Wednesday, July 17, 2002
Undermining Confidence-I was talking yesterday about the fallout from the accounting scandals as well as the Harken Energy protoscandal being part of a liberal attack to discredit the free-market system. We need to pay close attention to this and make efforts to assure people that our financial system, while flawed, is still sound. If people continue to have added fears about the safety and relative honesty of the stock market, people will stop investing in stocks. If investors simply switch their investments to bonds, it will create more bankruptcy, not less, as companies will be more likely to borrow money to raise capital if selling stock becomes harder. The bigger debt burdens will cause more companies to go under in bad times under the added burden of extra debt. Also, companies that are deeper in debt will tend to play things closer to the vest, turning down some previously profitable investments, since a greater share of the rewards from risky investments will go to the bondholders and not the stockholders. Profits that come in scenarios when the company's bankrupt can be ignored from the shareholder's perspective, since they won't see a dime of it; a larger debt burden creates more bankruptcy scenarios and makes more and more projects unprofitable to the shareholder. Such a reliance on debt and the resulting corporate investors with tighter sphincters will not be good for the economy, as many new projects won't be done. However, if the decreased confidence gets people to stop investing altogether, then that will have even greater impact on the economy. You may have a rush of added consumer spending, as the money that would have been spend on stocks and bonds gets put into buying stuff. However, that will be offset by a decrease in business spending, as a larger number of new projects will go undone because of the higher cost of capital required to lure investors back into the capital markets. The GDP effects of this will be of a long-term nature, as the plants and stores that don't get started today won't be hiring new employees six months or a year from now. We're almost exactly two years away from the economic picture people will take to the polls with them in 2004; any changes after the conventions will get drowned out by the political rhetoric. Remember that the recession ended in the fall of '92, but the Clinton rhetoric silenced the improving economic news. If this Accounting Risk bear market continues, we will see the effects in decreased business spending and a decrease in the creation of new jobs in 2003 and 2004, as the plants that will be opening then are being planned for now. Right now, this market could be seen as overreacting to bad news and be more of a nasty correction than a true bear market. We haven't been in a market where pessimism was the overriding rule in two decades. Democrats have a vested interest in encouraging this trashing of the stock markets. If capitalism is taking it on the chin, statism starts to look good. Random Jottings pointed out that the Krugman was the main instigator of the Harken protoscandal, trying to make a decade-old lucky sell (if you want to counter with Hillary's pork bellies, prepare to be Fisked) into a liberal political issue. The Birkenstocked Burkean had this take in the Corner yesterday
I've been talking over the past few days to family members in Red America who have taken serious hits to their retirement funds because of the stock market. To a certain extent, that's life, and they know that, and they're surely not talking about voting Democratic because of it. But when I heard my dad on the phone last night light furiously into the "cheating bastards" running these companies, I thought: God help the GOP if President Bush is credibly presented to voters as one of the corporate elite who get rich and take care of each other, while ordinary folks who trust them to play fair are left holding the bag.It's the statist's goal to make the CEOs look like SOBs. If Joe 401K becomes unduly fearful of the stock market, he will start to make a move away from being a dynamist and be listening to the siren song of the statist. It is Joe 401K, the middle-class working stiff who is a net provider of resources to the government, who is the swing vote on election day. If he can be made to be fearful of the markets and either reduce his investments or to shift his holdings into bonds, he will help create a recession. Then, when the Accounting Risk bear market turns into the Recession of 2004, the statist will blame the supply-siders for the whole-thing. We each have our jobs to do here. I may only have 100-150 weekday readers, but each of you has dozens of people you know. Let your coworkers and family and churchmates know that things aren't as bad as the headlines make them out to be and that long-term investment in the stock market is still a wise thing to do; even more so now that the speculative bubble of the turn-of-the-millenium has been pricked. The fans of a dynamic economy need to stand up and try their best to counter this statist offensive and see to it that the Recession of 2004 doesn't happen.
Comments: Post a Comment