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Healthcare’s Double-Dip

by TwoCentsEditor

Published on: 03/26/2010

Categories: Current Events, Economics, My Two Cents

Tags: Congress, debt, deficit, Economics, healthcare reform, politics, Senate, stocks

Comments: No Comments

One of the most interesting terms to come out of the past two years is the ‘double dip recession’. This is Newspeak for depression as far as I am concerned, but it fits with the new nomenclature we have used in an attempt to paint a crisis as not really being one. After all, what fun is it to admit that we’re in a morass that we have no hope of getting out of, or even a cogent, sensible plan for exiting? It is much easier to conjure up new terms in an attempt to move the boundaries into more palatable territory. This week, in the wake of the biggest nation-killing bill to pass out of the halls of Congress to date, I’m going to tell you exactly why we are now guaranteed a second dip (to use the nomenclature du jour), and how this is going to hit small businesses, which are the backbone of the real economy.

In order to accomplish this, I am going to cite exact passages from the House Bill from last summer (HR3200) and give you page references so you can download a copy of the bill and follow along if you so desire. I am using the older bill because it is much clearer in language than its Senate counterpart, and while not all of the provisions were passed in the exact same form, I believe this is where we’re ultimately going to end up. I am also doing this since many people simply cannot believe that our reps would put such provisions into legislation and will no doubt call me a liar and a shill. Before anyone gets any ideas about turning this into the sadly typical political muckraking that passes for debate these days, I want to refer you back to the articles I wrote in 2008 issuing scathing criticism of the banker bailout, the AIG bailout, Fannie/Freddie, and the housing relief bills, which were pushed by the ‘other’ folks in Congress. I couldn’t give a rip about politics. I am interested in the impact these bills will have on our economy and American families.

Piling on Debt

One of the planks that was used to promote this legislation was the fact that it will be a deficit-reducing measure. Let’s consider a few things here. The IRS will need to hire upwards of 16,000 agents and require an additional $10 Billion over the next decade (reported in the MSM) to ‘police’ the provisions of this new law. So the public sector will get even bigger. The late Milton Friedman did some fascinating research and modeling that pointed to the fact that every public sector job created destroys roughly 2 private sector jobs. That is 32,000 more private sector jobs down the tubes just on the IRS’ account using Friedman’s research, which has proven to be pretty accurate.

The bill itself is advertised to cost $940 Billion. Looking back a few years, we have Medicare Part D, which was advertised to cost around $500 billion. To date Medicare Part D has already added nearly $7 TRILLION in contingent unfunded liabilities to our national balance sheet. While it would be irresponsible to do a naked extrapolation here, the point is simple; this bill will, in all likelihood, end up costing an awful lot more than what has been advertised.

Martin Feldstein who, incidentally, concurs with the above assessment estimates debt service on the debt created by this new law to run around $300 billion over the next decade. In the new financial landscape where we talk in terms of trillions, a mere $300 billion doesn’t seem like a lot. However, when you consider that $300 Billion represents the total of yearly earnings of over 6.5 MILLION average US families, it is obvious we’re not talking about chump change here.

For a nation that already has liabilities that outstrip assets by anywhere between $15 and $20 Trillion dollars, it seems foolish to even consider more debt, but we don’t even blink twice anymore. Our government is probably already aware of the fact that the debt cannot be paid, so why not pile it on as long as others are willing to let the game continue? It’ll be ok until it isn’t, then we’ll have to think of something else. How’s that for an exit strategy?

The Provisions

Page 22 Section 113 – The Health Choices Commissioner along with the Dept. of Health/Human Svcs will conduct an audit of the books of any businesses that self-insure. This constitutes an additional regulatory burden on the small business that chooses the self-insurance route.

Page 50 Section 152 – This will allow illegal aliens to get health insurance; presumably at no cost since nowhere does it mention charging them or making them pay any sort of taxes, fees, or levies. The section reads that health care will be provided ‘without regard to personal characteristics extraneous to the provision of quality health care or related services.’ Although, ironically, Section 246 contains language that purports to exclude ‘undocumented aliens’ from Federal payments towards affordability tax credits. This is something of a joke since these people don’t file returns anyway and would not be able to take advantage of such a credit.

Page 149 Section 313 – Any employer who has a payroll greater than $401,000 and doesn’t offer a ‘public’ option for employees will pay an 8% tax on its payroll – payable to the Health Insurance Exchange Trust Fund.

Page 150 Section 313 – The following schedule applies to smaller employers who don’t offer a ‘public option for employees. The percentage represents the additional ‘tax’ they will need to pay to the Trust Fund:

Does not exceed $250,000 – 0 percent

Exceeds $250,000, but does not exceed $300,000 2 percent

Exceeds $300,000, but does not exceed $350,000 4 percent

Exceeds $350,000, but does not exceed $400,000 6 percent

Also of interest is the fact that Section 313 states that an employer hasn’t satisfied the contribution requirement if they simply cut the employee’s salary by the amount of the contribution. This is best illustrated with an example:

Let’s suppose Employer A has an Employee X who makes $10.00/hour and Employer A doesn’t offer a ‘public option’ for his employees. By law, the employer is now required to pay an 8% tax on payroll (let’s assume Employer A is in the highest bracket). If the Employer simply reduces Employee X’s wage by 8% to $9.20/hour, the Employer is in violation of the statute and is deemed to not have made a contribution. While on the surface this appears good since it forces the employer to effectively increase total employee compensation, this will be a job-killer. Employer A might very easily choose to reduce the workforce by 8% to keep costs the same.

