BAILOUTS for Wall Street and Corporate America; Is the US Economy Safe?

The US government has spent unfathomable amounts of money attempting to attenuate the consequences of thirty years of Reaganomics. Still there are signs that the economy is deteriorating as more people realize that the polyannesque view of the US is not realistic. Banks do not lend to each other because they do not believe the financial statements of their counterparts. Financial institutions do not lend to individuals because they have realized that credit ratings mean little or nothing. People cannot buy products and services because they have always bought things on credit in fact living past their means. Companies are firing people, foreclosures are increasing, and the latest shoe to drop is the credit card defaults.


Bank of America, just before announcing it would attempt to raise an additional $ 10 billion, released its financial statements. Among the normal $ 6 billion in additional mortgage right-downs slipped in that is was taking a “prudential” $ 1.2 billion in credit card losses. As other institutions announce their results we will see that the credit card losses will rival the CDO and mortgage paper sectors.

This week Corporate America announced another 100k firings of employees and new unemployment claims has been touching 500k. The government says Unemployment is at 6.1 %. Unfortunately if you do not find a job in 6 months or are new to the labor market you do not count. Perhaps the most telling sign of the disastrous economy is that retailers have decided we are going to skip Thanksgiving altogether and start the Christmas sales right after Halloween!

Some “talking heads” are telling us to have patience that all will be well. Others are telling us that the problem was caused by the EU and they must make the same mistakes the US administration is making to “Save us All”. How dare the Europeans employ the wisdom and experience of 3,000 years of finance and trade instead of tanking their economies to support the USA. WE ARE NUMBER 1!

The worst is not here yet. The depression has just begun and we will not be able to stabilize the decline until we recognize the real problem and start working as a nation to fix it. The problem is the service economy. We no longer produce anything. Our greed has focused us on the short-term gains to the detriment of long term stability while borrowing more and more money from the future. Yes we are consumption junkies, always searching for the next fix.

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Defending the Culture of Corruption

The application of Reaganomics has changed America. Our infrastructures have been neglected and are falling apart. Production has been shipped to third world countries where regulations on child labor, noxious materials and working environment are inexistent or without enforcement. Costs associated with production facilities in unstable states are pushed onto the US state department and our military. It only seems appropriate that Hank and Ben suddenly realize that the fundamentals of the economy are not sound, requesting that the US taxpayer fund a $ 700 BILLION bailout of financial institutions.

Business and Washington are unified in their cries that “Main Street does not understand that this is to save them!” They propose purchasing bad financial products at higher than market prices so the banks will lend to Joe Worker. Right… Banks will lend according to their current risk parameters. That is the way banks work. Buying these “assets” will only make the US taxpayer responsible for bad investment decisions made by greedy Wall Street dudes.

There is a much darker aspect to this plan. US banks are not the major holders of these securities. With a blossoming trade imbalance US dollars are held in the TRILLIONS of dollars by China. Many US corporations are shutting US facilities and investing great sums in China to take advantage of lax regulations. Perhaps, one day last week, Hank received a phone call from his Chinese buddies indicating that they did not intend to lose money on these bad financial instruments and held the US government responsible for lack of financial regulation. Perhaps they also reminded Hank of the value of US investments currently in China.

As one life insurance company’s advertisement states, “Hank got the message.” Suddenly the administration’s presentation of the US economy went from “We are number one”, to “Armageddon is upon us!” It happened so fast, the Republican candidate for president, John McCain, stated, “the fundamentals of the economy are sound” on the same day that Hank and Ben were telling Congress that end of the US economy is nigh.


This BAILOUT WILL NOT FIX ANYTHING. It will increase public debt. The real problems are serious. The US can return to wealth and prosperity but we must recognize and cure the real problems, not the symptoms. FYI the real problems are that 72% of our economy is consumer spending. We no longer produce a reasonable portion of the goods we consume. We confuse smoke and mirrors services with real assets. We have expanding income inequality and finally our government is corrupt. Our politicians and business leaders are pillaging the equity of this nation for personal gain. Do not fall for the talking points. This BAILOUT IS NOT FOR MAINSTREET.

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Consequences of Things as Usual

I will be publishing only on Monday for the next couple of months. Corporate Greed, Excessive CEO Pay, and Corporate Loopholes seriously affect Joe Citizen. The world is changing as Washington DC and Wall Street slowly recognize that “Houston, we have a problem!” False prophets arise in the darkness proclaiming, “Lower Interest Rates, Bailout the Financial institutions from their ills and all will be well!”

The United States is suffering from Structural Dislocations. Tax Rebates, Lower Fed Funds Rates and other stimulus packages will do little more than slow the decline while boosting up foreign economies supplying the US. All this will come at the expense of our children who will be left holding the bag. The US government is acting like the homeowner who bought too much house for their earning capacity and then refinanced every year leveraging up each time. At a certain point the bubble bursts and the faux earnings come out of the system leaving the homeowner upside down in his house. This is where we are with the US economy. We continue to spend our nation’s equity without increasing our productive capabilities. The result is always bad.

In some areas the decline is breathtaking while other areas still do not show the perilous times ahead of us. When the US dollar traded at 1.44 Euro I said it would go to 1.75 Euro. I believed that to happen over the next year not the next 30 days. Continuing Unemployment Claims are at historically high levels as the Labor Department says that we will not see the 20% unemployment of the 1930s. I suggest we are well past that level when calculated with the same formula used in the 1930s not the faux calculations imparted after the beginning of Reaganomics.

Eliot Spitzer has been shown for what he is: a corrupt public servant that used his office for his own personal gain. Corruption is the only result that can come from collusion between unscrupulous business executives and lying politicians.

Bear Stearns, the financial institution, has to be bailed out by JP Morgan. JP Morgan will only do the deal if the Federal Reserve guarantees their investment. Yes your tax dollars are going to buy out Bear Stearns. All this while the government is trying to unilaterally reduce Social Security Benefits for which you paid your entire working life. This is just the latest example of why legislation must be passed to limit CEO pay. The CEO of Bear Stearns has received more compensation in the last five years than the entire net worth of the company!

Our politicians continue to squawk about the war in IRAQ, tax cuts, buying entire neighborhoods, relaxing regulations to allow companies to employ more unethical and illegal practices instead of looking at the real problem: The United States no longer produces a reasonable portion of its internal consumption.

