Monday, December 22, 2008

Chrysler & GM Do Not Resuscitate

The idea that the Tiny Two ( GM & Chrysler) have been saved by the TARP Funds is comical. This is no more true than saying that the brain dead patient on life support is "saved" by the court order not to turn off the respirator. In both cases, neither of them will get up from their deathbed and carry on normal activities. The auto companies and the patient are both dead, it's just that the people who still want them to be around for a variety of reasons are not ready to pull the plug.

This circus will go on for quite some time, as it usually does in cases where only government intervention is keeping someone "alive". The truth is that Chrysler was dead when Daimler Benz sold them to Cerebus. Even Chrysler admitted it when they said, “Cerberus has advised the Treasury that it would contribute its equity in Chrysler automotive to labor and creditors as currency to facilitate the accommodations necessary to effect the restructuring.” Another very revealing statement, “Unless Chrysler’s labor costs can achieve parity with the foreign transplants and without the restructuring of Chrysler’s debt,” Cerberus announced. “Chrysler cannot be restored to long-term health and the government loan will be unlikely to be repaid.” came from Cerebus. This show us that even MBA private equity types make mistakes. The only difference between them and us is that their mistakes turn out to be doosies.

GM's partial restructuring will enable them to limp away from the billions of dollars owed to bondholders, while benefiting from the death of Chrysler. I would grab up the Jeep name plate as it will be available for a song. This will also let them make a claim that they are a much larger company, the same way little lizards puff up their chest to try to intimidate would be attackers. But, they will not have gotten rid of the UAW, which is really killing them.

How long will this GM Mini Series play out? My guess is only until the real recovery starts, or the final payment to the VEBA is made, which ever comes first. Once they have fully funded the VEBA, the UAW will have little reason to keep them around. This is not so much a bailout of GM, as it is a bailout of the UAW. If the economy recovers before then, and other businesses that have not received bailouts are back on their feet, what will GM say is their Raison D'etre?

Sunday, December 21, 2008

More of the Same! Won't Fix it This Time!

When I am advising someone whose efforts are not producing the results they seek, there are several expressions I've picked up along the way that come to mind immediately. The first one goes something like this: "If you want more of what you have, do more of what you are doing". If that doesn't work, the second one is a little sharper, and more to the the point: "Doing the same thing over and over, and expecting different results is the definition of insanity". If they aren't with me after that, this last one is self evident, unless you work in Washington: "When you find yourself in a hole, first stop digging".

Based on what I read and hear today, I've come to some conclusions. Our political class has gone insane. They'd rather enjoy the power that accrues to them in troubled economic times, and they are going to make things much worse on the way to trying to make things better. How else do you explain the way they are acting?

The new administration is putting together the mother of all stimulus plans in order to get our economy back on track again. The big problem with this kind of thinking is that it was this type of thinking that got us into this jam in the first place. The housing fiasco that set off the economic troubles we now enjoy is the result of a huge misallocation of capital brought about by a number of policy decisions, some of them misguided, and there unintended consequences. There are lessons to be learned from the housing debacle , but they are not the ones that seem to be getting all the attention. The lessons are 1.) Misallocating capital always ends badly, which also means that misallocating huge amounts of capital ends even worse. 2.)Eliminating the capital gains tax is a powerful incentive that draws investors to seek the higher profits it affords.

Providing tax relief to homeowners, by eliminating the capital gains tax on the first $500k in profit on the sale of a residence, was probably pretty good tax policy. You shouldn't follow it up with an easy money stance ( the Fed Funds Rate was held below 2% from December of 2001 until November of 2004) as the Fed did, providing artificially low mortgage interest rates and putting pressure on the value of the dollar, that invariably lead to an surge in inflation and a preference for real assets. If you do, you are you are walking down a very dangerous path. On top of that, you push banks to make loans to folks who can't pay them back, and it turns into an all out sprint, sending home prices soaring. The Fed reacted by tightening monetary policy, which started the downward spiral in home prices as the SEC dug in it's heels defending it's mark to market accounting rules that have help to gut the capital base of the banking industry.

The culmination of the unintended consequences of what many people considered to be good public policy has turned into the economic ilk we see all around us today.The question I have for our sages on the hill is this: Where did you get the idea that our economy would be better off if we invested more capital in our homes at the direct expense of investing less capital to make our businesses more productive? In others words, only crazy people say things like, "I might be unemployed but at least I have a big house I can't afford". My followup question is: Why are these same pols now insisting that the government pursue the same bad advice again on an even grander scale?

