I was personally hoping that the socialist bail out package would fail. In its first time around, most Republicans correctly defied the increasingly irrelevant President and voted against it. Not surprisingly, a larger fraction of the left leaning Democrats voted to support Comrade Bush.
Unfortunately in its second pass, it got approved by large portions of both parties. What does it mean for America and the world? 1) In the short run, it could mean more inflation, depreciating USD values and continued declines in America's standard of living. I think the latter would have happened even if there was no bailout package. The US has been living beyond its means for a long time. Some facts to ponder: * Total government debt has crossed 10 Trillion dollars. It was around 4 Trillion just 8 years ago. As a % of GNP, it is now around 75% and is at its highest levels since the 1950's (after WW2). * US consumer savings rates are around 1-2%. In 2006, it was actually negative. The relatively so called good years of the past decade was mainly driven by high consumption using borrowed money - both at the federal and consumer level. * US trade deficits as a % of its GNP are actually lower now than in the mid 1980's. However this time around, the pillars of consumer debt and accumulated govt. debt may make this an issue in impacting the value of the dollar. I am feeling very Japanese these days. After Japan's asset bubble burst in the early 1990's, it has suffered from a decade of little or no growth. To counteract the down turn, the Japanese govt. went into many deficit spending to get itself out of its rut. It failed, so much so that compared to the US, Japan has an even worse accumulated govt. debt load of 140% of GNP. In Japan, the consumers who had the money, never stepped in to boost consumption. In the US, the financially strapped consumers will have no choice in this matter - they don't have the money. Hence it may make sense to short consumer driven sectors such as durable goods. 2) If there is place I would invest in, it is in clean/renewable energy. The bailout package has additional legislation that includes promotion of clean energy in the US. World wide wind energy demand is currently growing at a rate of 80% pa, while for solar it is around 40%. I think investing in these sectors should be reasonably safe bets. 3) Although everyone talks about inflation, I would like to suggest that the reverse - deflation may actually occur over the longer term (2+ years). It all depends upon how severe this downturn will be - bad or very bad. If the recession in protracted, we can expect significant price pressures on many products and commodities. If this happens, it would be a good idea to maintain significant cash positions. It is possible that the US could try and counteract this by printing even more money by going into even larger deficits, in which case it would be a good idea to dump the dollar. Furthermore, there is already talk to America's credit rating being downgraded. Thanks to poor management and the focus on wrong priorities such as the disastrous Iraq war, the fall of the American economy in the last 8 years has been quite stunning. Whoever wins the next election, will have a difficult challenge ahead of him. I think the fiscally conservative McCain would be a better choice, but Obama may also be ok too. Regardless, either candidate would be better than the monkey currently occupying the white house. I hope monkeys around the world will not be insulted with this reference. Marlon
