Reaping What You Sow

The economic policies that the Obama Administration has implemented through legislation, and countenanced by appointing Timothy "Weak Dollar" Geithner to the position of Treasury Secretary, and re-appointing as Chairman of the Federal Reserve Ben "I'm printing Money til it hurts" Bernanke are having the opposite effect of what this administration and all of their reputable economists had assured would now be happening , and it's not good. What is true in farming is also true in economics: You reap what you sow! When you plant lima beans all the backyard town-halls and campus rallies in the world will not produce a crop of beautiful beefsteak tomatoes. You can blame it on the weather and the soil, you can even blame the Republicans, but come harvest time you are going to be stuck eating lima beans and your words. The stagnant economy that we endure today is what you reap when you have sown an economic policy mix that gets it totally wrong.

What makes this all the more frustrating to people who understand economics (I'm talking about the millions of ordinary Americans giving this Administration’s current policies the thumbs down, not the so-called experts that are now running from Washington as though they were mice being chased down by the farmer's wife,) is that the answer to our current economic malaise is so simple. It boils down to getting only two things kind of right. Not millions of thing perfectly right. Two things kind of right! Is that too much to ask for? It's not, as we are lead to believe, a very complex formula. It doesn't involve having the best and brightest economic minds surrounding the President carefully crafting complicated plans to be painstakingly executed and monitored day and night by the government's financial Czars. It involves getting two things kind of right.

My friend, Nathan Lewis, who understands better than most how tax and monetary policy effect economic output puts it this way: The two and only two things you need for a vibrant, no, booming economy, are low tax rates and stable money. Get those two things right and you are off to the economic races. Get them wrong and you are, well, you are right where we are today, scrapping along the bottom not quite falling behind but certainly not moving ahead.

Many will argue that a third component rolling back unnecessary regulations is required and while that may be true, in reality regulations are just a subset of the low tax proposition. After all, regulations are just additional costs imposed on business by various governments. In other words, they are taxes. Low tax rates will once again realign the incentive structure that has been undermined by the current policies of redistribution, and once again reward hard work.

If a low tax rate is the Burpees Big Boy seed of economic growth, stable money is the spring rain that makes the combination bear fruit. Economies that debase their currency find that attracting capital becomes increasingly difficult. The Plummeting dollar tells investors the game is rigged. Even if you can achieve the nominal returns you seek, at the end of the day you’ll end up a loser, as the falling value of the dollar turns your real returns negative. Without capital, you are just a man leaning on a shovel in the field wishing you could persuade the folks at the bank that the tractor that would make your business boom really is a capital idea!

Why Not A Boom Instead of a Double Dip?

In 2009 I listened as one Democratic politician after another stepped forward to endorse the Stimulus a bill that was to save us all from what would surely be the next Great Depression. Most of their ill-considered arguments contained copious amounts of economic fallacy seasoned with just a dash of truth to make them palatable. That truth is if you raise tax rates during a recession you simply get a deeper recession to without raising any additional revenue.

Midway through 2010 with what is at best a tenuous recovery under way, and without any evidence that their spending spree is working those same folks eying a reckoning with the voters in November are telling us that even more Stimulus spending is needed. They have now ditched their cover story of not raising taxes in order to fully embrace their Inner Redistributionist Side. What does this portend for you and I? Six months from now we may experience first hand how a nation's economy performs after dramatically increasing tax rates on the incomes and capital that drive economic growth and devaluing it's currency. It ain't going to be pretty folks.

If you want a sneak peak of what is in store for 2011 you'll want to brush up on your economic history. I suggest you start with Herbert Hoovers tax increase in 1932, the one where he was just raising the rates back to where they were under President Wilson. That increase pushed the top marginal rate of tax on personal income back up to 63% from the 25% rate where Harding's tax cuts had left them. Far from producing additional revenue for the treasury it had the opposite effect. Receipts to the treasury from the personal income tax fell from $834 million in 1931 to $427 million in 1932 and $353 million in 1933. In other words, raising the tax rates reduced the amount of revenue the government took in and made the economy worse off in the process. Can any one spell SNAFU? In light of these FACTS, might it be time to rethink the tax increases on income and capital scheduled for next January?