Washington must go cold turkey. They must break all ties with business and lobbies. They must take a hard look at our economy, our culture, and our nation and create a framework in which hard work is valued and entrepreneurs can actually create businesses and not Ponzy Schemes. They must allow Americans to have hope for a better tomorrow for themselves and their children.

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US Economy shows Structural Dislocations – The Illness of Supply Side Economics

One percent of US population is now in jail. The number of Illegal immigrants is now above 24 million. Unemployment is at record highs. The US dollar is at record lows. The US Financial System risks collapse as numerous banks seen failing in 2008. Foreclosures are at record highs across the nation. The housing market is on the verge of collapsing. Over 33% of Americans are “Food Insecure”. Personal debt is at record levels. 1% of Americans are homeless including 250,000 veterans. Inflation on primary goods and services is above 10%. Americans retirement savings have lost 5% since the beginning of 2008.

These are nefarious indications of a pending crisis in America. Business lobbies continue to say, ”Stay the course, everything is fine.” Our politicians respond to these problems with patches and makeshift policies to calm the public. Anyone of these realities, individually, would require serious measures from our government but when seen as a whole point to Financial Armageddon and the end of the US as the primary world superpower.

Interestingly we continue to see these realities as single events instead of viewing them for what they are: symptoms of structural defects brought on by Reaganomics.

Defining the illness is easy. We must simply look at cause and effect. Everything we do. Every choice we make. Every law passed. They all have consequences. The alchemy of securitization (changing subprime loans into AAA rated debt) initiated to save the financial institutions following the Savings and Loan Crisis resulted in the current $1.5 trillion mortgage debacle. Free Market tax incentives resulted in moving production facilities offshore. Tax Breaks for the Uber Wealthy created the financial liquidity bubble resulting in unrealistic financial operations in publicly traded companies and CEO compensation based on a CEOs tendency to “return equity to shareholders”, better known as raiding the corporate coffers, instead of looking at the company’s capability to pay its debts and fund its future obligations.

No matter what actions we take, including doing nothing, the future will be tough. There are no free meals. Sooner or later the piper will be paid. The questions we face today will determine if America will be better for our grandchildren. We must ask ourselves if we are willing to fulfill the promise of America immortalized in the words of JFK:

“Ask not what your country can do for you, instead ask what you can do for your country!”

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Reaganomics is in Intensive Care

Two days of testimony by FED Chairman Bernanke brought unusually clear indications that the US economy is bad and that the risks of serious degradation are very high. While the Administration, President Bush and his mignons, continue to indicate that the “Underlying Economy is strong” the FED chairman talks about the dislocations in the market are serious. The Administration indicates that if you eliminate the losses of the Financial and Housing Sectors corporate earnings are at all time highs. While this is an exaggeration, it is true that other sectors are holding up fairly well. The problem is that our economy is Financial and Housing. We call it the Service economy. I call it the smoke and mirrors economy.

The most important comments by the FED chairman concerns the imminent failure of smaller banks with exposure the mortgage industry. The FED chairman also indicated that the number of failures would be inferior to the Savings and Loan failures of the late 80s. Further questions by the committee brought an unusual clarity to the discussion. Inflation is a problem however the FED believes the slowing economy will place downward pressure on demand. Oil and other commodities will most likely stabilize thus reducing inflationary pressures from raw materials.

To a direct question about alternative solutions the chairman indicated that should inflation remain strong there is little the FED can do without destroying the economy. In other words, if we are unable to stimulate the economy quickly and inflation continues because of the deterioration of the dollar’s value, the resulting environment could be disastrous.

Notwithstanding these clear indications our political leaders refuse to look at the “why” we find ourselves at this point. They somehow believe that fixing the housing market will make everything better. The economists promoting Free Trade and Open Borders continue to say that labor costs are the most important part of costs of goods produced. They lump labor costs along with advertising and transportation indicating that raw materials are only 18% of costs of goods.

While our structural problems are numerous the highest cost responsible for inflation is energy. Labor costs have been driven so low that they no longer count in the top 5 costs associated with the production and sale of goods. Obviously a business oriented government will support this breakdown because a reasonable person would find the immediate solution in producing goods locally and strengthening the dollar. How could big business compete with this geographically distributed model? How could a CEO siphon a $150 million dollar salary when locally produced goods could do without his infrastructure? Where would the lobbies get money from to pay off the politicians? How would the politicians survive without free vacations and free travel?

The road is still long. Without a doubt there will be more layoffs. There will be more foreclosures and bankruptcies. There will be more people who have to choose between heating and eating. If left to our politicians things will go from bad to worse. They will hold hearings and create stimulus programs that make the problems ever greater. They will try to find someone to blame. If we want to avoid or attenuate the inevitable we, the people, must force our politicians to think about the good of America and not the good of their pocket books.

Note: For my Australian readers I have had the opportunity to speak with a group of individuals heavily involved in the economy there. From their comments I believe you can substitute America for Australia and have a home grown article.

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Don’t Worry, We Know Better!

In one of my previous lives I was a turn around artist. I would go into either just before bankruptcy or just after bankruptcy and attempt to “save the savable”. On several occasions I helped long time friends. Once I got comfortable with the situation and saw how close they were to failing I would ask why they did not call me in earlier.

They would invariably respond, “I have seen what you have done with other companies. I knew you would cut the company and change it from what it was. I did not think our situation was that bad. I was sure we could turn it around with just a little more time.”

This morning current data indicated further deterioration of the US economy. Inflation is registering at a 12% annual run rate while consumer confidence is down. The FDIC announced that credit delinquencies in mortgages, car loans, credit cards and commercial paper are at the highest level in 30 years. The Vice Chairman of the FED came out and said that there is greater risk of recession than inflation. For some reason he sees the two as exclusive events.

The international markets interpreted this as the FED’s tendency to continue to lower FED funds rates. The dollar dropped to its lowest levels ($1.49 to buy 1 Euro). Oil increased to its highest level (over $100). Wheat, corn and all other commodities priced in dollars increased proportionately to the fall in the dollar.

This time it is different. Our economy has changed. Commodities are no longer the center of our production costs. We are the silicon tech economy where ideas are more important than physical goods.

