Tag Archives: debt crises

Is The Next Recession Here Already?

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The US economy is either right at the edge of falling into another recession or has already entered a second recession. The big money spenders say we need more stimulus. It is kind of like having a drink when you have a terrible hangover (the tail of the dog that bit you).

Mike Mish Shedlock wrote:

Is the US economy at a tipping point or has it already tipped over? The best one can possibly say is the economy is at a stall rate.

Harvard University economics professor Martin Feldstein said the U.S. recovery that began two years ago has been losing steam and there are even odds the economy will slip into a recession.

“This economy is really balanced on the edge,” Feldstein said in an interview on Bloomberg Television “Surveillance Midday” with Tom Keene. “I think there’s now a 50 percent chance that we could slide into a new recession.”

What has got us here at the worst recession since the great depression (there are many who believe that we are in a depression). I believe it has been the loose credit cycle of the last 40 years or so with government and the consumer.

Obama certainly didn’t start it but he has put the spending on steroids.

No Solution?

There is a solution, just not a politically viable one. It’s called debt deflation. That is the economy’s way of purging the excesses of a housing bubble and debt orgy.

Instead, the Fed and the ECB-protected bondholders at the expense of taxpayers even though the unemployment rate is sky-high.

The Fed’s action was supposed to get credit flowing again and create jobs. Instead, Fed policy created jobs in China while bailing out US bankers and wealthy bondholders, many of whom arguably belong in prison or stripped of their financial assets.

In the end, Greece defaulted anyway at huge extra cost to European taxpayers. In the US, unemployment rate is 9.2% not counting millions of people who involuntarily dropped out of the labor force.

This is a solution that would in the long run make us an economically viable country. Unfortunately, I don’t think there is the political appetite for this.

But it may happen forcefully at some point in the future whether we like it or not

Keynesians Argue for More Stimulus

Sadly, Keynesians still argue for more stimulus. Supposedly we need to build infrastructure.

Let me ask a question: Where would the US economy be had we done that?

The answer is certainly in a better position than the alternative of dropping bombs in Iraq. For starters the US would have better bridges instead of holes in the Iraq desert and millions of destroyed lives (and millions more enemies on top of that).

However, the US economy would still be where it is now. Why? Because of the three cardinal rules of stimulus.

Three Cardinal Rules of Stimulus

  1. First rule of stimulus: It always runs out.
  2. Second rule of stimulus: All it can do is create a greater pile of debt.
  3. Third rule of stimulus: Spend enough money and interest on debt will eventually consume you.

I thought the first Obama stimulus package was sold to us as “shovel ready jobs” many of which were infrastructure improvements.

I guess those didn’t get done the first time, maybe it will the second time

Never do the Keynesians want to throw in the towel on what they suggest. One might think that the 20-year history of failed infrastructure stimulus in Japan would be enough to open the myopic eyes of Keynesians but one would be wrong.

US Structural Problems

Before we go throwing money around, why not fix a few internal structural problems to ensure we at least get our money’s worth. How do we do that? Easy.

  1. Scrap Davis Bacon and all prevailing wage laws.
  2. End collective bargaining of public unions
  3. Enact national right-to-work legislation

Give me those measures and I will gladly hike taxes a bit. Those measures would at least help ensure we got our money’s worth for government work.

Those would never pass our current congress because they would be seen as anti-union measures. This administration is financially supported by unions.

However, those three items, while desperately needed, do not solve the problem of why jobs are fleeing the US in the first place.

For starters we need corporate tax laws that do not reward and encourage job and capital flight. Second and more importantly, we need to address the issue of trade imbalances

Finally, some of the real reasons that jobs are fleeing the US instead of the usual nonsense talk of the “greedy” business people. Politicians need to stop creating caricatures to campaign against and quite waging class warfare and start addressing the real world problems that are affecting business.

Before wasting more money on stimulus measures doomed to fail, how about fixing internal and external structural problems first? If we do that, and stop the war mongering, we will not even need stimulus; the economy will heal itself.

The economy is life a human body, it has the capacity to heal itself without outside interference.

The problem is that the economy has been artificially manipulated by all levels of government is the name of creating more prosperity. This manipulation has created imbalances that have created financial uncertainly and volatility.

