Representatives of an American populist movement, the Tea Party, are using their votes in the US House of Representatives to exert power beyond what their numbers might normally command. The United States has been without a Federal budget for more than two weeks. If the mandated Federal debt ceiling is not raised the oldest democracy in the world may default on its sovereign debt for the first time in its 221 year history. Angry populism has led the United States to a condition of increasingly poor governance. From the view of the investor, will populism kill the American economy? Successful stock market investing requires a degree of stability and, ideally, a healthy economy. The predictions of what will happen if the USA defaults on its debts include banking collapse, major disruptions in world trade, and a substantial fall in the value of the US dollar. Prices will go up in the USA and another recession is likely, perhaps as bad as the Great Depression, and lasting decades. The unthinkable is happening as governance fails on Capitol Hill. So, will populism kill the American economy?
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Populism, What Is It?
Populism is a political doctrine. The short, take home point, is that in populism a person or group sides with the people against the elite. Dictators used this approach to take over Germany and Italy and bring about World War II. In India and Latin America the same doctrine brought strong men into power. The widespread result of these movements is typically the loss of political freedom and the consolidation of power in the hands of a new elite. The strongest example is Communism as seen in the world of today. Although Marx envisioned a world of fairness to the worker, witness the huge amount of wealth amassed by the Communist Party elite in China and the power and privilege of the Russian commissars before the collapse of the USSR. If one believes that free enterprise, capitalism, and democracy go hand in hand then one comes to the conclusion that populism when it gains final control falls into the hands of scoundrels and defeats its stated purpose. Will populism kill the American economy? Could be if things go too far.
Fundamental Analysis of Investments
Basic to successful investing is the ability to analyze the fundamentals. One considers the forward looking income stream of a stock, its intrinsic value. If intrinsic value is more than current value a smart long term investor buys the stocks. If the reverse is the case he sells or simply does not buy. Will populism in the person of a debt default kill the American economy? Smart investors will likely sit on the sidelines instead of risking their money in uncertain markets. If a debt default occurs the rating of US debt will fall precipitously making it much more expensive for the USA to borrow through Treasury bond sales. This will raise the cost of servicing the US debt at a time when Tea Party populists claim that their goal is to reduce the burden of US debt. The concern of many investors is that debt and growth are inversely related. The nation needs to get a handle on its spending but it needs to do so in a rational manner. Will populism kill the American economy? An old saying is that if good men do nothing evil prevails. In this case the evil may simply be pig headedness and stupidity but the result might be the same with a terrible depression worse than that of the 1930s. That would be the killing of the American economy!