The tempo has changed and well understood rules no longer seem to apply to anything any longer. Just a few months ago, all we heard was the rush to spend money. TARP, Stimulus, Bailouts, Obamacare. all multi billion dollar expenses.

It’s funny how the cold breath of the laws of mathematics changes everything. The laws of mathematics and economics are the liberals’ hangman’s noose, focusing their mind on survival of Big Government. Change is in the air, and many people now can sense that there is a seismic shift in the established order of things.

The consumer driven economy is weakening and its ability to drive prosperity is now in serious question. In general, retail sales forecasts are softening and a weak Q4 2011 and Q1 2012 now seems to be a serious possibility. Some forecasters are predicting retail sales to shrink by over 3% for December 2011 and January 2012.

This make sense when early signs of slack demand is reflected in flaccid back to school sales. Many retailers are reporting sales that are flat-lining and are having to take significant mark downs to move already thin inventories. The National Retail Federation states:

As they prepare for their annual back-to-school shopping trip, parents this year will make children scour their closets before agreeing to buy any new jeans, pencils or backpacks. According to NRF’s 2011 Back-to-School survey conducted by BIGresearch, families with children in grades K-12 will spend an average of $603.63 on apparel, school supplies and electronics, within a few dollars of last year’s $606.40 average. Total spending on grades K-12 is expected to reach $22.8 billion.*

For many retail businesses, flat is the new up, but trying to play up the positive of low growth by sloganeering is really unhelpful. We need actual sustained and real growth, not bumping along the bottom. Add into the mix that a slow down in government spending may create a further downdraft in sales.

Consumer Debt

Yet, more trouble is coming along. A recent report from Bloomberg reports that ever larger numbers of citizens are racking up debt to just keep food on the table and provisions on the shelf. The bottom line is that citizens are turning to their last source of revenue- debt- in order to drive and feed their families. Debt to fund a boat is an act of stupidity. Debt to feed your family is an act of desperation.

Energy Costs

Both West Texas Crude and Brent are climbing back up, and gasoline prices will soon follow. Fuel prices are going to recover from the dip we saw a few weeks ago. While they may not rocket to the prices seen just before the start of the summer, anything near $4.00 a gallon is a hardship and will drain energy from the economy.

After falling to $3.54 a gallon from May’s $3.98 peak, prices have unexpectedly surged the past two weeks to a national average of almost $3.70 — a dollar higher than levels a year ago.

How much further they will climb depends upon demand and actions by our administration. Opening up exploration and releasing permits would drive the price of crude down considerably.

Unemployment

Mass layoffs are continuing. Cisco, Borders, Lockheed Martin, Perkins, and many others are undergoing massive restructuring and laying off employees. Now we have NASA releasing thousands of experienced engineers. Many hospitals and health care organizations are furiously cutting staff and consolidating- circling the wagons in anticipation of the ObamaCare debacle that is almost here. Get ready for the health care shortage that is going to hit us, partially due to a reduction in experienced professionals.

Housing is still not healthy. The Case-Shiller index shows no real improvement. What is worse is the fact that we have deliberately forced the cost of lending downward, making rates artificially low. Yet, these rates will, at some point, rise, and when they do, that’s it. Game over. Our current 4.5% 30 year home loans are going to disappear when inflation appears, and when the risk of devalued assets goes up, banks must charge more to cover this erosion in purchasing power of the dollar. Right now a 10 year T Bond is a little under 3%, but it is not hard to imagine a scenario where it raises to 5%. That translates, roughly, into a 7% (or more) 30 year mortgage. Able to afford less house, home prices will drop another 15% or more. To add insult to injury, while housing prices are dropping, closing costs and fees are going up substantially. In other words it will take longer and cost more money to sell your home.

Peak Government

Peak Government. That is what we have been witnesses to, and are now seeing it collapse.

Exhausted financially, addicted to ruinous borrowing, bloated by byzantine bureaucratic control of too many aspects of life, the ocean of borrowed money has dried up, leaving big government stranded ashore like a beached whale in August. Government has simply outstripped the ability of its citizens to pay for the services being provided. The tools it has used in the past are no longer very effective. We got here by having too much debt. The solution is less debt, not more. We are left with very narrow choices. As a clear example of this, our central bank- the Federal Reserve has painted itself into a corner.

As for the Fed, they are checkmated, Dent says, suggesting the Ben Bernanke & Co. are damned if they do QE3 — because the bond market will freak out — and damned if they don’t — because the economy and financial markets are so dependent on easy money.

