In the old Star Trek television series, mortal danger followed the man with the red shirt beaming down to a planet. Inevitably, the uniformed team members would split up to search the area. The script was predictable. Soon after, there would be a commotion and a shout. Everyone else would run to the location of the poor man wearing the unfortunate color. He would be unconscious. Because of the importance of their mission, Captain Kirk would order Doctor McCoy to revive him. Over his objections, "Bones" would inject a stimulant. The prone patient would awaken wide eyed, utter some cryptic clue, and then his head would fall back. "He's dead, Jim," Bones McCoy would always say.
Impatient for an immediate result, American leaders have administered fiscal and monetary stimulus since the beginning of the Great Recession. The private sector is not being allowed to heal itself by deleveraging. Quick fixes and spin serve as poor substitutes for real policy. The next congressional election, presidential election, or appointment becomes more important than solving problems by either major party. Therein exists the singular risk to the global markets. Poorly timed and misguided government actions, enabled by binary thinking voters, prodded by light speed media, can be disastrous.
Another injection of stimulus could be the death blow to our red shirt economy. Leveraging up by the US federal government carries a special danger substantially greater than many underwater homeowners, a bankrupt automobile manufacturer, or even a "too big to fail" Wall Street company. There is no political decision to be made to revive or not to revive Uncle Sam. He is too big to save. The trillions of dollars in debt are rapidly becoming too much for even the rest of the world combined to deal with. Treasury bond default risk could come as swiftly as the heart attack the markets suffered in late 2008. Nothing good can happen to the US and world economy when the global markets realize that unsustainable debt will create a crisis sooner rather than later.
How this bad episode plays out over the next decade cannot be foreseen in detail. Specific future actions by the actors in Washington and Manhattan can make or break any defensive investment plan, or even a well considered financial survival strategy. Who could have foreseen that the appointment of Paul Volcker as Federal Reserve Chairman in the late 1970's could have led to the last double dip recession, but also to the solution to the inflation crisis? The dilemma for us Main Street folks is that doing nothing to ensure we are not part of the problem is unacceptable. Praying for the US government and economy to muddle through the 2010’s does not make anything happen. Prior to a plan is awareness. Awareness requires warning. This is your warning to change your red shirt.
©2010 by Chuck DiFalco
