One of my major themes last year was the return of political economy. This is the discipline that Smith and Ricardo, among others, invented, and it was called that because they understood very clearly the relationship between politics and what we now call economics. The notion of considering them independently would have seemed nonsensical.

As I prepare to head to Maine to celebrate the Fourth with my family, I’ve been reflecting on a number of my past themes—the place of the U.S. in the world, the structure of the republic, how grateful and lucky I am to live here, and how well positioned we are in the world.

The first thing I want to mention is an excellent New York Times blog post about the meaning of the Battle of Gettysburg, by Allen Guelzo. Briefly, Professor Guelzo makes a strong case that the Civil War, with Gettysburg as the turning point, helped refute the argument that democracies were unstable and could not survive. Given that democracy has become a de facto gold standard for government, the early elimination of the U.S. as an exemplar would have changed the way the world has evolved—for the worse.

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Yesterday, we talked about the big picture and why the longer-term outlook for the U.S. is actually quite bright. I mentioned in passing that there are some shorter-term risks between here and there, and I wanted to spend some time today catching up on those.

The big one in the papers today is China. As you know, I’ve been very concerned about China for a long time. Most recently, I wrote about the decline in wage competitiveness and about some of the risks to the financial system, discussing in both posts the increasingly tense regional security environment in Asia.

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A point I have been making about the stock market recently is that it makes no sense to bet against it in the short run. The momentum is clearly on the upside, and there are no apparent reasons why that trend can’t continue. We may very well see new records for a while.

I do not, however, expect the trend to go on forever. At some point, the market will top and decline. We are already well into very unusual territory for how long an increase can last without a downturn. At some point, a decline is certain, and the longer it takes, the more certain it becomes.

I have written before about the difference between precision and accuracy, and the challenge of distinguishing signal from noise. With the constant barrage of economic and stock market data, much of which is taken to ridiculous levels of precision—one part in a thousand, for example, for the unemployment rates—the problem is particularly acute. What makes it even more ridiculous, of course, is that the figures will often be revised substantially. Precision is an illusion in this area.

This isn’t anyone’s fault; it’s just the reality of collecting messy data across a massive economy in a massive country. It is remarkable that the statisticians do as well as they do.

I talked yesterday about how the U.S. has been implementing its own austerity plan—by reducing federal and general government spending over the past couple of years—and how that has led to slower growth than would otherwise have been the case. Many would argue that this is nonsense, given the deficits we have been running, but a look at the stats from yesterday demonstrates that the government as a whole has in fact detracted from growth.

What has largely allowed this detraction to occur—while also allowing overall economic growth to continue—has been the Federal Reserve’s support of the financial markets and consumer spending by forcing down interest rates. You can certainly argue about how long the policy should continue or how damaging the exit will be—both questions I have addressed before—but, in my opinion, the idea that lower rates have allowed consumers to de-lever and supported the housing market recovery is beyond question.

I saw an interesting chart the other day, in a piece by the analyst Jim Paulsen, that showed how the U.S. economy had performed net of the government sector—which, to spare you the suspense, was actually quite well. We’re also seeing increasing debate over federal spending cuts: Are they needed in the short term in the U.S., or are they doing more harm than good?

The austerity debate is also well underway in Europe, and it is starting to be resolved in favor of more spending—at least on a political level. That’s a different discussion, though. Here in the U.S., it is both easier and harder to justify less austerity. Easier, in that we can better afford it; harder in that we need it far less.

Yesterday, two of my colleagues and I were discussing the end of the world, a conversation prompted by some of my recent posts, as well as a call from an advisor seeking help with a client who has a nine-figure net worth and fully expects the world to end. In discussing what to do, we realized we hadn’t actually defined the problem: what does the end of the world mean? The last time we seriously had this discussion, in 2008–2009, we thought we knew what the end of the world looked like, but in talking it over, we realized we didn’t. So, in that vein, here’s my attempt to define various “end of the world” scenarios and what to do about them.

Defcon 1 – The U.S. today: economic uncertainty and looming hazards