This type of wishful thinking keeps us from taking the necessary steps to fix our economy and move forward for the future. Einstein’s theory is that mass cannot be created or destroyed. It can only change form. Energy is catalyst or the byproduct. Mass is the commodity. Our economy will be different when we change the source of energy at the base of transforming mass from one object to another. As long as Oil is our energy source it is the same old economy that Henry Ford took on.

If we continue hiding our heads in the sand hoping that our economy will fix itself things will only get worse.

The talking heads blame Ethanol for the rise in commodities. They blame the drop in the dollar on the European Union’s holding interest rates to fight inflation. They blame the loss of jobs on lazy workers. They blame the high cost of agricultural products on the Congress for not passing Amnesty legislation for slave labor.

At the same time our “compassionate” President says that he will veto the new bankruptcy legislation because courts should not tell business what to do. The Presidential candidates are just now realizing that “It’s the economy stupid.” For some reason they thought that people were more concerned about the war in Iraq instead of feeding their family.

Our leaders are hiding their heads in the sand. They refuse to accept that we need structural changes to eliminate the policies of Reaganomics. We need to eliminate our public debt and force financial institutions eliminate their unethical and immoral practices. We need to raise taxes and reduce our presence in the rest of the world. Remember we cannot take on the world’s problems if our own country collapses. We need to regulate business and eliminate illegal immigration. Most of all we need to return the United States government to the people of the United States removing all influences of business in governmental policy.

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Stagflation The Challenge of the New President

The US economy is slowly playing out the results of 30 years of Reaganomics. The excesses of the various bubbles created by irresponsible economic policy are wrung out of the system. Everyday brings new evidence of resource dislocations. The dollar trades at historic lows. Gold rises to historic highs. Salaries, adjusted for inflation, continue to slide. Core inflation, the one without food and energy, retains its upward bias. Real inflation, the one that acts on consumers buying power, rises to the highest levels in 50 years. Unemployment, even with the FAUX calculations of the Government, is above 5%. All this data reported by the FED while expectations of GDP are falling. Obviously the FED will not project negative GDP but recent real data is showing negative growth. This is the dreaded STAGFLATION!

The candidates for President of the United States range in their rhetoric from, “times are difficult” to “the economy is on a strong foundation, we need to confirm the tax cuts for the rich.” In some ways I feel sorry for the new President. The President will inherit a disaster that may or may not have become evident by the end of the year. To fix the problem the new President will have to get away from the Pollyannesque view of the US economy and take on business to restructure what and where we produce goods and services. Given the extreme pillaging of the US economy by corporations the fix will also need to be extreme. So many of the current Reaganomic structures will be influenced that it would be prudent to add extra security around the President as this individual will most likely not finish his term.

Many ask, “why so negative?” In reality I am not negative, simply realistic. If we refuse to see the problems we face we cannot fix them. Like a tumor they grow and fester. One day they are so powerful that the only hope of survival is radical surgery and aggressive attacks with radiation and chemicals. Many times the patient still dies. We are coming to the point when the symptoms of the illness will no longer be masked by band-aid type interventions. Interest rate cuts and stimulus packages will do little or nothing just as painkillers mitigate the pain but do not eliminate the cause.

Our new President will need WE THE PEOPLE for support. Sacrifices will be needed by all and public consensus will have to be unwavering to reform corporate and fiscal law.

Many still do not understand what I am talking about. Sure things are a bit tougher than times past but still pretty good. They are more interested in discussing whether or not gays should get married or if the appropriate drinking age is 21. These topics will become less important as the number of homeless increase. Those with homes will face the choices made in the 30s, pay the property taxes or eat dinner. The House Poor will be the new phrase. Times are changing. The data is clear. Save your money and pay down debt if you can. Cash will be king.

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Bailouts and Reaganomics

Tax cuts, FED rate decreases, and government bailouts have little impact on the US economy. The unemployment data showed another increase for January and corporate profits are down do to inflationary pressures on raw materials. The dollar continues to make new lows. Inflation, even as calculated by the FED’s skewed prism of life without food and energy, is now well above 4.5%. America is not ready to look at the real problem. The experts are convinced that the tax rebate plan will save the US economy.

I do not mind the idea because it will be the first tax cut for those who make less than $ 250k annual. Most likely the rebate will not have the desired results. Hopefully a significant portion of the recipients will pay down debt. The rest will spend money at Walmart or other distribution chains for Chinese manufacturers. Our current production structure will cause the primary benefits to be felt in China. Perhaps this is inline with the Chinese government’s recent announcement that a stimulus program is on the way following recent weather events.

Unfortunately this program will be very expensive. Although it is said to be %1 of GDP these funds are not coming from surplus revenues. Instead this program increases the irresponsible debt levels of the federal government. Recent, and proposed future, FED rate cuts will further weaken the dollar without providing benefits for working America (known as the consumer). These cuts will directly benefit financial institutions as their working spreads increase (the difference between what they pay on deposits and what they receive for loaning money). This policy is directly related to Reaganomics (Corporatism) where government’s primary concern is to make business more profitable believing that the rest of the nation will benefit from the trickle down effect.

If we are looking to improve our economy we need to think like the salt of the earth workers. You do not spend more than you have. You eliminate debts before buying new things. You make quality products and treat your customer (who is also your neighbor) with respect and give them a quality product at a fair price. You buy things from those you know and trust. You repair your house before you buy a new car.

These concepts may seem to be those of a simpleton but I have found they are valid rules to build true wealth. The old adage “the simplest ideas are usually the best” may have new value in a world that is constantly changing.

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The Fundamentals of the Economy are Strong! The Crisis is over!?!

Wow, I decided to write about the Border Patrol Agent killed by Undocumented Workers and the financial crisis is over. All of the economic problems of the United States have been solved. The financial institutions declared victory today and even told the EU FED that he had to get with the program and reduce rates in the EU. As one international analyst put it, “They are behind the curve.” This is another way of saying, “THEY KNOW NOTHING!”

Arrogance and Stupidity usually walk hand in hand. Most people believe that the US economy is the largest in the world. Different than what most Americans believe the US is no longer the world’s largest economy. The EU dwarfs the US in both GDP and Population. The EU has intelligently mandated that their FED has one job. Their job is to fight inflation. Yet when our Analysts and Experts talk about what the EU must do they are thinking that the EU political system is similar to that of the US. Fortunately for the world, Corporatism was banned in most Western European countries after WWII.

