Look Back, Look Forward

December 29, 2019

By Steve Stofka

In this last week of 2019, I’ll look way back for a bit of perspective heading into the coming election year. In 1932, voters elected FDR to the Presidency. More significantly, they elected an overwhelming majority of Democrats to the Congress to enable FDR to make big changes. Voters wanted an activist government to fix things.

$2.8 trillion is a lot of money, about 2/3rds of what the federal government spent in 2018 (CBO, 2019). That’s how much inflation-adjusted money depositors lost in bank failures during the Great Depression (Investopedia, n.d.). Imagine if ¾ of all the cash and money in checking accounts just vanished. That’s $2.8 trillion.

The Federal Deposit Insurance Corporation was created in 1933 to protect bank depositors from the loss of their life savings. During the 2008 Great Financial Crisis, Washington Mutual had losses of $307 billion. Depositors lost nothing. That’s activist government.

Republican advocate for a reactive rather than a proactive government – one that has a light regulatory hand. Too often this type of government ignores signs of trouble until a full-blown crisis develops like the 9-11 terrorist attacks or the Great Financial Crisis.

Voters will be asked to decide on which government role they prefer. Advocates for an activist government believe in grand communal solutions, many of which are poorly executed but are better than nothing. Cars, phones, computers and the social media that dominates our public policy discussions were all privately developed solutions that have adapted quickly to user demands. Government solutions are clunky contraptions of conceited ambitions that are slow to evolve as effective solutions. When they finally achieve some efficiency, the problem has changed. Examples include rent control, Social Security, Medicare, and the federal student loan program.

Advocates for a reactive government wait until the situation is near crisis levels, see that no one has created a solution yet and propose a public private partnership (PPP). These programs are not well designed to solve the problem but serve the purpose of funneling public tax dollars into private coffers while policy makers pontificate about free market solutions.  Examples are prisons, toll roads, and university student housing.

Presidents are usually elected for a second term. President H.W. Bush lost his bid for a second term in 1992 because of the lingering effects of a recession.  In 1980, President Jimmy Carter lost his bid for economic reasons as well. Divisions in the Democratic Party over the Vietnam War convinced an unpopular President Lyndon Johnson that he should not run for a second term in 1968. It’s unlikely that we will have a recession next year and that will increase the likelihood that Mr. Trump will be re-elected. Will that influence your financial decisions in any way?

The SP500 has gained 41% since President Trump took office in January 2017. Most of that gain has come in the past year. A record amount of money flowed into equity ETFs in December (Bell, 2019). Are investors chasing the high? Now is a good time for older investors to evaluate the risk-reward profile of their portfolio. An unpleasant task is to imagine what choices you might need to make if the value of your equity holdings were cut in half. That’s what happened in 2001-2002 and again in 2007-2009.  

97% of the U.S. is classified as rural but only 20% of the population lives there (Census Bureau, 2016). The map of the country may be colored a political shade of red, but there are relatively few voters per county. An ever-increasing portion of the people live in the scattered blue and politically purple areas. For decades the children who grew up in rural communities have left and not returned. The political fight for the direction of the country is not between rural and urban populations but between voters in smaller metro areas and suburban communities (Marema, 2019).

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Notes:

Bell, H. (2019, December 20). ETFs See Record $52B Inflows. [Web page]. Retrieved from https://www.etf.com/sections/weekly-etf-flows/weekly-etf-flows-2019-12-19-2019-12-13

Census Bureau. (2016, December 8). New Census Data Show Differences Between Urban and Rural Populations. [Web page]. Retrieved from https://www.census.gov/newsroom/press-releases/2016/cb16-210.html

Congressional Budget Office. (2019, June 18). The Federal Budget in 2018: An Infographic. [Web page]. Retrieved from https://www.cbo.gov/publication/55342

Investopedia. (n.d.). Bank Failures. [Web page]. Retrieved from https://www.investopedia.com/terms/b/bank-failure.asp

Marema, T. (2019, March 14). Contrary to What You Hear, the Rural-Urban Gap Didn’t Grow in 2018 Election. The Daily Yonder. [Web page]. Retrieved from https://www.dailyyonder.com/contrary-hear-rural-urban-gap-didnt-grow-2018-election/2019/03/14/

Majksner, Nikola. (n.d.). The Battle of Sutjeska Memorial Monument Complex in the Valley of Heroes, Tjentiste, Bosnia and Herzegovina. [Photo]. Retrieved from https://unsplash.com/photos/as_pS7EkK-Y

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