The Economic and Political Outlook for 2015

Summary

The global economy is entering a deflationary recession, and the United States will not be immune.  We live in a financially and economically integrated era, and only concerted action can bring an economic recovery.  Unfortunately, the political will is lacking, as the United States is dominated by anti-government Republicans, and other countries practice austerity and currency devaluation in a deflationary spiral. 

The political consequences will result in a paradigm shift to a new model of governance with regard to the economy.  This will be somewhat similar to the way in which the Great Depression of the 1930s resulted in the New Deal and a much bigger role for government in the economy for the next 50 years.  The current era of Reaganomics began around 1980 and enjoyed considerable success for about 20 years.  However, beginning in the year 2000, this era of globalization of the economy, with reduced government regulation and a porous safety net, has been wobbly.  The stage is set for a new era.

Of immediate concern is the direction of governance in the United States.  If I am right and the economy tanks in 2015, the allure of Hillary Clinton, and more of the same from the Reagan-Clinton-Obama era, will be nil.  Either Clinton will have to make a sharp turn to the left, or she will face a populist backlash.  If I am wrong and the tanking of the economy doesn’t occur until mid-2016 or later, this will be bad news for Democrats who will own the crappy economy in the eyes of voters.  This could be similar to the situation faced by Republicans in 2008 as economy crashed shortly before the elections that year.

On the Republican side of things, I have much less certainty.  Republicans seem more likely to do a 180° pivot and boost their favorite parts of the economy (big corporations and other Republican interests).  I can imagine them passing massive tax cuts as well as subsidies to businesses, and such measures could prove effective.  They are equally likely to worry about the deficit in Hooveresque fashion, thereby prolonging the depression.    If Republicans gain more power there will be conflict between the anti-government and pro-business wings, as business will need government help.

Current State of the Economy

The following factors form the basis for my belief that the economy is in the process of tanking:

• The United States stock market is massively overvalued by all reasonable measures.
• The middle class in the United States is heavily dependent upon the stock market for retirement saving.  This situation is similar to the 1930s, when life savings were held in uninsured bank deposits.  Now life savings are held in uninsured 401k-brokerage accounts.
• The global economy is slumping.  Japan is in recession, emerging markets are crashing, Europe is slipping into deflation.
• The global economy is interconnected, and the U.S. is in the center of it all.  Deflation in other countries is resulting in deflation in the United States, as gas and import prices fall.  Similarly, the rising value of the U.S. dollar is making U.S. labor comparatively more expensive, despite the actual fall in U.S. wages in the latest employment report.
• The global financial system is interconnected.  The rising value of the U.S. dollar is squeezing emerging markets that have borrowed trillions of U.S. dollars.  Thus, credit markets around the globe are tightening, while the safe haven of U.S. Treasury bonds is soaring.
• The United States economy has been weak for the last decade.  This was disguised by a housing bubble and, more recently by an energy boomlet.  But labor force participation and wages have stagnated.  There is little room for a slowdown, as evidenced by interest rates approaching zero all around the world.
• Expectations are wildly out of whack.  In spite of all the factors noted above, consumer confidence is up and the conventional wisdom among both Republicans and Democrats is that the United States economy is taking off.

In short, the perfect storm is coming.