Food For Thought

From a mass Email today from David Kotok of Cumberland Advisors, traveling in Zimbabwe. Dr. Kotok appears to be a reasonable, middle-of-the-road sort of guy. Food for thought:

At dinner we discussed how regimes alter policy and how Zimbabwe is the extreme example of a sequence that was summarized by LSU professor Joe Mason as political change leading to socialization and industrial policy followed by inflation, as the government dominates or controls the financial engine. In Zim's case, Joe noted that the politics were those of “a "ruthless dictatorship.” The target of the industrial policy in Zim is agriculture, and property seizure, corrupted courts, and painfully inflicted police power have also been characteristics of this regime change.

That led us to a discussion of the present evolution underway in the United States. We do see major political change in the massive repudiation of the Bush Administration and with the now overwhelming majority in the House and the Senate of a single party that also includes the president. Add only one or two Democrat senators, and the US will be operating under a full one-party rule.

There is a trend toward growing socialization, which will accelerate when the proposed Obama tax structure becomes law. By then, less than half the wage earners in America will be paying income taxes; hence, the funding of government will fall on the minority.

We already see an industrial policy in banking. And we have one in housing finance now that most residential mortgage lending is done by government agencies. We are also evolving an industrial policy with autos. We've had one in agriculture for years; federally subsidized ethanol policy was one of the worst results.

Will this lead to inflation? Our central bank claims vigilance while expanding its balance sheet in ways without precedent. Clearly markets see an inflation risk and are raising interest rates. Foreigners worry about the US dollar and evidence their views in the foreign-exchange market. The jury is still out on an eventual large inflation while the US economy remains in recession, but one must certainly admit that the inflation risk is high. The political influence on the central bank by our Congress doesn’t lessen this longer-term inflation fear.

Some political history. The last three times the U. S. had this sort of one-party rule were first under FDR. Coming into the utter devastation of the end of the Great Crash, he brought some inflation and initially soaring stock prices, but ultimately unemployment never declined a lot or consistently. Carter had 4 years of one-party rule. The first two years had very poor stock markets and the second two years had soaring inflation and in year 4, a dollar crisis. Clinton, in a time of the strong Perot balanced-budget movement, had only two years of one-party rule, got none of his agenda through (think quasi-socialized medicine); when he and the Party were repudiated, the great Bull (-sh*t) market of the second half of the '90s got going. We are still enduring the hangover from that and the associated ascendancy of Big Finance that suited both Clinton's and Gingrich's purposes.

While the above data is necessarily of statistically poor power, I believe that it should be kept in mind in interpreting the markets.

Big Government is bigger than Big Finance.

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