The lesson was: tax cuts provide powerful incentives to investors. What also should have been apparent is that tilting the playing field has consequences. It leads investors to favor one asset class over another. I propose that we once again level the playing field, by eliminating the tax on all capital gains. This would unlock significant capital from non productive assets, and provide a powerful incentive to the risk takers whose capital facilitates the business productivity increases that drive employment growth and higher wages.

The lesson that wasn't learned is that politicians are incapable of making policies guided only by sound economics. They are too busy providing favors for their political supporters in order to be able to count on them to fund their next run for office. Should I believe that the political class will do things differently this time? I don't think so. They never do. Instead, there will be a massive never ending orgy of pork to pay off the friends of the party in power. In other words, a misallocation of capital on a scale we've never seen before, the same thing that got us here, only several magnitudes larger.

The millions of entrepreneurial minds that together make up the free market are a much better bet to move us forward than the proven record of those whose failed policies have landed us in the soup. They just need a little incentive to get going again. So let's "Ax This Tax" and get on with the economic recovery.

Thursday, December 18, 2008

"You Can't Hit Two Targets with One Arrow"

The above quote is by Dr. Robert Mundell, the 1999 winner of the Nobel Prize in Economics,who correctly forecast that breaking the dollar's link to gold would lead to a severely weakened currency, a corresponding rise in oil prices, and the ensuing inflation of the 1970's.

In this quote he was referring to the Fed Funds Rate and the value of the dollar. Mr. Bernanke thinks the focus should be on the overnight interest rate the Fed charges to member banks. Dr. Mundell thinks Bernake is wrong. Mundell correctly attributes the Feds misguided focus on setting interest rates, as opposed to a policy of maintaining a stable value for the dollar, as the cause of many of the financial problems past and present.

Had Chairman Bernanke and his predecessor, Alan Greenspan, focused on maintaining a stable value for the dollar, the see-saw monetary policy of the last decade would not have happened. There would not have been a tight monetary policy of the late 90's to deflate the dollar, crater commodity prices and end the decade by blowing up and finally collapsing the stock market in 2001. There would not have been a reversal to an overly accommodative monetary stance, which proved to be the precursor of the housing bubble and banking crisis. The chairman would not now be trying to once again inflate our way out of the falling home price debacle.

The Fed's policy blunder on top of policy blunder proves just how erratic this monetary operating mechanism really is, and reveals the plain truth. No one including Mr. Bernanke can run the economy by trying to guess what one interest rate, the Fed Funds Rate, should be set at several times a year.

The Fed needs to get it's focus back on the value of the dollar, People don't transact business in Fed funds rates, but rather they use the dollar. It is the dramatic change in the value of the dollar that is causing this financial chaos, and it's not just a problem in our country. The dollar's troubles are felt around the world. The dollar is the world's reserve currency, it's change in value impacts every transaction priced in dollars, and every transaction done in currencies linked to the dollar.

A weakening dollar will not attract the capital that the US needs for recovery, and the higher interest rates that it will ultimately usher in will be an anchor around the neck of this struggling economy.

A stable dollar, who's value can be counted on by investors, will draw capital to the US and which will provide the low interest rates that Bernanke is trying to artificially engineer with his mountain of liquidity. It will also stabilize commodity prices and and wrest the inflation genie back into it's bottle.

Einstein once said the definition of insanity is doing the same thing over and over again and expecting different results. Who am I to argue with him?

Tuesday, December 16, 2008

My Recovery Plan

The first thing President-Elect Obama should do once he is sworn in is to sign into law my proposal, which you can read below. I worked out as many bugs as I could in the shower this morning, so it's a pretty complete plan. Trust me, it will be the fastest way to jump start our economy. It doesn't rely on government spending or tax increases, rather, just a little government coercion. This should eliminate much of the haggling in the Congress so we can get this done. The no-tax increase trick should make it filibuster proof, so we won't have to worry about those Senate Republicans. We all know how much those guys hate tax increases. I must admit I'm a little concerned about the lack of spending and being able to attract enough support from the other side of the aisle.

