How to Fix Our Economy: Stop Obama’s Recklessness

Jim Cramer has started to promote Gold or the popular bullion ETF, GLD, as the best investment in this whacked market. With this signal, I have pointed out to investor friends that they should sell gold (see: "Gold, Great for a Trade, Risky as an Investment" ). Cramer has proven to be the ultimate contrary indicator.

But the fact gold is going down just underscores the power of this deflationary environment. Gold does best during periods of inflation. Deflations are inherently bad for hard assets of all kinds as fiat currencies increase in value (the definition of deflation). Gold does not escape this effect, though for short periods of deflationary panic, like the past 2-3 months, gold may do well.

Deflationary spirals are self-feeding and there is little to stop them. People will spend less and less first through fear, and later because they are unemployed and have nothing left to spend. Unfortunately for this country, we just elected a president who does not get this (not that the previous one did either). Raising taxes into a depression is a very bad idea. It guarantees economic failure (see Hoover administration). And don’t be fooled by the $200/250K promise to limit tax increases. It will be broken when revenues come in lower than expected because of the declining economy and the need to pay for expensive new entitlement programs.

I have harped here long and hard that the only way to fix a depression is to print money like crazy and “reflate” (see: Reflation Economics (or “The Minsky Solution” and Fixing a Deflation: A Most Intelligent Analysis). I have even offered some ideas to both fix the housing market, and reflate at the same time, with little added debt to the economy: the 4%, 40 year fixed mortgage program for everyone (not just the irresponsible few), and a no-interest, no-payment loan from the Feds for any balance above market value, repayable on home sale (forced and secured by a Federal lien to guarantee repayment).

These two programs, easy to implement and relatively cost effective (the Fed loan program would cost almost nothing compared to other current bs... like forced bankruptcy and all the court costs that go with that idea), would solve our housing and banking crisis at the same time. Bank mortgage assets written down to 20 cents on the dollar would suddenly go back to almost 100 cents as even underwater mortgages were repaid in full to take advantage of the 4/40 and no interest loan programs. The banks holding those "toxic mortgages" would see their balance sheets repaired and the capital ratios improved (every dollar of increased value in the loan portfolio goes directly to capital). Bank stock prices would move up, dividends would increase and talk of nationalization of the banking industry would stop. From there, we might be able to rebuild our economy as consumer confidence, and then business confidence would return.

Once we have a well functioning economy, then (and only then), if Obama wants to fund his social engineering programs, noble ambitions that they are, there would be a chance to break even on those programs without crushing the economy and everyone within it. But as it now stands, he is impatient, suffering messianic impulses and not willing to wait for the economy to recover before he starts redistributing wealth.

How many ways is Obama wrong with his budget and spending plans? Here are but a few:

1. Eliminating deductions for charitable contributions for the high income tax payers that provide the bulk of non-profits' budgets will spell doom for many non-profits and needy chartiable organizations. Those organizations already were hit by the blowup of hedge funds, including the biggest of them all, the Madoff Fund. Now, when they need financial help most, how ironic Obama's budget attacks his own natural constituency: non-profits and those that need charity. He is eating his own children.
2. Eliminating the home mortgage deduction for higher income taxpayers does not help our housing crisis, it definitely hurts. While this proposal might be defended in that it only hurts high income individuals who don't really need the deduction (sarcasm intended), we all know that the threshold for "high income" will be reduced over time. Taking away deductions will reduce housing demand and continue the downward spiral in home prices.
3. Eliminates subsidy for student loans through private banks (the Sallie Mae program) which benefit the middle class students and instead redirects those funds to PELL Grants which are only available to low income students. Obama has made a decision to deny higher education to many middle class students, who might have good high school grades and bright future prospects, and will instead bless the poor who may or may not be good students now or in the future.
4. His ten year budget projects increased deficits (above those of the last eight years) until the end of that period, 2019. So much for fiscal responsibility and his promise to cut the deficit made just a couple months ago.
5. Increasing income taxes on businesses, capital gains and dividends will not encourage employment, in fact it will insure that the 4-5% unemployment levels we have enjoyed the past decade will be a thing of the past and much longed for in the future.
6. An Environmental inspired "Cap and Trade" system will be applied to businesses that pollute (putting further pressure on our greatly weakened manufacturing sector and the blue collar jobs that go with that sector) and will apply an additional $80 billion a year in new taxes. A business will have the choice to either clean up emissions or spend money on eco credits to offset emissions. This will kill many globally marginal "heavy-industry&q... businesses and cost tens or hundreds of thousands of decent paying jobs.
7. The budget projects increased tax revenues based on assumptions of higher than average economic growth: an assumption that "the next 10 years of GDP growth will be better than the previous 10". That is very hard to accept given the current near Depression circumstances and the anti-business, anti-growth leanings of the budget proposal
8. From this week's Barrons: "Debt held by the public as a share of current-dollar GDP will run 58.7% in 2009. Data since 1969 show that it never ran higher than 49.4%, and that was in 1993, when the incoming Clinton administration was concerned about taming the debt. Yet, even based on the president's rosy (growth) scenarios, the outstanding debt is projected at 67.2% of current-dollar GDP by 2019."

