The Government Bubble

They are now infamous economic household names: the tech bubble, the housing bubble, the S&L crisis, the roaring twenties.  In each case we had discovered something that made money, was stable, and couldn’t possibly go down in value.  It went from that to over-inflated and everyone knew it.  But if you could still sell a 1200 sq foot home in California for $500,000 tomorrow, why wouldn’t you keep buying them for $400,000 today?  In each case we had a bubble, and we knew it was only a matter of time before it popped.  Yet when it did, the effects were disastrous.  That’s what happened back when we had a choice to take our money and run while we still had the chance.  We no longer have that choice.

Do you realize that the government is paying people up to $12,500 to buy a new house and car?  It takes over half the country a minimum of two years just to pay that much in individual income taxes.  Our economy is propped up right now by Government debt.  The market correction we needed to return to normalcy was politically inconvenient and now a new bubble has been inflated.  Unfortunately, this new bubble is the worst possible kind.

In addition to $8,000 giveaways to buy a house and $4,500 giveaways to buy a brand new car, the Government is also handing tax revenues back to failed businesses through 5-year loss carrybacks.  In many cases this money is not going to employers to grow their business and hire new people.  It is instead acting as a welfare check to former business owners, allowing them to effectively take back all the tax dollars they paid when the economy was good under the Republican controlled congress and Presidency.  The result is a staggering loss in Government revenue.

Plus we had a trillion dollar stimulus bill to build skate parks, duck walkways, and turtle bridges.  The result is a deficit this year of more than $1.5 trillion dollars.  Perhaps this would be tolerable as a one year government fix, but even without continuation of these radical measures we are facing a $9 trillion deficit over the next 10 years.  Every year of Obama’s administration is scheduled to have a deficit twice as bad as Bush’s worst deficit.  Eventually you can’t blame this on the last 8 years anymore.   In 10 years, US debt will be 75% of annual GDP…

Let me say that again.  By 2019, 75 cents of every dollar you make will be owed to someone else.

And yet, with the government spending a trillion and a half more than it has this year, we are still expecting negative growth.  In fact, our economy will shrink as much this year as it grew annually on average during the Bush years.  Obviously out of control spending is not the blockbuster economic solution that long term, across the board tax cuts were. We are trying to maintain the size of our economy by growing government.  It’s unsustainable.  And Obama cannot prevent the government bubble from bursting when he is the one inflating it.

Here’s the problem.  When private economic bubbles grow and pop, private individuals can become rich or lose it all based on their greed, abilities and personal decisions.  When the government bubble pops we will all be affected.

How long will it take?  Consider this: on Monday the Cash for Clunkers program ended.  Cash for Clunkers has been credited with creating 700,000 new car sales (half of which were foreign).  As a result, car-makers have increased production and hired new workers.  It takes 1 1/2 hours to file a cash for clunkers application, so dealerships have been hiring as well.  But the program is over.  Do you honestly think people are going to buy another 700k cars next month now that the tax credit is gone?  Welcome to the revolving door of short-term stimulus hiring.

Speaking of the auto industry: the government owns GM, Citigroup, and several other private companies.  Obama bought these companies with tax dollars and borrowed dollars that neither he nor we could afford.  With record deficits and not much left to squeeze out of the taxpayers, these cannot be permanent investments.  In case you haven’t been paying attention, GM and Citigroup still have no brain activity and are not ready for the life support to be removed.  When the government pulls out, who is going to keep these companies in their portfolio?  The question now is how far Obama will take it when investors anticipate his pullout and sell before he can.  I suppose the government could save money by using their GM stock certificates as toilet paper.

Housing sales are up. When prices are this deflated and the government is paying you to buy, of course sales are going to be up.  But what about next year?  There will be no tax credit and banks have plenty of inventory they are keeping off the market to keep the price of a house from dropping below the price of the new GM Volt.  The housing slump may be just getting started.

For months before the tech bust, economists knew that stocks were overinflated.  Every night the market climbed, they were amused about the frenzy and wondered how long it could possibly last.  No one was really surprised when all these tech companies who hadn’t made a single dime became worthless.  We can see the exact same thing coming with the government bubble. The same day Obama is scheduled to take back the crutches from the auto, housing, and banking sectors, he will be hiking taxes on employers by up to 9% to pay for his deficit spending.

During the campaign, Obama said that only government could fix the economy. Mr. President, who is going to fix the government?

Advertisements

0 Responses to “The Government Bubble”



  1. Leave a Comment

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s




Share This Blog

Bookmark and Share

Categories


%d bloggers like this: