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'Economy like an airplane. It needs to refuel'

Though this column first was published in October, Smith notes the principles stated also apply to today’s debate over yet another stimulus plan.

Every economy in the world experiences cycles of expansion and contraction. These cycles are healthy and as regular as the tides. When attempts are made to alter these cycles economies run into major trouble. This time is no different.

There are certain rules of the universe that just cannot be violated. At least for any long period of time.

One can defy gravity simply by flying in an airplane. However if that plane doesn’t occasionally land for fuel, the passengers will realize rather quickly gravity’s infallibility. So it is always better to land and refuel. And while that refueling may delay arrival at the destination, it sure beats the alternative.

For years in this country we have had times of economic expansion. The expansion is a time when prosperity is the main focus of all the participants. Very few ever take the time to think about what will happen when the expansion slows or even stops as it always does. Imagine a lung that expands and contracts. Just as it is a natural movement for the lung, it is the natural movement of markets.

A continuous expansion ultimately leads to a bursting of a bubble or lung, for the analogy’s sake. Thus we have learned that “balloon markets” can be the result of never wanting the expansion to cease. But just as in the airplane it has to be refueled or it will crash.

Dot com or housing bubble ringing a bell?

Contractions in the economy are never welcome but they are necessary for the long-term health of the economy. Contractions generally cost some jobs. Require a tightening of the belt. But most importantly, a reassessment of expectations. Realistic expectations. Nothing goes up forever.

Those expectations may require an investor to understand that investments carry risk. That as easily as a market can go up, it can go down. Double digit investment returns are not a birthright. Watching the value of our homes increase endlessly is not a realistic expectation. Yet most in America have gotten so accustom to watching their 401K and home equity increase that any drop produces immediate screams of pain in citizens and Wall Street alike.

When those screams are heard on Capitol Hill, 535 elected representatives go into a frenzy attempting to avoid a necessary contraction. The real housing crisis is not on Main Street or Wall Street as much as it is in the House of Representatives. And while they would like the plane to keep flying they cannot legislate fuel into the tank any more than they can legislate confidence into a battered, overdue market.

And so I must remind the readers of WND that this bailout bill is ill conceived, reckless in its approach and a shameful display of politics. A simple, albeit worthless, three-page plan has morphed into a 451-page bureaucratic nightmare complete with $105 billion in earmarks and pork to “buy” the votes of those who know how bad this bill is.

This bill will do little, if anything, to stop the arrival of the contraction and recession that is way overdue. As American corporations and citizens alike start to de-leverage, profits will drop and spending will slow. This will mean stocks, bonds, real estate and various other assets will soften until at least the second or third quarter of 2009. Then we will see, just as we have in the past, America start to expand again and prosperity will return.

The 535 politicians and all their misguided motivations will only prolong the pain most Americans are willing to endure. With the knowledge, of course, that a better future for our children will be assured if we do not put further debt on them by increasing the national debt to $11.3 trillion, which this bill will do for sure.

Now that the bill has passed, we will see a stock market rally. We will hear a big sigh of relief across the land from those who believe this Congress knows what it is doing, but it will be only momentary. For the contraction and recession that must take place will. It is as normal as rain and while we all wish to avoid it, we will not.

Unless we want to inflate our way out with additional government spending of money we do not have, which will require taking on more and massive amounts of debt to be passed on to future generations, this is the time to just say no.

As I have stated dozens of times in the last few months, if we are serious about adopting the changes necessary to make this contraction produce long-term positive effects on the market we must:

  1. Reduce government spending by 15% across the board over the next four years.
  2. Reduce corporate taxes from 35% (world’s 2nd highest) to 25% with targeted incentives to create new, high paying jobs.
  3. Freeze personal income taxes at current levels so proper tax planning can occur.
  4. Have a capital gains tax holiday for any company or individual who purchases distressed real estate from a lender to clean up the lender’s balance sheet.
  5. Ease the “mark to market” rules now in place to provide breathing room for lenders.
  6. Ease the capital requirement currently in place at the banks.

Not one of these suggestions requires a dime of tax dollars and thus doesn’t have a snowball’s chance in Phoenix to be implemented. That does not, however, diminish the effectiveness they would have in setting the stage for future growth and prosperity in America.

Market cycles do and will happen as long as there are markets. One can only hope we as a nation accept that fact and plan accordingly. Then and only then can politicians, who are attempting to play economists, go back to protecting and defending the constitution as their job description outlines.

Politicians will only prolong the pain they wish to eliminate. History and gravity can be ignored temporarily but will never be stopped.