President Obama entered stage left yesterday on a message of hope and change, and by the end of the day, the market delivered on that change, closing down 4% or to its lowest level since December 1st. While one day moves in the market are rarely broad indactors, yesterday’s action was telling of a more fundamental economic psychology problem: The government’s economic policies are increasingly rooted in short term actions, not long term results. And that is a major problem when the present value of the market and the long term growth of the economy are both rooted in our expectations of the future.
Obama recently said that we should expect “Trillion Dollar Deficits For Years to Come”. While proponents claim that the US can handle increasing deficits and expanded national debt, few believe that there will be no future consequences from these actions. In the words of bond king Bill Gross, who openly supports stimulus spending:
More regulation, lower leverage, higher taxes, and a lack of entrepreneurial testosterone are what we must get used to – that and a government checkbook that allows for healing, but crowds the private sector into an awkward and less productive corner.
In fact while we are simultaneously increasing our future debt, we are also radically increasing the money supply. At some point we will have to either sharply reverse this course or allow the supply and demand of dollars to significant erode the value of the dollar. The best case scenario is that we quickly recover, and can afford to start contracting the money supply, which will immediately start putting the brakes on our recovery. The worst case scenario is far less rosy.
And if these policy decisions were not enough to dampen long term optimism, Obama’s clear support for economic redistribution, combined with a fully democratic-controlled government, ensure that when and should the economy start to recover, the government will be waiting with a fleet of new taxes and regulations.
So the question is this: If the only way to solve to our problems is economic growth, then why not focus on that long term objective? Imagine a world where instead of short-term stimulus, bailouts, and printing money, our government came out and acknowledged the inevitability of short term pain, but committed to a long term policy of lower taxes, smaller and more efficient government, and increased foreign trade. Its hard to believe that the market and the economy would not see a bright outlook in that future.
While the US may very well be resilient enough to simply grow out of the current situation, true economic recovery can not happen until people believe the future will be better than the present. If we want people as a whole to invest in future growth, the government should begin to promote that objective as well.
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