Contrary to statements from his Administration, this is not an "Honest Budget". There is much in it that is really as dishonest as anything we have seen from any recent President, as compared to the promises made during the campaign and after.

Any of you who would like, take my ideas and send them to your Congress persons, Republicans and Democrats alike. Only they can block the insanity of Obama’s proposals and save the economy (many Dem congresspeople are aghast at Obama’s tax and spend proposals).

Comments

[DONE_SONZ:]

print money like crazy and “reflate.And thats whats happening.

May 06 09:49 AM

[History Buf...:]

As politically incorrect as it sounds, soaking the rich has never worked for very long. The rich usually have the wherewithal to take their marbles elsewhere.

I would settle for not destroying our middle class at this point. But it may already be too late.

May 06 10:15 AM

[BrunoT:]

Gold's within about $10 of where it was 3 months ago and has been pretty static. Since when is that "but the fact gold is going down" ?

You show a complete lack of understanding of money and economics. Gold "goes down" in an inflation in what? Automobiles? No. Homes? No. Only DOLLARS. Who gives a flying fudge if the price of gold in DOLLARS goes down if your gold buys you more oil, homes, cars, food, or whatever else than before?

You could buy much more house, oil, or car with an oz of gold this past winter than you could the summer before, even though the price of gold "fell".

THAT is one reason why gold is superior to dollars. It's thought of not in numerical terms but in terms of what real things it will buy.

Get a proper economic education before you start pontificating to others about how to invest. You FIRE economy types killed the economic futures of millions of trusting citizens who didn't know you were nearly as clueless as they were. Please avoid another round of losses for your clients and get an decent economic education. And no, technical knowledge of options and futures doesn't count.

Your 4% home mortgage solution is laughable. What happens great wizard when this subsidy ends? Do you think when mortgage rates are allowed to return to market levels (sky high because of your silly "print money" scheme destroying the currency) home prices will remain stable? Would YOU pay more for a home with a 12% mortgage than one with a 4% mortgage? No, you'll simply postpone things and we'll suffer yet another crash then.

The fact that you guys mix in this drivel and ignorance with actual good criticisms of the Obama "plan" only adds insult to injury, as you've in one swoop also managed to discredit anyone justifiably critical of his "recklessness" by associating your bad ideas with them.

May 06 10:21 AM

[BrunoT:]

should read "in a deflation" about gold.