The collusion between government and Corporate America is a bad thing. The FED panicked following the drop in world markets on Martin Luther King day. They believed that the the smoke and mirrors financial structure of the US had spread into the rest of the world. They cut rates by ¾ % in an emergency action. Their reasoning was that the drop in the markets, in itself, became a economic factor. In other words the loss of value on the US stock market is as important as the loss of equity in housing. The obvious solution is to create excess liquidity (drop FED rates) and not worry about rampant inflation. They also promised additional cuts at the upcoming meeting.

The politicians are also preparing a tax rebate plan. The idea is that by putting money into the economy that money will be spent keeping GDP above zero. They are targetting negative growth instead of understanding why the economy is contracting. That is like wiping the forhead of a soldier shot in the stomach. He feels comforted but will most likely die in any case.

These programs are bad. Not only will they not produce the desired results, they increase public debt and accelerate inflation. I do not think we have taken on the structural problems in our economy. Perhaps we can find another area to create a bubble that will carry us on for another couple of years but sooner or later we must pay the piper.

More importantly after the FED ran to save the financial institutions, Societe’ Generale announced that it had sold positions due to fraudulant trading by a broker. The stock markets tanked because of a rogue trader.

Government should never be beholding to business or financial institutions. This must be a priority if we want to return the US to a position of strength.

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The Bailout Cometh!

The US economy is in a recession and most likely will move into an extended depression. The data speaks to us. The twenty-year expansion of Reaganomics mirrors the rise of Corporatism in the twenty-year period from 1910-1930. The Biotech, Technology, Internet, Housing, and Financial bubbles resulting in artificially high Price/Earnings multiples correspond to the same irrational exuberance of the stock market euphoria of the 1925-1930 bubble. The same disregard for labor, favoring thinking jobs and fraudulent money making schemes find unnerving similarities. Collusion between business and government in the 1920s is superceded only by the corruption prevalent today.

Our politicians have been surprised by the downturn. Perhaps this is due to the influence of Wall Street in government. The recession is not new news to those of us away from the Ivory Towers. Suddenly Investors have lost faith in the smoke and mirrors economy proposed by the US financial system and Washington DC is suddenly, in just a few weeks, aware that America is in trouble. The Bailout cometh! Being good Corporate Lackies our politicians want to buy their way out of the problem. The politician’s only concern is that too many Americans will become financially smart and pay down personal debt instead of spending the money in retail America.

The plans vary in form but both sides agree on the amount to spend, about 1% of GDP. The thinking is that this amount will keep America from registering negative GDP, everyone will feel better and continue spending money they do not have. This intervention will not work. The politicians are reacting to what their corporate masters are telling them is the problem while remaining ignorant to the cause and effect relationship of Reaganomics. Corporatism makes corporation America richer while there is equity. When America no longer has residual equity then Reaganomics feeds on itself as corporate America finances, without sufficient assets to guarantee the loans, purchasing. In other words, corporate America is now eating its own body to feed consumption.

This Bailout will not work. It may give some immediate sense of well being however the structural problems remain. Future GDP will not meet expectations. The elimination of 30 years of smoke and mirrors growth will leave significant scares. In the financial institutions the leveraged credit products will no longer generate revenues and depending on how the government records the losses will either reduce GDP for the last 10 years or drop GDP this year by 12%. Credit Card losses will also reduce revenues for the institutions as they take right offs to cover historically high defaults. The loss in family wealth caused by tanking housing values will further create pressures. The financial institutions still have not begun talking about write-downs for houses they own after foreclosure where owner equity was less than the depreciated asset for sale at auction. In the 1980s this fact alone caused the Savings and Loan Crisis.

The Service Industry Revenues will also be damaged as housing, which represents 28% of GDP, slows and finally stagnates. No more sales commission, housing warranties, insurance policies for the purchase of new homes, inspections, flips, and the likes. Long gone are the days when housing appreciated 20% a year because “they are not making any more land!”

In the past America has had a healthy agricultural and production economy. Today these combined only correspond to 12% of GDP. If the service economy is in the critical care unit how can we think that GDP will not suffer proportionally? Government home surveys indicate that 45% of adults in America do not have a job. This most likely corresponds to our true current unemployment rate. If the US economy drops another 10-30% unemployment could reach levels never experienced in the US.

Why all the Doom and Gloom? An informed individual has a greater probability of surviving difficulties than someone living a Pollyannistic existence. Watch the signs. Look for financial institutions to talk about credit card deterioration followed by questions about the housing portfolio held by the institutions. Watch for layoffs in the financial and insurance sectors. If you do not see new production plants opening in your area will be a precursor to serious problems. If you can go into this period without debt your chances of survival are higher than those saddled with debt. Regarding investments remember, “Cash is King!”

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Huckabee – Ignorant or an Outright Liar?

The title is a bit much but the question is accurate. It is highly improbable that Mr. Huckabee prepared his tax program based on a consumption tax. It is a bit unnerving that a man who heralds himself as a man of the working class would support a fiscal program that would significantly reduce taxes on the UberRich and significantly increase taxes on those who have lost their jobs, are retired or are in the lower tax brackets. Mr. Huckabee touts his plan saying that European countries have an unfair tax advantage because they do not pay Ad Valorum Tax on goods shipped outside their country of origin.

Mr. Huckabee then goes on to explain that America needs to eliminate Federal Taxes and take on the European Ad Valorum tax. This would make America competitive. Unfortunately, by supporting this argument, Mr. Huckabee is either ignorant of tax structure or is a real snake hiding in the cloth of his religion.

The Ad Valorum tax, in Europe 20%, is sales tax. Each country also has the equivalent of Federal taxes that increase based on how much one earns. Each country has a different scale but they are generally inline with US tax scales.

Mr. Huckabee is not talking about a “Flat Tax” instead he is suggesting a consumption tax. A Flat Tax would be a fixed percentage on all income including capital gains. A Flat Tax would eliminate all deductions and loopholes. A Consumption Tax would exonerate all income from taxation that is not spent. Supporters say this would encourage saving since all interest would be tax free. All capital gains would be tax free. The unforeseen consequences include decreasing investments in start up or small businesses since there would be no way to offset the losses. To offset the increased burden on the lower and middle class citizens the government would cut a monthly check reimbursing the individual for taxes. I do not think this statement requires any additional comment.

