Wednesday, April 11, 2012

Court Decision is Pivotal

Normally, the Supreme Court's activities are irrelevant to the future direction of the economy. But, not this time.

The American economy is weighted down by historically unsustainable debt levels. This is not just a problem of federal debt. If you add in state and local debt, the situation is significantly worse than the European sovereign debt crisis. And, there is no good solution.

On top of the sovereign debt overhang, the American economy is beset with an onslaught of new regulations that threaten to overwhelm the fledgling recovery. Businesses have pulled in their horns. There is no real enthusiasm to expand employment or start new businesses. Meanwhile, there is a steady drumbeat of vitriol from the White House about how "unfair" business people are. This stuff takes its toll.

With Obamacare on the horizon and a massive tax increase slated for early 2013, the American economy is poised to go over the cliff and another important recession could well be underway by the second half of 2012.

Will it happen?

That depends. There is always the feeling the tax increases that will automatically take place in early 2013 might be postponed one more time. That won't help much because taxpayers will realize that this merely postpones the day when they will get bludgeoned by the tax man. But, it will help a little.

More threatening is Obamacare. Obamacare dramatically increases the national debt, expands the government's direct role in the economy in a historically unprecedented manner, and burdens businesses with the largest single cost mandate in history.

The combination of Obamacare and much, much higher tax rates and an Administration that wants even higher tax rates than those that are coming in early 2013 is deadly for an economy struggling to find it's way out of the 2008-09 crisis.

If the Court finds that Obamacare is constitutional (which may or may not be the correct constitutional decision...I'm no expert on that one), the economy will be in big, big trouble and a second recession is undoubtedly in the offing. Combined with inept policy in the Eurozone, things could get dicey, economically and politically throughout the developed world.

Pretty gloomy picture! But, it may not turn out that way. I am ever the optimist. Hopefully, Obamacare will not pass constitutional muster and the scheduled tax hikes in early 2013 can be cancelled (permanently). If those two items work out, then the economy should gradually work its way forward. If not, Katie bar the door.

For now, I would still own common stocks, but if Obamacare is constitutional then stocks will not be a good place to be. We will know by some date in June what lies ahead.