The next president will tax and spend

Thank you, Jason Stoons for your post.
I realize you are simplifying.

And I know you are not suggesting that I am saying that we should go back to a gold-standard to back our paper currencies. You and I both know that this will never happen. However it is always instructive to use a gold-based system to show us how we went off the rails — the reasons for this have to do with the characteristics of how a system gains stability when it is girded to some impartial arbiter or to some invisible-hand-type guidance.

Allow me to please point out why I used the comparison to the old gold standard as just a frame-of-reference for our thinking. You can do the same thing with one common currency. Or you can do it with some other rule-based system.

There is one such system that was proposed by Milton Friedman to control via a very specific formula how much net-new paper money Central Banks should create each year into their respective national economies. Our Central Banks don’t follow Mr. Friedman’s rules any more — and that is one of the reasons we have come to rest on a reef of regret.

Some such new rule-based regime will come, sooner or later. The authorities from the leading 20 economies of the world will see to it. They will identify the many shortcomings in our current national and international financial arrangements. They will identify the many causes of our current predicament. They will try to correct the current malaise. But they will also put in place such controls as they decide are needed to minimize the chances of this happening again. The world cannot take the pain that will soon come — and I say that because I am sadly sure that the real pain has not even remotely begun to manifest itself.

You say there is fraud. Sure there is fraud. Sure there are ‘manipulators’. Sure there are always people who make money from ‘not working’ and from other people’s misery.

But is that all that we have to deal with? Are these the only reasons for our current (and coming) problems?

I most wholeheartedly agree with you that the governments should not be picking up private losses on behalf of hard-working taxpayers.

“The trend is your friend.”
“Don’t fight the FED.”
“Buy low, sell high.”
“If it is too good to be true, then it is false.”
“If you don’t understand it, then don’t buy it.”

I will give you one more, timeworn and hackneyed, phrase — “This time it is different”.

Let me suggest why.

This is no ordinary ‘bust’ in an endless cycle of regular business cycle-driven booms and busts.

This is the Titanic of all busts.

Why?

IMO it is because we had the Mother of all artificially-induced financial booms to precede it and to give birth to it. It has little to do, IMO, with any 3 such boom-lets and bust-lets coming together in some perfect storm. At least not in any typical sense.

Please read Warren Buffett’s classic “Squanderville versus Thriftville” take on just one of the problems that are behind the current problems and imbalances.

This is at his dot-com site named “berkshirehathaway”.
You can refer to a Fortune article by him dated November 10, 2003.

Mr. Buffett wrote then that unless there was a way to encourage American production and export, we could not in any conceivable way continue down the road we were on. He has been proven right. That road of Un-Sustainability has now reached a dead end. When a path is unsustainable, guess what? It cannot be sustained.

The huge ups and downs we just went through with commodities, and other sectors, that you refer to, are typical of the dysfunctions that an economic system that is breaking down displays in its dying days.

China can no longer artificially stimulate its economy with phony-money printed only to buy the excess U.S. currency that she earns from her exports.
China can no longer ‘buy’ U.S. Treasury bonds with this surplus ’savings-glut’ money without endangering her own economy.
China can no longer engage in the same kind of ‘vendor-financing’ that the now-extinct dot-bust companies used in the last days of the dot-com ‘miracle’.

China can no longer be the lender and seller of last resort.
America can no longer be the borrower and buyer of last resort.

To believe otherwise is to somehow think that we have not yet reached the dead end of that dead-end street known as Un-Sustainability Drive.

Just cc and paste Jason Stoon’s earlier comment here! I think he has it right on all counts.

Interesting comments. I simplify these:
reader A. Viirlaid says we should have a gold-based system.
reader Mike says were should stimulate the domestic economy.
reader Ken says we should abolish credit.

Come on, guys. This is part of a boom-and-bust cycle, but it’s really three or more boom-and-bust cycles that converged on a bust together. Hence it is a very big bust, a very long trend along the bottom, and there are more bust cycles entering this one.

I don’t see any of the journalists or analysts or commentators showing charts of economic cycles (mining, agriculture, financials, manufacturing, retail, etc.) or even biorythms. Or astrology. Why not? Seems all the attention is focused on the stock market and the prices of various stocks, bonds, mutual funds, because those are easy to chart – and easy to sell and buy. There are graphs and charts for unemployment figures, gasoline prices. But all of these charts leave out the history of the last 90 years.

The manipulators know about these cycles, and they try to figure out which cycle is trending upward, create a lot of hype and draw attention to the trend, buy into the trend and then sell before the cycle goes down, all the while making positive news about the trend. The enormous run-up of the price of oil earlier this year is an example of such a cycle. Even better for the manipulators is weak or non-existent regulations requiring timely reporting of transactions – lack of transparency as it is now called.