If the Bush Tax Cuts are allowed to expire and tax rates rise next year the economy will falter, resulting in fewer transactions and a reduction in the demand for money. How will the Federal Reserve respond? Can you see this Fed tightening as the economy falls back into recession? Not a chance! That means we'll enjoy the additional negative impact that a weaker dollar and higher interest rates have on an economy recently burdened with higher taxes on capital and income. Can you say stagflation?

The historical revisionists in Congress will trot out their favorite talking heads to tell us how they are only raising rates back to the Clinton levels of the 90's when the economy did just fine. Where have I heard that line before? Of course they will leave out the part where the capital gains tax was cut by 40% in 1997, which just happens to coincide nicely with when the real boom in the economy occurred. They'll also forget that there was some semblance of fiscal sanity back then . You remember back when the government's entire annual budget was only slightly larger than this year's Budget Deficit? Nothing their smooth talking experts can say will be able to sooth the real world pain you're going to experience. How much political hot air does it take to make up for the loss of ones job?

When the incentives to save and invest are reduced investor behavior will change accordingly. Expect less capital to be available to business as the rate of tax on that capital is increased. Less investment will lead to lower production and a lesser need for all things related to production including jobs. I'm just thinking out loud here, but shouldn't we be considering policies that are pro capital accumulation ? Pro investment and pro growth? Hey, throw in a stable dollar and we could have a boom instead. Wouldn't that be nice!

When Something's Wrong in Your Neighborhood Who Ya Gonna Call ? Headbusters!

While you might expect, no, make that take for granted, the thuggish display put on by the 500 strong SEIU Goon Squad who showed up recently at the home of a Bank of America senior attorney to terrorize his teenage son, shouldn't we at least expect the police to obey and enforce the law?

I've got two questions for the Goon Squad and their protectors in Blue. The first is: Who do you think you are? The second is: Who do you think you're fooling?

Let’s start with the D.C. Police who provided the escort for the 14 bus loads of SEIU Goons beyond the limits of their jurisdiction. Is it possible to escort someone if you don't know where they are going? I don't think so! Are we supposed to believe the Police don't know the boundaries of Washington D.C.? Do you supposed to believe that when the patrolmen reached the city limits they just continued on because they didn't know what to do next? Does anyone to believe they acted on their own? No! Someone in authority gave the DC patrolmen, who were present at the demonstration, an order to escort the Union protesters outside D.C. city limits and their jurisdiction, or else the DC Police department has a rogue unit that acts not on orders from their superiors but instead do the bidding of the SEIU. Either way it’s a problem, and someone needs to get to the truth.

Their actions were wrong, and we need to know who is responsible. What if you find yourself in Montgomery County and have an Emergency don’t you want to know who to call? Do you call the local police, the D.C. police or should you call the guys who are really giving the orders the SEIU?

The DC police who are backpedaling at light speed trying to deny any part in this outrageous behavior, are not putting forth a coherent argument. In an interview yesterday a spokesperson for the D.C. Police said they escorted the SEIU protesters only to the city limits, which they noted were only several blocks from the executives’ home and called the MCPD to meet them there in order to give them the “heads up” about the protest. A Captain from the MCPD says that after meeting with the DC Police at the city line they then responded to the incident at the home but did not witness anyone trespassing or disturbing the peace as the crowd was already dispersing. The Police officer’s story doesn’t add up! Is it possible that 500 union intimidation specialists filed out of 14 busses, marched several blocks, held their protest rally and did it in such short order that by the time the MCPD had completed their own journey of several blocks with their lights flashing and sirens blaring the rally was over and the peaceful union thugs were heading back to the Union Hall for some milk and cookies? Well no, not really, not according to the MCPD’s own 911 tapes which say that the DC police were on the scene and were in fact speaking with the person who had made the 911 call and was still on the line with the operator. Talk about not getting your story straight.

If any other organization, like maybe the Tea Party, had tried to dump 500 protestors in a suburban neighborhood, the MCPD would have been there in advance asking to see their permit and when they couldn’t produce what they didn’t have they would have sent them back to where they came from. Why the special treatment for SEIU? Why don’t the laws apply to them? Thankfully no one was sent to the hospital as a result of this rally. It’s not always the case when these goons show up in public; for some reason beatings seem to break out. Ask Kenneth Gladney, or Ken Hamidi or Dianne Feeley if you don't believe me.