It is pretty easy to see that just these four provisions add some serious burdens on what are considered to be small businesses. These are the business that employ somewhere in the neighborhood of 80% of all workers and create roughly 60% of new jobs. The most logical response of these businesses will be to cut staff or reduce non health-related benefits such as retirement contributions. Still mired in a severe recession, small businesses have not been able to grow top line revenues (nor have large ones to any meaningful extent for that matter) and are therefore going to be focused on controlling costs. This is precisely how the firms that have survived have done so over the past 2 years. This law will put many of them under. I wonder if BLS will take this new reality into account when it pulls CESBD (birth/death model) adjustments out of the black hat each month?

This says nothing of the encroachment on civil liberties such as the IRS having direct access to your bank accounts (Page 59 Section 1173A) and the creation of a National Heath Card ID and giving government instant access to your financial information (Page 58 Section 1173A).

All this and we still haven’t considered the overall impact this will have on the macroeconomy. We know that half a trillion dollars will be transferred from consumers to government vis a vis the ‘Shared Responsibility’ doctrine espoused in the law and it will likely be much more than that. That is an additional half trillion dollars that will not be spent efficiently by consumers, but will be squandered by government. Ok, I’ll admit it – I am deeply skeptical of any government ‘Trust’ Fund. For those who want to bicker on this point, I refer you to the status of the Social Security ‘Trust’ Fund as my basis for skepticism.

We also know that $500 Billion worth of Medicare cuts will be made, which essentially means that another half trillion will disappear from the pockets of households in pursuit of paying higher Medicare premiums. The beauty of the shift is that it is essentially GDP neutral since government spending counts in GDP at the same weight as consumer spending. In this new world of socialized everything we clearly need a new way of measuring economic output or at least differentiating legitimate output from the activities of our borrow and spend politicians.

With all the debt being accumulated, the money being pulled from the real economy in favor of the centrally planned utopia sought by so many on Capitol Hill, and the pressures brought to bear on businesses by this ‘reform’, it is hard to contemplate a set of circumstances under which we avoid another steep contraction in the real economy. It will be interesting to see how long it takes to go from recovery to contraction. My guess is about as long as it takes for a Baskin Robbins double dip to melt.

Points to Ponder

by TwoCentsEditor

Published on: 04/01/2009

Categories: Current Events

Tags: Barney Frank, business, Congress, democrat, dodd, education, finance, financial, gold, inflation, investing, investment, news, obama, oil, politics, president, republican, Senate, silver, stock market, Wall Street, washington, White House

Comments: No Comments

On April Fool’s Day, it seems apropos to consider a few things and ask yourself if you ever thought you’d see the following headlines in America:

- ADP Report shows worst ever job losses in March 2009; stocks surge on the news.

- US President fires CEO of a private-sector corporation after the government shuffled tens of billions into the zombie firm.

- US Congress considering measure to set pay levels for ALL employees of any firm in which the US Govt. has taken a ‘capital position’.

- The Federal Reserve and US Treasury have now spent a year’s worth of Gross Domestic Product on rescuing financial firms.

No folks, we’re not making this up.

The Great American Banking Experiment

by TwoCentsEditor

Published on: 03/20/2009

Categories: My Two Cents

Comments: 7 Comments

One of the most common questions that folks who are becoming newly acquainted with terms like ‘fiat money’ and ‘fractional reserve banking’ are asking is “How did we get here?” For sure, the recent publicity of 21st Century Tea Parties along with the occurrence of the worst financial crisis in recorded history has people asking questions. In terms of the American obsession with central banking and fiat currency, 1913 is generally identified as the point where the country went wrong. In truth, however, our obsession with funny money has transcended all; including even, the birth of the nation. And on a global scale, the eternal ponzi scheme of fractional reserve banking has been going on for a few thousand years now. It is a scheme that has been so perfectly atrocious over the centuries that it makes ponzicons Stanford and Madoff look like petty thieves. In this week’s piece we’ll take a look at some of the more noteworthy landmarks in America’s great experiment with paper money.

Gresham’s Law

Gresham’s Law deals with a situation when there are two (or more) competing currencies and one is ‘pegged’ against the other. More specifically, the law deals with bimetallic currency systems where both Gold and Silver are used in an economy and the ratio of the two is fixed. A good historical reference would be the post Bank of North America United States in the early 1800s. The US Constitution in Article 1, Section 8 gave Congress the power to coin money and determine the value thereof. A Constitutional Dollar was determined to be a coin containing 371.25 grains of pure silver. In order to encourage the use of gold as well as Silver, the ratio was set at 15:1 – therefore a Constitutional Dollar could also be a Gold coin containing 24.75 grains of pure Gold. For anyone who knows Gold, 24.75 grains is not a very large coin so coins that contained 247.5 grains of Gold were used and were valued at 10 Dollars. So far, so good, right?

The only problem here is that the exchange ratio of any two goods will vary over time. When the 15:1 value was set, that was the going market rate. Alexander Hamilton, who was a big proponent of the bimetallic system, gets an “A” for effort, but failed to recognize and/or provide for the constant fluctuation. In the case of the Gold-Silver ratio, the supply of Silver grew disproportionately to that of Gold due in large part to mining in the Caribbean. The silver made it to our shores thanks to a vibrant trading relationship between America and that region of the world. This is where Gresham’s Law comes into play. The law states that anytime one money is compulsorily undervalued while another is overvalued, the undervalued money will be driven out of the economy or hoarded while the overvalued money will explode into circulation. In following Gresham’s Law, Gold all but disappeared from circulation in early 19th century America. With the obvious consequences of Gresham’s Law, it is easy to ask why any government would forcibly attempt to impose a bimetallic standard on an economy? Hint: It must be remembered that in absence of paper money, the supply of money in the economy was determined by the quantity of specie (Gold and/or Silver).