The thing that caught my attention about this program is the hypocrisy of Mr. Huckabee. He first states that he wants to give America back to Americans and then proposes tax policy that would significantly burden the lower and middle class (more than 75% of Americans) and reduce investments in small businesses. Small businesses are the main source of new jobs. Unfortunately this is just another example that what politicians say has little to do with what they intend to do.

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Reaganomics causes Recessions – Economic Stimulus Needed

Secretary of Treasury Hank “Henry” Paulsen finally acknowledged that the US economy sucks. President Bush meekly accepted that there are mixed signals but the underlying economy remains strong. Perhaps he is talking about the Chinese or other third world economies that supply the 82% of US consumption because he cannot be talking about anywhere in the continental US. President Bush and Hank Paulsen spoke of stimulus packages for the US economy. In the spirit of no crisis is too grave to cut taxes on the rich, Mr. Bush talked about making permanent his tax cuts. Even if this would do anything other than make the rich, richer this would do nothing until 2010 when the current entitlements for the rich expire.

Other programs include bailing out the financial institutions. The push back from the general public was so strong that Countrywide, the poster boy of Corporate Greed and malfeasance, dropped another 30% today to begin trading at bankruptcy levels. In the true spirit of Reaganomics Financial Institutions continue to present vague and misleading information regarding their economic stability. Some institutions, like Countrywide Financial, are falsifying documents in court proceedings to inappropriately participate in the personal bankruptcies a direct result of their immoral practices.

There are stimulus packages that talk about rebates. This package would entail sending a refund check to taxpayers once their IRS return has been filed. While tax reductions are a great thing they would simply be a band-aid solution. This type of intervention is the only one guaranteed to get money into the system immediately but they leave the reasons for the economic problems in place. Unfortunately just the rebate, without further structural changes, will only increase our public debt.

There are stimulus packages that talk about eliminating corporate taxes. Obviously this comes from Corporate America. It does not merit discussion.

How about investing in America?

Inspect our ports for faulty and dangerous products.
Control our borders financing the fence.
Repair our bridges, levies and basic infrastructures.

These are not the superficial quick fix everyone seems to want but they will start America on a path to prosperity instead of the road to the poor house we are currently following. Every operation we undertake must be balanced. We must reduce our debt. We must create economic activity inside the US. We must reign in the power of Corporate America. Finally, we must legislate every aspect of the financial institutions operations. These things will create the greatest economic boom since the 1950s.

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Government by, for and of the Corporation

Americans, outside of the ivory towers, are aware that the US economy is in difficulty. There is no need to study the economic data, MM2 or MM3. They know things are bad because they are losing their jobs and having a hard time making it to the end of the month. Most Americans know that inflation is rampant since they have to heat their homes, drive their cars and buy food. Even the most supportive of President Bush are somewhat dismayed when they hear empty phrases like, “the economy is on a strong foundation” or “additional tax cuts for the rich are necessary.” In the real world things are bad and getting worse.

The Bobble Heads of Wall Street also know how bad things are. They can no longer talk about soft landing or Goldie Locks. Now they are looking for someone else to blame. They run around like chickens with their heads cut of ranting about how the FED “knows nothing”. They believe that America is contained inside the Island of Manhattan and that the only thing that is important is the salvation of Financial Institutions. They believe the hundred million dollar salaries of corrupt and incompetent management teams are more important than the jobs of the rest of America. They refuse to accept that Corporate America is the cause and not the victim.

These individuals are calling for an additional rate cut. They argue that this will increase spending by making more money available. They conveniently ignore the fact that the dollar has lost 50% of its value because of poor economic policy, American debt at historic levels, GDP based on smoke and mirrors service revenues, and forecasts for a much poorer America by international economist. They think that further augmenting the debt crisis by making even more money available will do something good. Rate cuts have proven, and will prove in the future, insignificant. World financial markets are more liquid than previous years and international investors will not buy the Polyannesque policies of the US.

For every 25 basis point drop in the interest rates the dollar will weaken proportionally. Oil in turn will cost more as producers realign the value paid for oil to represent real dollars and real buying power. Since the US does not produce more than 12% percent of the goods it consumes, inflation will directly reflect the falling dollar. Lowering interest rates will do nothing of value. Lowering interest rates will cause a brief increase in stock prices so financial institutions will liquidate their stock positions to unsuspecting Americans. Who cares that the losses will then be recorded in the 401K and IRAs of working America.

We have a few choices. The FED can, and most likely will, lower interest rates by at least 50 basis points. I say why so little. Drop the rates by 400 basis points. Even though dropping interest rates will have no real benefit on the US economy, this would at least quiet the monkeys.

Another, more responsible, road is to accept Reaganomics for what it is. Reaganomics is economic policy designed to redistribute income from the working class to the governing class. Once we accept that Reaganomics do not work, we can implement sound economic and trade policies that would return the US to a productive powerhouse. We can require that any country exporting to the United States be required to follow all laws and regulatory entities for the procurement of raw materials, materials, labor laws, indenture, design and energy production. We can inspect and clearly identify all products regarding origin and content (including genetically cloned meats and by products). Finally we can invest in the United States infrastructures and the United States citizens.

These two strategies are very different and they will take us to different places. I believe we should be fighting for our country and our children’s future. I believe that America can be great again. I believe that if we continue on this road to destruction as mapped by Reaganomics we will see poverty never known in the history of the US. All our big guns and smart bombs cannot save us for the decay of our economy and national infrastructures.

It is time that we invest in America. It is time that we return the United States to its citizens. It is time that America returns to be a Union by, for and of the PEOPLE.

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The Inevitability of the Destruction of the Middle Class – War on the Middle Class

A father opens the door in the early evening just as the family has finished dinner. The sharp explosions of gunshots break the peaceful silence in a quiet neighborhood and a normal family ends its existence. The police investigate and find no reason for the tragedy. No apparent enemies, a simple family with a simple life. Stories like these find their way on to the front pages of our newspapers with increasing frequency. An unknown killer choosing a house at random in places where “these things just do not happen!”

