By John Reizner |
The Obama administration may be doing everything in its power to destroy private industry jobs faster than the government can "create" them. The U.S. government itself may be the best growth industry in the U.S. as the government directs taxpayer money into the industries and pet projects of its choice.
Normally in capitalist economies, recessions clean out businesses and consumers whose risk-taking did not succeed or who accumulated excessive debt and cannot pay it back. A downturn will then lay down the foundation for healthy growth in the future by rewarding both older and new business success stories and punishing businesses that did not adjust to a dynamically changing economy and therefore failed. This is sometimes a painful process.
The Obama administration is attempting to prevent the business cycle from completing its normal course through successive bailouts of the banking and financial services sector and by buttressing major failing companies such as the autos. Business failures are being rewarded with billions of taxpayer dollars while business successes are being punished through Obama's "spread the wealth" plan.
The government has effectively frozen our economy where it is now, trying to stop the process of "creative destruction" in which the new supplants the old (and about which Joseph Schumpeter wrote so well). The only "change" we see happening is being dictated by our government as it attempts to spend its way out of the hole we are in.
The Obama administration and Federal Reserve Chairman Bernanke are literally betting the republic's financial survival on the outcome of a massive spending plan and the Fed's potentially inflationary "monetary ease." Obama's populist wealth transfer policies from "rich people" to benefit Main Street do help many mortgage holders and struggling families.
But the Obama administration may be nailing the coffin shut on certain industries such as banking as it mandates changes in mortgage contracts which will squeeze the banks further. Many banks are on life support while receiving taxpayer dollars. They are being told to issue loans to businesses and consumers. Should life support fail or be cut off, the banks may not survive and their employees may end up unemployed, though somewhat later than if the banks had been allowed to fail in the first place. Meanwhile, tens of billions of taxpayer dollars will have been wasted. See my article on Obama written before the election at How Obama May Bomb the Stock Market and Economy in 2009-2010.
For further information regarding the effect of Obama's policies on the stock market, see Why the Stock Market May Have Collapsed Months Before Barack Obama was Elected President.
There is also the Law of Unintended Consequences, as big government's intrusion into the private sector has unintended and potentially harmful consequences to the economy. For example, Bill Clinton's luxury tax on yachts almost destroyed the boat building industry in the Carolinas as the buyers of higher priced yachts refrained from purchasing because of the excess taxation. This taxation was probably more harmful than good for economic growth.
Obama's comment that businesses that receive TARP money should think carefully before sending their employees on "junkets" to conventions in Las Vegas, has resulted in many convention reservation cancellations. Restrictions on executive travel destinations and behavior may cause a significant unemployment ripple effect that will harm the hotels, restaurants, cab drivers, theaters, etc. I do think that TARP money should not be wasted on business/gambling junkets, but the reduction in business travel has consequences for the economy.
The pharmaceutical companies are other obvious targets of the Obama administration, as lifesaving drugs may be placed under price controls. Such price controls, if enacted, may result in shortages of many medicines as it may not be as profitable to produce the drugs. It is possible that the drug companies may attempt to cut costs by reducing sales representative and research scientist staffing.
Most of the new drugs developed globally come from U.S. companies. If price controls are imposed, we may see in several years a significant reduction in the count of new drugs being created. Bureaucratic delays of drug approvals may further limit the number of new medicines available to the public. Pharmaceutical companies may end up needing to modify their businesses to suit the heavy hand of government, not the free market.
The U.S. is now effectively subsidizing the drug prices of other Western economies that have socialized medicine. In a free market, the high prices that are being charged in the U.S. might fall and prices in countries with socialized medicine might be adjusted upward. This would end the subsidy through the free market and at the same time save crucial drug companies from being forced to cut back their research and development expenditures.
What does this all mean for the investor? I only hold one bank, and have sold my two pharmaceutical holdings, all which I have held at least fifteen years. Future inflation beneficiaries such as physical gold, major integrated oil companies and major oil service firms may pick up steam should inflation go into the high single or into the double digit range, as I believe it may. See my article: Will the U.S. Suffer an Inflation or Deflation in 2009-2010, (or Both)?.
The dollar may resume its decline against certain major currencies should market players take into account the United States' uncontrollable budget deficits and a reduction of our living standards (because of high consumer and Federal debt levels). I am trying to keep enough cash in money market or bond funds, both foreign currency and U.S. dollar denominated, to cover my mortgage debt.