Haiti on the Potomac

The Liberty Papers thinks we have become a lawless Banana Republic.  George Will is thinking along the same lines, snarkily observing that Sweden, China, and Mexico have all observed in one way or another that the Feds seem to be acting outside the rule of law.

I have opined in the past that what really extended the Great Depression was not any real underlying economic issue, or even vast increases in government spending per se.  It was that arbitrariness with which the Roosevelt administration dealt with economic matters.  With nutty programs like the Mussolini-inspired National Industrial Recovery Act coming and going, investors and businesses never knew from day to day what the rules of the game would be next year, or even next week.

I fear that this is exactly the climate Obama and Congress are creating today.

  • When Congress reacts to CNN headlines by retroactively confiscating legal compensation that it had protected just weeks before, what will happen to my compensation?
  • When government deficits soar by trillions of dollars, what will taxes look like next year?
  • When the Administration says that Co2 will have to be reduced by 80%, what numbers do I plug into my forecasts for fuel and electricity?
  • When the government decides on a whim to print a trillion dollars more money to pay off government debt, what will inflation look like in the coming months and years?

As of two months ago, my company was still investing.  We were still getting bank credit, particularly for equipment financing, though it took more work than in the past to secure it.  We still saw opportunity in our business, and in fact saw increased opportunity in the recession for low-cost recreation options and outsourcing of public recreation facilities.

But today, I am reluctant to make any new investments.  Investing $5000 now for $8,000 a year from now normally sounds good, but what happens now that the Feds have more than doubled the money supply?  How much will $8,000 really be worth a year from now?  What will my taxes be on the increase?**  What new costs or liabilities  might be retroactively placed on me for making the investment?  What happens if beltway pundits start thinking I am making too much money?

All this commotion of government intervention started when Paulson and other Bush appointees started screaming that the banking system was going to shut down and therefore crash the whole economy.  As my readers know, I believe to this day that this was all sky-is-falling over-reaction and panic-mongering, and most of the credit crunch resulted from uncertainty about the Treasury and its statements, not due to realities on the ground.   However, whatever tightening of credit we might or might not have avoided by government action, it pales in its effect on investment in comparison to the arbitrariness and trillion-dollar-plan-of-the-day that has been the first 60 days of the Obama administration.

** footnote: For those of you who have not lived through high inflation times, taxes and inflation are a deadly combination.  That is because the Federal Government, after creating inflation, then taxes each of us on its effects.  Here is an example:  Invest $5000 now at a fixed 10% a year.  Suddenly, inflation goes up to 8% a year.  In five years, I now have a bit over $8000.  In economic terms I have made a small profit of, since $8000 in five years at 8% inflation is worth $5,445 today.

But the IRS thinks I have made $3000, not just $445, and will tax me on the full $3000.  If they take a third, I only have $7000 at the end, or $4,764 in current dollars, meaning that after taxes, I actually lost money.

  • Allen

    Inflation is a bitch, to say the least.

  • TXJim

    Dead on amigo. Inflation plus taxes is a bitch. Today I am a "1040 guy" precisely because my family could not afford to continue our farming and ranching business during the late 70's/early 80's. Inflation and the whiplash policy changes designed to combat inflationary affects made it very difficult to pay debt with commodities that fluctuated wildly because of the uncertainty. Remember the Soviet grain embargo?

    Maybe some will find this link an interesting look back:
    http://www.polyconomics.com/ssu/ssu-990108.htm

  • Franco

    I'm sorry I missed this post yesterday. Our main investor is a small bank that took some TARP money under great pressure from Treasury. For a large part of the day I was again buried in the senate calendar trying to figure out what the next retroactive comp restriction coming will look like and when it will materialize(see S. 651 which is still held up in the senate, maybe indefinitely). We need to rework some comp plans and are now unable to do so. Basically we're stuck although the problem we need to address seem to keep moving forward not caring about the US Congress and their whims. Also, we're probably going to have to cancel a planned meeting because the location may be "too nice". I'm still trying to figure out if its in a Democratic district. If it's in a Democrat's congressional district I think we'll be OK politically. So, I agree with the post. Government is making it harder to run our business and time is spent trying to conform with the ever changing laws. I used to consider buying a business for myself. There is no way I'll buy one in this political climate.

  • tomw

    In the scenario envisioned, you forgot to add the fact that you will be taxed at a higher rate because you will be moving into a different bracket.

    You are obviously making too much money.

    I am too old to start over again, and our Chief Executive has determined that he will devalue our currency, keep Wall Street guessing, and discourage corporate investment with uncertainty. Thanks a lot for tanking my savings and investment. Oh, and slamming my house value too. I am sure that the property tax appraisal will reflect the reduction in market value. Wanna buy a bridge???

    tom