I was reviewing the posts I made last December, and it occurred to me that many of the problems we were worrying about then have largely been solved, or at least are on their way there. I think we all have short memories and tend to look more at the now than at the recent past, so it’s worth highlighting some of the very real improvements that occurred in 2013.

The biggest relief, of course, was the successful passing of the date for the Mayan apocalypse. No doubt you were all as worried as I was about the impending end of the world, but, ultimately, my decision not to sell everything and head for the hills was vindicated. We are still here.

Over the weekend, I traded e-mails with one of our advisors, who pointed out that I hadn’t yet done a complete explanation of the situation in Washington, DC. Sure, I’d touched on various aspects of it, but I hadn’t really looked at the thing as a whole. So here’s my take. Thanks, Alex, for the great idea!

The Big Picture

For the first time since 1995–1996, the U.S. government has been shut down in a dispute over the federal budget. Now that it has happened, we can start to assess the damage, as well as evaluate how the dispute is likely to play out.

Before we do, there are a couple of important things to keep in mind. First, we made it through the 1995–1996 shutdown, and we will make it through this one. Second, although there will be damage, it will be limited. Just as with the sequester spending cuts, the damage will be absorbed and the economy will return to growth. This too will pass.

Here we go again. I’ve written something to that effect several times over the past couple of years, what with the 2011 debt ceiling debate, the 2012 fiscal cliff, and now this. Governmental dysfunction has been normalized.

The phrase that comes to mind is “defining deviancy down,” from a 1993 paper by Daniel Patrick Moynihan, one of the great statesmen of American politics. The idea is similar to the boiled frog theory I described last month: with every ratchet down in behavior, the new low becomes somehow normal, and any subsequent changes are perceived as being less bad (compared with the new “normal”) than they would have been otherwise. Another way to describe it is a behavioral downward spiral—that is, behavior that formerly would have been thought absolutely disgraceful is now seen as somewhat embarrassing.

I have to be honest: I’ve been putting off writing about this for the past couple of days, for both good and bad reasons. One good reason is that, really, there hasn’t been much news. Congress is playing games, everyone is shouting at each other, and nothing is getting done. The other good reason is that there’s not much we can do to prepare, given the level of uncertainty that prevails. No news, no action items, no need to comment.

The bad reason I have for putting this off is that, quite frankly, it’s depressing. We’ve been through this before, in both 2011 and 2012, and the fact that we’re going through it once again is just ridiculous. Be that as it may, though, here we are, so let’s deal with it.

As I mentioned yesterday, the countdown to fiscal meltdown is back on. Washington, DC, has once again formed a circular firing squad, busily loading weapons and aiming across the circle, oblivious to the fact that the guy on the other side is doing the same thing.

In yesterday’s post, I discussed why I think both house sales and car sales are good indicators for the economy’s performance over the next 6–12 months. I went into some detail about the housing market and why I believe it will continue to support growth; today we’ll do the same for auto sales.

To recap a bit, anyone buying a car is making a long-term commitment, as well as a long-term bet on his or her own earning power. To be willing to make the commitment is to have confidence in the future. At the same time, since most autos are bought with financing, a lender must also have confidence in the future. Rising auto sales therefore reflect both consumer and business confidence, and are based on what people are really doing at a given point in time, without much room for interpretation or adjustment.

In what I really hope is an apocryphal story, it is said that frogs don’t notice small temperature changes. You can, therefore, put a frog in a pan filled with cold water, and, as long as you heat it very slowly, you can actually boil the frog without it jumping out. If you keep the temperature changes slow enough, it will never realize that the heat is rising to harmful, and then fatal, levels.

I have, obviously, never tried this, but something similar has been happening in the U.S. economy. I am pleased to find, however, that people appear to be somewhat smarter than frogs. The heat I’m referring to is the pending debt ceiling crisis.

We can expect the announcement of GDP growth for the second quarter to be lousy—around 1 percent or so if we’re lucky, less than that if we’re not. Why is this, and what does it say about the rest of the year?

The short answer is that we got what we asked for at the start of the year. If you remember, back then we had the fiscal cliff and a record, uncontrollable deficit. Some wanted higher taxes, others wanted reduced spending; everyone wanted a lower deficit.

Many of my posts over the past several weeks have focused on immediate, here-and-now issues—or, at most, ones we’ll be seeing over the next couple of months. With summer here (finally!) and sunshine cheering me up, I thought I’d take another look at the medium- to long-term future—which was good the last time I looked, about two years or so ago, and which has since gotten even better.

Two years ago, when I first gave a presentation on the longer-term outlook for the U.S., I identified several key issues: capital, raw materials/resources, manufacturing, energy, geography, markets, and labor. The U.S. was in a relatively superior position compared with its competitors in all of those areas, except for capital.