John Mauldin stated it best in his Frontline Thoughts journal:

Eventually the bond market decides that loaning you more money is not a high-value proposition. If your home or your government is debt financed, you are forced to cut back. While the US is not there yet, we soon (as in a few years) will be.

The point of the exercise is to reduce the deficit over 5-6 years to below the growth rate of nominal GDP (which includes inflation). A country can run a deficit below that rate forever, without endangering its economic survival. While it may be wiser to run some surpluses and pay down debt, if you keep your fiscal deficits lower than income growth, over time the debt becomes less of an issue.

And now massive deficits are projected for a very long time, unless we make changes. The problem is that taking away that deficit spending is going to be the reverse of the stimulus — a negative stimulus if you will. Why? Because the economy is not growing fast enough to overcome the loss of that stimulus. We will notice it. This is a short-term effect, which most economists agree will last 4-5 quarters; and then the economy may be better, with lower deficits and smaller government.

Going Forward

So where does this leave us? What is the path do we take?

First, both personally and nationally, we need to reduce debt, save more and make incentives for these things to happen. This would include a reduction not only in the size of government payrolls, but the compensation rates as well. As much as liberals fight to prevent it, the reality of mathematics makes significant government contraction a certainty.

Secondly, anything that can be done to encourage manufacturing needs to be done. That might include zero taxation. That might include a serious look of how and why we sent jobs overseas. Only until we restore our manufacturing, will there be a meaningful change in unemployment and in the number of people making middle class wages.

Third, there must be significant entitlement reform. That will likely include lower benefits, higher fees, and fewer participants. Keep in mind that most of us would be far better off if we and our employers had jointly put 12% of our paychecks into a bank account. After 40 years, most would have sufficient resources for a decent retirement.

Fourth, we are in a period where citizens will need to do less with less. Focus on those things that you can do to better shape your circumstances. Gardening is more than just a hobby now for many. Debt reduction- take action- even small steps over time really add up. Do you really need a 3,500 square foot home for you and a spouse? Foster better connections and relations with those living around you. Mutual support is better than gong it alone. I am not suggesting going off the grid, but a process of simplification and better community involvement is prudent.

Big Government never really was a part of the American ethos and culture. The proper role of government. now that is a story that needs retelling in every generation, and it seems that it is going to happen again very shortly.

Do you feel it?

The tempo has changed and well understood rules no longer seem to apply to anything any longer. Just a few months ago, all we heard was the rush to spend money. TARP, Stimulus, Bailouts, Obamacare. all multi billion dollar expenses.

It’s funny how the cold breath of the laws of mathematics changes everything. The laws of mathematics and economics are the liberals’ hangman’s noose, focusing their mind on survival of Big Government. Change is in the air, and many people now can sense that there is a seismic shift in the established order of things.

The consumer driven economy is weakening and its ability to drive prosperity is now in serious question. In general, retail sales forecasts are softening and a weak Q4 2011 and Q1 2012 now seems to be a serious possibility. Some forecasters are predicting retail sales to shrink by over 3% for December 2011 and January 2012.

This make sense when early signs of slack demand is reflected in flaccid back to school sales. Many retailers are reporting sales that are flat-lining and are having to take significant mark downs to move already thin inventories. The National Retail Federation states:

As they prepare for their annual back-to-school shopping trip, parents this year will make children scour their closets before agreeing to buy any new jeans, pencils or backpacks. According to NRF’s 2011 Back-to-School survey conducted by BIGresearch, families with children in grades K-12 will spend an average of $603.63 on apparel, school supplies and electronics, within a few dollars of last year’s $606.40 average. Total spending on grades K-12 is expected to reach $22.8 billion.*

For many retail businesses, flat is the new up, but trying to play up the positive of low growth by sloganeering is really unhelpful. We need actual sustained and real growth, not bumping along the bottom. Add into the mix that a slow down in government spending may create a further downdraft in sales.

Consumer Debt

Yet, more trouble is coming along. A recent report from Bloomberg reports that ever larger numbers of citizens are racking up debt to just keep food on the table and provisions on the shelf. The bottom line is that citizens are turning to their last source of revenue- debt- in order to drive and feed their families. Debt to fund a boat is an act of stupidity. Debt to feed your family is an act of desperation.

Energy Costs

Both West Texas Crude and Brent are climbing back up, and gasoline prices will soon follow. Fuel prices are going to recover from the dip we saw a few weeks ago. While they may not rocket to the prices seen just before the start of the summer, anything near $4.00 a gallon is a hardship and will drain energy from the economy.

