Baltimore — The radio is a fantastic mirror of the economy. Advertisements, radio personalities and even the tunes themselves, do a fine job of illustrating the highs and lows of a region’s fiscal situation.
I spent the past weekend knocking a few items of my honey-do list. Living in a 110-year old farmhouse, however, it’s more of an ever-expanding notebook than a measly list. This time, I was charged with ripping out half-inch thick wood paneling and replacing it with modern drywall.
Like any self-respecting handyman, I cranked up the radio to help lull me into a sawing and hammering stupor – anything to break the monotony of measuring twice and cutting once.
What I heard was a lesson in local economics and national politics. The airwaves that should be filled with car ads and news of mom-and-pop grand openings were buzzing with public service announcements and advertisements for government programs.
There were ads for drug-intervention programs, a new community center and even a savvy attempt to get me to donate my blood.
The only folks buying airtime are the ones getting checks from Uncle Sam.
Isn’t that indicative of the nation’s economy? With so much focus on reducing debt and shoring up their balance sheet for a no-growth economy, few companies are willing to advertise.
Even if they want to pay high advertising rates to grow their top lines, most companies couldn’t get the loans they need to boost their production capacity. Again, the only companies eager to hit the airwaves are the ones spending your tax dollars.
That’s the conundrum this nation faces until the market forces naturally bring a credit-addicted economy back in line with its true potential. Look at it as the same kind of gridlock that ruins your Friday-night commute home. The only way to alleviate the situation is to remove some of the traffic.
That is exactly what China is doing.
As one of the few economies with a shot at any real growth potential over the next couple of years, risk-seeking investors are flooding the Chinese markets. Beijing thinks it’s a dangerous situation.
And it is.
As America has learned, speculative capital tends to wax just as quickly as it wanes. If not faster.
China, with its double-digit GDP growth, was flooded with an estimated $26 billion in cash inflows during Q3 2009. For a country trying to keep its currency undervalued and its inflation tame, suitcases filled with cash are nothing but trouble.
But just because Beijing doesn’t want investors flooding the market, doesn’t mean the speculation will stop. As Bernanke and Geithner have found out, smart money can squeeze through some tiny loopholes.
And who ever said stopping speculation was a good thing? Sure, it prevents the kind of painful bubbles that have made so many Americans rich and just as many poor. But without speculation, an economy will essentially flat line.
Just ask Japan.
After a near economic meltdown, Japan worked tirelessly to rid its economy of the risks associated with speculative investing.
Sure, the country has been devoid of bubbles, but it also spent the last few decades walking in place. Many investors, including myself, are convinced America is dangerously walking in Japan’s footsteps.
As we close our factories and tell Wall Street to stop making so much dang money, we show our susceptibility to eroding into a growthless economy that does nothing but feed off itself.
Service-based economies won’t make you rich.
Japan’s service sector is worth three quarters of its GDP, which is yet another reason its economy hasn’t grown by more than a handful of points over the last two decades.
The way I see it, America is at an important crossroad. We can let Washington intervene by unleashing trillions in stimulus, creating a bevy of new taxes and fees and putting excessive regulations on Wall Street.
Or we can reap what we sowed and face a cold, hard economic correction.
In one scenario, we can reduce the pain at the expense of decades worth of growth potential and in the other, the short-term pain will be immense, but the long-term benefits will allow more than just politicians to get rich.
Japan made its choice and is still paying the price.
Americans will know our direction come the November elections.
*** I know what you gold bugs are thinking. What does a decade’s worth of no growth mean for the precious metal?
The answer is one you likely won’t want to hear. Gold’s a safety net. It’s ultimate use, at least according to today’s buyers, is for protection against a major economic disaster.
Unfortunately, if Washington “heroically” rids the world of speculators, it also removes much of the risk of currency collapse, at least in the short term.
Gold prices will show the reduced risk with lower prices.
As we enter another critical earnings season, we will see a bevy of divergent data. It’s the start of the side-to-side vibrations that mark a stagnant economy.
Get ready for the “Japanization” of America.
You will still be able to make big money by playing the markets, but it won’t be fundamentals or intriguing growth stories that get the big rewards. We are entering an event-driven world, where one piece of legislation or a sliver of data can make or break a company.
The market as a whole may not move, but many of the individual pieces sure will.
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