Government's Plans for 2009 Miss the Mark

As 2008 comes to an end after a brain curdling descent in to an economic abyss, what is on the to-do list for 2009? Will the same mistakes that were made to try and ease the impact of the crisis be repeated in 2008? All indications are that addressing the root problems is still not on the agenda and the predilection for Keynesian stimuli will only exacerbate the fallout from a fundamentally unwinnable war. Unwinnable in the sense that the definition of victory is the restoration of a failed Economic model.The injection of $3 Trillion in to commercial paper, mortgage, banking and auto markets has not even touched the onslaught of Economic Armageddon. The credit, so earnestly hoped for, never materialized as recapitalization outbid exposure in the financial world. There is a long, long way to go before the deleveraging Genie is put back in the bottle, and only then after a carnage never seen before in the history of the free market.

With the coming bankruptcy of General Motors (GM), there comes the specter of the $250 Billion in Credit Default Swaps written against it. The F.D.I.C. will be working overtime after this one. This will only tighten the noose around the credit market even more. Every component of an economy is dependent on the other for a productive environment, but when the dependency is wrapped up in an envelope of hugely leveraged bets on the viability of these components, the consequences of failure are multiplied beyond a sustainable level. This is the systemic failure that needs to be addressed above all others. There is no point in trying to reinvigorate an economy if you have not removed the cancer that made it ill in the first place. The Derivatives and securities markets must be opened up, dissected and written off.

How this will be achieved, nobody really knows because the opacity of these “weapons of mass destruction” has prevented a solid accounting of exactly who owes what to whom. The objective of this essential surgery is not to save the limb but to save the organism. There will be banks and financial houses that will die as they discover that they never really had the money in the first place to cover their gambling debts. Well, hey, that’s the free market for you. Live by it, die by it. If there is genuine regulation the healthiest institutions will rise from the ashes, burnt and better mannered. The end game here is to have a credit infrastructure that can stand on its own two feet and not have to grovel at the public trough when it has lost its shirt.

By not reining in the gamblers now, we are guaranteeing that the deficit will continue to rise with absolutely zero in return on investment.

The first assaults in the War for the Economy have been a miserable failure. Each wave has been pushed back by an unforgiving army of economic realities. Overburdened by debt, a population cannot spend its way to prosperity; overburdened with falling incomes, a population cannot spend its way to prosperity; overburdened with unemployment, a population cannot spend its way to prosperity. Trying to increase the debt burden only exacerbates the problem. But what has been proposed as the next step on the road to recovery? Spend your way to prosperity by increasing the debt burden.

The brainchild of the Economic Transition Team, it encompasses Healthcare, Infrastructure and Energy policy. The first estimate was around $500 Billion and now is heading beyond the trillion mark. The overarching consequence of this spending will be that future generations of Americans will be the eternal debtors of the rest of the world. This does not seem to fit in to the mindset of the planners. Printing dollars and selling Treasury bills at sub inflation interest returns is the financial plan behind the project. The loss of attractiveness for T Bills as the deficit rises and flooding the country with devalued dollars will combine to unleash an inflationary spiral that will only aggravate the mess.

Let's analyse one part of the stimulus plan - Infrastructure. The crash of the housing bubble has created an enormous pool of job hungry construction workers. The latter will be newly employed by the Government, i.e. the taxpayer, i.e. themselves with their own tax dollars going to pay their wages. The one speck in the ointment here that comes to mind is how much of these tax dollars are going to be needed to even just pay the interest on the Government Debt? Assuming we put the latter on the back burner for a while and get on with the business of rebuilding the Economy, the health of suppliers to the construction industry will improve as their tax dollars are recycled back to them as wages. With each newly employed individual comes an extra paycheck, a sum of dollars that can be spent in the real economy. Paying off mortgage debt, car debt and credit card debt are going to remain top priorities. The one snafu here and the big question that needs to be asked is how much will the Government pay all these new employees?

Industry standard, union enforced remuneration with benefits will definitely not be on the cards as frugality for the general population as opposed to generosity for the financial population, will be the order of the day. Billions allocated for Medicare and Medicaid will also eat in to the apportioned cash. If the former “wealth” was only obtained by living beyond one’s means, then the amount of income needed to get out from under it after being unemployed for months would have to be greater, not less than before. So being employed at low wages by the Government will increase the amount of money brought in to a household but will not be on a level to recreate the Nirvana of yesteryear. Call me cynical but can you say “Iraq Reconstruction?” This reconstruction will be the biggest boondoggle in American history. The same companies involved in the “reconstruction” of Iraq will most likely be the lucky recipients of Government contracts. Halliburton (HAL) and KBR must be salivating right now as yet more taxpayer dollars will be winging their way to them in 2009. If Iraq was one of the golden opportunities for corruption, think of how much more opportunity there lies in the reconstruction of America.

