Posted on 11/29/2009 8:40:46 AM PST by blam
Why I'm (Cautiously) Optimistic About The Future
by: John Mauldin
November 29, 2009
I admit that of late my writings have had a rather dark tone. There are certainly a number of severe long-term problems that we must deal with, and they're going to serve up a lot of economic pain.
But the Thanksgiving weekend with the kids has me in a reflective mood, and one that has only served to underscore my long-term optimism. This week we look at why 2007 will not be the good old days we will yearn for in 20 years, after we briefly visit Dubai and the latest unemployment numbers.
Subprime Dubai
While we in the US spent our Thursday eating turkey and watching football, the rest of the world's markets went into a downward spiral as Dubai announced it wanted its lenders to give the country a six-month moratorium on some $80-90 billion in debt.
This has the potential to be the largest sovereign debt default since Argentina. Somehow this was a shocking development. (How can too much debt and real estate be a problem?)
And by markets I mean gold, commodities, oil, stocks, and risk assets everywhere. They all went down. Friday the US markets experienced their own sell-off, though not as deeply as the rest of the world.
As I wrote last Friday, the world is now negatively correlated with the dollar, and as money went into the dollar and US Treasuries, everything else went down.
Vietnam devalues, Greece is looking increasingly risky, Russia wants to devalue some more, the world is still deleveraging, etc. Is this another repeat of 1998, when Russia and the Asian debt crisis tanked the markets?
To get an answer, let's look at some facts about Dubai. It is one of the Arab Emirates; but unlike its neighbor Abu Dhabi, oil is only about 6% of the economy. While the foundations of the country were built with oil, the country has diversified into finance, real estate, tourism, trading, and manufacturing.
It is a small country, with a little under 1.5 million residents, but with less than 20% being natural citizens - the rest are expatriates. The gross domestic product is around US $50 billion.
(Note: I used this source, and then converted the currency. I found the numbers on various websites and services strangely at wide discrepancies. This seems close to a median number. I think the discrepancy is mostly people confusing the GDP for the United Arab Emirates as a whole, which includes Abu Dhabi, rather than just Dubai.)
Dubai has become a byword for thinking large. The world's tallest building, underwater hotels, the largest manmade islands (plural), indoor snow skiing in the desert... For links to more information try this from Wikipedia:
The large-scale real estate development projects have led to the construction of some of the tallest skyscrapers and largest projects in the world, such as the Emirates Towers, the Burj Dubai, the Palm Islands and the world's second tallest, and most expensive hotel, the Burj Al Arab.
The list goes on and on.
UBS suggests that the $80-90 billion in debt may not include rather large off-balance-sheet debt (where have we seen that one?). So, a country with a GDP of $50 billion borrows $100 billion.
They build massive projects, which are now among the most expensive real estate in the world. The latest manmade island plans for one million people to buy property there. Seriously. Talk about Field of Dreams.
Then came the credit crunch. Property values dropped by as much as 50%. Sales, say the developers in understatements, have slowed.
Seems there was a lot of debt used to speculate on real estate, not to mention buying Barney's, Las Vegas casinos, banks, etc. And while US banks have little exposure, it seems England has about 50% or so of the debt, with the rest of Europe having the lion's share of the remainder.
Admittedly, the estimates seem to confuse the debt of Dubai with that of Abu Dhabi, so it is hard to know a reliable number, other than that European banks are the most exposed.
[snip]
If Obama enacts his plans for America, the outcome is bleak.All America needs right now (economically) can be realized by cutting tax rates, cutting government spending, eliminating or substantially reducing regulation of the development and production of domestic oil, gas, and shale oil, and reducing the size of government.If Obama's vision for America is relocated to the round file, our future is bright.
Why I’m (Cautiously) Optimistic About The Future
I’ll add mine
If Climate gate was exposed as a fraud, There is hope. Health Care is not passed as yet, Less than a year to a change in Congress. Maybe some decent Conservatives will get in
Roll on
I don’t know how we grow our way out of the debt, and I don’t know how we get out of recession by increasing taxes. It would be damn hard to fix things even if Obama is stopped in 2010 and booted in 2012.
$80-$90 billion? Why the big deal? That’s chump change. It’s a fraction of what was lost in the sub-prime crisis, it’s nearly a tenth of Obama’s stimulus package. Hell, we gave the automakers nearly half this amount.
I'll ask this question again. Assume that conservatives have their prayers answered. Dems are routed in 2010, ending any possibility of Obama getting his radical plans through Congress. Assume that Obama is booted in 2012, and a conservative is elected.
What policies would the new President follow that would provide a path to economic recovery? In other words, even with great people at the helm, is it really a bright future? Is it really that simple? If it is, I want to know what the solution is that fixes things like the deficit.