It’s not like this was a spontaneous gathering of folks in the neighborhood, the Union knew well in advance that there would be a protest that day as one SEIU protester had bragged about flying in from California to join the merry band of Social Justice Merchants for the day’s festivities. He told his personal story of woe about how he lost his job and his house is in foreclosure. What was his purpose for being there? What was the Union’s real purpose for being there? What did he expect the general counsel of Bank of America would do for him? The last time I checked the bank was not unionized, so this slug wasn’t there for a job and he couldn’t possibly have been there for another loan, as his foreclosure status provides all the evidence one needs to determine he is a deadbeat when it comes to honoring his debts, and besides everyone knows the loan dept isn’t open on Saturdays.

These modern-day shakedown artists seemed to have taken a page from Willie Sutton, a notorious bank robber from the thirties who is quoted as having said, "You can't rob a bank on charm and personality," as there was certainly none of that on display that day. What we saw was arrogance and the ultimate in chutzpah. The SEIU went to intimidate a bank official from a bank that holds millions of dollars of the Union’s outstanding debt and they brought their own police escorts. That’s extremely rich, don’t you think?

A Good Dollar Bill Makes For A Sound Currency

It has been nearly 4 decades since President Nixon, in an attempt to win re-election, cut the US dollar loose from it's golden anchor in order to manage the economy towards a higher GDP number. Win he did, but for the rest of us that move has turned out to be a failure of epic proportions. Each market blow up and bust is accompanied by the usual frenzy of Congressional finger pointing that always leaves it's ten regulatory thumb prints on the economy,but never fingers the co-conspirators most responsible for creating the chaos, the current and former Secretaries of the Treasury and the Chairmen of the Federal Reserve.

While Bernie Madoff cools his heels in a jail in Butler, North Carolina for bilking the public out of billions, a much brighter future awaits those men responsible for causing trillions of dollars in damages to both private and public sector balance sheets the world over. They become highly sought after advisers, earning seven and eight figure paydays from banks ( Robert Rubin , Citi Group,) Hedge Funds ( Alan Greenspan, Deutche Bank, PIMCO and Paulson&Co,) and Private Equity firms (John Snow, Cerebus Capital Management,) a strange payoff for the economic havoc they have wrought with their calamitous monetary policies. The media who understand monetary policy even less sing their praise, bestowing upon them monikers like "The Maestro," while ex presidents exalt them, even going as far as calling one former Secretary of the Treasury the "Greatest Secretary of the Treasury since Alexander Hamilton." Comparing any of these monetary undergraduates to Alexander Hamilton, the man who defined the value of the US Dollar, is to slander Hamilton.

The idea that the US Dollar, the reserve currency of the world used in measuring the value of billions of transactions every day, should to rise and fall as erratically as an amusement park theme ride in order to manage economic growth is nonsensical. Those who preach that markets should set the value of the dollar fail to understand that this is not a monetary policy but is instead a lack of a policy. Finally the Pols who endlessly argue that a weaker dollar will make our exports more competitive should go back to washing cars or organizing communities or whatever other brainless endeavor they previously preformed. If they truly wanted to make not only our nations exporters but our entire economy more competitive there are any number of policies they could pursue, including but not limited to the following: reducing corporate tax rates, promoting free trade, reducing unnecessary regulation, oh and lest I forget,the most important of them stabilizing the value of the dollar.

The dollar is but a measuring tool used to determine if transactions make economic sense. The dollar's role is to translate the value of dissimilar products and services into money values called prices in order to enable comparison. Allowing large swings in the value of the dollar (from 35 dollars for an ounce of gold in 1970 to $800 in 1980 back to $250 in the late 90's and the over $1200 dollars needed to purchase a single ounce of the shiny metal in today's market, a five fold increase in the last ten years,) as has been our policy merely adds another level of risk to all but spot transactions. Infusing longer dated contracts, whether they be for goods and services or the use of capital as in bonds or equities with additional risk, serves only to increase the price of those transactions, causing many more of them to fail than would be the case with a stable dollar. This results in fewer transactions, less investment, slower economic growth and fewer jobs.

Congress needs to take back it's responsibility and once again ensure the soundness of the dollar. Congressman Ted Poe from Texas has a bill to make that happen. Read it here and show your support.

