28 January 2009

Government-Induced Economic Discontinuity

There is considerable upheaval in the U.S. economy right now, and your business could be in jeopardy if you do not have a framework and method by which to come to grips with the discontinuity that is likely to be introduced by federal government actions over the next several months.

Consider these facts:

  1. Over the last 50 years, the federal government has controlled about 20% (+/- 2%) of our gross domestic product (GDP). They have done so through some direct controls as well as through the letting of government contracts for defense and so forth. However, with Congress pushing for a plethora of new programs, the drive toward a nationalized health care system, and the results of various so-called "economic recovery" actions being the virtual "nationalization" of some segments of some industries, we may see the federal government directly or indirectly involved in up to 50% of GDP in the near future.

  2. Since about 1948, the federal deficit has hovered around 2% of GDP. Now, however, with so-called "recovery" bills pending and acts that have already been passed that run into the trillions of dollars, we could easily see the federal deficit leap to 15%, 18% or even 20% of GDP.

  3. For nearly 30 years the Federal Reserve has grown the money supply at about 4% a year. That has changed dramatically! The Federal Reserve has doubled the money supply between October 2008 and January 2009 alone.

In essence, the U.S. may rapidly become "Europe" if politicians in Washington have their way -- and it is likely that this is largely unstoppable at this time. If we use for comparison Germany and France as "typical" Euro-zone nations, we find that in these countries the national government controls 40 to 60% of GDP and that these nations are dominated by massive social programs.

What are the results for business economics?

  • Slower growth - the economies in these nations grows at a rate equal to about one-half or two-thirds that of the U.S. economy
  • Higher inflation -Euro-zone inflation is about 10% higher than that of the U.S. over the last 20 or so years

What does all this mean for you and your business?

This government-induced economic discontinuity means that you and your business will find that "the rules have changed." You will discover that management tactics that may have worked before may no longer have the same positive effect.

In revolutionary times like these, my very best advice is for you to be sure that you and your management team have a sound framework of understanding by which to analyze and interpret the new reality in which you find your enterprise. I strongly recommend the application of the highly rational and easily understood "Thinking Process" tools as developed by Eliyahu Goldratt.

Contact me!

(c)2009, 2010

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