks. I doubt you're an exception.

"Now I know why Bill Clinton was so resentful of his treatment during the Monica Lewinsky scandal. He was probably thinking (and likely justifiably so): 'What the heck did I do wrong to deserve impeachment? What did I do that other Presidents didn't do or haven't always done?'"

He knew exactly what he did to deserve it. He sexually harassed a state employee in AK, then lied under oath.

I'm not extremely knowledgeable about the topic, but I think one of the first things President Obama needs to do is restore the capital gains tax back to where it originally was-- to both improve government revenue but also to maybe keep some cash in the markets and halt some of the decline. The second thing has to be raising the retirement age and moving the FICA cap; as the boomers start to retire they'll be even more trouble.

Unfortunately, I think he'll have to hold off on those promised middle class tax cuts. Personally, I won't be disappointed if the money goes instead to rebuilding American industry by investing it in green energy, infrastructure, and the like. I could use a job a lot more than I could use a $500 tax cut.

The things that worry me are not the dow jones industrial-- its unemployment reaching double digits that makes me toss and turn at night.

I very much enjoyed the article. Thanks for leading me to it. I always enjoy the comments here as well.

I'm going to post my conclusion after going through the post:

As near as I can tell, this is the Paradox Of Thrift, which I don't see as a major problem. The way to shift the tendency to save is to offer incentives not to. He's claiming that this time it will do no good. I don't agree, and we should certainly try.

Okay. This scenario is around in different forms. One scenario uses the same info he does to argue simply that we shouldn't have a huge stimulus and vastly increase our deficit and debt. He's more dire than that. He's positing a kind of mechanical downward spiral that we can't get out of.

Anyway, all one really has to know is that to counter this downward spiral we simply have to offer incentives for people to alter their spending and investment choices. One way to do this is to fashion a tax cut aimed at encouraging investment instead of everyone just buying bonds over and over. See, I don't believe that risk taking is dead, or even that dormant. So, I basically don't agree with his analysis of the Paradox Of Thrift or the total death of risk taking, killed by high interest debt from the government. But he's interesting, and I loved the charts.

As to China, here's from my reading of Brad Setser's post. Everyone should read his blog:

http://blogs.cfr.org/setser/2008/11/12/china%E2%80%99s-fiscal-stimulus-doesn%E2%80%99t-necessarily-mean-that-it-will-stop-buying-treasuries/

So:

1) We'll be buying more of our debt ourselves, and therefore need less foreign buyers

2) Chinese banks will still borrow, but will lend to the government, for the stimulus I guess, instead of builders. But China will still buy our debt.

Today Harry Turtledove references, tomorrow Jerry Pournelle! (I think we've already had Heinlein.)

Matt K: Time to get "knowledgable". Raising the capital gains rate would be a BAD idea. Why? Because when the cap. gains tax rate was cut, it resulted in an INCREASE in $$ to to national treasury. Not a decrease. So it was a win-win. More money in the treasury, more money left in investors pockets. What's not to like? Yet Obama wants to raise it back because he goes strictly on what his Marxist dogma tells him to do. Not what's good for the country or taxpayers.

and Karth is right: We don't need to live our whole lives on credit cards. Mortgages are of course needed for most homebuyers, but Dave Ramsey (the guy with the book and radio show, and now a TV show) taught me the importance of starting to pay off a mortgage early. and he talks about the fact that we don't really need credit cards to eat a meal out, or buy a pair of shoes or a refrigerator, or even using credit to buy a car. I have never had a car loan. I buy used (nice used cars) and pay cash. Save up, and we can do all that with cash. People get themselves into trouble because they buy what they really cannot afford, with a credit card, or a car loan.
Get off the credit train, and start using cash. And saving your money. It's very freeing.

I agree with Karth.____EricW, if people stop spending money on junk--we don't need Circuit City or Mom & Pop's gift shop to survive as a nation--you're right that quite a few more businesses will fold in 2009, and thousands more will be out of work. But then, don't we have to ask ourselves, were those businesses economically sustainable to begin with and is it worth our dollars to artificially prop them up for a few more years with holiday spending sprees? We need manufacturers of medical equipment, automakers, farmers, dentists and so on, but we could do with a lot fewer "plastic pumpkin" factories and retailers. ____What will those folks do? I think in the next few years, more folks will be working in manufacturing, construction (lots of roads and bridges and even railroads to repair--assuming this is how the government eventually responds to the crisis), farming and other physical labor type jobs. ____Whether we like it or not, our economy can't sustain the types of jobs (in retail/service economy) that we have now. We don't have the money and we soon won't have the oil to continue on that path.____After almost finishing "Reinventing Collapse," I think the biggest problem with this transition is housing. Those who own their own homes outright will be much better off than those who still hold a mortgage. In the Soviet Union, all housing was owned by the government and so no one lost their home when the economy collapsed--no one was foreclosed on--no one was forced to relocate to find work to make the mortgage payment. I don't know what the solution is for this country--the government buying up mortgages and letting foreclosed homeowners live there indefinitely?--but something needs to be done.__

1:38 is me. Weird formatting...

That 1:50 post was mine, btw.

EricW @ 9:01: You're quite right. The Christmas season is going to be terrible---there's no other word for it---but that's what happens. And I will further agree with you that there are going to be quite a few retail and other businesses going under or in serious pain next year. Circuit City, GM, the Mom-N-Pop Cafe, et cetera, et cetera, ad nauseam. I don't see any way around that. The debt loads and obligation-burdens of American families are at historic highs, and they are going to have to come down one way or another.

This is probably inevitable. No one has to like it (I certainly don't !), but this is what happens in a mixed- or partially-capitalist society like ours. I can understand the reasoning for the various bailouts. Nobody likes to or wants to see anyone undergoing economic pain.

The problem is that the pain is still something we have to go through. Just as for individuals, pain is the universe's way of telling us that something is wrong. It's a feedback mechanism. The reason why the current pain is going to be so harsh is that we as a society chose NOT to go through and take the necessary corrective steps---removing incentives to acquire debt, not goading people into unnecessary consumption, keeping central-government spending in line with available resources--that could and should have been taken before.

I'm not predicting Doomsday; not this time, at any rate. We have a reasonably productive economic base. Our population has a much higher ratio of productive to non-productive citizens than others do. Even our anticipated spending commitments are lower, as a percentage of our economy, than in other countries. BUT--and this is a major and significant BUT---this is going to change, and very soon. If we do not take some simple but necessary steps, very soon, to avoid digging ourselves into a deeper hole, we may well get a Doomsday scenario.

If that happens, we may well get ourselves a Jake Featherston/Freedom Party-type politician promising to solve all our problems. A certain country listened to a politician like that once, and got into a world of trouble for its pains.

That politician's name was Adolf Hitler.

Your servant,

Lord Karth