GM's Give Back Gimmick ... Happy Talk on the Way to Its Next Bankruptcy

GM, short for Gubmint Motors, is telling a whopper of a fib in its new advertising campaign. Listen to Ed Whiticare's Happy Talk and you'll be informed that through his Masterful leadership GM has become so successful in the last year that it has paid back the government loans in "FULL" with interest 5 years ahead of schedule.

That would be wonderful news, as a matter of fact it would be the best news I've heard out of Detroit in ages, but nothing could be further from the truth. GM has not come roaring back to life after a successful rescue by the brilliant Pols in Washington. GM was, and is still a basket case, only now they have a bank account that is chock full of our money.

In fact, GM's story is just another in a long line of Bailout success stories to go along with Chrysler, AIG, Fannie and Freddie, all of whom received money from the US Taxpayers and will never pay it back. GM didn't pay back, as much as it gave back a tiny portion of the bailout money it received. I Thought paying something back implied that you had earned the money used to pay off your debt. In GM's case ,they got 60 some billion dollars from US taxpayers and gave 6.7 billion of the money back. GM lost 3.3 billion dollars in the 1st quarter of this year, which means there is no way they "paid back the money". That's a Give Back! Not a Pay Back!

More happy talk is on the way with the good news that GM continues to lose market share and is down to 17.6% versus a year ago number of 18%. That's just a small loss of market share, no need to worry right? No! Not right! Last year the economy and auto sales were in a free fall. This year we are in a recovery, albeit a tepid one, and GM is still losing market share. How can things get better when revenues and market share continue to fall and profits are something that you can only dream about having someday? Answer: It can’t and it won’t!

Maybe even more Happy Talk can turn things around. GM can disclose, as it did several weeks ago ,that its pension plan is massively underfunded and short a couple of billion dollars. Well, actually they are short 27 billion dollars, but Like Ed I'm trying to keep the happy talk going. Is there any question about who is going to get stuck with that bill when it comes due? Then there is the Healthcare VEBA. What happens when that goes bust?

GM didn't go bust last year, but should have and almost certainly will go bust at some point in the near future after proving to be the biggest money pit the US tax payers have ever had the pleasure of funding, no matter what kind of snake oil Ed Whiticare is peddling.

Mass Insanity Healthcare Rationing in the Bay State

If I told you a story of how one of the bluest of the blue states, Massachusetts, would of it's own accord institute health insurance rationing three months after electing a Republican to the Senate to stop Obamacare, that would normally be considered satire. That is unless the story was true, then we would just call it irony!

Ironically, it is very true that Massachusetts, with what is essentially it's own Obamacare program, has started to ration health insurance. Surely that wasn't Governor Patrick's intent when he rejected the insurance companies' request for premium increases. Like all politicians, he just wanted to get re-elected, and being tough on insurance companies is a very popular stance among Democrats these days. Never the less, that is precisely what the outcome has been. The insurance companies did what any business does when faced with a money losing product: they declined to sell any more of that money losing product. As a result you can't buy health insurance in Massachusetts, even though it is against the law not to! Ain't that a catch 22?

This is always the result when politicians dictate how businesses must operate; they always do what is politically expedient instead of what makes economic sense. Politicians constantly prove that they are checkers players in the chess match of business, unable to see even one move ahead. As a result, they compound their initial mistakes with additional ones, as the unintended consequences of the laws they've just passed undo what they were supposed to have accomplished.

The governor thought that by standing up to the greedy insurance companies he could portray himself as a hero in the fight against the high cost of health insurance. This is an awfully thin argument, considering that three of the four largest insurers in Mass are non profits, as noted by the Wall Street Journal in a recent article. Those high costs, I might add, were imposed by the state on it's residents when it mandated coverage for all , instituted community rating and eliminated the insurance companies' ability to refuse coverage to people with preexisting conditions. I'm sure it came as quite a shock to him that his savvy political skills had instead of making insurance more affordable to his constituents made it unobtainable. After all, who could have possibly foreseen this would be the result of his actions? I'll tell you who! Any businessman worth his salt would have seen that one coming a mile away, but that's because they are in the business of making economic decisions, not political decisions. Business owners understand that they are in business to make a profit and those who don't , don't hang around all that long.

