Monday, September 26, 2011

A New Wrinkle

The latest scheme out of the European political class is the idea of creating an SPV (Special Purpose Vehicle) that will "leverage up" the $ 400 billion fund that had been previously put in place to "stabilize" the sovereign debt crisis. How will this work?

The idea is that you create this SPV (think Fund) and put $ 400 billion into it in the form of equity capital. The SPV then borrows $ 1.2 Trillion from willing bond buyers. That gives you $ 1.6 Trillion to buy up Greek, Spanish, and Italian debt and stave off disaster. So, the theory goes.

So who provides the $ 1.2 trillion in debt capital? That is, who are the willing bond buyers who think investing in a vehicle that buys trash will be a winner? If you thought Wall Street cooked up outrageous schemes, try this one on for size.

This idea will not work. It is not the magic elixir. No one in his right mind would provide the debt financing for this vehicle. The US, no doubt, will volunteer to put money into this. (We love throwing money away). But, the rest of the world will balk at this silly idea. The Chinese will not fall for this.

What this scheme shows is that the politicians still haven't figured out that defaults are inevitable. Only defaults have any real shot of turning the situation around in Europe. Politicians can only make things worse by these kinds of dreams and schemes.

Sunday, September 25, 2011

Mind The Gap

The so-called income gap between rich and poor is growing we are told. The rich are "sharing disproportionately" in the economic gains we are told. What does this mean? Should we do something about it? If so, what should we do?

Imagine, that adopting "Policy A" would double the income of the poorest sixty percent of the population, but, at the same time, quadruple the income of the richest forty percent of the population? Suppose that there was simply no other feasible way to double the income of the poorest sixty percent? Would you favor implementing "Policy A?" After all, "Policy A" increases inequality. The dreaded "income gap" widens under "Policy A."

One way to eliminate income inequality -- eliminate the income gap -- is to force the entire citizenry to live at the edge of starvation. This is, more or less, the experiment that the Soviet Union embarked upon in 1917. How did that turn out? The Soviet Union successfully eliminated the "income gap."

Suppose "taxing millionaires and billionaires" meant that unemployment for the rest of us would rise to double digits and stay there for the next thirty years. Is it still worth it, so that we can make "the rich pay their fair share," even if such a policy would guarantee that large numbers of people cannot find jobs?

Why does anyone care about the income gap? The issue is not how to divide a fixed pie after all. The issue is how to grow the pie. Suppose our only concern is with people whose income and wealth puts them in the bottom 50 percent of the pile. It might be necessary to enrich a few folks in order improve the lot of the bottom 50 percent. Who cares if the rich get richer?

Isn't it the right policy to try to improve the lot of the poorest 50 percent of our population regardless of how rich the rest of the folks get? It just might turn out that income inequality is a by-product of improving the lot of the poorest folks in society and that deliberate policies to reduce inequality damage the economic prospects of the poorest half of the population. So, why the interest in the income gap?

What we should be concerned about are policies that improve the economic prospects of the half of the population with the lowest income and least amount of wealth. If improving the prospects of the less fortunate increases income and wealth inequality, so be it.

Friday, September 23, 2011

If You Want Jobs, The Micro Environment Must Change

The regulatory and litigation environment virtually guarantees that job growth in the US will be anemic for years to come. No macro activities (or short term tax gimmicks) will change the employment picture.

The truth is: employers are scared to expand payrolls. They don't want to get sued; they don't want to take on future health care and retirement liabilities that are limitless; they don't want to deal with all of the extra costs that government has imposed on employers. The motives for all of this employee protection were no doubt noble.

The latest wrinkle is that Obama's "Job's Plan" permits the unemployed to sue a business that has the temerity to hire someone who already has a job elsewhere instead of hiring an unemployed person. Laws like that make employers leave the playing field. Who wants to hire anyone when the very act of taking on a new hire can trigger litigation that can put you out of business? Why can't the Obama folks get this?

