It’s ugly out there

The economy is getting to look downright ugly.

The reason why the U.S. government was working so hard on the bailout is because credit markets are frozen. For those who don’t know, our economy operates mostly on credit. When most companies buy inventory, purchase property, plant and equipment, or pay wages and salaries, it’s frequently done with credit.

So, when credit markets are frozen, businesses (and municipalities) can’t keep operations going, they can’t expand, and they can’t pay their employees.

It’s unclear that the government bailout will unfreeze credit markets. Banks aren’t lending because their balance sheets are either close to or insolvent. They can’t lend. Having the government purchase illiquid securities may facilitate the rebuilding of bank balance sheets, but it won’t rebuild bank balance sheets directly.

The credit freeze has been slowing the economy remarkably over the last two months, and precipitously over the last two weeks. That is why Secretary of Treasury Paulson and Federal Reserve Chairman Bernanke have been running around like chickens with their heads cut off trying to get the bailout going.

Warren Buffett says this is the worst he’s seen in his 50+ years of investing. The situation is being touted as the worse financial crisis since the Great Depression.

It’s going to get worse before it gets better, but, if free markets are left alone to work, it will get better. The U.S. economy is the most dynamic and resilient in the world.

We may be over-leveraged with debt, we may have too much debt, we may not save enough, but we have the best protection of property rights and a relatively sound rule of law. That’s all it takes, and individuals will do the rest.

It’s always darkest before dawn. Things look pretty dark out there now. Believe it or not, that can be a great time to invest. By the time things look better, you will have missed the upswing.

I’m not saying investing at a time like this is easy, but it is smart. In the long run, investments made today will do very well, even if it’s looking ugly out there right now.

Nothing in this blog should be considered investment, financial, tax, or legal advice. The opinions, estimates and projections contained herein are subject to change without notice. Information throughout this blog has been obtained from sources believed to be accurate and reliable, but such accuracy cannot be guaranteed.