SeriousBull

Can the US bail itself out before crisis engulfs it ?

Tags: Currency + Dollar + Economy + Election + Market + Recession

The numbers are out and there are few bright spots on the American economic landscape.  By most any domestic economic measure: Gross Domestic Product, Employment, Manufacturing, US (Domestic) Corporate Earnings, Durable Goods Orders, Housing, Consumer Spending, Cost of Goods Sold (real CPI), Consumer Sentiment, Energy Prices, Balance of Payments, Deficit, Dollar value, and Financial Condition, the US is in a world of

hurt and heading full speed toward what will likely be an extended Recession. Only Productivity, Exports, and the Administration’s optimism offer a glimmer of hope as layoffs begin to pile up.  The Iowa Caucus underscored two key messages: Americans want change and a focus on Domestic rather than Foreign Policy by their next leader.  Governor Huckabee’s message of helping small businesses and and a National Sales Tax played especially well as did Obama’s and Edwards’s message of “Hope” & “Time for Change.”  The fact that Senators Biden and Dodd, who each touted theirs seasoned Foreign Policy credentials, received a paltry 1% of the vote underscored the Domestic concern. But are these moderate populist’s possible given the circumstances now limiting US policy options?

The truth is a national sales tax is likely inevitable (ex food, health-care, essentials) as part of any tax reform package because the US must find new sources revenues.  SB would additionally not be surprised to see lower, or no, corporate taxes. This is because numerous sectors that used to power US growth now have such enormous, long term tax carry-forwards that they are essentially tax free entities any way–think Autos, Tech, Airlines, Internet, Telecom, and now Banks & Brokers. And yes, there are surely a few exceptions in each of these industries, but it is neither fair nor adequate to burden the few sector leaders who avoided debacles of the past to fund the US’s growing Revenue (tax) shortfall –besides that, it is the masses that in the end pay the burden. Quite an irony really, that whether the system is Socialism and Capitalism the common gene both share is that each relies on the masses to pay for the common good and to bail out government debacle.

Analyzing how we got where we are is always a good place to start– essentially we chose Guns instead of Butterand made the decision to finance it all. We stimulated multi-national corporate earnings noticing the trend of globalization without any program to cultivate and grow our domestic industries.  We failed to calculate the geometric multiplier effect of a negative growth scenario derived from too much liquidity.  And we focused on immediate, short term profit opportunities, hoping to find, rather than engineer a competitive strategy that might combat the growing forces driving domestic businesses to Asia.  When trade dynamics became inexorably unfavorable, we first relied on goodwill to cajole China into going against its national interest, and then weakened the Dollar to give US corporations a greater competitive edge when they refused.  In taking this ’free market’ approach the Federal Reserve surrendered  key economic tools to battle the entirely foreseeable ramifications created by the Financial sector’s blunder to lend to anybody, no questions asked, to make a buck. Regulators apparently opted to look the other way under what has to have been an ill-concieved plan to boost GDP growth and worry about the ramifications later.  Now the Fed finds itself in the quandry that lowering interest rates to stimulate the economy is at cross-purposes to our need to stabilize a too weak Dollar fewer that fewer investors desire to own. Should this quandary work against us we could have to raise rates to attract investors to finance the deficit at a dire cost to the domestic economy.  Meanwhile, our national banks and brokerage firms armed with near open-ended power, continue to issue unlimited amounts of Derivative securities the aggregate value of which is some score greater than the net worth of all world nations combined. The result is that capital formation has superseded US national interests such that the Financial sector now works with abandoned acumen to thwart Central bank monetary moves for profit like they are playing ‘Russian Roulette’ or some nightmarish version of hunter stalks prey.

The strengths of America are in its people, but it is likely that CRISIS will have to occur before solutions can be agreed upon and implemented. Though President Bush is gaining an understanding of the impact of ill-planned economic policy, he can do little more now than add another band aid fix as the Congress is out campaigning to replace him. Regulation is crippling the jobs creation engine of small business as “one-size fits all” legislation has been enacted to thwart big business white-collar crime. Costs of doing business can not be lowered to alleviate this problem without a good measure of Tax, Regulatory, and Tort reform. But alas, all of these mean cutting government spending, including downsizing government, which would additionally increase unemployment in the Accounting, Legal, and Financial sectors of the economy. This would come at a time when America can least afford any job loss.