The monetary ‘authorities’ at the time were attempting to make sure that the economy had enough money to function properly, which was certainly a good intention. Where they went wrong in their approach is that the economy could have easily functioned on silver alone since it was in good supply. Market prices for other goods would have adjusted themselves through the laws of marginal utility and supply/demand according to the supply of both specie and the other goods.

Gresham’s Law is easily observed today in our own currency system with a slight variation. While the Dollar and Gold are allowed to adjust to a certain extent in terms of each other, it is easy to see how the undervalued money (Gold) has gone into hiding while the overvalued ‘money’ (Federal Reserve Notes) have flooded into circulation.

Early American Attempts at Fiat Paper Money

Perhaps ironically, America’s first attempts at fiat money began before Lexington and Concord. Before the French and Indian War. And even before the 18th century had seen the light of day. The first government issue of paper money came in 1690 in the colony of Massachusetts. It had become a custom there to embark on plundering missions into Quebec and then use the proceeds of the missions to pay off the soldiers upon return to the colony. In 1690, however, one such mission was unsuccessful so there were no spoils to distribute. In order to placate the soldiers, the colonial government attempted to borrow the required money from local merchants. However, these merchants had a rather dim view of the creditworthiness of the government and refused. In an ill-fated decision, the government of the Massachusetts colony then decided to issue paper notes with the promise of both redeemability and that the issuance was a one-time affair. They ended up being wrong on both counts.

These endeavors continued almost constantly up to and through the American Revolution with two predictable results: the notes issued always depreciated versus the competing specie money and the amount of paper notes issued got larger with each subsequent attempt. These comparisons are important to make when connecting early monetary ventures to what is going on today.

The “Continental”

Early in the American Revolution, the Continental Congress ran into the serious issue of funding and opted to look towards fiat money for the solution to the problem. Unlike some of the previous redeemable fiat ventures, the ‘Continental’ as it became known was not to be redeemable at all, but would rather be dismantled after the war ended by using taxes paid by the colonies. While this was a temporary solution, it carried the double whammy of inflation and taxation for the colonies. Certainly, sacrifices had to be made, but what is most interesting is what happened next. From 1775 through 1779, the supply of Continentals exploded by over 1800%. Predictably, the value of the Continental in specie (silver) had fallen to 42:1 from a beginning value of 1-1.25:1. By 1781, with the war still raging, the value of the Continental had fallen to a negligible 168:1. Comparatively speaking, today’s fiat dollar which traded with specie (gold) before the Great Depression at a rate of 20:1 now trades around 950:1 – a similar hyperinflation although over a much longer period of time.

The Supply of Continentals - 1775-1791

The next step taken by the colonial government was to impose price controls and attempt to dictate the market value of the failing currency. These efforts flouted several of the laws of economics, the first of which is that you cannot run an effective paper money system without confidence. The second is that price controls create shortages by artificially setting the market price below that of the equilibrium price as is illustrated in the chart below:

Effects of Price Controls

With the impending failure of the Continental in 1779, the Congress resigned itself to allow the Continental to depreciate unredeemed into worthlessness. However, and tragically, the Congress then resorted to issuing loan certificates for the purchase of goods and services from Colonial merchants and refusing to pay anything in else. Soon enough the certificates became used as a currency and, much like their brother the Continental, began to depreciate. Here’s the important part though. Instead of allowing the certificates to be redeemed at a depreciated value, they were carried into perpetuity and the permanent Federal debt was born. This unpaid bill is better known today as the National Debt.

The Bank of North America and Robert Morris

In 1781, Robert Morris introduced a bill that created both the first commercial bank and the first central bank. The resulting catastrophe, headed by Morris himself, opened in 1782 and quickly ran into problems. The first of these problems was our old friend confidence. Americans, already weary of paper notes due to decades of failures, inflation, and broken promises just couldn’t shake the perception that the new bank’s notes were being inflated compared to the still-existing specie. The bank, in an extraordinary move at the time actually went as far as to hire people to promote the new bank and its notes and to insist on redemption for specie. Obviously the idea here was to gain the confidence of the public by demonstrating that the notes were in fact worth something. Paradoxically, today’s Fed doesn’t even try to maintain an illusion of backing or intrinsic worth.

The First Bank of the US – 1791 (above)

This first experiment into central banking lasted barely a year as in early 1783 Morris moved to end the institution’s authority as a central bank and shifted its focus to commercial activities with a Pennsylvania charter. Although short, it was one of many important steps in the establishment of a central banking authority. Perhaps most importantly, the population grew more accustomed to using paper money. By the 20th century, specie was removed from circulation in totality while the ability to redeem still existed. Eventually, redeemability was suspended as well, leaving us with a paper currency with only implicit worth. In 1971, in a final blow to sound money, settlement of foreign debt in specie was suspended as well. What has transpired since has been a slower, but eerily similar version of the demise of the Continental.

In conclusion, there is absolutely nothing wrong with paper money in and of itself. It can actually serve a valuable purpose in that it is more portable, easily divisible, and in the case of the grain banks thousands of years ago, was much easier than moving bushels of wheat. However, the predilection of those charged with running these types of operations has been to coerce and conspire to rob the people of wealth through stealth. Whereas it would have been exceedingly problematic to confiscate a farmer’s grain without incurring his wrath, it was magnificently simple to inflate his wealth away through the over issuance of grain receipts. The parallels between these early experiments and what goes on today are astounding. We as a people still haven’t gotten our heads around the idea of inflation – the over issuance of fiat paper money – and the confiscation of wealth it represents. What could never be done through direct taxation has been done under another name, right under our very noses, and in plain sight.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.sutton-associates.net and clicking the free report banner.

Sources:

“Man, Economy, and State” Rothbard, Murray N. Mises Institute.

“A History of Money and Banking in the United States” Rothbard, Murray N. Mises Institute.