The Mass insanity that is Playing out now in the Bay State is what's in store for the rest of us if Obamacare remains the law of the land. The government will mandate greater coverages for the insurance companies to provide while denying them the ability to recoup their cost though increased premiums. When insurers are prohibited from selling their products at anything but a loss they will be forced to stop selling them. It will then be time for more regulation to fix the problems the previous laws created. On it will go until it reaches it's inevitable conclusion: the government controlling health care cost through by rationing health care. That's when being politically connected will literally be a matter of life or death.

Washington Wants a VAT... What They Need is a Twelve Step Program

After passing the health care bill that raises taxes on earned income, dividends, suntans, medical devices, capital gains, and pharmaceutical companies, not to mention the cost of health insurance for those of us able to afford it as well as those who can't, you may be asking what Congress plans to do as an encore. Well, just like the drunk who's waking up from a three day bender, they're going to reach for another nip of their favorite hooch, another shot of taxes so to speak. Just so they don't leave anything out this time, their next tax will be on everything. That's right, the same folks who are bringing European style health care to America are beginning to talk up that other European favorite: the Value Added Tax as a way to pay for their unbridled expansion of the welfare state.

What's a Value Added Tax ( VAT) you ask? Well, like I said, it's a Tax on everything.

VAT is a tax assessed and collected on the value of goods or services that have been provided every time there is a transaction (sale/purchase). The seller charges the VAT to the buyer, and the seller pays this VAT to the government. If, however, the purchaser is not an end user, but the goods or services purchased are costs to its business, the tax it has paid for such purchases can be deducted from the tax it charges to its customers. The government only receives the difference, in other words, it is paid tax on the gross margin of each transaction, by each participant in the sales chain.

It's looking like 2010 may yet be the year we try to tax ourselves into prosperity. You can do that, can't you? Just think of how much better off you'll be once this new tax is imposed; think of all the additional revenue your government will be able to squeeze out of you. The proponents of the VAT say it will enable us to once again restore order to our fiscal house and close the gaping trillion + dollar hole that they've created between what the government collects in tax revenue each year and what it spends. Won't that be great? Can't wait till it happens, right? Well, don't hold your breath. The VAT won't even come close to living up to it's advance billing. How do I know this, you ask? Just have a look at the current budget deficits of any of the European governments who already have a VAT Tax.

According to the European Commission, the average budget deficit for 2010 will likely be 7.5% of GDP, a percentage point or two below what the US deficit will be without a VAT. As we've seen, folks drunk with power, just like those overly lubricated with alcohol, can make all kinds of promises that are quickly forgotten as soon as they need their next drink. I'm sure you recall that no one making less than $200,000 would pay a nickel more in taxes and that health care reform would reduce the cost of health care. If eliminating the deficit was really a national priority, the folks who decide what the government is going to spend each year would be in a massive belt tightening mode; but government giving up the sauce just isn't in the cards. Instead, their attitude is why should we cut our budgets, when it is within our power to make you cut yours?

So, if it won't do away with the deficit, and it's as unlikely to restore fiscal discipline in Washington, as one more drink is to sober up the drunk, then what can we expect from the VAT tax, aside from more welfare programs? For starters, you can expect to pay higher prices for everything you purchase, and as a result of increasing the price of everything, you should expect the demand for everything to fall and along with it the volume of all goods and services produced. How many additional employees do you need to produce less? This sounds to me like a recipe for an economy on the rocks, with even higher unemployment than we are currently choking on. Maybe we can make our chronic unemployment rate permanent like our brothers and sisters in Europe have done. They seem to have gotten used to a rate that is two to three times what our unemployment rate has averaged over the past twenty years. Perhaps it's an acquired taste, like scotch or gin?

Don't worry you say, the President's Budget Commission is sure to deal with the deficit. Don't kid yourself! The President's new Budget Commission is just a diversion from reality. It is but a group of stammering, stuttering politicians who will will seek to convince you just how sober they are; whose pretense will be to convince you and me that there is just no way to cut government spending any further, and the only way out of the nation's fiscal troubles is to raise more revenue. After all, everyone knows Obama has frozen the spending on 13% of the budget already; so what else is there left to do?

What our representatives fail to see is that the way out of a spending problem is to stop spending, just like the way out of a drinking problem is to stop drinking. But we all know addictions can be difficult to break, and sometimes you have to hit bottom before you can admit you actually have a problem and seek help. I'm thinking that their political bottom is coming, and they'll be free to spend some much needed time in rehab, come November.