- January 6, 2010
“It was the age of wisdom; it was the age of foolishness” started Charles Dickens 1859 novel "A Tale of Two Cities." There could not be a better description of where we find ourselves. It is the best of times for the economy, with the stock market hitting recent all-time highs; the worst of times for government economic leadership. Our economy is full of innovative and creative ideas displaying more commercial wisdom than ever before; our growth hampered only by the foolishness of our government’s policies.
One must ask how the economy is helped, the future is advanced, and public welfare is promoted by shutting down a significant percent of domestic oil and gas production and creating trillions of unnecessary dollars out of nowhere that will do nothing but produce a high rate of inflation for years. The incompetence of our central government’s policies may both crush the economy and destroy existing constitutional government which has sustained this country for almost 250 years. This mess started with forcing interest rates to unrealistically low levels. This has created two problems: one in the public sector, and one in the private sector that’s a result of the mess in the public sector.
It’s a double-edged sword. Bondholders will now receive more income; however, it is done at the expense of the taxpayer. With government debt exceeding $30 trillion, each 1% increase in the cost of interest costs the public $300 billion in interest payments. In 1980 the Fed increased their key rate to 20%. Inflation peaked at 14.8%. Should we reach that percentage of inflation, and the Fed funds rate was 20%, that would add a staggering additional $5.6 trillion to our annual budget, almost doubling the entire current budget now estimated to total $6 trillion. Interest payments alone will dominate the federal budget.
The government is responsible for every bit of it. It started with the government flooding the market with cash. Inflation is caused by too much cash in the market. Adding trillions to the spending stream created huge demand, and left producers unable to meet demand. That is an example of the current inflationary cycle. The U.S. was an exporter of petroleum products. We are now an importer, and we are at the mercy of world demand, which is being disrupted by war in Ukraine.
The resolutions are bankruptcy, or inflation. The government talks about keeping inflation low, but that’s misleading us, again, as they would love to have 6-8% inflation sustained over several years. It would eat away at the real “principal amount” of the debt. Five years of 8% inflation would reduce debt by a third, making the “principal amount” of debt less than $20 trillion.
To determine the historical average price of the Dow, one needs to determine the average dividend yield on the Dow. The average long-term dividend yield is 4.1%. If the market were selling at the 4.1% yield, the Dow would be 15,400 points instead of 32,500. The market is yielding 1.9%.
One has to take into account that this country is in trouble: politically, economically, and militarily. While our mortal enemies, Russia and China, build and train their militaries, we are holding classes on how to treat each other “civilly” and we are taking our eye off the ball on China’s military innovations. That ignorance is likely to lead to catastrophic consequences. Politically, we’re spending billions of dollars pushing agendas helping children decide if they are really males or females, and other confusing, and distracting, subjects. These interferences create a disorderly society, and they are dominating the national agenda. Rising interest rates, escalating oil prices, years of inflation, and investors switching into the bond market for higher yields represents a set of obstacles to overcome if the market is going to move forward.
It is hard to fathom any set of circumstances in the next 12-24 months that mitigate other than a continuously depressed market pushing stocks well below present values.
George Rauch, of Longboat Key, is the CEO of Bradenton-based General Propeller and a former Wall Street investment banker.