Thursday, February 26, 2009

How will Obama era affect economy in 5 years?

With record spending, record deficits, with higher taxes for the "wealthy" and business, with the bailouts and handouts, where will we be in five years?

Where will be be with inflation? 3% or 10%
With unemployment? 3% or 10%
With the cost of gasoline? $1.50 or $4.50?
With medical expenses? More affordable or less so?
The Dow Jones Industrial Average? Still less than 8,000, or a big recovery to over 12,000?

Here are my predictions:

Inflation - 2008 averaged 3.85% for the year. There has been a dip in the consumer price index into negative values over the last several months due to the recession. This dip is likely to extend through the middle 2009. However, by 2014 there is a good chance CPI will exceed 8% to 10%. Sidebar: I visited an "investment advisor" today (a current hobby) who asked several questions typical of the diagnostic questions investment advisors ask. One question he posed, as serious as could be: "What do you think the rate of inflation will be?" I answered: "There are Phd's in economics earning $200,000 a year working for Bank of America who can't answer that question" as I was thinking to myself "YOU'RE the expert - why are you asking ME that question - how many sows can dance on the head of a pin?" Then I asked him: "What do YOU think the rate of inflation will be?" He answered, "Let's assume 3%." I'm guessing the lower we guess the rate of inflation, the better the performance of his recommended investment products will seem. Since last years' rate of inflation ended at 3.85%, I'm wondering if he is an advisor to be trusted.

Unemployment- The nationwide unemployment rate is now at 7.6%: many states lower; industrial states higher. The rate will increase to between 9 and 10% by the end of this year, peak in 2010 at around 12% and settle to 7 to 8% by 2014.

Cost of gasoline - Now hovering around $1.90 for regular, the price will gradually rise to $2.50 by the end of the year, and reach between $3.00 and $4.00 a gallon by 2014 due to additional taxes and declining value of the dollar. Alternative energy sources and supplies will not significantly effect the market until beyond five years. Even then, their prices will not necessarily be cheaper. In fact, if alternative sources were cheaper, the market place would have already made these alternatives available to us.

Medical expenses - Due to an aging demographic, the simple "supply/demand" equation for health care services for the elderly, medical costs will rise significantly over the next five years, likely 30% to 40% higher by 2014. No government subsidized health insurance program will be able to keep pace with rising costs. Any such program will lower health care quality at great taxpayer expense.

The DOW - Experts suggest that the stock markets typically recover 6 to 12 months ahead of the overall economy. The DOW is now hovering around 7,200. By next year it will still be below 8,500. By 2014 the market may again reach 12,000. Much of this gain will be a result of inflation.

I would like to hear your prognistications to see how they compare with my guesses.
The poll, below, asks your opinion about inflation...

What will be the rate of inflation in 5 years?
Prices will still be deflating
Around zero
1 to 3%
4 to 7%
8 to 10%
Higher than 10% free polls

This next survey question allows you to provide more than one answer...

What is the basis for your opinion?
Just a hunch
We're not doing enough to free up credit and encourage spending
We're pumping more money than ever into our economy
My knowledge of economic history in this nation
My financial adviser
Financial or economic newsletter or guru free polls

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