Our political class knows that only one thing stands between us and a full blown recovery: a trillion or so in additional government spending. Granted, there are a few who haven't gotten with the program yet, but they are mostly the extreme right wingers and libertarian types. You know who I'm talking about, the ones who drone on and on saying you can't spend your way to recovery, and how they earned the money and should be able to keep some of it . Hey, “spread the wealth around” is the slogan du jour on Pennsylvania Avenue. It's kinda of catchy, like the flu. Same headache, but without the runny nose.

Some of our more courageous lawmakers had warned that the three trillion or so in government spending planned for this year wasn't nearly enough. I know they said the same thing last year and the year before, but did we listen? No, and as a result we're in a recession. God forbid if they underspend now. We might even end up in a depression!

The more I think about my plan, the more brilliant I think I am ( Wow, I'm even starting to sound like them). I've even given it one of those fancy names to make it sound good. I call it the SUCER Plan!

Spending Unlimited Cash for Economic Recovery. It's pronounced “Sucker”!

The Sucker Plan is still in it's formative stages, so you need to give it a chance before you start tearing it apart. No haters, please. Hey, they passed that $700 Billion TARP plan and aren't even doing what they said they would do with the money. Besides, like I said, my plan won't cost the government a dime, and they won't have to raise taxes which will leave them with plenty of room to do both, in case my plan doesn't work. But it should work, trust me.

From what I see on the news about the other stimulus plans out there, there seems to be a difference of opinion as to how they work. Some of them say that getting the economy going is like starting a pool filter. You just have to prime the pump a little. Others say it's more of a jump-start thing, like when the battery in my Jeep runs out of juice. The economy needs a jolt. My plan, The SUCkER Plan, functions more like “Pennies from Heaven”. I'm sure this tag is going to offend some of those separation of church and state types, but I'm not using government money, so I think I'm safe.

Anyway, all the plans out there seem to be in agreement that a lot more money needs to be spent in a hurry, and it needs to be spent properly. It turns out that when the rebate checks were sent out this summer, some people had the audacity to pay off bills, and others were so blatantly un-American that they saved the money. Now look where we're at. Go figure.

My plan is based on a combination of sound Keynesian Economics and the ground breaking social work of Robin Hood . We all know it was the Lord Maynard Keynes who saved our butts in the Great Depression. Who can ever know how long the Depression would have lasted without the enormous government spending programs. Without the giant tax increases, it may never have amounted to anything worthy of being called great. Does any one deny the powerful incentive effects of higher taxes and increased government spending!

My plan is a charitable one as everyone, well almost everyone, will be taking from the rich and giving to the poor. This is the Robin Hood part, get it? We should probably exempt the politicians, as they generally aren't very big on using their own money for charitable giving, but rather prefer it's done with other people's money. Besides, they are busy coming up with their own spending plans, which will bring the recovery even sooner.

My plan builds on two economic principals that can't be disputed:

  1. It is a fact that consumers are 70% of all economic activity

  2. It is easier to spend other peoples money, rather than your own .

On to the plan. All stores will have two bowls by the front door. OSHA can determine their size, placement, and markings. I don't want to get bogged down in too many details. When you walk in, you will empty your pockets of all your cash and or gift cards into the first bowl. You'll then put what ever money is in the second bowl back in your pocket and go on to enjoy your shopping experience. The person who enters the store behind you will take all of your money from the first bowl and put all his or her money in the second bowl, and on and on it goes. The genius is in the simplicity.

See, no government spending, and no tax increase. In other words, this is the perfect plan. The reason this is not a tax increase is that it is a total confiscation of one's cash, whereas a tax increase just takes most of one's money. I call it a “Pennies from Heaven” approach, because “Pennies from Rich People” just doesn't sound as good.

Okay, for those of you in the slow group, here is why this works: because you are always spending someone else's money, you are going to spend more, ( just ask congress) and spending more money will get us out of the recession ( this is the Keynesian stimulus spending part). The Robin Hood part of my plan stimulates even more spending by people who have very little money by taking from the rich and giving to the poor. You see, when a poor person goes to the store he or she doesn't have much money, so he or she can't spend a lot, and that is part of the reason we are in this mess. Under my plan, there will always be more money for them to spend. The poorer people will benefit from spending the money of the rich people who enter the store. The rich will have to give up their cash, but they'll still be able to charge things on their credit cards, and they will. It would be a big waste of their time if they went home with nothing! Rich people don't waste their time. That's how they got rich in the first place.