Left to its own devices, our economy would probably already be recovering with strength not what we have. Yes, there would be winners and losers, that is the way of nature. Our politicians can’t let that happen, because they don’t see it as “fair”.

If politicians had their way with nature, there would have never been an evolution in nature, they would have legislated against it because it wasn’t “fair” to the species that eventually were extinct.

We need to let our economy “evolve” into the next stage of our development.

We Have Been Scammed Again!

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Both political parties are crowing this morning about how they won the debt showdown. In reality, they both did. The real losers are the American people and future American genreations.

Jeff Harding wrote:

This is the fun stuff about politics. Basically our politicians are being forced to do something they don’t want to do, and our job is to cut through the obfuscation to uncover the fact that they are doing exactly the opposite of what they say they’re doing.

It is fairly obvious that despite what they are saying publicly, they aren’t making significant cuts to the budget. And S&P and Moody’s know this. Which means that we’ll see our gilt-edged credit rating (a curious term since there is nothing really golden about our national debt) be cut anyway.

There is nothing being cut here. What is happening is that the automatic growth of some spending in our “baseline accounting” method is being reduced. But understand we (The United States of America) will still be spending a great deal more money next year than this year.

We were scammed by both parties with the exception of the tea party members, those “terrorists” as Joe Biden calls them.

What do we have so far?

$917 billion in cuts over 10 years. 2012 spending is capped at $1.043 trillion, $44 billion, or 4.2%, below the CBO March baseline of $1.087 trillion. 2013 spending is capped at $1.047 trillion, $62 billion, or 5.6% below the CBO March baseline of $1.109 trillion.

Then there is this bipartisan committee of politicians who will wrangle over how to cut another $1.5 trillion. If they can’t agree by January 1, 2013, cuts will be automatic across the board, one-half from defense and one-half from discretionary spending. Social Security, Medicare, and Medicaid won’t be cut. The debt limit would be increased dollar-for-dollar by the amount of the cuts.

So the ruling elite get more of the taxpayers money to spend. What do the American people get.

The shaft!

They promise to have a vote on a balanced budget amendment by year-end.

Will the Bush tax cuts be allowed to expire? Yes, at least that is what Obama says will happen. I believe him.

Obama in a speech this morning laid out his “vision” of more “investments” (read a lot more spending on things other then job creation) to help our economy. I think his “investments” have just about bankrupted us. And I worry for my teen-age daughters’ future. Greece can happen here and in fact I think it already is.

All I can hope for is that we can elect more “terrorists” tea party people to defeat the grandiose plans of the Washington D.C. ruling elite. Republicans and Democrats alike.

Would You Short America If It Was Publicly Traded?

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Mary Meeker wrote:

In February, we published a report (nearly 500 slides) that describes how America’s spending exceeds our revenues, how and why our debt levels are rising, and how we got here. The report, called “USA, Inc.”, is intended to be fact-based and bipartisan. We do not provide policy recommendations but instead endeavor to provide context about America’s financial trends.

The summary is clear: Our country simply spends more than it brings in; we have lost money in 40 of the past 45 years, and we can’t keep boosting our borrowing indefinitely. If we look at America as if it were a publicly traded company that had to manage its finances responsibly, investors should be rousing for a clear plan to steadily and slowly reduce the budget deficit.

The numbers imply:

  1. Expenses need to be reduced.
  2. Operations need to be restructured so they run more efficiently.
  3. Incentives need to be put in place to drive economic growth which should help spur job growth and tax revenue.

I think this is a great way to look at our problem, like you would evaluate a business. Would you buy more shares in this business or would you short it?

If you work in a business or manage a household you likely think about these types of numbers often.

The fact is our leaders clearly need to make some tough decisions.

And therein lies the problem, our leaders. The people we have in Washington DC, with a few notable exceptions, think more of getting re-elected as opposed to what is good for the country. They will not make the tough decisions, because it may not play well at home, even though it is the right thing to do.

America’s financial challenges are headlined by a negative net worth of $44 trillion (or $371,000 per household) and gross debt as a percent of GDP in excess of 90%.

I don’t think our spending and debt problems can be cured quickly, but I do believe that we can start down that road and maybe in 20 years you would want to buy shares in America instead of wanting to short it.