Until the micro conditions of the labor market change (and no one is really discussing making these changes), the poor, the minorities, the less-educated have no real future in this economy other than collecting welfare checks and entitlement payments. Working for a living is increasingly not a likely possibility.

Obama and the liberal elite don't get this because they know nothing about hiring and why businesses hire people. None of the Obama people have any experience at all with business or with unemployment.

The Obama folks think that the solution is to have government build roads and patch up airports and transfer money to public employees. That is not the answer. The only people that benefit from stuff like that are highly paid union employees with rich retirement plans and generous health plans. They really don't need the government's help. They are riding high in this economy. Obama and his gang are riding high as well.

But, Americans that are least able to defend themselves -- lower middle income, minorities, the lower-skilled work force -- have no real chance in the economy that Obama and his crowd have created. Businesses are not going to hire employees that are "lawyered up" and ready to sue them. Why should they? The alternative is to outsource and to substitute capital for labor. That will continue.

We need micro changes. Even if the economy grows, the beneficiaries will not be the unemployed. Obama has seen to it that these folks have no real shot.

So, Why the Selloff?

Other than Obama's new(?) tax plan to tax "millionaires and billionaires," there wasn't much news to point to for an explanation of the nearly 8 percent drop in world equity markets from Tuesday at 2 PM until Thursday afternoon's market close.

Greece is old news and so is the weakness in the American economy. Nothing new on this front was announced prior to the selloff.

The equity markets seem to be stuck in a very wide trading range since early August. If so, the market probably rallies from here. My own guess continues to be that this is buying time for long term investors. This is not a time to be exiting equity markets, but a time to be planting a large foot into these markets.

It is scary. Government policies in western countries have been so absurd for so long that one despairs that things can ever be turned around. But, they can be and, I think, will be. Most Eurozone countries are going to default on their debt and a number of high-profile European banks have no hope of survival. Once these things happen, then we have a real chance for an economic revival.

As long as western politicians think there is some magic and painless solution to the debt crisis that avoids defaults, then economic stagnation will continue. But, the clock is ticking. Defaults will come whether politicians like it or not. The sooner the better.

So, it still makes sense to own equities -- perhaps more now than ever. Markets can see into the future and past unpleasant events. We will get there and get past all of this.

Monday, September 19, 2011

The Obama Tax Plan

Obama will announce his new tax plan today -- more than $ 1.5 trillion in new taxes. Even a Democratically-controlled Congress wouldn't pass something like this in the middle of a recession. You have to wonder if Obama really cares at all. He is wasting everyone's time with proposals like this. He should go back to Martha's Vineyard.

Sunday, September 18, 2011

It Won't Be Long Now

Goodbye Greece. We are getting into the fourth quarter on the Greece situation. The Germans are increasingly unlikely to continue the bailout game for domestic political reasons. Ditto for Greece. The Greeks are more likely to roll back their existing "austerity" measures than enact new ones. The game is just about over. Default is coming soon.

Then we look to Spain and Italy and watch that story unfold in much the same manner.

As If Things Weren't Bad Enough

Here comes the President -- one more time: "Tax the Millionaires and Billionaires." Same ole, same ole.

Hidden in his tax-the-rich proposal is the virtual elimination of the current municipal bond market, because the Obama proposal essentially eliminates tax exempt interest on municipal bonds. That should help our cities and states!

If the Obama package could pass, it would nail the coffin shut on any future American economic progress. We would become the new Japan with no real prospect for economic growth in the next half century. (That may happen anyway. Obama has done a lot of damage already).

Fortunately, no one is listening to Obama anymore and new taxes are not in the cards with a Republican House of Representatives.

All Obama signifies with the package to be released on Monday is his irrelevance. He doesn't understand the private sector, he doesn't understand the dynamics of the entitlement programs, and he doesn't seem to care anyway.

He's still having a good time in the White House. There are still a lot of parties to attend and fun things to do. That the country is collapsing economically is not something that Obama seems much bothered about.

Nothing new there.