Now, before all of you Einsteins tell me the plan won't work because the second bowl starts off empty, I've taken care of that too! We'll make each store owner put money into the second bowl to prime the pump, so to speak. This makes perfect sense, because they're going to get it back anyway when the customer shops in their store. See, I told you, it was brilliant!

Of course, it's possible there might be a flaw or two in my plan, but that shouldn't stop us. We can work things out as we move along (that's a fairly good imitation of Hank Paulson, don't you think?). What's important is that we do something (this is a pretty good imitation of pick your favorite democrat) and this is as good of an idea as any of the stimulus programs I've seen so far. It makes perfect sense to me. No?

Monday, December 15, 2008

The Laffer Curve Across the Centuries Low Tax Rates = Prosperity

The Confucious Curve
This Chinese Sage understood the principal of what people today know as the Laffer curve and it's implication for economic expansion and contraction as you can see from the following passage:

Duke Ai asked asked Yu Zo : It has been a year of famine and there are not enough revenues to run the state. What should I do ?
Zo said “ Why can't you use a 10 percent tax?
The Duke answered : I can't even get by on a 20 percent tax, how am I going to do it on 10 percent?
Zo said , “If the people have enough what prince can be in want? If the people are in want how can the Prince be satisfied”

- analects of Confucious (12:9)

The Tao Te Ching Curve
Was written in the fifth century BC it's author also understood the Laffer Curve. Chapter 57 contains the following passage:

Run the Country by doing what's expected.
Win the war by doing the unexpected.
Control the world by doing nothing.
How do I know this?

The more restrictions and prohibitions in the world the poorer the people get.
The more experts a country has the more of a mess it's in .
The more ingenious the skillful are the more monstrous their inventions.
The louder the call for Law and order the more the thieves and con men multiply.

So a wise leader might say:
I practice inaction and the people look after themselves.
I love to be quiet and the people themselves find justice.
I don't do business and the people prosper on their own.
I don't have wants and the people themselves are uncut wood ( naturally virtuous)

The Ibn-Khaldun Curve
The 14th century 's Arab economic genius wrote the following about taxes and regulations

In the early stages of the state , taxes are light in their incidence , but fetch in a large revenue; in the later stages the incidence of taxation increases while the aggregate revenue falls off

Now where taxes and impost are light , private individuals are encourage to engage actively in business: enterprise develops , because men feel it worth their while, in view of the small share of their profits which they have to give up in the form of taxation. And as business prospers ... the total yield of taxation grows.

From this you must understand that the most important factor making for business prosperity is to lighten as much as possible the burden of taxation

The Jean-Bapitise Say Curve had his take on the Laffer curve ( circa 1803).

A tax is not productive to the public exchequer in the proportion to it's ratio[rate] ... it had become sort of apophthegem, that two and two do not make four in the arithmetic of finance. Excessive taxation is a kind of suicide, whether laid upon objects of necessity , or upon those of luxury.
Were it not almost self evident , this principle might be illustrated by abundant examples of the profit the state derives from a moderate scale of taxation, where it is sufficiently awake to it's own interests.

The Calvin Coolidge Curve
From a speech delivered in 1924
An expanding prosperity requires that the largest possible amount of surplus income should be invested in productive enterprise under the direction of the best personal ability. This will not be done if if the rewards of such action are very largely taken away by taxation If we had a tax whereby on the 1st working day the government took 5 percent of your wages , on the second day 10 percent, on the third day 20 percent , on the fourth day 30 percent on the fifth day 50 percent ,and on the sixth day 60 percent, how many of you would continue to work on the last two days of the week?

The Franklin D. Roosevelt Curve
This from a campaign speech in 1932
“Taxes are paid in the sweat of every man who labors because they are a burden on production and are paid through production. If those taxes are excessive , they are reflected in idle factories in tax sold farms , in hordes of hungry people, tramping the streets and seeking jobs in vain. Our workers may never see a tax bill, but they pay. They pay in deductions from wages , in increased cost of what they buy, or as now in broad unemployment through out the land. There is not an unemployed man , there is not a struggling farmer, whose interest in this subject is not direct and vital. It comes home to everyone of us.”