We discussed these events over a plate of Cincinnati Spaghetti. Incredulous, we wondered what is happening to our world. My profession requires that I study tendencies and perceptions. I am subjected to hours of financial programs and news services. Some interesting things have been published recently. Raw data that may explain what would drive a person to knock on the door of a stranger and kill a family in cold blood without a moment’s hesitation:

Over the last 10 years the increase in earnings of the top 0.5% was more than the total earnings of entire bottom 20% of the population.

Greenspan and others state that inequality in earnings has been going on for 100 years. It is inevitable and cannot be stopped.

Successful people say that they work harder or have sacrificed more than people who are less successful. This is a fallacy. Success, as measured by earnings, has a great deal to do with social status, education and opportunity (knowing other successful people creates opportunities).

Legislation allows financially stable individuals to take advantage of difficult times. Financial institutions are allowed to charge usury rates on loans on credit cards. This reduces the disposable income of the lower income or rising classes. The result is less demand for products that can then be purchased with cash at significantly lower prices. A simple example is that one individual does not pay bank fees, credit card dues or any other type of utilization costs while an individual with a lower salary will pay 50$ annual dues, 12$ monthly service fee, 18% interest which can accelerate to 30% even though the debtor is making the payments in accordance with the contract. These fees can be the difference between eating dinner and going hungry for many families.

Rich people get bailouts from government when they make bad investments while working class gets bankruptcy.

The US working class mentality sides with the rich on policy because they believe they will become rich (the lottery syndrome).

Government uses tax dollars to protect America’s interests (only rich people). The latest example is the mortgage bailout. The only people helped by the various plans suggested will be the investors in bank stocks.

Government allows powerful individuals to close US production facilities and move their facilities to poor countries to avoid health and safety standards. They will say it is to reduce labor costs but the only real reason to produce outside the US is to avoid regulation.

It seems that the world is stacked against the working class. It is tough to make it to the end of the month much less think about the future. Should this individual get sick they are hit with a double whammy, healthcare costs they cannot afford and must go into debt just to stay alive and loss of wages since sick leave has been practically eliminated. God forbid that an individual should become part of the 35% of Americans who are not employed. They will be homeless in a few weeks and left to die.

With this type of future, always present in the mind of 98% of Americans, the pressure is intense. It is a short road from despair to anger against the world thus any door in quiet neighborhood is the perfect place to express that anger.

Free Markets work under enlightened self interest. They can last for centuries but take away the enlightened part and free markets bring their own type of enlightenment. We have seen it over the centuries with all great empires. The French Revolution, the fall of the Roman Empire, Macedonia, Egypt, Napoleon all learned why all members of society must have hope for a better future for themselves and their children. Perhaps the US is simply another fallen empire learning a lesson in humanity.

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Reducing Deficits – Can the FED

The United States Government has been running increasing deficits. The Government continues to spend excess liquidity from the Social Security fund paid by workers over the past 75 years. The government knows that the contractual agreement of Social Security will bankrupt the government if they do not replace these funds or cut costs. Their answer is to reduce contractually agreed benefits placing the burden on those who contributed to the fund.

I suggest a different answer. Let’s eliminate useless agencies. The FED has become nothing more than a Sugar Daddy for speculative financial institutions. When the cute smoke and mirrors service sector known as Wall Street makes mistakes the FED intervenes and congress bails them out. This makes the real economy, what is left of it, uncompetitive on the world markets. Originally the FED was designed to control dislocations and excesses of the financial markets however in today’s Reaganomic based financial scam Wall Street completely dictates the actions of the FED.
The FED costs the US taxpayer a great deal of money. Additionally it is responsible for bubble creation and facilitates the devaluation of the dollar by increasing M3, conveniently eliminated from FED policy several years ago. Banks are encouraged to enter into speculative operations by easy money. Individuals are encouraged to spend more than they make because there is no return on savings.

The FED is thinking only about the short term. It does exactly what Wall Street calls for but we have learned that short term focus is usually not in the best interest of any entity. I guess the old adage, “Eat drink and be Merry for Tomorrow We Die!” is the FED’s motto. The FED is doing exactly the opposite of what it should be doing in the long term. We see the disastrous policy expressed as LIBOR spreads continue to increase. In fact we see other interest rates remaining high while the FED lowers rates. The dollar is sold as the Economic Policies of the US are seen as creating greater future problems. All said, the FED is creating more problems than it solves. If an agency costs money and we need to reduce the deficit and the agency is not performing its mandate then get rid of it.

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Why Wall Street CEOs Earn Multimillion $ Salaries!

It should be a reasonable assumption that no single individual can bring the same value as what can be produced by 10,000 other people. This can be supported by the fact the great pyramids, the great wall and other truly major accomplishments were made by people who would have a hard time finding a dishwasher’s position here in the US today. So what makes some institutional investors believe that one man is worth more than 10,000, and in some cases 100,000, employees?

This week the FED has reiterated numerous times that it intends to bailout financial institutions with a move much stronger than the economically disastrous move it made it August. They ingenuously stated that the August move did not resolve the problem. It is comforting that our government employs individuals so astute. The new, and improved, bailout will be sold to the public as saving the poor homeowner.

This bailout will do the same as the last. The dollar will fall, inflation will exponentially explode, and the stock market, after a brief rally will tank again. All of this will occur and homeowners will still have the same problems as today. They will lose their homes. The banks rally on these proposed plans because the government will keep them from losing money on the foreclosures. Creating excess liquidity and low interest rates will create a new bubble in some other smoke and mirrors sector like Internet or Housing.

The FED knows it cannot fix the excesses created by institutional speculators who throw caution to the wind while playing the subprime roulette. The members of the FED have said as much. So why are members of the FED willing to throw away distinguished careers to be remembered in history as facilitators of the greatest depression in the US economy. A depression of this magnitude would most likely creep into the rest of the world and could trigger a deflationary period similar to the Dark Ages.

This is where the Wall Street CEO makes his pay. Only the best are employed in this activity. They must woo the regulator and convince the government that it is in the best interest of all that the interests of financial institutions are greater than the good of the country. He must engage his imagination and supply plausible mumbo jumbo talking points to make the pill edible. It takes a unique individual to play this role. Most Americans would puke their dinner every night as they consider the repercussions of their actions. Simply put, a normal human being could not live with himself. These superhuman CEOs are able to sleep at night knowing that while people are dying because we cannot afford health insurance, families are homeless and children have no hope for the future they will use public funds to enrich the coffers of financial institutions.