Saturday, September 17, 2011

Geithner and "Catastrophic"

Tim Geithner is an embarassment. He spent Friday in Poland lecturing European leaders on the necessity to increase the bailout fund for the bankrupt states of Greece, Spain, and Italy. According to Geithner, failure to expand the bailout fund and, implicitly, to let Greece (and Spain and Italy) to balloon their national debts to even greater heights, would be "catastrophic." Great idea! Add to the debts of Greece, Spain, and Italy! That's a novel way to solve the European debt crisis -- make it bigger.

Well, Geithner might respond, that's what we did in the US and look how wonderfully things are going there!

This is what happens when politicians think they can solve problems. They make the problems much bigger. This way when things collapse down the road, they won't be around to face the music. Europe will eventually implode. Geithner just doesn't want it to happen on his watch.

Unfortunately for the US, we are on "his watch" and the results are there for all to see -- economic stagnation.

It is embarrassing that the Obama Administration is still trying to pretend that more and more debt and more and more economic stagnation is the way to go. It makes one wonder what the real motive is here.

Thursday, September 15, 2011

Geithner Selling His Failed Ideas to Europe

Tim Geithner will be in Poland tomorrow to sell his failed US 2008 program to Europe. Heck, maybe it will work this time. It certainly didn't work in the US, unless you think our situation is a good outcome.

All these folks can ever say is that it would been worse. Really? What makes you think that? Letting nature take its course without government interference has worked in every other situation. Only when the government intervenes to "fix things" such as the 1930s in the US and 1990s in Japan,and now the US in the Obama era, have economies failed to recover.

Europe is so far gone, it won't matter anyway. All Geither will be able to do is make certain that when the defaults start, Germany and France can be added to the list, because they are the ones that will have to underwrite this stupidity.

Oh, by the way, the Federal Reserve is stepping up too. That means the US, which is reeling from massive indebtedness, is now adding to its own woes by helping to backstop the idle Greeks. What a great idea!

You just couldn't make this stuff up. The idiots are running the asylum!

A Clueless White House

The White House released the following statement on Wednesday (Amy Brundage, White House spokesman):

"As the president has consistently said, he does not believe that Social Security is a driver of our near and medium term deficits."

How can the President of the United States be this misinformed on perhaps the most important issue facing the country?

Wednesday, September 14, 2011

Geithner to the Rescue

Tim Geithner wasted a little more taxpayer money -- why not? -- going to Europe this week to have an important meeting with Germany's Angela Merkel to "convince" her how important it is that the Greek situation be contained. You really have to wonder about Tim Geithner. Does he really believe Greece is not going to default? How disconnected is this guy from reality? He still thinks his stimulus plan worked?

The lack of understanding of Economics in this White House is without parallel in American history. This White House not only doesn't know what to do, it doesn't even look like they care about whether the economy recovers or not. The so-called "Jobs Plan" is little more than transfer payments to Obama allies paid for, he says, by taxing "millionaires and billionaires," which apparently includes everyone who makes over $ 200,000 per year.

The sad fact is the folks below the median income are hit hardest by this White House. Those with protected jobs -- public school teachers, public employees, government bureaucrats of all stripes -- they're pretty happy. Their income hasn't fallen a bit. In fact their income has risen, while folks in the bottom half of the income spectrum have been savaged. Obama's war on lower middle incomes is bearing fruit -- massive long term unemployment, massive short term unemployment, and massive under-employment.

Maybe we should increase some of the old standards to get this economy going: 1) Raise the minimum wage to $ 100 per hour...that should raise living standards; 2) Why not let folks get six months a year paid sick leave...they might need it; 3) How about 100 days a year mandated family leave with pay; etc. etc. Heck if $ 7.25 is a good minimum, think how great $ 100 an hour would be. I can just imagine these kind of discussions going in the Obama White House.

Why not outlaw all pollution starting today? Why not mandate that all cars have to get 200 mpg starting next week? These are merely extensions in degree of the current Obama EPA actions. Heck, why not go for it, since we don't care one way or another about American jobs or the economy?