The Laffer Curve
(Circa 1970's)
The theory is simply saying that at theses higher tax rates ( “in the prohibitive range”) there is a disincentive to make more money, which will result in lower revenues from taxes . In the end, it's really all about incentives to work, invest, take risks and earn money.
Here have a look: The Laffer curve

Friday, December 12, 2008

Detroit to Washington " The Sky is Falling"

As the plight of the Detroit Three & the UAW dominate the news each night, I am amazed at what I see and hear. The Detroit Three's hearings in the Senate and Congress were, with a few exceptions, completely divorced from reality. The politicians aren't making any sense at all, and while you might be able to excuse the pols from Michigan, the rest of them need to get back on their meds! The strange brotherhood act of the CEOs might have some people fooled, but I'm not one of them. The UAW is portrayed as the savior of the middle class. The executives of the Detroit Three are cast as greedy, overpaid jet-setters who have single-handedly caused the ruination of this once proud industry. The media scribbles articles, like the one written by Johnathan Cutler in the LA Times, and presents it a as serious analysis of the auto maker's troubles. His thesis is that the UAW's failure to unionize the transplants are what caused this whole mess . All of this would be very funny if it were a SNL sketch, but it isn't. This is real money, and real peoples livelihoods they are playing with.

Senators and Congressmen spoke of the great benefit the jobs bank was for workers, while scolding the CEOs for arriving at the first hearings in corporate jets. Evidently, only one of these two practices is wasteful. The other is not? They praised the UAW president Ron Getielfinger for the sacrifice he has imposed upon his union members. Does anyone really think that a compensation package rich enough to push your company into bankruptcy is sacrifice? Maxine Waters excoriated the private equity firm Cerebus for not wanting to invest in Chrysler. Earth to Maxine... no one will lend to Chrysler, GM or Ford. Why do you think they are groveling before you? Each politician tried to top the next with their "the sky is falling" and we'll all be unemployed forecast. The last prediction I heard was that 13 million people would lose their jobs if any of the Detroit Three filed Chapter 11.

In it's glory days, the UAW had a veritable army at its command . In the 1970's the UAW had grown to 1,619,000 members, but in the following 20 years their ranks were thinned by almost half. Today the entire UAW membership numbers about 400,000. The guy whose head should be on the chopping block is Ron Geitlefinger, the president of the UAW. Since his election as president of the UAW in 2004, membership has been slashed by more than 1/3. So much for job security. He also seems to be suffering convenient memory syndrome, which allows you to forget key provisions of the contracts you negotiate. Did anyone who watched the hearings really believe that he doesn't know what the jobs bank is? When he reminded me that 40% of his retired UAW workers aren't old enough to qualify for Medicare, I nearly jumped from my seat. Old enough to retire, too young for Medicare. How rich it is that he wants taxpayers to foot the medical bills for his early retiree's medical plans. The idea that he could say this with a straight face shows that he is capable of Oscar-caliber acting! Ron if the union gig doesn't work out, I know a Hollywood agent you can call. Question: which is funnier C-span or SNL ? I think it's a toss up!

Johnathan Cutler, an Associate Professor of Sociology at Wesleyan University, argues in a column in the LA Times that the UAW failure was not due to the union's demands for above-market labor cost and productivity- hampering work rules which helped caused the Detroit three to falter. Rather, he opines that their lack of success in unionizing the transplanted auto companies is the reason the UAW 's membership has declined so dramatically. Nowhere in the article is there any talk of competing with the transplants on pricing style or comfort. This guy really ought to stick to sociology. It's quite obvious that when it comes to economics, he is clueless! What the good professor doesn't understand is that automobiles don't have to be produced in the US at all, and if they don't manufacture automobiles at competitive prices that consumers will buy, there won't be a Detroit Three. It's tough to make the case that all three of them are needed today!
The auto companies that prosper and thrive in the South do so precisely because they are not unionized, and had they been, they would now be suffering the same fate as Detroit. You can't charge more for your product than your competition if you want to stick around. Apparently this is difficult to understand if you are from Michigan, or write for the LA Times.

I hope I'm not the only one who finds it troubling that in a industry as competitive as automobile manufacturing, that the Detroit Three's CEOs have banded together to support each other's need for a bailout. You would think that one of the Big Three going out of business would be cause for celebration by the remaining companies, wouldn't you? Would Google be upset if Yahoo closed shop? Of course not. It means more market share for them.