On May 06 10:21 AM BrunoT wrote:

> Gold's within about $10 of where it was 3 months ago and has been
> pretty static. Since when is that "but the fact gold is going down"
> ?
>
> You show a complete lack of understanding of money and economics.
> Gold "goes down" in an inflation in what? Automobiles? No. Homes?
> No. Only DOLLARS. Who gives a flying fudge if the price of gold in
> DOLLARS goes down if your gold buys you more oil, homes, cars, food,
> or whatever else than before?
>
> You could buy much more house, oil, or car with an oz of gold this
> past winter than you could the summer before, even though the price
> of gold "fell".
>
> THAT is one reason why gold is superior to dollars. It's thought
> of not in numerical terms but in terms of what real things it will
> buy.
>
> Get a proper economic education before you start pontificating to
> others about how to invest. You FIRE economy types killed the economic
> futures of millions of trusting citizens who didn't know you were
> nearly as clueless as they were. Please avoid another round of losses
> for your clients and get an decent economic education. And no, technical
> knowledge of options and futures doesn't count.
>
> Your 4% home mortgage solution is laughable. What happens great wizard
> when this subsidy ends? Do you think when mortgage rates are allowed
> to return to market levels (sky high because of your silly "print
> money" scheme destroying the currency) home prices will remain stable?
> Would YOU pay more for a home with a 12% mortgage than one with a
> 4% mortgage? No, you'll simply postpone things and we'll suffer yet
> another crash then.
>
> The fact that you guys mix in this drivel and ignorance with actual
> good criticisms of the Obama "plan" only adds insult to injury, as
> you've in one swoop also managed to discredit anyone justifiably
> critical of his "recklessness" by associating your bad ideas with
> them.
>
>
>
>
>
>
>

May 06 10:22 AM

[GMiki1:]

Gold is going up, not down.

May 06 10:25 AM

[Dirk McCoy:]

I don't think it's so bad to raise top level income rates a few percent, but I am concerned about constraining our multinational corporations' cashflow with higher taxes, regulation, and central planning.

But Bruno makes a good point about mixing good ideas with bad. I agree that reflating our economy with more money was a good idea (except for folks like Bruno who must have been sitting on hordes of cash in their "363 opportunity fund" and are now sadly disappointed that the wave of rolling bankruptcies has been interrupted), but we will never be able to agree on a society that this monetarist intervention was responsible for stopping the slide and creating recovery because government intervention muddied the stew. And future growth will be hindered because our comparative advantages in high finance and multinational corporations are being hindered. I hope we don't end up like Soviets who attributed 1950s economic progress to Communism instead of technology and expanded Soviet bloc trade (and plunder). It was only decades later they realized how inferior this approach was.

Good news is that cap and trade is such a needless idea that it will never pass- but beware the EPA...

May 06 11:16 AM

[Dirk McCoy:]

Cetin, bear in mind that even the risk of tax increases is discounted into investment decisions. And if they don't occur for a couple years, they still make it into multiyear npv horizons. I think the expiration of the estate and cap gains tax reductions is a given, and I think the top income rate will change as well.

There was a deflationary spiral, it looks now like oil and Chinese manufactured goods cost will inflate, as will gold. Given US labor prices, I don't see significant inflation beyond that for quite some time.

May 06 11:50 AM

[SmBlkBob:]

What a poor excuse for a reporter? If you can call it that.
Just repeating what others have said without a single thought coming from just him other than gold is heading down. Right!

Gold is the only thing that is going to save most from total loss of everything they've saved.
I'm not saying invest all you have in gold or gld, just be smart enough to ignore reporters like this one who haven't a clue.

May 06 12:25 PM

[Dave Wrixon:]

Yes, and it that doesn't work, he could always sell Alaska back to the Russians. Who knows perhaps the Japanese are still interested in Hawaii? Mind you they are not much better of than Spain who would not be in much of position to buy back Florida, when their own real estate market is in such a mess. Perhaps, the Mexicans will prove to be the best bet, although the Chinese would probably take Texas off his hands.


On May 06 09:49 AM DONE_SONZ wrote:

> print money like crazy and “reflate.And thats whats happening.

May 06 01:38 PM

[save the mi...:]

The Obama student loan plan does nothing to help middle class families or student who go on to graduate schools. Middle income students and parents are paying 6.8% to 8.5% on federally guaranteed loans that should only cost around 4%. Congress sets the interest rate NOT the lender. For a student who borrows $20K @ 6.8% that is an extra $6000 in interest. WOW. I bet those middle income parents and students would rather get a market rate on their loans. Now here is the REALLY interesting part. Student loan lenders earn less than 4% on the loans. They are limited in what they can earn based on federal law. The lenders actually send the overage to the federal goverment. SO the government is already making somewhere between 2.8% and 4.5% off every student loan. Wanna help reduce the cost of education? Push the government to REDUCE the interest you are paying on your student loan. NOW! My daughter would rather have the $6000 back.