Disclosures: Long GDX

Congress Deserves an Oscar for AIG 'outrage'

by TwoCentsEditor

Published on: 03/18/2009

Categories: Current Events

Comments: 4 Comments

Politicians on Capitol Hill have done their very best to muster up an acceptable amount of rancor over the AIG bonus checks that went out last week. Ironically, the gang of 535 are more interested in getting back $165 million than finding out where the TRILLIONS in Federal Reserve ‘gifts’ to big banks, brokerages, and other financial institutions have gone.

There is no need for any of this political grandstanding. The US Government owns a near 80% stake in the failed insurance company and as such could simply retract the bonsuses through a shareholder action. There is no need for hand-wringing, negotiations, or incessant hearings on Capitol Hill.

Secondly, the chief of AIG insisted that “when you owe someone money, you pay it back” referring to the fact that these bonsuses were contractual agreements. However, the Congress has had no problem suggesting that bankruptcy judges modify subprime residential mortgages (which are also contracts), so the small matter of the $165 million shouldn’t be an issue from a contractual standpoint.

Perhaps most importantly, the AIG bonus situation is non-issue in comparative terms and is meant to absorb the public’s outrage while the vast majority of TARP and other Fed disbursements go unaccounted for. By my calculation, the $165 million is exactly .61% of the money that has been spent in the people’s name so far (that we know about) in dealing with the financial crisis.

The hystrionics of both political parties are a nice piece of acting, but should further establish that they are much more interested in protecting the status quo than the US taxpayer.

Citigroup gives profits to taxpayers

by TwoCentsEditor

Published on: 03/10/2009

Categories: Current Events

Comments: No Comments

Don’t hold your breath on the headline; it is very unlikely to happen.

Citigroup CEO Vikram Pandit said today that his company is now making money and having a great 2009 so far despite the fact that the firm’s stock dropped below $1/share last week. If this is truly the case – if the firm is actually making money - that money should immediately be refunded to US taxpayers. Why? Because it is ours, tha’s why. Hundreds of billions have been shuffled the way of this zombie of all zombies on our behalf in a futile attempt o pick winners and losers in the ongoing financial crisis.

We will find out shortly enough if this morning’s assertions were actually true or if we have just witnessed yet another effort to pump another diluted and essentially worthless stock. My optimistic side hopes for the former, but common sense leans firmly towards the latter.

A Look Inside the Numbers

by TwoCentsEditor

Published on: 03/06/2009

Categories: Economics, My Two Cents

Comments: 3 Comments

The much-anticipated employment situation report for February 2009 has now been released. Markets breathed a sigh of relief, following recent conventional wisdom that things could have been much worse. Clearly they could have been. Clearly they are. December and January’s numbers were both revised much higher (577,000 to 681,000 and 589,000 to 655,000 respectively). There is little doubt that when next month’s report rolls around that the current stated loss of 651,000 will be revised much higher as well; likely to the 700,000 area.

Unemployment Chart

What is even more alarming is that these numbers don’t include what could be called partially discouraged workers. These are the folks who are working part-time, but not by choice. They’d like to work full-time, but have either had their hours cut or are unable to find full-time employment. There are now over 9 million of these folks in the United States according to Bureau of Labor Statistics (BLS). We’ll take a closer look at this segment of the labor force later in the article. While it is understood that the methodologies of BLS are largely political and are compromised in terms of relevance, the trends are still helpful in terms of extracting clues about where things are headed, and getting an idea of exactly how many folks are under job-related duress.

Forced Part-Time Workers

Looking at the aggregate numbers – in what has become a recurring theme – government, education, and healthcare were the only three areas in which there was growth in February. These three areas added 35,000 jobs during that time. Here is a brief summary of some of the more notable industries:

• Goods-producing industries lost another 276,000 jobs in February for a grand total of 1.456 million just since September 2008.

• Manufacturing lost 168,000 jobs in February for a total of 891,000 since September 2008. Most of these losses were concentrated in the durable goods, tool, and machinery sub-sectors.

• Construction lost 104,000 jobs and the once-venerable sector has shed a total of 551,000 jobs since September 2008. The industry has lost 1.1 million jobs since peaking out in January 2007.

• The service sector has been hit particularly hard, losing 375,000 jobs in February and a grand total of 1.77 million just since September of last year. A healthy portion of these losses have occurred in the financial arena including investments, credit intermediation, real estate, mortgages, and banking.

One area that has held up reasonably well so far is leisure and hospitality. This industry is ripe for a pullback, however, as Americans continue to cut back on discretionary purchases. Stories of free hotel rooms in Las Vegas and other trendy tourist spots are becoming more and more commonplace as firms in the sector engage in a frantic race to capture waning consumer dollars and cover their fixed costs.

Compromised workers – a more accurate measurement?

Perhaps a more useful measure is the degree to which incomes and earnings have been compromised. To get a reasonable representation of this, we can take the total amount of individuals on unemployment and add to that the number of individuals who are working part-time for economic reasons. This does not include people who choose to work part-time, but have to. When you add these two groups together, you come up with almost 23 million Americans or nearly 15% of the workforce. Compare this with the BLS advertised 8.1% rate and you see a very different picture.

Unemployment Rate

To get a better idea of the scope of the ‘unemployment’ problem, add in the people who are given the choice of taking a pay cut or losing their job plus those who have fallen off the unemployment rolls. Let’s mention one more group in here too. What about the people who retired over the past few years only to find their retirement accounts wiped out and who are now in need of work? While there is no way to easily track these folks, the anecdotal evidence suggests that this group is much larger than most policymakers and pundits would care to admit.