The result is simple. The losses from the speculative actions by financial institutions would cost the bottom line 1.5 trillion dollars. Through these gods of Wall Street the losses will be 1 or 2 billion. The 200 million dollar salary of the CEO is a cheap price to pay for the governmental bailout they can provide. Another example of Reaganomics at its best: A government of the corporations, by the corporations and for the corporations.

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Stagflation or Brain Stagnation?

The month of November brought a slower stock market. Most Americans were Giving Thanks for having jobs, any job, at any price. Those who were not so fortunate to find part-time employment in some Walmart or McDonald’s Gave Thanks for the numerous food recalls. The trash bins have never been so bountiful. A smorgasbord of free meat and vegetables were readily available even if they did carry a few uninvited guests. Never look a gift horse in the mouth. The government found an unintended ally to fight obesity. The 50% annual inflation in energy and food is helping Americans, if they can avoid the temptation of government subsidized, fructose based, foods from the supermarket shelves, shed a few pounds.

Our politicians continue to use their screened data to support that the economy is doing great even while consumer confidence hits decade lows, the falling dollar, energy prices at historically high levels, the housing market in the worst free fall since the great depression, and food pricing doubling every year. Governmental data indicates flat GDP. This is no small feat with the way the US government chooses to calculate GDP. We have seen this before. Most Baby Boomers have lived through it. It was the late 70s that we coined the phrase STAGFLATION.

Our government is moving with its usual competency. The FED is preparing for another bailout of the financial institutions along with lowering interest rates. Now that is just what we need, interest rates cuts, utilization of tax dollars to bailout speculative financial institutions further damaging public accounts, tanking the dollar and further increasing inflation.

Recent FED decisions and current statements by FED members has turned the FED into a joke. Market players and Financial Institutions know all they have to do is to shout a little and say how stupid the FED on national television and the FED will do whatever business wants even though the FED knows this will be disastrous for the US economy. This is not surprising considering we have the King of Wall Street as Treasury Secretary.

The current actions of FED will do no more good than the bailout in August. The current economic situation is a direct result of Reaganomics. To simplify America is spending more than it produces. Reaganomics has allowed the government to hide the pillaging of America as they count financial gains as part of GDP. America has become nothing more than marketing and financial institution. It is affectionately called the Service Economy but is nothing more than smoke and mirrors.

Whenever economists discuss the appropriate action of the FED those supporting the bailout proposal find themselves quickly without arguments. There is no good economic reason to reduce the FED funds rate. The final argument, usually shouted, is, “What do you want to do destroy the financial institutions? These are not the housing companies. These companies are America’s economy!”

The FED vice chairman declared today that these actions are necessary. “We must not hold the entire economy hostage to punish speculation in financial institutions!” Yes, American citizens must pay to protect America’s 100 million dollar CEOs from losses on their bad choices.

Corruption is the one thing capable of destroying any great empire. It has brought down the most vicious of dictators and the most democratic of societies. It is a scourge and it will bring America down if we do not take a stand and let our government know that this is not acceptable. I wonder if our current economic crisis is better denoted as STAGFLATION or BRAIN STAGNATION. Is it possible that these really smart people cannot see the obvious writing on the wall? Are they so blinded by their fairytale belief that you can create something from nothing? Have they not learned that Alchemy, just does not work?

To procure a better future we must throw away the rose colored glasses and make significant changes to our system. All traces of Reaganomics must be eliminated from our economy and our government. We must destroy the smoke and mirrors “service economy” and actually produce something of value. The short-term will be bad but the future can be better. If we continue on this path of economic insanity the very short-term may see a rise in the stock market but our short, medium and long-term prospects are nothing short of Armageddon.

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US Government’s Economic Policy ravages US markets – Financial Stocks Tank

The piper has come for payment. In August the Fed bailed out their buddies in the major US financial institutions. After years of speculating in credit derivatives the collapse of the housing bubble threatened the existence of most financial institutions. Instead of requiring the institutions to write down their bad positions the FED pumped in almost $1trillion in liquidity and piloted the purchase of Country Wide Financial, the poster child of bad lending practices, by 4 major banks utilizing funds lent by the Federal Reserve to these institutions. The FED lowered interest rates even though real inflation is through the roof. This was a really bad move but right in line with the disastrous ideology of Reaganomics.

The US dollar has been losing value for the past 5 years. A country’s currency can be seen as shares representing the country’s equity. Just like shares if you spend more money than you earn the currency diminishes in value to represent the new economic reality. If a company creates more shares the value of existing shares is diminished. If the company pays a dividend it receives a higher valuation. The dividend for currency is interest rates. A company may also receive a higher price if the future outlook for earnings (retained equity) is positive. The dollar has devalued because of the current account deficit, budget deficits, artificially low interest rates, and the lack of faith in the United States as a going concern.

The US has eliminated internal production of goods and services. The US only produces 20% of the goods it produces. The US is completely dependent on countries that do not have our values or our product safety laws. The excuse is for cheap labor but the reality is that products may be produced using materials and processes banned in the US. If a worker dies, well, “C’est la vi.” That glue is not available well GHB will do just fine for a child’s toy. The shipping costs are offset by cheap energy produced by high polluting processes. The US cannot complain about quality or the producer will stop shipping goods and stores in the US will have empty shelves. The economic impact of Free Trade at all costs is a reduction of middleclass jobs, lower wages across all segments, and a migration of wealth from the middleclass to the upper class.

The US lives on a smoke and mirrors “Service Economy”. US corporations have become nothing more than marketing companies. Research and Development, Intellectual property, quality workmanship are no longer important. We now make money without working. Wow! Experienced and educated professionals are the latest in the outsourcing scheme. In countries where University is free the PHDs abound and corporate America wants a piece of these low cost professionals. We are now emptying the US production machine, basis of any country, of the last remaining resource, educated scientists, engineers, and top managers.

Corruption is widespread in both Government and Business. Taxes are a cost of doing business. Corruption is a hidden tax on the economy. Corruption is paid for by the collective while the benefits are limited to the parties involved. Corruption is considered a victimless crime. This is like saying that dumping toxic waste into the watershed is a victimless crime. There are victims it is just harder to find the direct correlation. Corruption affects everyone in the country. It reduces GDP just a higher taxes or high interest rates. It causes the loss of jobs. I consider governmental corruption up there with mass murder because the economic effects are felt by rich and poor alike. This in turn results in people not being able to pay their bills, have homes or sometimes even eat. Corruption should carry a mandatory life sentence and lobbying by corporations should be made illegal.