May 06 04:14 PM

[BIG DAN:]

BIG DAN- GET BACK TO BASICS ,SHRINK GOVERNMENT , TAKE BACK ALL THE INTITLEMENTS PROMISED THEY ARE NO MORE THAN PONZI SCHEMES,GO TO A FAIR SIMPLE TAX SYSTEM SUCH AS A CONSUMPTION TAX. GET ALL THE PRIVATE INTEREST GROUPS.UNIONS,ETC OUT OF GOVERNMENT . DEMAND A BALANCED BUDGET!!!!!!AND WATCH OUR ECONOMY GO . ITS SHOULD NOT BE ANYONE BUSINESS HOW MUCH MONEY SOMEONE MAKES PERIOD. ALSO WHY AND WHO MADE UP THE NEED FOR HEDGE FUNDS WHY SHOULD I BE AFFECTED BY PRIVATE BUSINESS TRANACTIONS AND WHY ARE THESE FUNDS GIVEN FAVORABLE TAX BREAKS .

May 06 07:49 PM

[Fitz919:]

4% fixed rate mortgages for everyone is a rock solid idea. But 40 years is a terrible idea. Mortgages should always be paid off before the owner retires. The term of the loan needs to be far more flexible, and there should be no penalty for early payments.

May 06 07:59 PM

[valinho:]

I'm dead tired of reading these posts about how the President is wrong about all is doing. We have been in a decline for the last 35 years by accomodatibg the big business and screwing the public. Now the same companies that poluted this country's land, air and water took their dirty deeds to Mexico, China, etc... to lower costs and sell the stuff here for higher margins. The problem is that creating a one trafic for technology, jobs and cash. In the end those companies forgot that the consumer is also the citizens and sooner or later the tide turns. Everybody is entitled to a profits on his labor but we have been victims of profiteering and worth, this companies have gamed the system and used the power to control the government to have ever increasing profits over the wellbeing of folk and country. $140 oil anyone? How many cadillacs and lincolns does the $7 chinese worker by from the USA?
I do not believe anyone wants a free meal, but what sense does it make that in a country facing an incredible recession and with thousand of previous middle class citizens living on the streets, the banks are buldozing brand new homes in front of tv cameras, while taking tax payers money to stay afloat?
Lets give the President the benefit of the doubt, G_d knows he got handed a real nightmare.
For those who think differently, the greatest thing about this Country is that any person can ran for office and show what their got. Roll up your sleeves, and get to work if you think you can get elected and do better. Talk is cheap.

May 07 12:33 AM

[fireball:]

dave wixon
i worked out in texas a lot. those texans might have their own ideas about what texas should do. i get some interesting emails from my texan friends. they would be quick to say texas isn't obama's to sell.
i figure you were kidding anyway.

May 07 05:26 PM

[Northstar10000:]

I was with you until you said the noble ambitions stuff. What's noble about anything a government does to take money from one group who works and bribe the other for votes. Guess you are brain washed like the others. I started to like your article until you got lost in the brain wash patch.

May 09 02:48 AM

[Living4Divi...:]

"I have harped here long and hard that the only way to fix a depression is to print money like crazy and “reflate” (see: Reflation Economics (or “The Minsky Solution” and Fixing a Deflation: A Most Intelligent Analysis)"

I hate inflation - but DEFLATION is a heck of a lot worse. The Fed is
reflating. The $64,000 question is: are THEY reflating too little or too much. Only time will tell. Inflation is an inevitable outcome down the road.

I know I am going to get slammed for what I am about to say, but here goes:
I think Obama is doing a great job so far. The tax increases have only been on the upper 1% of the taxpayers. He has seen the needs for stimulus, and stimulus we have had. He has seen the need to reflate and reflate we are doing.

May 18 12:52 PM