'Compromised' Workers

Like it or not, to one degree or another, all the aforementioned folks are unemployed, even if only partially, in that they’ve lost a portion of their income. Compromised incomes translate directly to lost consumer spending, which translates directly to lost GDP. The bottom line is that these folks don’t spend much money. Nor can they easily be induced to borrow especially to purchase discretionary items.

MTC Economic Distress Index

Confusing isn’t it? So many numbers lead to even more interpretations, so we’ve tried to make this a bit simpler for folks. To do this, we created a weighted index which takes into account compromised workers (from the data in the chart above), consumer prices (domestic purchasing power), the trade-weighted Dollar (purchasing power abroad), and the burden of consumer credit. We update the numbers each month and the chart (seen below) each quarter. Due to the lag involved in gathering credit numbers, the current index is for January 2009. To give a better graphical representation of the impact over time, we ran the data series back to January 2000. Further explanation of the chart and data as well as updates may be found at:
http://www.my2centsonline.com/edi.php

MTC Economic Distress Index

12/08 = 160.93; 01/09 = 163.37 (1.52% – 18.19% Annualized)

All of the data listed herein only serve to illustrate and underscore the need for America to focus on productive employment. Emphasis on productive. Government attempts to spur employment by increasing the hiring rate of paper-pushers, government bureaucrats, and regulators produces nothing and in fact constitutes a further drag on economic growth. Private sector investment at this time is key to reviving America. What we need in this country is another industrial revolution. ‘Free trade’ agreements need to be recognized as being unfriendly to American prosperity and summarily fed to the shredder. The sooner the better. Otherwise, there will be little in the way of prospects for future employment reports and our economy will be further devastated.

Don’t miss out on your free copy of our report “The 7 Mistakes Investors make..and how to avoid them”. Get your copy today by going to our website www.suttonfinance.net and clicking the free report banner.

Disclosures: N/A

Who runs the Country?

by TwoCentsEditor

Published on: 03/02/2009

Categories: Current Events

Tags: business, Congress, democrats, finance, house of representatives, investing, investments, lies, money, obama, political, politics, republicans, Senate, stocks

Comments: 7 Comments

By Fred Carach

In American history there have been two great defining elections. All other American elections are insignificant in comparison. The first great defining election was the election of Abraham Lincoln in 1860 that ushered in the great period of Republican Party dominance, which lasted from the civil war until the Great Depression. The second great defining election was the election of Franklin Roosevelt in 1932, which ushered in the great period of Democratic Party dominance.
This dominance has just been re certified by the recent election of President Obama.

After the historic election of 1932, the Democrats faced a shattered opposition. Just as they do today. The Democratic Party then dominated politics at every level of government. The overwhelming majority of all the mayors in the country were Democratic . The overwhelming majority of all the state legislatures were Democratic. The overwhelming majority of all the state governors were Democratic. Democrats dominated both houses of Congress and the president was a democrat. Nothing has changed in 77 years. Eight decades later the dominance of the Democratic Party at every level of government is almost as total as it was in 1932.
Nothing better demonstrated their strangle hold on political power than their absolute domination of the House of Representatives for 62 straight years from 1932 to 1994. Under our system, command of the house alone granted Democrats perpetual blocking power over all legislation.

What two party system are people talking about? The simple truth of the matter is that we do not have a two party system in this country and have not had one since 1932. What we have is a one and a half party system, which is pretending to be a two party system. The only level of government at which the Republican Party is competitive is the presidency. Remove that and there is nothing left.

The question that has to be asked is how has the press missed this? Are they really that stupid or are they just pretending to be that stupid? The truth of the matter is that I just do not know. Both presumptions seem equally plausible to me.

As for the Democrats, the Republicans serve a very useful purpose. They are the perpetual fall guy and whipping boy of the Democratic Party whenever things go wrong. Just ask yourself what would the Democrats do if it ever dawned on the people that the lion’s share of everything that has gone wrong in this country since 1932 was the fault of the Democratic Party? Things could get very ugly. Besides they like having the Republicans to kick around.

We now come to the vexing problem of the alleged power of the presidency to influence the economy. This idiotic belief is something that the Democrats have had a field day promoting ever since they rose to power in 1932 with their vicious attacks on President Hoover. Since their control of congress since 1932 has been almost perpetual and the presidency is the only branch of government in which the Republicans are competitive. There are enormous rewards for the Democrats in shifting the blame for economic hard times from congress where it belongs and in promoting the myth of presidential economic responsibility.

This domination not only extends to their control of the press but to popular beliefs as well.
Consider this, all my life I have wondered why the Hoover Dam was called the Hoover Dam
instead of the Roosevelt Dam. After all, we all know that after the stock market crash of 1929 President Hoover and the Republicans sat around in a stupor and did nothing while the country went to hell. Don’t we? Then the heroic Democrats took over and saved the country in the 1930s with their huge public works projects. The most massive of which was the Hoover Dam and the magnificent Golden Gate Bridge.

Recently, I was stunned to discover that the Hoover Dam and the Golden Gate Bridge and god only knows what other major public works projects of the 1930s were authorized not under Roosevelt which is what we all believe but under President Hoover!

How sweet it is! This is domination, total and complete.

When the Democratic Party took control of the country in 1932 their position was ideal. They had assumed power when the country was at rock bottom. Things could not possibly have gotten any worse. The stock market had lost 91% of its value and 5,000 banks had failed. The unemployment rate was at 24%. If they had done nothing for the rest of the decade except giggle stupidly at themselves the economy would have improved.

They instead embarked on the most advanced economic thinking of the day. Keynesian economic theory, which held that vast government public work programs was the solution to the depression. It should have worked but it didn’t.

I would have supported these programs. Just as I support public works programs for today’s recession.