A dose of reality filled the room when Senator Bob Corker from Tennessee took out his Bowie knife and cut through the crap, exposing why each of them were really there.

It went as follows:
1. Ford doesn't need a bailout, but they would like a low-cost line of credit if they can get it without strings attached .
2. Chrysler needs a new dress so that some other car company will marry her and bailout Cerebus Capital and it's private equity clients.
3. GM has gone off the road and landed in the ditch, sustaining so much damage that it should and would be totaled unless they get a huge cash infusions now.
4. The UAW can't get the billions for it's VEBA unless the taxpayer forks over billions to the Auto makers, they would be the only losers if any of the Detroit Three filed for bankruptcy. The VEBA is classified as an unsecured creditor, affording it the same treatment as the bondholders who might get 30 cents on the dollar.
5. With out a bankruptcy filing, the enormous debt load of the Detroit Three will prohibit them from recovering, no matter how much money they receive.

This whole thing reminded me of a joke I had heard long ago and have revised slightly to fit the times:
Why did Chicken Little cross the road?
To get to the big pile of bailout cash!

Thursday, December 11, 2008

" The Road to Economic Recovery Isn't a Road at All."

Repaving the highway near your house and building a bridge near mine is not an on ramp to economic recovery. It is merely a means of providing jobs for a relative few, while the rest of us wait for the recovery. The idea that we are going to borrow and spend our way to economic health is fiction! The truth is that borrowing additional dollars to ramp up spending on these types of projects is actually counter productive, as it consumes the very capital business need to expand the production of goods and services, which is what drives real job and wage growth.

" Son of Stimulus", the newer, bigger stimulus package won't improve the economy. We've been there, done that, and it didn't work. In May, June and July of this year, millions of us received checks in the mail from the government. These checks, we were told, were to keep us from sliding into a recession. Evidently it didn't work. The forecast for the 4th quarter is for a contraction of 4% in GDP. Now we are told the reason it didn't work was because people didn't buy new things with the money. They instead saved it or used it to pay down debt. Can it be that the only people who don't understand that the consumer is over leveraged is Congress, and that's why they continue to propose additional borrowing for new programs.

Stimulus packages never work, and it's not because the people who got checks from the government didn't spend them. They don't work because they do not create an incentive to increase production. Once the money has been borrowed, allocated and spent, tax rates, availability of finance, regulatory cost and all the other factors that a business considers in their expansion plans will not have changed.. The only increase registered will be the size of the national debt. The incentives for growth in the economy will not have improved one bit. Economic growth, which is what makes a recovery happen, is the result of businesses providing more goods and services in the current month, quarter or year than in the previous period.

What is needed is a growth package, long term incentives to encourage expansion, and an increase the production of goods and services. Here are the top three things needed to return the economy to a growth trajectory:

Reduce the Corporate Income Tax
Economic growth is literally the successful completion of the next transaction., If you want to promote economic expansion, make it easier for businesses to complete their next transactions. The cost of taxes and regulation are passed along to the consumer in the form of higher prices, which act as a wedge, pushing apart buyers and sellers .The larger the wedge, the further it divides the buyer and seller, until ultimately the transaction fails. When enough transactions fail, businesses become unprofitable, and they too fail. Reducing the corporate income tax wedge will make US businesses more competitive in the global market place. This will enable companies to produce additional goods and services at competitive prices and complete more transaction.

Eliminate the Tax on Capital
The capital gains tax is a job killer. Greater economic growth comes only as a result of successful risk taking. To the extent that you limit the ability of successful risk takers to fund the next company, you kill jobs and reduce economic growth. This success tax is only applied to investors who have risked their capital, and in doing so created additional value by growing an enterprise. There is no tax on a loss of capital. To the contrary, there is a deduction a tax break. Why limit the ability of successful investors to grow the economy by confiscating the very capital they use to do so? There are some folks who defend the capital gain tax as a measure of fairness. What's fair about eliminating jobs? These are the people who fund expansions, and you want to slow them down? We can never know how many Microsoft- type enterprises, along with the jobs they produce, died in the lobbies of Venture Capitalist in the 1970's, never making it to the board room and the decision makers as a result of dramatic increases in the capital gains tax.

