The way forward or why blindness is comforting to some.

chartI’m in a quandary over what if anything I can do or say that will help me and my children’s economic future. Those arguing on each aspect of our economy point to some magic demographic they are trying to assist or take money away from. I have no cause to be alarmed that I’m nearing those identified to be in the upper 1% of income. Indeed one could examine my balance sheet and see it’s clearly in need of a stimulus.

I read and listen to the numerous pundits and purveyors of economic wisdom and wonder if we haven’t become too clever by half. It seems the ideas essentially repeated in the public forum on how to get the US economy working as it once was, break down into two main camps.

1 – Increase taxes on those with greater income so the annual deficit is reduced. Increase government spending in key areas (key areas often debated) such as infrastructure, roads – bridges – schools. Temporarily adjust (incentivize) payroll taxes for employers that hire new employees. Continue to increase governmental oversight on financial institutions and regulate them until they perform no errors and lose no money. OK that last statement was a bit sarcastic.

2 – Reduce taxes or maintain present tax policy for those in the larger wage earner brackets. Decrease government spending. Reduce the number of federal agencies and departments and associated regulations.

Whenever the magic jelly bean phrase of ‘decrease government spending’ is used, many politicians and a larger swarm of supporters have their collective heads catch on fire and they start yelling about the need to provide essential services and if anything cut defense spending.

I’ve simplified the overall talking points because I fear those which argue them vehemently get lost in their minutia.

Before I too get lost in the fine points and bore you further perhaps I can point out a little reality 101 from a boots on the ground perspective.

2008 was a killer year for the economy, for me and the nation at large. I lost my regular job. I worked for a reasonably large automotive chain spanning several states which saw their business decrease over 40% in just over two years. They were not alone. Most business which was connected to automotive sales fell radically. We know about GM, Chrysler and even Ford all taking a hard look at the bottom line. The federal government stepped in and propped up the GM restructuring into their bankruptcy. Chrysler was sold again, primarily to another foreign investor, Fiat.

We are all aware of the real estate market. I joined the millions of others which lost my home due to foreclosure. Real estate like any product is purchased through perception of value and demand. This meant as the flood of foreclosures occurred and people lost their jobs, the demand for real estate went down. New housing demand was next to nil. The price of real estate fell by half or more in many areas of the country. I sold a home in Florida which 3 months later saw an equivalent house in the same community sell for less than half of mine.

Many large banks and financial institutions were in shambles or went out of business. The current wave of popular thinking is because the large financial investment firms sold bundled real estate loans as investments and then got even more clever with selling contracts to option investment securities called derivatives backed by equally nebulous insurance contracts as backstop for these special ‘toxic’ loans. These were sold as a type of security based on the perceived value of the original mortgage holder loan. These may likely be in the form of a CDO or Synthetic CDO. Without going into my explanation, if you click on the underlined links you can get a much better definition.

coffee mugI recommend you read those explanations before you go on further. Go ahead… I’ll wait.

It may be all to obvious to the average person who works for a living or a retired person attempting to live off of decades of hard earned savings and investment that we are in a real mess and no matter what the latest economic reports suggest about jobs creation and prosperity is just around the corner, we know the stats are cooked to make politicians and their cheer leaders look like they know whats going on and we should agree how wonderful they are. I’m sorry I’m not buying the hoopla or worse yet, the prevarication.

We are still in a very serious mess. Our publicized debt, collection and foreclosure announcements in our Thursday paper is thicker than all the combined ads in Sunday.

I believe the arguments over what should we do are getting in the way of a natural stabilization. Let me try to explain this; if you are a CEO, President, Chairman / Chairwoman or board member, you have to be almost as confused as I am. The various proposals of legislation and the unfunded liabilities created by our present structure suggest the way forward is murky. You are obligated not only by your shareholders to make accurate financial statements, the very people who can’t make up their mind on new tax policies, health care and a vast array of regulations want you to accurately predict and promote the future.

Shifting the goal posts doesn’t just wreak havoc on the economy and jobs, it creates a mood of uncertainty that deters investors as they attempt to understand what’s next. Our political leadership wants investors to stimulate the economy by plowing more money into their existing infrastructure or grow new business and hire more employees. How can they do that without knowing whats coming, maybe just assume more taxes and more government spending? If so, how much?

I think our federal as well as many state, county & municipal leadership are in denial of our economic shift which has occurred over a long period of time. All of them try to continue to fund programs or create new ones thereby maintaining or increasing spending levels as it was before 2008. The federal government leadership says we must spend all of our collected money and borrow even more so we can shift into a new prosperity.

Let’s get real here folks. Tax money comes from the populace of each country (at least for now – Cap & Trade laws may make it international). As a population grows a country may take in more tax revenue because there are more hands to exchange goods and services. Thats true only if the overall prosperity of the collective group doesn’t go down. What then if the wage earning population substantially decrease? Let’s say we have a very large group of active taxed workers going into retirement. What if the existing group of workers earns less because their wages are in competition with much lower earning workers of other countries (globalization). Now lets combine that with a global imbalance in trade; we buy a lot more than we sell. What are you going to do now Mr & Mrs. Politician to continue to prop up your seemingly narcotic addicted cash redistribution program?

First you’re going to blame others for the problems you now face so you don’t lose your high paying ego stroking job. Next you’re likely to associate and honor those people who suggest the only way out of this mess is to spend a lot more in order to stimulate / jump start the sagging economy. Then you are going to scramble for new fees or increase levels of taxation. Realizing the jig is up on increasing taxes on most of the mainstream population you set about attaching misplaced responsibility and guilt on those who earn the most, knowing if you anger a few but send tingles down or up the legs of the masses you will probably get reelected thereby continuing your national budgetary Ponzi scheme. Meanwhile you quietly find some aging big tycoon with sage like wisdom to support your taxing the dastardly financially successful and promise those willing dupes large federal contracts to support their railroad or petroleum investments.

money stackYou’re going to meet with industry giants out of of direct public view and assure them their portfolios will remain intact if they support your efforts or at least don’t get in the way of them. (Maintain high fuel prices at the pump).

Finally as predictable as long as there has been written history of large failed economies, your treasury circulation of money supply will increase. You have learned from the past however and you will be sure to give this increase in money supply a clever name. You might call it Quantitative Easing.

If you have read the referenced hyperlinks in this post and all I’ve written up to this point and haven’t dozed off, want to do something nasty to me or wish to dis-invite me to your next economic summit, I’m pleasantly surprised because this sort of post or on-line discussion seems to bring out the beast in some and that may explain why Washington can’t come to agreement either.

Synthetic CDO Diagram

Synthetic CDO Diagram (Photo credit: Wikipedia)

 

 

* JOBS bill,legislation,Jumpstart Our Business Startups Act

* Britain can’t afford to fall for the charms of the false economics Messiah Paul Krugman

* Billionaire Buffett’s Bakken Boom

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