Democrats' Crashing Economy
by Brian Lynch

Iraq and terrorism are not the issues that will matter after the 2006 elections. It's going to be "the economy, stupid" all over again. The Republican ecnomic program, based on expanding global trade and dollarizing the world's financial capital and reserves will come to a crashing halt if the Democrats win control of Congress. Blood in the streets of America's cities is a real, looming prospect.

If enough Democrats get elected to take control of Congress:

1) U.S. and international business confidence and investment in the United States of America will decline sharply. This will have devastating economic consequences for anyone who relies primarily on wages or a salary for income.

A. Growth will slow, and the Federal Reserve will be forced to either reduce the money supply to prevent inflation, or allow inflation to keep the recession from deepening. Inflation will erode savings and depress business investment. With housing and bank-lending already slowing, signs of inflation will lead to sharply higher borrowing rates, and housing values will begin a secular decline.

If home prices decline nationally, as they have in a few overheated local markets, the U.S. faces the prospect of a depression similar to that which hit Japan from 1990 to 2005. But the U.S. will fare far worse than Japan did. Japan had a stable, culturally unified, domestic poulation, and no immigration. The U.S. population is multi- cultural and has a huge growing immigrant population. Economic stress will lead to balkanized politics, with rising racial, relgious, and ethnic tensions. The European riots of 2005 will be repeated here, and for the same reasons: the liberal Democrats will (mis) govern just like their Euro-Socialist colleagues.

B) U.S. Productivity growth and working-age population growth are already above the U.S. economic growth rate. The U.S. economy will slow due to diminished capital investment, because businesses fear that the Democrats will tax business profits, and implement a set of draconian business regulation nationally (with Nancy Pelosi as the speaker of the house, that is a likely scenario and a rational business fear). Result: U.S. job losses and unemployment will soar, first from layoffs in construction and housing related industries, followed soon by cut-backs and job losses in retialing, financial services, trade-related buienss, and elsewhere. With rising inflation, those who are able to retain jobs will face stagnant dollar-wages and declining real incomes.

2) The Federal Reserve will be forced to choose between recession or inflation. If history is any guide, the central bank is more likely to choose inflation.

Inflation will cause a sharp decline in the value of the U.S. dollar around the world, and could turn into hyper-inflation if foreign central banks start dumping the U.S. currency as their reserves.

If U.S consumption drops because of rising unemployment and a bad business climate as stated in number one above, the incentives to hold US dollar can no longer be maintained and the Fed will certainly choose inflation.

Brian Lynch, FYI ECONOMETRICS, Austin, Texas.