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Brian Patrick Cork is living the Authentic Life

what next America?

January27

As I have already stated on this Blog, 2008 was a financial crisis, affecting mostly “Wall Street.” 

Looking ahead, what can we expect for America?

2009 will be the year “Main Street” gets hit. 

Mind you, 2009 will be awful for A LOT of people.  But, I believe it can be pretty good for some people focused on Best Business Practices, clear thinking, opportunities and having a plan.

But, generally speaking, the damage to the real economy so far is trivial to what will happen over the next two years.  There will be two big stories.

Business bankruptcies

Going into 2007 we knew that our financial sector was unusually strong, well-managed with strong balance sheets.  False!  Going into 2009 we know that our non-financial business sector is well-managed (outside of some weak sectors, like autos), with strong balance sheets.  Expect to be disappointed and astonished yet again.

Triage

That is a VERY scary word.

Everybody wants bailouts.  Worse, the expectation of bailouts means that few preventive measures will be taken.  This referred to as “moral hazard”.  We see this, for example, at work in California – which is already de facto bankrupt.  But, nobody gives an inch.  No lower government spending; no lower government wages; no reduced government employment; and, no higher taxes (there is more; but, you get my drift). 

Why compromise? 

Well… The Federal Government will not let California go broke.  Or the auto companies.  Or the universities.  Or the banks and insurance companies.  Or millions of households (not actually sure about that one yet).

There is not enough money to bailout everybody.  Triage will be necessary.

I have seen this under the worst possible scenarios.  But, you can probably relate to it in terms of what Kate Beckinsale does with lipstick on the foreheads of the wounded at Pearl Harbor (but, it is one of the most gripping scenes in the 2001 movie). 

To wit:

  • Those who will die anyway:  no treatment. 
  • Those who will recover anyway:  no treatment. 
  • Those will will recover only with treatment.

Making these harsh decisions might be President Obama’s greatest challenge. He may have one of the toughest jobs ahead of him since Truman.

Looking beyond the downturn, what can we expect?

The consensus confidently – almost to a man – anticipates inflation, against which the Federal government will fight either successfully (optimists) or unsuccessfully (doomsters). 

This is, however, absurd. 

People are already preparing for this “inevitable” outcome by owning mostly short-term debt.  As the end of the downturn approaches — inflation can only manifest itself in times or full employment or via a currency crisis — everyone will (should) take strong measures.  Even elderly ladies in Peoria will own inflation-protected bonds, short-maturity bonds, and hoard gold bars in their basement.

These measures will foreclose inflation as a workable option.  As the government is forced to either issue vast amounts of short-term debt or monetize the debt, inflation becomes useless as a tool.  Short-term debt becomes an albatross during inflation:  interest expense skyrockets as interest rates soar.

Seriously.

Hyperinflation always remains an option – as does atomic war and mass suicide. 

However, none of these are “solutions” in any meaningful sense.  

Seriously.

With a history of vast deficits behind us, and larger deficits ahead (from baby boomer’s retiring), the government will choose Door #2:  default.  We will just not pay all our obligations.  This is historically the most common solution.

How we decide who to pay — and how much to pay — will test America as it has seldom been tested.

  • Do we pay our foreign debts?
  • To what extent do we renege on promised social security and medicare benefits?
  • To what extent do we raise taxes vs. defaulting?  

The big unknown

The recession of the late 1920’s became a Great Depression due to a series of public policy errors. 

Most seriously:

  1. Many nations abandoned the gold standard too slowly, and
  2. The nation with the largest trade surplus wrecked the world trade system.

America was the culprit (for #2),  enacting the Smoot-Hawley Tariff Act in 1930.  We can only guess at the equivalent of mistake #1, but the prime candidate for #2 is China devaluing the RMB to boost its exports. 

More later.

Remember what Hemingway thought of Spain.  Go read those books.  Spain can be defended.

“Sons Gonna Rise” by Citizen Cope.

Peace to my Brothers and Sisters.

Brian Patrick Cork

2 Comments to

“what next America?”

  1. Avatar January 29th, 2009 at 3:11 am Craig Says:

    Hi Brian,

    Wow. Very well thought out. I have to agree with you on all points including the Pearl Harbor scene. When I think about Pearl Harbor, much like 9/11, it set off a series of negative actions we are still dealing with and unable to predict. Much like an after shock after a earth quake (they still are working on predicted them). Or a wave that appears out of no where and within minutes creates havoc. Pearl Harbor made our country wake and take a hard look at the world and all the events shaping it. Our Grandparents had no choice but to sacrafice for an unknown amount of years for the sake fo Freedom. I have a feeling we need to bring back the superpower days to stabilize the patient so that we can stop the bleeding.

    Its funny, Kelli and I are both 40 years old this year, and we are expecting our second daughter in late May. I often think how she is going to grow up and adapt to this new global society.

    Keep up the good work.

    Craig


  2. Avatar January 29th, 2009 at 3:28 am Brian Patrick Cork Says:

    Thanks Craig.

    As I put this post together, I kept thinking in terms of: “How does the past not have to equal the future”. And, I wish kids had a hunger for history lessons before they become carved in stone.

    Brian


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