Some ideas to think about as we head into 2010

We all have ideas about what 2010 will bring. I have made a list of some ideas, some thoughts, and some possibilities that I think might happen in 2010. But rather than guess at where the S&P 500 will end up or how much analysts will trim their earnings estimates; I thought I would come up wit a list of things that could make 2010 better or worse than I envision now. But I also wanted possibilities that would make people think about key elements of the economy as we move through the year. Here is the list.

1.Unemployment will not get much better and could get worse in 2010 because consumers are now into saving and debt reduction rather than spending; and companies key their inventories and expansion off consumer demand.

2.Dollar could increase in value early in the year due to global uncertainties (risks) and what looks like an improving U.S. economy and then fade later in the year.

3.The number of “Tea Party” people will continue to grow and will shape the look of the Republican candidates in the 2010 primaries.

4.More burdensome and anti-competitive regulations will come out of Congress that will prove to be roadblocks to recovery.

5.Concerns about when the Fed and Bernanke will raise interest rates will become mute because the market will raise rates months before the Fed and Bernanke decide it is time to raise rates.

6.The central Bank will hold interest rates low and continue to print money causing the next bubble because of malinvestments.

7.Residential housing will get worse in 2010 due to millions more foreclosures and more “toxic assets” put on bank balance sheets. Commercial real estate will continue to decline into 2011 because of the need to refinance “underwater” properties. However, new investors with assets will begin to buy up these cheap properties.

8.Banks will have to build assets to cover the toxic assets they currently have on the books and to cover the new toxic assets to come in 2010 and 2011. Therefore, bank lending will remain tight (and credit worthy borrowers scarce.)

9.Corporate winners and losers (consumers and tax payers have already lost) in the health “care” legislation will begin to become apparent in 2010 and the health care CEO’s and Unions who made deals with the administration will be surprised when they find that their negotiated “deals” will not be honored by the government.

10.Congress will pass another stimulus package to again help create jobs. It will be large, but it will be passed in smaller packages so they can get the spending bills passed without attracting too much attention or outrage.

11.Climate change hysteria will begin to abate during 2010 and Congress will begin to work on a realistic energy plan that we have been waiting and paying for since 1975.

12.Corporate revenues will continue to be elusive so companies that can raise money (with low interest bonds) will buy revenues and earnings with more mergers and acquisitions.

13.Government debt levels, already very high, will get much higher and the Federal Reserve is funding this debt with short-term bonds. Therefore, the Fed will be reluctant to raise interest rates. Imagine a 50% increase in rates (or from just 0.25% to 0.5%) would due to your “costs” when you are already paying hundreds of billions of dollars in interest.

14.This is certainly a minority opinion, but corporate earnings for 2010 are too optimistic and will be revised downward beginning with the second quarter numbers.

15.New investment areas will emerge because where you have buyers you have sellers and vice versa.

Is that enough or have I missed some important ones. If you have some others that should be added, please e-mail me your idea.

If we could just spend more on interest, we could really stimulate GDP growth

This may not sound right, but give me a second and I’ll show you that this statement is true.

The economy, as defined by most politicians and economists, is a mathematical model called Gross Domestic Product or GDP. This model is based on consumption (spending by consumers, businesses and the government.) rather than wealth building or production. So every dollar spent is a dollar of GDP and every new dollar spent is GDP growth.

Now, if you are in Congress or the President, you could catch on to this real fast. The more you spend, the more GDP goes up and the better your chances for reelection. But it gets even better.

But, we have one speed bump to get over first. To spend a dollar you have to produce a dollar. But the government doesn’t produce anything so it has no money to spend. No problem, it just has to get its dollars from somewhere else.

The government has to take a dollar from producers in order to spend a dollar; or it has to borrow the money with interest from someone else. It doesn’t matter where the dollar came from in the GDP model because every additional dollar the government spends is counted as an increase in economic growth (GDP.)

Now, if the government takes a dollar in taxes from a producer to spend. You could argue that the net is the same; you subtract a dollar from the economy in taxes and then spend that dollar. This could hurt down the road when you have to increase taxes to pay for the dollars you are spending now; but who cares. Many think they will be out of office by then.

You would think tax payers would catch on to this, but remember you elected them because they were clever and great communicators. So they just change the meaning of the word spending to investment and everyone is happy. Long-term you try to convince tax payers that you are only doing this because the government can spend dollars more wisely than the producer or because the government can buy something the producer cannot.

Wait. I’m not done. Here is the BINGO. You borrow lots of the money because if you pay-as-you-go, tax payers could catch on. And you get to pay huge interest payments on the borrowed money—you got it. Every new dollar paid is an increase in GDP.

Now, think of the GDP growth we are going to get when our deficits go up by 10 trillion or more over the next few years. PLUS, if interest rates rise significantly because of all the debt, BINGO –even more GDP growth.

If you think this is a sane approach to our economy, do nothing. If not, support politicians who are sane.