The Feehery Theory

Death Spiral

Posted on October 13, 2008

 The conventional wisdom says that the failing American economy benefits the Democratic candidates, especially Barack Obama, over the Republican candidates, especially John McCain. But what if we are looking at this wrong? What if the specter of government dominated by the Democrats is contributing to the stock market crash? There is some evidence that investors are fleeing the market and hunkering down for an era of higher taxes and more government intervention. When taxes rapidly increase on investment, investment dries up. That is a basic law of economics. Barack Obama has run a series of commercials where he looks into the camera and promises to cut taxes for 95% of the American people. His implicit promise is that he will sharply increase taxes on the other five percent. Those are the people who are pulling their money out of the stock market, putting their money in Treasury bonds, gold and cash. According to an article in the Washington Post, “During September, investors pulled $22 billion from U.S. equity mutual funds, compared with $2 billion in August, according to the data from TrimTabs Investment Research, which publishes detailed coverage of U.S. stock market liquidity. At the same time $24 billion was also withdrawn from bonds during September, the largest extraction in a single-month.” That investors are abandoning the market is not much of a surprise, but the fact that they are doing so in such big numbers and not investing in bonds is very surprising. As many of the market mavens on CNBC have pointed out, the unfriendly investment atmosphere that is sure to be created by Democratic dominance in Washington will spook investors even more in the next couple of weeks. Our fiscal situation is in a death spiral spun around by two forces. The more the economy sinks, the better off the Democrats are politically. But the better the Democrats do politically, the more investors gets spooked, and the worse the market tanks, increasing the inevitability of higher taxes and more government intervention. This is the situation that the McCain campaign finds itself in, buffeted by the winds of outrageous fortune, or misfortune as the case may be. They are trying to change the subject, because the news on the economic front has been so desperately bad for weeks now. And the bad news has been very, very good for Obama. But there is no changing this storyline. For McCain, he needs to have a better message than Bill Ayers. He needs to collect the stories of investors who are pulling out of the market to avoid the Obama tax regime. Otherwise, this death spiral will continue until Barack Obama becomes President.