Critique of Dollar Policy

Politicians often ask you if you are better of than you were 4 or 8 years ago.

I was reading some campaign rhetoric this weekend and I was amused by the fact that there are still rabid calls to "keep the Bush tax cuts" and it got me to wondering who this is really going to benefit.  We all know that the US has gone 40% more in debt than when Bush took office and, obviously, inflation is out of control, especially for the things we import, like commodities.

Since core inflation is "under control," what that means is that the price of goods and services we produce in this country are not demanding more money, even with the drastic dollar deflation, and, in terms of foreign currency, we are being paid only 2/3 of what we got paid for the same amount of work or production as we did in 2000.

Now, intuitively, you may think that if the dollar has declined 40%, you need 40% more money to offset the loss, but that is not the case…  40% off of 100 leaves you with 60 but - to get back to 100 - you need to multiply 60 by 1.67!  This is why we try not to lose money in the markets, once you lose more than 20%, you need to do better than 30% just to get your money back.

So if you had a net worth of $10M in 2000 and voted for George Bush (or, if you lived in Florida, if you did not fully punch your chad for Gore) because you liked his tax cuts, the question you have to ask yourself is if you are 67% better off now than you were then.  If you do not now have $16.7M from a $10M start, then you have lost ground.  The money you worked for your entire life, not to mention the value of other assets you may have like homes, boats, cars, stocks… has been discounted by 40% over the past 7 years of Bush economic policy.

That’s why the stock market, already trading flat to 2000 levels, is much further down than you think as the Dow valued in Euros is actually already down to 6,807!  This is not a math trick - a share of IBM (IBM) stock (flat at $120 since 2000) that bought you 4 barrels of oil when Bush took office, now does not even buy you a single barrel of oil.  Even a share of Exxon Mobil (XOM), which is an oil company, hasn’t kept up with inflation, going from 1.5 barrels of oil at $40 in 2000 to 0.62 barrels of oil today.

The "good" news is that 7,000 was our big break-out level on the Dow back in 1997 and we held the 7,000 line in 2002, despite 9/11 so, effectively, we are back to our 9/11 lows on a dollar-adjusted basis - one would think things can’t get much worse but we do have 6 more months to go…

It is very obvious to poor, working class and middle class people that their situation has become desperate in the past few years bur it amazes me how delusional the rich and the super rich are about their situation.  Here is a list of the Super Rich from the Forbes 400 lists of 2000 and 2007 along with their dollar-adjusted wealth (click to enlarge):

It is interesting to note that the people who got rich building corporations by working hard for many years were punished while investors and speculators were rewarded under the Bush administration.  Is this the America we are really trying to build?   Are these the values for the new America?

Warren Buffet had challenged rich Americans on the Forbes 400 list to disprove his claim that “the average tax rate paid by the Forbes 400 billionaires is lower than the average tax rate of their receptionists“.  In fact, Buffet revealed that the average tax rate for employees in his office is 32.9%, while he paid 17.7% of his income as taxes. Putting his money where his mouth is, Buffet said that if any Forbes 400 people can disprove his claim he would donate a million dollars to a charity of this person’s chosing.  In case you are wondering, Buffet does his own taxes, doesn’t use an accountant and does not employ any tax shelter strategies.

This is not a problem we are going to be able to spend our way out of folks.  Unless you are in the investing class, then you should be gravely concerned about what is happening to this country and our currency and the more money that funnels its way into the hands of speculators, the more money gets put into the things they speculate on, which raises the cost of those things - is that really such a complicated concept for Congress to grasp? 

I would urge voters out there to take a few minutes and perform a simple calculation as to how much better off you really are than you were in 2000.  Multiply your own net worth by 60% and compare that to where you were at the turn of the decade or, if you think you are "above" petty dollar concerns, then calculate your relative wealth in gold, oil, Mercedes, Rolex, Ritz-Carlton ...  whatever makes you happy ...  and think about whether massive government debt and a devalued currency is really what you are looking for in an economic policy for the next 4 years.  And it’s not just the Presidency; without Congress and the Senate we will have just 4 more years of endless bickering and this country is way too far off course to let ourselves drift aimlessly for another 4 years.