Let's hope that enough of us feel that way to make it happen. I hope for a major change, if HC & C&T are stalled maybe we can hope for at least a stalemate in Congress. I want more but grid lock is looking pretty good right now.
I am not optimistic, cautiously or otherwise.
There is only one ray of hope:
PALIN/BACHMANN 2012
IF we can survive till November 2010 and IF enough Republicans win who will block any more Obama BS we can at least not inflict any more damage till O is out
He makes some good points. It may well be that technological innovation and entrepreneurship save us from our own stupidity. On the other hand, I think these same forces also insulates us from the consequences of our stupidity, thereby fueling even greater (liberal) stupidity. Which side will win? Who knows. I guess that makes me “caustiously optimisitic”.
Capital is the fuel for the engine of achievement and Zero has spent or borrowed so much that engine is running on fumes. It’s going to be a long hard climb out of the hole he’s put us in , not made any easier by the multitudes of fools with their moral compass fixed on south who will keep trying to do those things that make it worse.
In the article it says that markets are pricing in 5% growth for the US next year. HELLO. Anyone home? We cannot grow, we’ll be lucky to keep from shrinking 5% next year. Credit is gone (except for buying houses and cars), regulations continue to slowly strangle business, and we keep running huge deficits.
All I can say is that I’m glad that I have no money in stocks now...if they are expecting that kind of growth.
What needs to be done is that, first, our government needs to create a stable business environment for small businesses. Small business owners need to see that they will not suffer an unfair tax burden such as that planned by Obama (in fact, corporate and individual tax rates need to be cut across the board) and that they will not be required to provide healthcare for employees. Also, the government could provide a big boost to small business by eliminating the minimum wage.
Second, the government needs to assure investors that government spending will be substantially reduced and that any new revenues generated by an improving economy will be used to reduce outstanding debt.
Third, the government should move immediately to reduce and/or eliminate restrictions on the development of oil, gas, shale oil wherever it exists in the U.S. and offshore. The technology exists such that this can be done without threatening the environment. Along these lines, the government should provide for the immediate expansion of nuclear generating facilities.
These simple steps would provide an immediate boost to the economy and job creation.
Here’s a start:
1. Real money: Silver and gold coins IN CIRCULATION. Withdraw the post-1964 base-metal slugs. Announce that on January 1, 2014, the price of gold will be fixed. Let the market find the correct price of gold. Then, introduce a NEW DOLLAR that is worth 1/20 of one oz. of gold, and convert all old dollars into new dollars at the proper ratio.
2. Repudiate the unfunded liabilities of the U.S. government—i.e., Sochcurity, Medicare, Medicaid, etc. Then, enact programs to soften the transition for those over certain ages, phased out so that younger people are neither paying in nor expecting any payout.
3. Abolish the Fed.
4. Repeal the 16th, 17th, and 19th Amendments.
5. The President must instruct the GOVERNORS in their duty to nullify usurped powers of the federal government—starting with Roe v. Wade and similar USSC usurpations, and continuing with unfunded mandates, gun laws, drug laws, etc.
Clarification: The withdrawal of the base-metal slug dimes and quarters, and the circulation of real money (gold and silver coins) will have to occur AFTER the new dollar is introduced.
With a name like ‘’Maudlin’’ this guys ‘’optimistic’’ about the future. Well there irony for you, eh?
My point is that a strong economy will produce the tax revenues need to begin to pay down the deficit particularly if spending is significantly reduced.
On additional point is well worth making and that is the system of taxation needs to be completely overhauled. It is my understanding that it costs more to operate the IRS than the actual revenues contributed to the Treasury after that cost is paid. If that is even remotely true, there is a huge opportunity to reduce spending right at the beginning of the revenue production mechanism.
Early in my career, I worked with a large CPA firm in their tax practice. The tax regs were a mess then...I can only imagine what they look like now.
Bottom line: bad tax policy means inefficient allocation of capital and that is detrimental to economic growth.
More accurately, you pay down debt, but lower or eliminate the deficit.
an interesting article HERE. Two interesting snips:
1) The circumstances behind Dubai's moves are murky, making it hard to gauge the exact risk to the pertaining bonds and Dubai's own general creditworthiness. UBS cautioned that Dubai's overall debt "might be higher" than the generally assumed $80 billion to $90 billion, due to potential off-balance sheet liabilities. These could include unlimited and unquantifiable amount of credit default swaps (CDS) and other derivatives against the underlying assets, and once unraveled, could potentially erupt into a subprime-like crisis.
2) Rational expectations or not, for now, the Dubai crisis is simply a reminder that the severe global recession has relegated much debt to near junk status, and there still remains a high degree of uncertainty as to the percentage recoverable on all outstanding debt which is going to be coming due over the next 5 years.
Dubai is the tip of the iceberg. I am not optimistic, cautiously or otherwise.
Right! Thx for the correction!
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