What about raising tax rates to 80 percent for all those rich people who make more than $ 75,000. That should bring in a lot of money. Lets eliminate corporate tax loopholes and raise corporate rates to 70 percent. That will solve our deficit problem.

All of these discussions are the kind that I suspect go on regularly in the Obama White House. They may seem extreme now, but we have gotten use to a lot of Obama stuff that would have seemed extreme ten years ago. Now we have nine percent unemployment; maybe we can double that number in two or three years. Why should people work anyway?

As goofy as all this sounds, it doesn't sound any goofier than what Obama and Geithner say regularly on the stump. No wonder the economy is moribund.

Tuesday, September 13, 2011

Europe -- A Case Study in Why Government Is Not The Answer

So, where are we now in fixing the Greek debt crisis. Greek government debt maturing in March of 2012 is trading in the open market at 55 cents on the dollar, according to today's Wall Street Journal. The yield on two year Greek debt is now 75 percent, on 10 year paper 20 percent. So, the default has really already occurred. The fiscal deficit for Greece through the first eight months of the year is 22 percent higher than last year. Meanwhile, real GDP is likely to drop 10 percent this year as compared to a fall of 5 percent last year. So, where does it end? -- where it should have ended two years ago when Greek sovereign debt was a lot lower and European banks were in far, far better shape.

This impending disaster is a direct result of government policy. Merkel and Sarkozy in cahoots with the ECB (European Central Bank) have served up the myth that somehow they could avert a Greek default through politics. We now see the results of their efforts -- economic disaster for Greece and the weakening of the entire European financial structure. So much for bailouts.

Think of how regulation is faring. Why would European banks be in trouble if they are marking their positions to market, as liberal politicians claim regulators will force them to do. Actually, liberal politicians are forcing these banks to mis-mark their positions so as to foster the illusion that they are in good shape. Yesterday, these European banks shed between four and ten percent of their value in a single trading session and most are down more than sixty percent in value value this year. Way to go regulators!! If you have properly marked your bond positions, then why not just sell them? That shouldn't change your net worth at all since you have already marked them to market. But, no. The regulators know best. Now, they are forcing the banks to publicly lie about the value of their holdings. Wow! Isn't that great. Good to see the regulators doing their job.

But, meanwhile, the markets are not fooled by the regulators and the politicians. The markets are showing the way and the way is down for European sovereign debt and down for the European banking system. Had the market simply been permitted to work its will two years ago and let Greece default, we would have only minor problems today with the Euro and with European banking. But, no, politicians and central bankers had to take center stage, repeating the same mistakes that American policy makers made in the fall of 2008. These folks never learn.

Take a lesson from the Asian Crisis of 1997, which was first and foremost a debt crisis. What happened? Fortunately, the IMF was unable to be a backstop or a bailout source for that crisis. So what happened? The crisis ended naturally by 1998 and by 2000 Asia was back and roaring ahead. Why didn't Asia stagnate like the US did after 2008 and Europe is now? Because no one bailed them out. Three cheers for "no policy." "No policy" works.

What doesn't work is government policy. It doesn't work in the US and we are watching government policy turn a minor crisis in European sovereign debt into a major conflagration. When will we learn?

Sunday, September 11, 2011

The Beginning of The Age of Default

There have been many famous epochs in European history and we are now about to witness the dawn of the latest -- the Age of Default.

Greece is verging on financial collapse (this week) and there is no longer any viable way to prevent that collapse. Whatever they may call it, default is on the way and soon, certainly before the year is out perhaps much sooner.

But, that will just be the beginning, as we move swiftly from country to country throughout the Eurozone. There is some chance, but it is slim, that Germany can itself avoid default. The reason for pessimism on Germany is that Germany will end up absorbing the obligations of its major banks, much as Ireland did two years ago. When the bailer bails out too many bailees, then the bailer needs a bailer. Who will bail out Germany?

It will be interesting how this plays out in the US. California, Illinois, and New York have no hope of avoiding bankruptcy. They will, no doubt, appeal to the federal government for relief, which, if given, would only prolong the inevitable.

