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Tuesday, August 24, 2010

Down the rabbit hole we go...

... but, unlike Alice, we won't find Wonderland at the other end.

Major stock benchmarks have dropped for a second consecutive week. Existing home sales dropped 27% in July. Oil prices are dropping due to pessimism in economic forecasts. More and more people are aware of threats hanging over our economy, ranging from the incipient crisis in public-employee pensions to the massive tax increase due in 2011.

Is this the beginning of an all-but-inevitable decline in the US (and, by extension, the world) economy? Does pessimism play a role in making the situation a self-fulfilling prophecy? And does that matter?

The answers are 1) very possibly so, 2) yes, and 3) no.

At this point in time, no real hope is evident for avoiding an economic crisis. Boosterism and blind hope are maintaining an image of an economy in recovery -- in other words, nobody wants to believe it's as bad as it really is. The only real question is the timing of that event, and no one can accurately predict it prior to its beginning.

When the hammer does fall, however, look for many talking heads and self-proclaimed experts to say that they knew it all along. Accord them the level of respect they deserve.

As to pessimism, the challenge is to define it. Yesterday's negativity is today's realism. In large part, our economy runs on wishful thinking. The problems we face are legion, and no one is attempting to seriously address them. Eventually, fantasy will be forced aside by reality, and whatever we would like to believe simply won't matter.

Despite all this, we have no reason to abandon hope. Events will run their course, and the innate tendency of economies is to seek equilibrium. We may suffer greatly in the interim, as the failed policies of the last hundred years are exposed and discarded, but if we remain committed to sound principles, we will prosper again.

Those principles are both personal and national. They are identical in both cases. Don't live beyond your means. Insist on value given and received. Live according to a high standard.

As odd as it may sound, the only requirement for freedom and prosperity is a "moral and virtuous people". That's something the Founders were well aware of, and something we have, today, largely lost sight of.

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