Collusion between politicians and Corporate America has distracted resources from internal infrastructures. Lobbying is legalized bribes. In any other developed country the activities of lobbies would be considered criminal. In the early 90s Italy went through a cleansing process eliminating entire political parties and incarcerating corrupt politicians. The activities were no different than our politicians taking vacations (or the many other perks) on the corporate dime. Italy has since maintained a stable government, reasonable growth, and contained inflation. It would be valuable to discuss the pros and cons of corporate lobbies. It is a good thing that citizens can petition their government for change. It is a bad thing that corporations can petition anyone considering the fact that corporations are not citizens. Corporations have one objective: to make money and the corporation is often misused to further an individual’s greed such as a CEO that makes hundreds of millions of dollars.

Our system is on the verge of collapse. We need to make changes to the underlying system. The problem is grave. The difficulties we are current facing have been brewing for thirty years and cannot be overcome with a change in interest rates or throwing money at the problems. Change will not come without sacrifice but it is time to pay the piper because the piper will always get his due. Our politicians have no vested interest in change. They are more powerful and receive higher compensation than any time in history. To start to fix the problem we need to change the players. We need real working people in Congress. We need a President who represents us and will think about his country before he thinks about his legacy or other personal gain. We need an individual who is not a politician, someone who actually works for a living (or would if he had a job left). Perhaps one of the workers from middle America who has seen his job outsourced or the scientist who cannot pay his university loans because wages for professionals have been trending downward.

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Spinning Recession – Redistribution of Wealth from the Working Class to Corporate America

Unfortunately, we have another example of the US government spinning the data to give billions of dollars to financial institutions. About 3 weeks ago we were at the pinnacle of the credit crisis. Countrywide and other lenders were insolvent. Major banks would not lend money to each other because each bank knew they had significant exposure to bad debts but no one else knew how bad the situation was. The banks were thinking, “If I have this type of exposure who knows what is on the books or the bank that wants a loan?”

Since banks no longer keep sufficient reserves to cover the deposits the banks were facing runs on the bank. The banks only keep a very small percentage of their client’s money. Over the years the US Federal Reserve has reduced the required deposit reserve allowing banks to leverage their positions to ever greater amounts. If all the clients ask for their money in a short period of time the bank would have to liquidate their investments to raise cash. The investments would be sold at current market value (much lower than the amount written on the books since these are illiquid assets).

In this situation, the banks would stop repaying deposits, close their doors and declare bankruptcy. This would cause other banks in the world to have less faith in the US system and the ongoing reallocation of resources would favor the EU over the US. This would in turn eliminate 40% of GDP generated by the smoke and mirrors “service economy”.

The FED needed to do something however the people, rightly so, wondered why the US economy should pay for the speculative mistakes of the financial institutions. Strangely enough, out of the blue yonder, four days before the FED meeting on interest rates the Payrolls report showed a loss of 4,000 jobs during the previous period. Even more unusual was the drop in government employees and teachers. Somehow, just as schools were hiring new teachers for the opening of the school year the government lost 28,000 employees? The Wall Street Journal reported that the data was fishy. Adding up all of the States data the national data should have increased government payrolls by 88,000 instead of losing 28,000.

Again, strangely, the revised data present on Friday October 5, 2007 for the month of September increased the number of government jobs upward by about 50,000 employees. So the FED decreased the FED funds rate by 50 basis points based on the government employment data showing a loss of 4,000 jobs driven by losing teaching jobs at the beginning of the school year. The drop in FED funds rates allows financial institutions to get rid of speculative positions. The dollar drops 3% creating a 36% inflation rate for the month of September and costing all Americans 3% of their total wealth in one month. The next month’s payroll data shows that the very data that allowed the FED to lower rates was tremendously wrong. If it smells like a turd, looks like a turd, feels like a turd, do you need to taste it to know it is a turd?

The same institutions that are taking billion dollar handouts from your tax dollars and devaluing your savings are promoting personal responsibility for the average citizen. You must lose your house to foreclosure yet the companies can make bad decisions, speculate and get bailed out by the government using your money. This is just wrong. It is time to let your government know that you will not stand for this. Congress must investigate the FED and the way this information was compiled and presented and in the case of malfeasance ask Federal Reserve Chairman Ben Bernanke to resign.

Tags: Government Politics Recession Corporate America Finance Illegal Immigration Economy Reaganomics

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Congress Spews Words of Wisdom – Buyer Beware!

Recent recalls of faulty and dangerous products and food are too numerous to list. People have died, children have been poisoned and pets have been killed. While congress runs around talking a lot and doing very little, words of great wisdom arrive from our hallowed halls, “Buyer BEWARE!”

Perhaps these are the most truthful words we have heard from our elected representatives in a long time. It seems that the numerous products recalled is simply the tip of the iceberg. Watchdog groups suggest that there are thousands of product lines that do not meet US safety standards sitting in warehouses waiting to hit the shelves for the holiday season. Yes our government knows about the problem however because of the trade agreements signed by the Whitehouse and ratified by Congress we would be held in breach and subject to fines under the WTO. Incredible as it may seem, our country must reduce its safety laws to conform to China’s laws under the trade agreements.

I am always impressed by the lack of intelligence or scruples expressed by corporate America and our elected representatives. Unfortunately what is done is done. The US government cannot, or will not, do anything to resolve the safety and quality concerns. You do have a choice. Perhaps you, as the consumer, are the only one who can really change anything. Be careful about the products you choose this holiday season. Remember every company (even the ones like Mattel and Disney) produce their toys in China where safety and quality standards are significantly lower.

The US only produces 18% of the goods is consumes. That means that only 1 in 5 products available in US stores actually conforms to legislative standards. I do not know what to suggest for gifts this year, perhaps fewer things of higher quality is a reasonable solution.

This is an important problem. The health and well being of our children has no price. Corporate profits are not worth the life of future our kids. Take a stand. Let these unscrupulous Corporate CEOs know that we are not as stupid as they think we are.

Tags: Government Politics Recession Corporate America Finance Illegal Immigration Economy Reaganomics

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