The failure of these public works programs to end the depression is astonishing. The unemployment numbers are so bad that it is hard to believe them. In 1932 the unemployment rate was 23.6%. In 1933 it was 24.9%. In 1934 it was 21.7%. In 1935 it was 20.1%. In 1936 it was 16.9%. In 1937 it was 14.3%. In 1938 it was 19%. In 1939 it was 17.2%.

Then salvation came. It was the armaments production of World War Two that saved the day. Not Keynesian public works projects.The 1929 GDP was not exceeded until 1943 well into the war. It was not until 1955 that the 1929 stock market peak was exceeded.

The Democratic propaganda machine is a Juggernaut. Almost everyone believes that the Democratic Party and its vast public works projects saved the country in the 1930s after the stupid, do-nothing Republican Party had wrecked it. The Republicans don’t stand a chance. They don’t have a chance!

The American people in their ignorance have been adamant since day one that when the economy goes south the person to blame is the president. The problem with this cherished belief is that when the economy blows up the president cannot possibly be blamed because the constitution does not grant the president economic powers. Only congress is granted economic powers. There can be only one possible explanation for this belief. At least 80% of the American people must have been in a stupor when the constitution was being explained to them in civics class.
The president is commander-in-chief of the armed forces and the chief executive officer or CEO of the federal bureaucracy. And he is the co-equal with the congress in diplomacy and foreign affairs. And that is where his powers end. His powers to influence the economy for good or ill are zero, Nada, zip.

The constitution grants congress total political power to influence the economy through its monopoly power to write laws effecting the economy and its power to spend money. Consider this; congress has the power to remove the president from office. But the president cannot remove one single member of congress from office. Congress can override the president by overriding his veto and thus impose its will on the president.But the president is powerless to override the will of congress if his veto is not sustained.

At this point some cretin will step forward and allege that while all this is true it is usually the case that congress follows the will of the president. You cannot be serious! What fantasy land have you been living in! Everything depends on which party controls congress. If his party controls congress, the president has a reasonable chance of getting something that vaguely resembles his proposal through. And this holds true only if you do not make the mistake of reading the legislation. If you read the legislation you are in for a rude disappointment. You will find that there is a yawning gap that looks like the Grand Canyon between what the president proposes and the legislation that he finally ends up signing. If on the other hand the president’s party does not control congress, forget it.

Recently, we have had a textbook demonstration of who holds the whip hand. When Treasury Secretary Paulson on September 20, 2008 presented President Bush’s now notorious $700 billion TARP program to congress. The proposal was written on three and a half pages. After he got through whining and begging the imperial congress presented the president with its own TARP program. A 450 page detailed document that after the president signed it had the force of law. Case closed!

Who runs the country,the Democratic Party? Who is responsible for the economy, the United States Congress?

Fred Carach is the author of the book, “Forty Years A Speculator” and his essays and pod casts can be viewed on his blog at fortyyearsaspeculator.blogspot.com

A Game of Confidence

by TwoCentsEditor

Published on: 02/27/2009

Categories: Current Events, Economics, My Two Cents

Comments: 4 Comments

A scan of the financial and economic landscape of any society during solid, genuinely prosperous times will always reveal a populace brimming with confidence. Confidence in their ability to make a living, confidence in the ability of their leaders, confidence in the workings of their financial markets to whatever extent they exist, and ultimately confidence in the strength of their money. These factors are all interlocking directorates; take any one of them away and you’ll witness an economy that is no longer efficient and begins to stumble. Take them all away and you’ll witness unbridled economic chaos.

It is the latter statement that causes me to reflect this week on the prospects for our return to prosperity. We have had the opportunity over the past year to listen to many speeches from Presidents to heads of Treasury and the Federal Reserve. Many men and women – bright men and women, have weighed in and opined on our current situation. They’ve spoken of stimulus, of consumer spending, government spending, bridges, roads, healthcare, energy, banks, and many other topics too numerous to count in this short space. However, what I haven’t heard nearly enough mention of is confidence even though the stated purpose and intent of these speeches has been to inspire the same.

The confidence of consumers

One report in particular has made some inroads in terms of getting coverage of the precipitous drop in overall consumer confidence. And in fact, the most recent release of the Conference Board’s measurement of consumer confidence was the worst in history since measurements began more than 40 years ago. Perhaps the worst part of this report was the expectations component, which absolutely fell off a cliff, plunging from a level of 42.5 to a 27.5 level. The jobs component of the report was no better. 47.3% of those surveyed expect there to be fewer jobs in the future with a mere 7.1% expecting more jobs. 4.4% thought jobs are easy get with nearly half (47.8%) opining that jobs are very hard to get. The chart below tells the awful story.

Consumer Confidence Chart

It is fairly easy to see how the lack of confidence has translated into overall drops in retail sales. Sure people are spending less for gasoline (a major component of retail sales) than they were a year ago, but they certainly aren’t buying anything else in its place either.

This situation, however, goes way beyond some numbers reported every month. It goes to the very heart of the opening paragraph. Confidence is the key to a successful economy, particularly ours, which is so heavily dependent on the consumer taking on debt and spending money. In order to perpetuate this dynamic, the consumer needs to have utmost confidence. As last 2008’s failed stimulus package demonstrates, simply handing money to consumers who are not confident will result in the money being saved or used to pay off existing bills. No confidence, no spending. It’s as simple as that.