The run on the stock market was begun by the manipulators – they began pulling their money out quickly to put it into US Treasuries (just after the bailout was requested) and then the herd saw stock prices falling and did the same – after all, there are no regulations requiring the reporting of massive withdrawals of money from mutual funds and the transfer to other accounts or purchase of Treasuries, is there?

As for the unethical and just plain stupid things like Credit Swap Derivatives, well, it was a clever way to ‘earn’ money without having to do real work.

And figure at least 10% of the problems are outright fraud – the losses have to be written off, someone’s pocket is already cleaned out. But that loss should not be shifted to the Federal goverment.

None of the above.

Firstly, the “secret plan” is that there is no plan. They’re making this up as they go, which should be apparent from the simple fact that they came up with a variety of off-the-wall ways of using the TARP funds after the TARP bill was passed into law. This implies that the law imposes few, if any, constraints on how the funds may be used. Incidentally, this is an egregious way to write law.

Now, the only real way to eliminate the possibility of a future credit crisis is to abolish credit itself. Lending and borrowing are inherently, fundamentally risk-bearing propositions. What enables the credit system to function is the ability to quantitatively evaluate risk and assign it a value, because this ability allows the holder of a risk-bearing asset to discount its value by an amount appropriate to the risk. As long as you can trust the way you measure risk, you can trust the system.

The trouble we’re in is the result of loan originators lying about the risk attached to the loans they issued. When the measurements of risk associated with a large number of large loans proved to be wrong, the asset values of those loans suddenly became less than investors paid for the loan-backed securities they bought. Lots of voices have been mouthing off about Fannie Mae and Freddie Mac creating this crisis, but they weren’t the real source. The real perpetrators of fraud were the loan originators, and Fannie and Freddie were secondary culprits in that they failed to catch the frauds perpetrated against them.

The key issue I have yet to see identified in public is the motivating factor that incented the original frauds: the fact that loan originators were immediately and fully rewarded for issuing loans, and had no accountability for the poor quality of those loans when the quality issues were discovered. This lack of accountability was the real driving cause of the credit fiasco we’re still sorting out.

It would be better to ask whether or not anybody’s working on a reasonable plan, though, because it’s clear that no such plan existed when the TARP bill was passed, nor is it clear that any plan exists today.

Obama has too many hidden agendas and radical views. His 250,000 “civilian security force” that will be funded just as much as the military? Isn’t this just a little freakish for anyone? The guy speaks like he’s talking straight out of Revelations.

I don’t think either candidate stands a chance of uprighting this “Ship of State”. Too much water has been taken on, & I feel this next President, whomever it might be, will be voted out after only one term. Federal, state, county, local & private pension plan deficits, increased medicare/medicaid costs with record level patient rolls, near immediate social security funding imbalances, local, state, & federal road, bridge, & highways infrastructure deficiencies, municipal bond defaults, bond insurer bankruptcies, student loan defaults, record level Treasury Bond loans, further unrealized CDS hits, plunging real estate values, roller coaster dollar values, and soon to be uncontrolled deflation & hyperinflationary spirals will turn this next term into a nightmare. Add to that increased unemployment, increased bankrupties for small business, increased taxation, food, shelter and fuel costs, major homelessness, and the monthly crisis du jour, and you have an insurmountable set of problems. Since the powers to be in Washington won’t allow their ego to be removed from the path of remedy, I fear a 1900s 3rd world real time future is within our grasp and don’t hold any hope for this once great Country.

Obama’s plan is a clearly better plan of “spread the wealth” rather than McCain’s plan of “trickle down”. Today, we are suffering from about 28 years of trickle down, which is McCainomics, was Bushonomics, and actually is really Reagonomics in clever disguise. But, it doesn’t work, except for those who are already very rich.

If Obama focuses on adjusting where the tax burden falls so that those who have more wealth start paying more, he will succeed. If he focuses on a stimulus plan that stimulates the domestic economy and not China (use transportation, infrastructure, health care, energy, etc.), he will thrive.

We must avoid stimulating cheap, imported consumption and housing; these areas are already overstimulated by the recent bubble. We also must force the lenders to come clean about how many bad loans they hold and take the mortgage writedowns. These should not be bailed out; force the lenders and borrowers to work them out at no cost to taxpayers. Then, we move on.

Beef up social security and extend medicare to all citizens. Health care could be the next big thing; everybody needs it, and these jobs are difficult to offshore. It could be win-win.

I have been reading and listening closely. Neither has a plan or knows much about the economy.

I expect that the secret plan in both political camps is that they will monetarize the debt, in other words just print more money. Economist may say that we must deficit spend to help our economy to recover, but the time will come that we must pay the piper. I am fearful that the long term consequences of economic stimulus and deficit spending may be far worse than the problems we are trying to fix.

I agree, IMO the ‘plans’ that have so far been presented are not the real ones — that is, the ones that will actually be enacted.