The proposal for nationwide broadband access is, in my view, nothing more than a plan to control the Internet, pure and simple. With no looming convictions for illegal wiretapping within the U.S., increasing victimization of dissent through an out of control Police force and the loss of influence amongst the erstwhile Guardians of truth and “all the news that’s fit to print,” large portions of the population are beginning to discover that there are sources of unbiased information and intelligent analysis on “The Internet.” This used to be rated along with Marvel comics as a source of intelligent discourse and the dwelling place of “conspiracy theorists.” But now people are turning to it as an alternative source of information.

As the situation becomes worse over the next few years, information will need to be strictly controlled to keep the population at bay. If the Government is going to provide the Internet access they will also be controlling what content is available under the guise of protecting children or eliminating “hate speech.” The latter being anything that goes against the party line.

Social Security, Medicare and Medicaid are already unfunded to the amount of $51 Trillion. Pumping more money in to this will only achieve a greater unfunded liability. Improving the efficiency and cost effectiveness of these programs can amount to a slight savings but the eventual bills will be falling on, as yet, unborn Americans. This is campaign promise planning, not long term planning. It might keep presidential approval ratings up for a while but goes nowhere in resolving the fundamental problems.

A quote from Tom Daschle, the new Health Czar, sums up the lack of connect between Government Economic policy and the real problems to be addressed:

Addressing our health-care challenges offers the best hope for reducing personal bankruptcies, improving American competitiveness and helping pull our economy out of its current tailspin.

Addressing health-care challenges would be providing real money for it. That means making a decision to take money away from other programs in the Middle East and Eurasia. (Remember, there are plans to increase troop numbers permanently in Afghanistan and maintain a force in Iraq outside of towns and cities by June 2009 but staying in the country until 2012. This will amount to a huge drain on U.S. balance sheet).

Personal bankruptcies have been caused by medical bills, but unemployment caused by off shoring and the bursting of the housing and credit bubbles have contributed much more damage. Improving American competiveness is not achieved by providing greater healthcare with money that has to be borrowed from our competitors. If this represents “the best hope” for “pulling our economy out of its current tailspin”, then we have indeed passed through the Looking Glass and entered Never Never Land.

Comments

[sheople:]

Groveling at the public trough is probably the wrong term. Reveling might be more appropriate.

2008 Dec 16 07:23 AM

[aarc:]

Government plan for 2009 is only to get out of this abyss and show the world the US is still the leader.

The foundation for the US economy for the next 2 to 3 decades has already been set - it is going to be banking and finance and retail. Health care industry will benefit the most be set 30 to 50 years from now.

Gobledegook? Speaking in foreign language?

Lets see what happened during the last 8 years with Money Flow:

- China, India, Brazil and other developing countries become shooting stars. Achieving GDP expansions never heard of before. China becomes the manufacturing and industrial center of the world. India is becoming the software production center of the world albeit still in the early stages. Brazil is simply more oil dependent and will go up or down based on the price of oil same with Russia.

- The US and other developed countries have lost and still losing their industrial and manufacturing base and is starting to lose their technological superiority to China, Taiwan, India and other developing countries.

- Most developed countries governments decided to support investments in housing and consumerism (retail) with the US emphasizing health. Banking and finance also got the boost since housing and retail (credit cards) are too dependent on banks and other financial firms.

- Most private in vestors decided to invest business capital in manufacturing and technology to China, India, and other developing countries. With ever increasing health care and wages in the developed world; there is no way the developed world can compete with cheap labor of the developing countries in the next few decades until robotics become viable alternative to human labor.

From what happened in the past, it is very clear that the US is not going to compete in manufacturing and technology with the developing countries. Likewise, agriculture and commodities are not the forte of the developed countries in generating income from exports.

What is left for the US to be able to compete in the global marketplace?

Banking and Finance, and to some degree Retail such as Walmart and MacDonalds.

How banking and finance? MacDo and Walmart are too obvious.

If I am not mistaken, the US was able to create the superbanks (JMP, BAC, WFC) in addition to Citi from the chaos of Sept 2008. What are superbanks for if not for global finance and banking services.

The US have the superiority in knowledge and experience in how to create money out of thin air with LEVERAGING. The first try-out was a flop, but it may be an uninteded necessity in order to avoid more mistakes in the future.

With that knowledge and experience in ABSs and MBSs and how to leverage them; the US has the necessary tools needed to be able to create much much more wealth in the future that manufacturing or technology cannot achieve.

But banking and finance is capitalized on TRUST. Without trust, the whole world is not going to deal with the United States. Thus the US govt has to provide it's full and unconditional support to the banking and finance sector to show the whole world that the government is going to backstop them come thru thick and thin.