Is there any solution then? SB believes that with some basic ‘Strengths & Weaknesses Analysis’ the US can improve it circumstance. Weaker global consumption impacts everyone and hopefully may buy the time for the new US Congress to formulate and implement sound economic solutions. Unfortunately SB’s recommendations to follow will require a measure of ‘tough love’ and deep consideration of moral choice–as well as a redistribution of income.

As a first step the US must implement a plan to thwart a US Depression (Yes, not Recession) even at the cost of a few institutional banking casualties. It should immediately cap Credit Card interest rates to extend the positive “consumer spending” engine which is running out of gas. This is preferable to lowering interest rates a fourth time as doing that does not help the Housing problem, the real problem of which is property devaluation. Moreover capping Credit Card rates would continue to support imports and shunt price increases overseas. Simultaneously President Bush should execute an Executive Order to freeze government Pension contributions until Congress can reform legislation to align Government and Civil Pension plan contribution and program benefit levels in line with the typical small business owner’s plan. This decree and legislation must also pertain to state and local ERISA plans which are on target to implode in most all these 50 states. Having the executive order apply to states and municipalities would stop additional debt issuance for this purpose which would prevent the ‘contra-effect’ of slowing state economies by indirect taxation of consumers. Since it is there (Government) pensions, time to take up the legislation would not be a problem, though admittedly, getting parity with business will be.

Secondly, the US must let the speculators fail and let housing prices naturally deflate. This necessarily includes letting financial institutions fail as well as those homeowners who speculated on lower, front-end, interest rate mortgage deals. Once the price bottom is reached buyers will hasten to pick up the bargains and these buyers will be good credit risks. This change of ownership will re-capitalize the banks that can be salvaged.

Next, President Bush should additionally ask Congress to pass a temporary, retroactive to 2007, tax reduction for individuals payers—something like raising income subject to tax thresholds (Adjusted Gross) for those earning $200,000 or less such that they pay no more than 10% tax. This should be coupled with closing loopholes to avoid tax on individual and corporate taxes while revising the Alternative Minimum Tax (again) to assure that those earning income on an EBTDA basis (earnings before Tax, Depreciation, & Adjustment for Tax Free and/or Foreign Tax Exempt Income) are taxed on a graduated level for income above $200,000 at the Individual level and $500,000 at the Corporate level. Both of these measures (Credit Card Interest Rate Caps and Tax Reform) are suggested to be used as stimuli to domestic consumer spending. For its part Congress should rescind earmarks just authorized, and President Bush should work to facilitate a sharp increase in foreign purchases of US real estate and Financial Institutions. This would repatriate Dollars and alleviate dollar devaluation while returning to the Fed some measure of monetary control. For China and the Arab world with Petro Dollars it would at once give them a place to invest (and deposit) their Dollars without realizing currency devaluation as well as a way to easily meet US Banking capital reserve requirements. This is a necessary part of the US’s solution because of the fact that the the US has been mortgaging its future tax revenues by the sale of US Treasury and Agency issues at an alarming pace. Should foreigners who own them lose faith (because they are losing money) in US debt instruments they might sell-off their government securities resulting in less demand and drive up interest rates thereby increasing the cost of US debt service. Indeed, with the need to finance $9 Trillion plus of national debt that would, needless to say, not be good. It is preferable to invite them to be equity owners.

The next part of the solution is to increase US Exports of goods, already mentioned as a bright spot in an otherwise gloomy horizon. To increase our slice of the pie we must streamline US technology transfer just like we have the export of infrastructure materials. This would include computers and nuclear reactors for utility plants, but also weapons. The Bush Administration has successfully created demand for US Weapons as the Arab nations seek to protect themselves and is working on alienating Russia to create a threat in Europe. With now double high energy prices, the threatened Arabs have more means to buy weapons while Europe has a great currency advantage—effectively they can buy at our 50% off sale. This is an unfortunate moral dilemma perhaps to many, but as the largest Arms dealer in the world the US can hardly, at this time, curtail optimizing these sales.

Finally, the new President and Congress must reallocate US spending, cut Defense appropriations, develop a viable US Energy policy, and get out of Iraq. Future foreign policy must emphasize Growth in productive, commercial goods and on savings to self-finance its debt to put American back on sound footing. It will take years to engineer a turnaround from where we are and it will not come without pain, nor without druthers. Nevertheless the time to begin is 2008.  The question is will we or won’t we rise to the challenge? Waiting is not an answer as taking no decision may be accepting others answers.

January 4, 2008 - Economy