Stabilize the Dollar
Business owners considering expansion have a tremendous number of variables to consider. If you want to eliminate a great many of these variables, you need to stabilize the dollar. A stable dollar will lead to declining real interest rates, along with a substantial moderation in the price swings of raw materials and energy due to currency fluctuations. With a stable dollar, inflation and deflation will be things of the past. Companies can get back to working on increasing production, instead of formulating complex commodity and currency hedging strategies.

The recovery will begin when the business climate signals entrepreneurs and investors that risks and returns have come back into alignment. You can't force investors to invest, and you can't force businesses to expand. Incentives are what count now!

Monday, December 1, 2008

"Where's My Bailout?"

Only kidding, I don't need a bailout. I'm not defaulting on my mortgage nor my credit card debt, since I don't have any, and I'm down to the last 7 payments on my automobile loan. I'm not trying to make out that I am some kind of a "Financial Saint". Believe me, I've made my share of financial mistakes . My point is that every time I made a bad decision I paid the price. It's because I paid the price that I learned from my financial mistakes.

The most popular phrase these days seems to be "I need You to save me from myself". None of the folks who have been bailed out or are asking for bailouts were put into their situation by someone else. They all did it to themselves, by making one bad decision after another . The List of bailout wannabes is getting longer by the second. The bailed out include the GSE's Fannie and Freddie, AIG and the Greedy Wall Street Bankers. The wannabes include the Big Three, and several states, including Michigan, California, New York, New Jersey and the City of Detroit are in the que with their hand out. The city of Detroit is asking for $10 billion to hold them over, and that is approximately $11,000 for each resident of Detroit. That's not a bailout. That's a buyout, and the buyer in this deal is getting hosed .

As we warned in our newsletter a while back "There are always takers for government handouts, and when the government lets it be known they are in the bailout business the line is never ending." . Now that they are smack in the middle of the bailout business, who should and shouldn't get bailed out?

My advice: It's time for some tough love. The businesses that are in trouble should hire a turn around specialist. Yeah, I know, it's much easier to ask for a government handout, but that won't solve your problems. These companies need to rethink their business model, not take on more debt. If you are not generating a profit in your business, borrowing money to fund your health care and pension cost doesn't change the fact that you are not making money in your core business. You certainly shouldn't take out a 25 billion dollar loan to start another money- losing division to build expensive little environmentally friendly cars that people won't buy, in enough numbers, to be profitable. It's not a good idea even if Nancy Pelosi thinks it is. You need to look at your cost structure, and if you find your labor cost is 50% more than your industry average, you might want to cut back in that area just a wee bit. A wee bit as in get rid of the 50% premium so you can be profitable. It may not be an easy thing to do, but when you're fighting to survive, it's the only thing to do.

The government needs to decide if the survival of the Big Three is really important. If it is, they need to get rid of the CAFE standards, which are merely government dictates as to what types of autos Detroit needs to build. You can think of it as a kind of "central planning lite". The Free Market will tell GM, Ford and Chrysler what will be profitable to produce without any help from Big Brother. The UAW needs to wake up and smell the coffee. Wage increases can only come from productivity gains, and Union work rules that hamper productivity is why they are now, hat in hand, begging for a bailout.

My advice for state and local government: It's the spending, stupid. State government spending is not merely out of control, the patients are running the asylum .Vallejo, California filed for bankruptcy. It seems they couldn't afford to continue to pay their fire fighters and police officers. With more than 200 of them making between $100,000 -$199,000 in salary per year, and 28 of them making between $200,000-$299,000 per year, is it any wonder? This does not include their pension or health care benefits. These "public servants" are making 2-6 times the median wage in Vallejo. Another California town is going bankrupt because the golf course they bought isn't making money and they are going to default on their nearly $7.5 million dollar bond issue. The golf course they bought, are you kidding me? Golf course = Essential Service? California, New York and New Jersey are three of the highest tax states in the nation, so once again it's not the revenue, it's the spending, stupid. It's time to cut back on spending.

These bailouts cost real money. Money that the government doesn't have. The only way they can spend it is to borrow it from you and me, and then raise our taxes to pay for the loans. Should you and I pay more taxes so that the Federal government can enable the companies, states, and cities that are profligate in their spending on salaries, pensions, and golf courses to continue about business as usual?