The earlier plans were presented mostly for political purposes. That is, to win the election. The electorate does not usually want a lot of details. We just want the “headlines”. Anything more is too demanding for us to follow. We are not professional economists.

It is not that the plans so far offered by the contenders are wrong or poor as far as they go. They don’t much differ. And they are mostly in the form of help for homeowners and tax-reduction-generated economic stimulus. This was fine for circumstances that existed 2 years ago. Candidates are loath to change their message midstream for fear of being seen to waffle, or for fear of being seen as “erratic”.

The article is right IMHO in that the economic hand has indeed been dealt to the new president for, at the very least, the first 2 years of office.

Spending cuts would be a good step if any such cuts could be found.

Encouraging Americans to save would also help. In Canada there is a new program that begins January 2009 that allows every person to open an account for saving. It is known as the TFSA — Tax-Free Savings Account. Please google TFSA or see a short 4-minute video at http://www.youtube.com/watch?v=Bjqjup7iDMU
There are great incentives in this program and there is no reason Americans could not take advantage of a similar program. Please note that this is not like a regular Retirement Plan. It is more of an every-day savings plan.

The new president’s plan for the economy should be far more detailed than any that has ever come before it.
We REALLY need to involve MORE experts.
We should not ever again be rushed out of the gate prematurely like with the Bailout Package (sorry, the Rescue Package) — our resources are just TOO precious and thus their employment should be done with commensurate care.

There could be a shorter initial 100-day plan followed by a longer-term one.

There are many reasons for this. We are dealing with many weaknesses some of which have only recently been identified.

Like weird financial instruments some of which should never have seen the light of the financial day.
There are practices like Liar Loans that should never again be allowed.
There are accounting practices that permitted the creation of some off-balance-sheet entities, or better-said, monstrosities, that should never again be tolerated.
There are regulatory bodies that need reconfiguration and new operating rules.
There may be a need for some new bodies and perhaps consolidation of mandates from other disparate bodies into these new ones.
There are so-called Rating Agencies that seem to have problems regulating themselves.
The roles of the FED and the Treasury need reexamination and possible revamping.
The list is much longer than this.
The bottom line is that Main Street needs some protection from a Financial System that has run amuck over the last decade and longer.

I would like to highlight just one issue that should be addressed in such an all-encompassing PEP — Presidential Economic Plan.

We live in a world where a lot of our economies and their currencies are artificially managed. This is allowed in a system that uses paper money, which can be issued to whatever extent each sovereign nation thinks right for its own particular purposes.

This results in some Asian countries having the ability to manipulate trade, manufacturing, and wealth-creation. Some countries artificially build up their foreign currency reserves by printing more of their own currency (so as to avoid having it appreciate against those of other nations — which would ‘normally’ happen). They exchange this currency for some of what their own exporters have earned.

This achieves many ends. These nations get to ‘goose’ their own economies. And they get to accumulate U.S. currency (or its equivalent in Treasury Bonds). By so doing they build political and cultural leverage over America.

Money can buy not only high technology and spies and influence, but it can corrupt our own culture. We spend and spend, and they save and save. They build and build and we dismantle and dismantle.

If the playing fields were level, it might not matter. But the fields are far from equal. They will never let us play on their fields. We will always be handicapped. Whether through currency controls or hidden import duties and controls or via other trade-suffocating means, our goods and companies will never have the unfettered access we so generously provide to others.

They must think we are imbeciles. They love us. We are so naïve, it’s like we were born yesterday — or so they must think. What would they do without us?

It would not matter if it did not cause grievous harm at home.

The odd thing is that they also jeopardize our economy, the golden goose. This may come back to haunt them. But in the short run, this is killing us, and helping their economies thrive.

A good view of this and why it should be possible — and what is missing in the real world that might mitigate these imbalances — can be offered by the mind experiment of using either gold as a currency intermediary or of having one world currency.

In a system where no country is allowed to artificially print its own money — which is the case under either a gold-based system or under a one-world FED- or World Central Bank-type body (scary!) — an Asian country which was running a surplus in trade could only print money equivalent to the gold it had received for its exports.

That would be good for us, because then we would be more like Thriftville (intead of Squanderville) — we could never spend BEYOND the gold we could pay for those exports. Because we would only have so much gold (or World Currency) to spend. We would not go overboard.

So the same would be true of using a CWC (Common World Currency).

In both cases we could never get in over our heads, as easily. If we did not earn our way by exporting enough goods and services ourselves, we could never EARN enough to buy more imported goods — unless that foreign country was willing to endlessly run a vendor-financing scheme.

Such a new setup is good for everyone. Employment and wealth are shared and not expropriated by one side from the other, as today.

Anyways, I’d like to wish the new President godspeed and to all Americans, a good fortune for the new dawn in America!

Hopefully all such new approaches will help America, and then she will thereby be able to help the whole world — as she has always done!