This is not one of those things that is out of our control. The value of the US dollar is a direct result of a combination of the credit-worthiness of this country (ie. spend within our means, raise the taxes we need) and the money supply as influenced by Fed Policy.  As we allow oil prices to climb out of control we flood the planet with $11.9Bn a day that are required to buy the world’s 85M daily barrels.  That’s double the rate at which dollars were exchanged for oil last year and other commodities have kept pace as well and those are all dollars that are printed here, sent out of the country and burned up in someone’s gas tank.

What do you think a dollar is worth when the world burns 12 Billion of them every day?

Comments

[Things Come Undone]

The reason many rich people still support Bush on the economy and are not screaming about Bush destroying their net worth is
1) because many of the rich are still comfortable
2) Many of the rich have people to handle their money, people with a negative incentive to explain to the rich the real state of their money.
3) Business TV does not inform viewers it encourages them to buy
4) Some people don't manage their money they just look at an increase and think its good. They never consider inflation, or how other investments are doing compared to their investments. They never consider what they could buy today or yesterday with their money.

[Melancholy Korean]

I'll be honest. I never read your posts that carefully. But this one was fantastic. Like the outrage, especially. Great work.

[mark van]

great article, thank you

[Philip Davis]

Good point Things!

Thanks Melancholy and Mark. Yes, I am outraged, that Fed move (or lack thereof) has had me angry ever since - I guess it was my last straw...

[David M]

I agree with all 4 reasons stated above, but think we need to add a number 5. It is the CEO turned politician. I catch a handful of CEOs, like Buffet and Pickens, who call them as they see them. All too many others sound like they are using political talking points. Recession? Hey, if we don't use the "R" word, we can all delude ourselves into believing we are not in one. You can also scream that anyone who dares make an objective assessment of the economy's health is "anti-American&qu... because they are saying bad things about the country. Hear no evil, see no evil... makes it hard for the layman who understands that the economy is weak to know why. Too bad more don't read Philip's work.

[David M]

I agree with all 4 reasons stated above but would like to expand on reason 3. It's not just that Business TV does not inform viewers. They wind up misinforming them. All too many CEOs who speak on Business TV sound like politicians, who can never admit to mistakes. A few, like Buffet and Pickens, call them as they see them. Others sound like they are delivering talking points, not an honest assessment of the economy. The Business TV anchors play along instead of asking the probing questions that Philip might ask of them.

Although most investors and business owners should have taken a least a few courses in economics, they forget the basics and fall into this Business TV generated herd mentality. We need more people like Philip to be heard on these influential Business TV shows.

[user8240]

"Buffet revealed that the average tax rate for employees in his office is 32.9%, while he paid 17.7% of his income as taxes." When did paying a higher percentage of income in taxes become fair? It was mis-labelled as "the progressive income tax rate" to con us into cheerfully paying more as we worked harder to create more goods and services for others. Paying taxes based on income is the problem. Adopting the Fair Tax which would tax consumption instead of discouraging investment and hard work is the answer.

[Lansingman]

I sense that a lot of the outrage in this and similar posts on this site come not from concern for the little guy but from the grim reality that income from actively trading securities or just buying and holding (like worked in the good old days) are no longer a sure thing. Speaking as a person who has run a manufacturing company for years and has heard all the wall street types condescendingly pontificate on all the ways to "fix" our industries it does me good to hear a little of the panic in the investment/trader class. Certainly in my case I have felt far more pain over the last 10 years from legal/investment/actua... advice gone awry than I ever have from underlying shifts in business.

[jjason]

Thanks for a good article, Philip.

I frequently post that people should read your article on "paper oil".

Also I refer them to:

www.star-telegram.com/...

and
www.commerce.senate.go...

When the American people know very little about the Enron Loophole and that former Senator Phil Graham was involved in this scam... and that Phil Graham's wife was once employed at the Commodities Futures Trading Commission ( the CFTC is a big part of the problem with high oil prices ) no wonder the problem is ignored.

But, this week, Senators Barack Obama, Byron Dorgan and Maria Cantwell and Rep Bart stupak have mentioned the connection between "paper oil" and market manipulation of oil prices and I have sent the two articles,above, to Congressman Paul Kanjorski, D. PA and Senator Bob Casey, D.PA.

I urge everyone to read what Ed Wallace and Professor Michael Greenberger have to say and send Wallace's article and Prof Greenberger's report to your friends, relatives and members of Congress.

Hopefully we can solve the problems with our economy one problem at a time.

[Philip Davis]

That's a great link JJ - I'll be using that in this weekend's post, thanks!