Collapse of retirement contributions a referendum on confidence in the financial system

Whether it is along with, beside, or because of consumer’s confidence, equity markets on a global scale have crashed in grand form over the past year. Sure, not all of that was caused by the little guy selling his 401(k)/IRA and going to cash. It is our opinion that the little guy actually represents a relatively small component of the overall money invested in the markets when leverage is factored in. However, the little guy’s actions have still had major ramifications. Consider the following:

• 529 plan contributions are down an average of 60% from 2007 according to a 529 plan representative who materialized at my office door a few weeks ago

• According to TD Ameritrade, 63% of people with retirement plans stopped contributing to them in 2008

• Only 21% of individuals surveyed in the above study had more than $50,000 in investable savings

• Unemployment (32%) and increases in health care premiums (25) were the leading reasons why people stopped contributing to retirement plans in 2008

• Nearly 25% of survey respondents in the 35-44 age group said they’d completely stopped contributing to retirement accounts in 2008. This more than any other group

While complete data for 2008 contributions is incomplete due to the fact that 4/15/09 is the deadline for 2008 IRA contributions, it is relatively clear that 2008 contributions will be down significantly. This problem is two-fold. The first is many people don’t have the funds to invest. The second is that they have lost confidence in the markets and their ability to protect (let alone grow) capital. This reality is unfolding at an unprecedented time in history – a time when people can least afford to be caught without savings.

Job loss – the ultimate confidence-killer

As now more than 600,000 Americans each week are realizing, the loss of a job is one of the most stressful events one can endure. There is an old adage that it is a recession when your neighbor loses his job, but it is a depression when you lose yours. This is not meant to trivialize the matter of unemployment in the least, but rather to underscore the effect that the loss of one’s livelihood has on confidence. As can be expected, consumer confidence has plunged as job losses continue to increase.

Unemployment Graph

Next Friday’s unemployment report is likely to feature an unemployment rate well north of 8% not counting the thousands of workers who lost their jobs in late 2007 and early 2008 that have now fallen off the unemployment rolls and as such are no longer counted. By our count, there have been nearly 2.4 million first time claims for unemployment in the past 4 weeks alone and the trend shows no signs of slowing, at least not in the short term. While unemployment insurance lasts up to a year (depending on the state), it only covers a portion of lost earnings. A good average is probably around 60%. I don’t know about you, but I don’t know too many people who can maintain their current standard of living on 60% of their income – or are even willing to try.

Money – A True Crisis of Confidence

Confidence in the monetary system of the United States has been a true lagging indicator. Inflation at a rate of 5% or so per year has been institutionalized in the system for as long as anyone can remember. Keynesian economics teaches us that this inflation is a normal by-product of growth and should be accepted with glee, which is absolute nonsense. This is akin to welcoming a burglar into your home and offering him 5% of your belongings then chalking it up as a cost of living.

However, even the most regular of folks are starting to wonder where the trillions of dollars for their retirements, healthcare, financial system bailouts, various industry bailouts, state bailouts, government spending, and other pet political projects are going to come from. The fact is we’ve crossed the Rubicon in this regard. The world no longer creates enough savings to cover our massive balance of payments and fiscal deficits. And remember, one in three Americans have less than $50,000 in savings to deal with this. Everyday Americans are starting to wake up to the reality that this money doesn’t exist and must be created from nothing. That certainly doesn’t bode well for their confidence in the value of the currency they carry in their pockets. It can no longer be called money, because to call it money is to imply that it is a store of wealth and acts as a standard unit of exchange.

A real store of wealth holds its value and maintains purchasing power. The US dollar has lost around 96% of its purchasing power since the Fed was created in 1913. Other paper currencies are not far behind. This reality has driven record demand for gold and silver coins as the public awakens and attempts to diversify out of paper. This overall loss in confidence in paper assets is what drives mainstream columnists to attack gold as a ‘useless rock’ and float the false notion that people who bought stock after the 1929 crash got their money back in a few years when in fact it took a few decades. Remember, it is all about confidence.

In the end, the financial crisis of 2007-? will be summed up as a fairly simple process:

1) Confidence shaken

2) More debt accumulated to maintain confidence

3) Confidence further shaken

3) Even more debt accumulated

4) Confidence lost because of all the debt accumulated

For in fact during the early stages of the crisis, policymakers and pundits alike were busy talking about strong economic fundamentals and failing to address the root causes of the problem when it might have mattered. For nearly 9 months the current depression brewed before Fed head Bernanke and Treasury Secy. Paulson were even willing to admit that a problem existed outside the banking system. The entire sum total of their efforts was to maintain confidence. It was a dangerous gamble that has proven disastrous and they’re about to learn the hard way that while you might be able to create a bailout for big banks and big government, there is no bailout for confidence.

Disclosures: Long GDX

Another Hit and Run

by TwoCentsEditor

Published on: 02/13/2009

Categories: Current Events

Comments: 12 Comments

In eerily similar fashion to last fall’s financial system bailout, the American people are once again having another piece of legislation jammed down their throats without their elected representatives even having a chance to review it. This by a new administration; one that promised that such things were of the past. However, when it comes to pork, all politicians are the same and this new stimulus bill has now grown to well over 1000 pages in the hours before the final vote.

The bigger question is how could an elected representative in good conscience vote for something they haven’t even had a chance to look at? At the very least, this is despicable behavior. This bill of goods has been sold under the premise that if something isn’t done within days that the economy will collapse. This is utter nonsense and fear-mongering – nothing more. An economy doesn’t collapse over a period of days. It has taken us well over 2 years from the beginning of the blowup just to get to where we are now. Certainly a few weeks could be taken here to at least give due diligence before committing the equivalent of fiscal suicide.

Unfortunately, by the time we actually learn about the content of this ever-changing bill, and its ultimate impact on us as citizens, the time for action will be long gone.

Twelve Zeros Worth of Protectionism

by TwoCentsEditor

Published on: 02/06/2009

Categories: Economics, My Two Cents

Comments: No Comments

Protectionism has clearly become a dirty word. Unfortunately, those in the position of dispensing awareness and perspective obviously have no idea what true protectionism is. If it were explained properly, I would venture to imagine that most here in America would be in favor of it. After all, it applies directly to us and our standard of living.

