U.S. Government Takes Over the Economy

U.S. government takes over the economy...

Not much news. Markets were closed yesterday. This morning, stocks in Asia are up. Ah...a new year...new hope... This year has got to be better than 2008. It couldn't be worse, right?

Maybe.

But a friend called us yesterday and told us that our Daily Reckonings were too gloomy. So, we have made another New Year's Resolution: we will always look on the bright side.

Let's see. What's the bright side of a worldwide financial meltdown? Of course...it's the recovery...the rebound! After the darkest, coldest winter comes the sweetest spring.

So, maybe the Asians are right. Maybe this will be a good year. Maybe the stock first hours of trading in the Orient will give direction to the entire year.

We hope so. We have some positions we'd like to sell!

There...that's looking at the bright side. When there's a stock market crash...typically...you can expect a bounce. Stocks should recover 30% to 50% of their losses - before heading down again. Heck, if you get the timing right, you could even recover all your losses from '08 (if you have any)...and end up ahead of the game.

If we were speculators, we'd take a long position in stocks soon. If we were speculators, we'd watch this position carefully...and reverse it when the rebound seems to have run its course - probably in April or May. And if we were speculators, we'd keep put in a leveraged bet on gold too. Somewhere between now and when this crisis finally ends, gold is bound to double.

Meanwhile, let's look at another bright side. Let's look at politics. Finally, thanks to the worldwide financial meltdown that the U.S. central bank helped bring about, the politician's can take control of America's most important industries. The dreams of central planners, meddlers, world-improvers, collectivists, Bolsheviks, corporatists and fascists are all being realized - right in the United States of America. All industries need money. And the U.S. Treasury department has it. And what it doesn't have, the Fed will supply. This, and an open-ended bit of panic-induced legislation - TARP, gives the feds almost unlimited authority over the U.S. economy.

Bloomberg reports:

"The guidelines don't bind the government, so the lack of specifics gives President-elect Barack Obama plenty of leeway to decide who succeeds and fails when he takes office in three weeks. The bailout was originally designed to buy assets from banks and has instead become a fund for Treasury to prop up lenders, insurers, carmakers, auto-finance companies and, now, any firm that may be important to those industries.

"Slippery Slope

"'The further you go, the slipperier the slope becomes, the more you open the door to anyone who says, "Look, my firm is in trouble, I need help too,"' said Lyle Gramley, a former Fed governor and now a Washington-based senior economic adviser for Stanford Group Co. 'We don't want to go any further down that road than we absolutely have to.'

"The Treasury already has provided $6 billion in aid to GMAC, the financing arm of GM, and up to $17.4 billion in financing for GM and Chrysler, using funds from the $700 billion bank-rescue package.

"'Treasury will determine the form, terms and conditions of any investment made pursuant to this program on a case-by-case basis,' the Treasury said in the new guidelines. 'Treasury may consider, among other things, the importance of the institution to production by, or financing of, the American automotive industry.'

"The government will weigh 'whether a major disruption of the institution's operations would likely have a materially adverse effect on employment and thereby produce negative spillover effects on economic performance' or on credit markets, the Treasury said."

Ha ha...get it? What major interruption of an industry's operations wouldn't have an adverse effect on employment?

The U.S. government can now determines who shall plant, who shall reap...and who shall bake. Americans will soon want bread, we predict. And then, the government will determine who shall eat! But that's not exactly looking on the bright side, is it? What's the bright side of a government takeover of the economy?

This morning...we don't know. But give us the weekend to think about it.

Bill Bonner
for The Daily Reckoning Australia

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