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The Bear's Lair: The gloomy world of 2008

By MARTIN HUTCHINSON

WASHINGTON, Oct. 25 (UPI) -- Through a warp in the space-time continuum, there landed on my desk this morning the Bear's Lair for Monday, November 3, 2008. It makes depressing reading.

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"As we head into the most divisive election in history, the lesson must be clear: economic distress breeds extremism. Democrat Hillary Clinton, running on a program of nationalization of the oil industry and establishment of a state-funded National Health Service, faces off against Republican Newt Gingrich, on a platform of privatization of social security and abolition of the departments of Education, Labor, Energy and State. Four years ago, such a confrontation would have seemed unimaginable, but economic difficulties have polarized American politics.

"The main difficulty facing the new administration will be the federal budget deficit, scheduled to hit $947 billion in the year to September 2009, around 7.5 percent of gross domestic product. With the long term Treasury bond rate at 8.7 percent, funding this deficit has become difficult even though consumer price inflation over 7 percent makes the interest rate relatively low in real terms. Blame for the deficit depends on where you're standing; conservatives blame an increase in Federal spending from 20 percent of GDP to 25 percent, while liberals point out that the spending increase was largely due to the prolonged 2005-2007 recession, and has been funded by only moderate increases in taxes.

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"As a result, two different strategies have appeared to deal with the problem. Clinton wants to increase the size of government, so that the American public gets real benefits for the high taxes it pays, while Gingrich wants to cut back government fundamentally. He would roll back President George W. Bush's education funding increases of 2001, abolish the Education Department, as he promised in his 1994 "Contract with America," and also close the State Department, held by Democrats to be an essential operation of government but denounced by conservatives as an unnecessary boondoggle that pays out American money to foreigners.

"Oil supply difficulties will also be an essential issue, with crude closing Friday at $112.50 per barrel. The collapse of the Chinese economy has reduced pressure on the demand side, but 2007's Islamic Jihad uprising and subsequent civil war in Saudi Arabia have devastated world oil supplies, allowing the world's demand to be satisfied only at very high prices. While General Motors' coal burning SUV is an innovative approach to the oil problem, there's no doubt that today's solution is conservation, with inner cities being re-colonized by the middle classes while the now worthless outer suburb McMansions are repossessed by their mortgage lenders and filled by the unemployed squatters that have alas proliferated during the recession.

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"Unemployment, currently 10.6 percent, is also a huge issue. The Special Textile Protection Act of 2005 certainly protected the textile jobs of North and South Carolina against foreign competition, especially from the then booming economy of China, but the collapse of Wal-Mart in 2007 has regrettably devastated the economy of Arkansas. However, the adverse U.S. trade balance has been reduced from its very high levels of 4 years ago to around $250 billion per annum, helped partly by protectionism but probably more by the current exchange rates of $1.85 to the euro and 76 yen =$1.

"Of course, the unemployment number is somewhat artificially elevated. The surge in immigration following the election of leftist Mexican President Andres Manuel Lopez Obrador in 2006, and the subsequent collapse of the Mexican peso and re-nationalization of the Mexican banking system, has made U.S. jobs hard to come by.

"The mass immigration of the Mexican professional class has had some highly positive effects. Who would have thought four years ago that the new and almost ubiquitous "Pedro's" dental centers chain, with its cheerful "Golden Sombrero" logo, could have reduced the price of an uninsured checkup and two fillings to $14.75, as I paid in Falls Church last week. Nevertheless, one must also count in the balance the hugely damaging Baltimore riots last July, started by the Johns Hopkins Medical School graduating class, distressed that there were no longer medical job opportunities that paid enough to cover malpractice insurance and amortize their medical school bills.

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"The candidates are divided here, as on most other things. The Democrat governors of Florida, Texas, New Mexico, Arizona and California have combined programs of drivers' licenses for illegal immigrants with an aggressive motor-voter registration drive, so that almost 12 percent of the registered voters in those states today were not in the U.S. 4 years ago. On the Republican side, Gingrich has promised a return to the Immigration Act of 1924, minus the anti-Japanese provisions, and with the quota limits based on the 1970 census rather than that of 1890. As in most other areas, 2008 is the most important election of our lifetime.

"Internationally, the new president will face a troubled planet. The deep recession in China following the U.S. imposition of textile import restrictions and the collapse of the overextended Chinese banking system may be just beginning to lift, but the anti-U.S., protectionist stance of Chinese foreign policy shows no sign of changing. On a brighter note, the remainder of East Asia, particularly Japan, has flourished and India after several years of stagnation appears poised for recovery and renewed moves towards the free market under the new government of prime minister Atal Bihari Vajpayee, who defeated the Congress-led coalition in June.

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"Elsewhere, the Middle East remains mired in corruption, instability and squalor, in spite of high oil prices, with civil wars having erupted in Saudi Arabia, Iran and a number of other countries. Latin America, too seems to have solidified itself into an anti-American, anti-capitalist coalition, led by Lopez of Mexico, Hugo Chavez of Venezuela and the socialist prime ministers of Brazil and Argentina. Needless to say, Latin America's economic progress has been minimal, and the debt defaults in Mexico, Brazil and Argentina have caused the collapse of the International Monetary Fund, bailed out by a special subvention from the U.S. Congress and the European Union, but a shadow of its former self. Only Africa has done a little better, becoming increasingly closely linked to the European Union by that body's overt use in Africa of trade preferences to promote foreign policy compliance with the EU's wishes.

"The European Union has had a good four years, with Bulgaria, Romania and Croatia entering the EU last year, the core countries of the EU reforming their economies sufficiently to meet the competition from the 13 new members of 2004-07, and Eastern Europe enjoying a substantial economic boom. However, this will be more of a problem than a boon to the incoming U.S. Administration, since the EU has increasingly allied itself with Russia and China in permanent opposition to U.S. political and economic dominance.

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"The Dow Jones Industrial Index closed Friday at 4,512, the U.S. savings rate has increased somewhat, but remains below 3 percent, and the baby boomers have started to retire. Thus there appear to be even tougher economic times ahead, whoever wins Tuesday."

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Regrettably, UPI's journalistic standards seem to have deteriorated so much by 2008 that the author doesn't tell us who's president, i.e. who won the 2004 election. Even more regrettably, there appears to be no way of telling the 2004 election result from the economic and political details given in the article!


(The Bear's Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that, in the long '90s boom, the proportion of "sell" recommendations put out by Wall Street houses declined from 9 percent of all research reports to 1 percent and has only modestly rebounded since. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)


Martin Hutchinson is the author of "Great Conservatives" (Academica Press, 2004) -- details can be found on the Web site greatconservatives.com.

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