In the 1990s globalization was presented to the nations of the world. Terms like competitive and comparative advantage became part of business lore. Americans, already punch drunk from a 25-year assault on the purchasing power of their currency, were sold on the promise of inexpensive imported goods. These goods would be made elsewhere and moved on barges powered by oil that would be cheap forever. While the former was certainly true, the costs of such shortsighted thinking were largely ignored by those in Washington. We are now witnessing the effects of those costs firsthand.

“We cannot afford a trade war”

This week, Senator John McCain proposed an amendment to the pork-laden ‘stimulus’ package that would have effectively wiped out the ‘Buy American’ clause in the package. Essentially this clause stated that any government or public building projects had to use steel that was produced in the United States. Having already lived through the obliteration of this iconic industry once, the ‘Buy American’ clause was very encouraging. However, it appears that in this regard, it will be business as usual, maybe not because we want to, but now because we have to.

To put it simply, America can no longer live on its own production. This is no surprise and has been the case for quite some time. However, we are in a position now where a little leverage might come in handy. Our economy is bleeding jobs and we need to be able to maintain and promote American manufacturing. And contrary to the tenets of globalization, there is absolutely nothing wrong with producing our own goods and services and we should be doing exactly that.

While the argument will be made that our trade partners cannot afford not to trade with us, it is much more likely that they can remain solvent far in excess of our ability to sustain ourselves. This is particularly true in the case of energy, the ultimate staple good. Despite the claims of many that we have enough oil right here in the US to last us umpteen years, even if that were true, you don’t just flip a switch and have oil flowing. History should have taught us that much. It takes years in many cases to raise these products, build a transport and distribution network and get them into the economy. Again, we have no leverage.

And in reality, why do these countries need to trade with us anyway? Much of what they get in return is nothing more than IOU’s on fancy paper.

The chart below illustrates our trade gap in terms of actual goods – goods we either aren’t able to or currently do not produce ourselves.

US Trade Statistics (Goods only – in Billions of Dollars)

Year*	Exports	Imports	Balance
2007	1,148,481	1,967,853	(819,373)
2006	1,023,109	1,861,380	(838,270)
2005	894,631	1,681,780	(787,149)
2004	807,516	1,477,094	(669,578)

*2008 Final Data Available on 2/11/2009

In typical lukewarm fashion, the US Senate shot down McCain’s amendment in it’s version of what is likely to become a $3 trillion pork-barrel spending package in the coming weeks. For those who are counting, that is $3,000,000,000,000. However, what was most telling is that the balance of the Senate has no respect for American jobs or industry either. This was evidenced by the addition of a proviso that no existing trade agreements be violated by the bill.

This is what happens when you’re behind the eight ball. You have no leverage and little flexibility. In the case of trade, it is doubtful that we can even talk tough let alone back it up with substantial action.

‘Free Trade’ agreements and the Lowest Common Denominator

Another spin off of free trade agreements such as NAFTA is that in addition to driving our jobs overseas, they created a lowest common denominator situation where wages in developed nations came under downward pressure. The causal relationship is simple to illustrate. If a company can make something in Taiwan for example where GDP per capita is about 1/3 that of the US (Economist World in Figures 2007), then import the goods back into the US, the consumer will benefit from the cheaper good. Unfortunately, for every benefit, there is an equal and opposite detriment, and in this case, the jobs in the US which used to produce that good no longer exist. This is what has happened over the past 25 years or so. We chose instead to focus on a service economy where we basically shuffled papers and intangible goods amongst ourselves and called it an economy. All the while, we racked up massive external debts to buy the real goods we needed to survive.

I will allow that obviously this transformation has not been total. There are still some thriving industries in the US, but rather, I am referring to the net effect of the past 2 and one half decades. Much of the wage gap has been filled with various types of consumer credit whether it is credit cards or, more recently mortgage equity withdrawals. Obviously, as we have seen in dramatic fashion, these levels of debt accumulation proved to be as unsustainable as the dynamics that necessitated the accumulation in the first place.

The Solution?

While we have been showered with announcements that our trade deficit is improving, it must be noted that this is almost entirely due to the liquidation of 2008 (which crashed commodity prices) and the US-led global recession. Were growth to return to normal levels, we would immediately observe the trade deficit returning to its prior trajectory. By way of extension, the same situation exists in the case of the US Dollar. Fundamentally, nothing has changed. Media outlets and pundits alike are reading false signals created by the distortions of a debt-laden, fiat monetary system. It is something along the lines of going to an 80s movie where 3D glasses were necessary to make sense of anything. Only the guy at the door forgot to give them a pair.

For quite some time now this commentary has been a soapbox for the idea that we need to rekindle our productive economy. Never has that been truer than right now. We tried the globalization experiment, and in my opinion, it has been a dismal failure. Sure we got some cheap goods, but as a country, we’ve become dependent on others for our very sustenance. This is not an enviable position for anyone to be in, especially not for a country that wants to call itself an economic superpower.

That said the upcoming stimulus package could be used help return America to her pre-1980s position of industrial superiority. During the late 1800s and early 1900s, we ran large trade deficits and put them to work building an industrial base that was second to none. We have a chance to use the debt that will be incurred regardless for something productive. Simply handing people checks so they can go buy television sets (thereby sending the money to Asia) is not going to help anything. Rewarding zombie banks for past financial transgressions will not help anything. Taking the ‘stimulus’ and building industrial capacity, creating real jobs, and producing high quality products, however, would be a nice start.

Get a copy of Sutton & Associates’ free report – “The 7 Mistakes Investors Make…and how to avoid them” by clicking here

Disclosures: None

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