Let the ordinary people cry out foul since they dont know the real scheme of things to come. If the US lose all sources of profit generating businesses in the global marketplace; the US will become an undeveloped country. Might as well go back to the stone age; or rather reduce worker wages by 90%, abolish health care, provide 20 years tax holiday to investors, and other incentives in order to be able to regain manufacturing and technology superiority in perhaps 10 to 20 years time or maybe never since investors are not going to simply close down their manufacturing plants and technology centers in the developing countries overnight.

So the US is stuck with banking and finance. Retail is a dog eats dog industry and the US has no definitive edge in the long run. Health care is mostly for the developed countries for the next 20 to 30 years as will be explained more in detail later.

Wealth begets wealth. As the developing countries keep on marching toward industrialization and as they keep on amassing wealth thru manufacturing and technology, they are going to need more assistance to manage those wealth from the more experienced countries such as the US.

Therefore, the United States is going to sustain and grow it's economy in the immediate future thru banking and finance. No other choices are available in the immediate horizon including alternative energy.

How can there be another global boom when the whole world is now in the brink of global depression that can last several decades?

This global economic crises is psychological in nature in general and financial in particular. They are mostly paper assets that will require rebalancing thru the magic of accounting much like the Third World (now called developing countries) mountains of dept of the 1970s and 80s.

All the infrastructures needed for a sustained global boom are still available and still intact.

- No massive bankcrupcies (yet) that can destroy companies needed for future growth. Think of it as no need to re-create new companies costing additional capital when global growth starts again.

- No global disease contagion such as SARS that could kill hundreds of millions or billions of people.

- No calamitous natural disaster 10 times more destructive than Catrina or the tsunami of Thailand or earthquakes in Japan and China that resulted in massive decimation of population and utter collapse of industrial/technologic... infrastructures and buildings.

- No global war (yet?).

But most important under the hood is:

- There are now billions of "new" baby boomers in the developing countries that are hungry and determined to achieve the same "American dream" for the rest of their lives. They are now in their 20's, 30's and 40's and are already becoming productive members of their societies albeit with low salaries as compared to the West.

The developing countries baby boomers are going to be the major source of growth for the next boom in consumerism.

Their low salaries is going to be balanced by the transfer of manufacturing and technology from the expensive west to the cheap developing countries making products becoming cheaper and cheaper in the future as long as commodity prices remain affordable thru increased productivity in mining and recycling.

How about the Western baby boomers?

Well, they are no longer interested in technology, manufacturing or sales and marketing. They are already in their 50's and 60's. Do you expect them to still be staying overnight in the laboratory tinkering with bizzare instruments or hitting the road day after day selling this or that?

They are going to concentrate on banking and finance - and politics for that matter. They are going to conquer the world thru politics and using the SuperBanks as primary instrument of monetary growth.

How about health care?

Yes, health care will become the major headache. It is a major expense that will keep on growing and growing as the western baby boomers aproaches their retirement age.

That is why the US has to find a way to generate much much more income than before that cannot be achieved thru agriculture, mining, industrialization, manufacturing or technology for that matter. They are all the past tense. The present tense is banking and finance. The future tense is alternative energy (perhaps) and health care as the US and other aging countries such as Germany, Britain and Japan allocate more resources into the health care industries.

Those health care industries will later be "exported" to the present developing countries in 20 to 50 years from now as the developing countries of today become "developed countries" fo the future and their billions of baby boomers start entering their twilight years.

2008 Dec 16 08:10 AM

[aarc:]

P.S.

There is still the question of opacity of the banking centers and the major question of where the money goes.

As I have said. The US has the superior knowledge and experience on ABSs and MBSs and how to leverage them. Will the US be willing to disclose all their secrets to the whole world and in so doing lose whatever competitive edge it has in the global marketplace of the future?

Have the US not learned enough already by disclosing and transfering manufacturing and technology knowledge to the developing world and in the process lose it's mainstream profit generating businesses?

How about the trillions of dollars in the hands of the SuperBanks they are hoarding and hoarding and hoarding?

How can you possibly provide the capital and financing services to China, India, Brazil, and other developing countries as they allocate more manpower and brainpower into manufacturing and technology (and away from agriculture and mining) without the necessary trillions of dollars in order to jump-start the next global boom and to sustain that boom?

Agriculture is no longer the mainstream of income generation for the developing countries. They have already learned (from the US primarily) on how to produce foodstuffs and animal husbandry the "assembly-plant" way.

2008 Dec 16 09:08 AM

[derryl:]

Mr. Hughes writes, "The Derivatives and securities markets must be opened up, dissected and written off."

And good riddance to these opaque blights!

Securitized 'investments' like CMOs that packaged subprimes and CDOs that packaged your car and credit card debt are about as close to snake oil as we could ask for.

Derivatives like CDS were supposed to "manage risk". How can you manage risk when nobody knows what is in the derivatives?

Unfortunately, once these things are unpacked and start to unwind, we're going to see the damage that 'financial weapons of mass destruction' can really cause.

2008 Dec 16 02:52 PM