Bull Market? Buoyant Economy? Here's How

Here are key factors to watch out for in the fate of our struggling economy and wobbling equity markets:

• Tight money. Just as a car won't run well without sufficient fuel, an economy won't run well without sufficient credit. The Federal Reserve's deflation between 1997 and 2001 was a prime cause of our slowdown and of much of the economic turmoil around the world. A good barometer of liquidity is the price of gold: If gold falls below $300, watch out: We'll be following the same disastrous, too-tight-money path that Japan has trod since 1989. If the yellow metal settles in around $325, we'll be in good shape. The ideal price would be closer to $350. Too bad Fed Chairman Alan Greenspan won't be explicit about what guides monetary policy; not knowing adds undesirable uncertainty.

• Taxes. Cut them. Democrats, as usual, will howl, but voters will respond positively. Halve the capital gains levy. Get rid of, or ameliorate, the alternative minimum tax. Slash business taxes; our burden is now one of the heaviest among industrial nations. Make dividends deductible. And make last summer's pitiful reductions--which, adding insult to injury, are phased in over several years--effective (and permanent) now.

• Trial lawyers. These folks have destroyed scores of tangentially connected companies with asbestos lawsuits; driven ever more good doctors from practicing medicine; enacted, in cahoots with politicians, a multibillion-dollar unlegislated tax increase on cigarettes that falls disproportionately on low-income Americans; and infused our society with legal-action fear (you can be sued for anything today). Will they now loot and wreck corporations that make honest but unsuccessful business decisions? In other words, are we on the way to making a business failure a civil or criminal offense?

• State regulators and state attorneys general. Will they rev up harassment of companies--extorting billions of dollars--by charging them with "violating" the more ambiguous areas of accounting and tax law? We're not talking about bucket shops or fraud but about having government do to businesses what trial lawyers already do: shake them down for money and eye-catching headlines.

• Stock options. These are a vital instrument for startups and, properly employed, are a great motivation for executives in existing companies. The new accounting oversight board may effectively put the kibosh on them with arbitrary expensing rules.

• Consumer credit crunch. Accounting regulators could also shut off the flow of credit for homeowners and consumers by making it difficult for financial institutions to sell packages of mortgages and consumer loans to money and pension funds. How? By forcing lenders to include these packages as liabilities on their balance sheets, even though they've been sold to investors. Securitization enables lenders to spread the risks and obtain liquidity for fresh loans and mortgages. But accounting pooh-bahs dislike securitization and, in the current climate, may tar it with the Enron brush.

• Health care. Will Washington saddle us with an open-ended Medicare entitlement for prescription drugs, burdening us all and crippling pharmaceutical research and development? The best proposal is a plan from the Galen Institute. It would provide low-income seniors with $600 a year for drugs, as well as with affordable private insurance that would cover most costs above that. Alas, liberals would rather have an issue than a sensible solution.

• The IMF. Having cut off at the knees the economies of Turkey and Argentina, the International Monetary Fund is now applying its chainsaw prescriptions of high taxes and currency devaluation to Brazil. Without the pro-growth policies of stable money, low taxes and property rights, Brazil will default on its debts. IMF bailouts only postpone the unnecessary inevitable.

• The war on terrorism. How President Bush chooses to deal with Iraq will be crucial. Appeasement and irresolution will undermine the war effort. A floundering America will not for long be a vigorous, prosperous America. The President and his lieutenants must vigorously make the case to us and to the world why Saddam Hussein must be forcibly removed from power. The sooner, the better.

Buoyant Economy

These are sound, logical, and common sense observations and the recommendations offered have much merit. However, the assumption that a buoyant economy is the objective for all who are able to effect the situation is in error.

There are those among us who have a different agenda to serve and a solution at this particular time would not serve that agenda. After all, it is nice to be needed and being exposed as unncessary is a fear held by many politicans.

"The whole aim of practical politics is to keep the populace alarmed (and hence clamorous to be led to safety) by menacing it with an endless series of hobgoblins, all of them imaginary." (H. L. Mencken.)

I propose a 3 tiered approach to solving majority of problems stated. Envision a tall oak tree with 3 strong branches on one side.
The uppermost branch would be tier 1. Midlevel branch would be tier 2. Bottom branch would be tier 3.

Now comes time to implement the solution.
Tier 1 – Hang all crooked politicians.
Tier 2 – Hang all crooked corporate executives.
Tier 3 – Hang all shyster trial attorneys.

Problem solved, case closed ;-)

How can he describe Federal Reserve policy as delationary during a period that the M3 money supply grew from $5 trillion to over $8 trillion in 5 years (approximately 10% annually)

I can’t understand why financial institutions would have to keep sold securitized mortgage derivatives on their books as liabilities (unless they sell insurance protection or otherwise provide guarantees). Does anyone know what he is talking about on this?

Forbes says: Without the pro-growth policies of stable money, low taxes and property rights, Brazil will default on its debts.

True, but EVEN with so-called “pro-growth policies”, low taxes, and property rights, Brazil will ALSO either: default, have debt forgiven, swap equity for debt, or have US taxpayers pick up the tab. The simple reason is the debt load is not a fiscal issue but a (hopeless) monetary one.

Does anyone know what he is talking about on this?

I think he has reference to discussions afoot to have different accounting rules and end securitization as presently known.

Not certain however.

I think he has reference to discussions afoot to have different accounting rules and end securitization as presently known.

You may be right. But then (it seems) he should have said:

Forcing lenders to include these loans as assets on their balance sheets, by disallowing sale to investors.

Instead, he said:

By forcing lenders to include these packages as liabilities on their balance sheets, even though they've been sold to investors.

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