After falling to $3.54 a gallon from May’s $3.98 peak, prices have unexpectedly surged the past two weeks to a national average of almost $3.70 — a dollar higher than levels a year ago.

How much further they will climb depends upon demand and actions by our administration. Opening up exploration and releasing permits would drive the price of crude down considerably.

Unemployment

Mass layoffs are continuing. Cisco, Borders, Lockheed Martin, Perkins, and many others are undergoing massive restructuring and laying off employees. Now we have NASA releasing thousands of experienced engineers. Many hospitals and health care organizations are furiously cutting staff and consolidating- circling the wagons in anticipation of the ObamaCare debacle that is almost here. Get ready for the health care shortage that is going to hit us, partially due to a reduction in experienced professionals.

Housing is still not healthy. The Case-Shiller index shows no real improvement. What is worse is the fact that we have deliberately forced the cost of lending downward, making rates artificially low. Yet, these rates will, at some point, rise, and when they do, that’s it. Game over. Our current 4.5% 30 year home loans are going to disappear when inflation appears, and when the risk of devalued assets goes up, banks must charge more to cover this erosion in purchasing power of the dollar. Right now a 10 year T Bond is a little under 3%, but it is not hard to imagine a scenario where it raises to 5%. That translates, roughly, into a 7% (or more) 30 year mortgage. Able to afford less house, home prices will drop another 15% or more. To add insult to injury, while housing prices are dropping, closing costs and fees are going up substantially. In other words it will take longer and cost more money to sell your home.

Peak Government

Peak Government. That is what we have been witnesses to, and are now seeing it collapse.

Exhausted financially, addicted to ruinous borrowing, bloated by byzantine bureaucratic control of too many aspects of life, the ocean of borrowed money has dried up, leaving big government stranded ashore like a beached whale in August. Government has simply outstripped the ability of its citizens to pay for the services being provided. The tools it has used in the past are no longer very effective. We got here by having too much debt. The solution is less debt, not more. We are left with very narrow choices. As a clear example of this, our central bank- the Federal Reserve has painted itself into a corner.

As for the Fed, they are checkmated, Dent says, suggesting the Ben Bernanke & Co. are damned if they do QE3 — because the bond market will freak out — and damned if they don’t — because the economy and financial markets are so dependent on easy money.

John Mauldin stated it best in his Frontline Thoughts journal:

Eventually the bond market decides that loaning you more money is not a high-value proposition. If your home or your government is debt financed, you are forced to cut back. While the US is not there yet, we soon (as in a few years) will be.

The point of the exercise is to reduce the deficit over 5-6 years to below the growth rate of nominal GDP (which includes inflation). A country can run a deficit below that rate forever, without endangering its economic survival. While it may be wiser to run some surpluses and pay down debt, if you keep your fiscal deficits lower than income growth, over time the debt becomes less of an issue.

And now massive deficits are projected for a very long time, unless we make changes. The problem is that taking away that deficit spending is going to be the reverse of the stimulus — a negative stimulus if you will. Why? Because the economy is not growing fast enough to overcome the loss of that stimulus. We will notice it. This is a short-term effect, which most economists agree will last 4-5 quarters; and then the economy may be better, with lower deficits and smaller government.

Going Forward

So where does this leave us? What is the path do we take?

First, both personally and nationally, we need to reduce debt, save more and make incentives for these things to happen. This would include a reduction not only in the size of government payrolls, but the compensation rates as well. As much as liberals fight to prevent it, the reality of mathematics makes significant government contraction a certainty.

Secondly, anything that can be done to encourage manufacturing needs to be done. That might include zero taxation. That might include a serious look of how and why we sent jobs overseas. Only until we restore our manufacturing, will there be a meaningful change in unemployment and in the number of people making middle class wages.

Third, there must be significant entitlement reform. That will likely include lower benefits, higher fees, and fewer participants. Keep in mind that most of us would be far better off if we and our employers had jointly put 12% of our paychecks into a bank account. After 40 years, most would have sufficient resources for a decent retirement.

Fourth, we are in a period where citizens will need to do less with less. Focus on those things that you can do to better shape your circumstances. Gardening is more than just a hobby now for many. Debt reduction- take action- even small steps over time really add up. Do you really need a 3,500 square foot home for you and a spouse? Foster better connections and relations with those living around you. Mutual support is better than gong it alone. I am not suggesting going off the grid, but a process of simplification and better community involvement is prudent.

Big Government never really was a part of the American ethos and culture. The proper role of government. now that is a story that needs retelling in every generation, and it seems that it is going to happen again very shortly.