The question is not whether California, Illinois and NYS will go bankrupt, the question is when. To the extent the federal government absorbs the obligations of these states, such activity will hasten the collapse of the US federal debt market.

None of this involves the losses that you might think. While Greek's nominal debt is $ 450 billion, it's current market value is probably half of that. The market has already dictated a 50 percent default, so that there is only another $ 225 billion left for investors to lose. Ditto for Spain and Italy with corrections for market conditions.

The problem is going to be: most folks have simply assumed that the ECB had some magic formula to avoid a Greek default. The ECB doesn't have such a formula. A Greek default will shock the markets and awaken the markets to the prospect of further defaults both in Europe and in the US. That is the main significance of the Greek default -- the loss of $ 225 billion to bond holders is a relatively minor problem.

For some reason, financial commentators have bought in to the "we can bail out everyone" song that is sung by European politicians and the Obama White House. It's not so and the Greek default will be the first bell that rings to show that it is not so.

Tough Road Ahead for US and Europe

Bad policy has a way of surviving, even though the results of bad policy may be plain for all to see. The US and the Western countries have managed, by government policies (political policies) to destroy the vibrancy of their economies. Perverse incentives and irrational agency costs so pervade these economies that real economic growth of the kind seen in the nineteenth and twentieth century is not likely to ever return.

Many in the Western world applaud the collapse of their own economies. They see economic growth as damaging to the well being of the population. Those who take this view are usually pretty well insulated from the downside of stagnant economic growth. But most of the citizenry are not insulated from that downside. Unemployment and under-employment mostly afflict folks that have no real way to protect themselves. In the US, minorities suffer the most from the collapse of the economy; white college graduates suffer the least.

John Maynard Keynes was, in my opinion, the greatest economist in history. Strangely, what passes as "Keynesianism" is an absurd, foolish set of doctrines that are routinely taught to undergraduates that suggest that wasteful government spending can lead to wealth. Keynes never believed anything of the sort as a perusal of his work would suggest. But, who reads Keynes these days? If you read Keynes, you will quickly run across the notion of "animal spirits" that motivate entrepreneurs to do the things that spur real economic growth. Where is that taught in the modern academic establishment?

In his classic "Treatise on Money," Keynes used the term inflation to mean mostly growth in the money supply. He was certainly no believer in the so-called trade-off between unemployment and inflation. He was aware of what happened in the 19th century when powerful economic growth carried Britain and the US to the pinnacle of power amidst more or less constant deflation (how can that be?). Keynes saw "pyramid building," which he cited in his 1935 work "The General Theory of Employment, Interest and Money" as a device to encourage business, not as Obama and his advisers see it, as a substitute for the private economy.

The media labels the Obama Administration as Keynesian. Nothing could be further from the truth. The Obama Administration basically believes in transfer payments to their political allies and throwing money down rat holes. Keynes would have been appalled. He probably would have joined the Tea Party.

The truth is that no amount of government spending or targeted tax cuts can do any good. They simply waste (future) taxpayers money and make things worse. Government is stifling entreneurial activity in the US and in Western Europe. It is that simple. Incentives do matter, contrary to what Obama and his folks think. Businesses are not the enemy, contrary to what Obama and his folks think. Until policies change, the future lies with Asia and parts of the world not bent on destroying private enterprise, but bent on encouraging it.

Just attend a movie in the Western world and you can see the stereotypes. Businessmen are always crooks and left-leaning lawyers and college professors and students are always the good guys. Businesses are portrayed constantly in the media as instruments of environmental destruction and unfeeling masters of downtrodden employees. Our modern literature portrays the same images. Pick up a college newspaper, anywhere in the country, you get the same message. College, student-run, newspaper columns spend most of their time counting up ethnic and social noses to see if they are all represented properly and if there are enough centers and resources sucking up tuition money to promote their agendas. Most of these latter efforts simply create divisions and animosities amongst people where there previously were none.

In short, the culture no longer believes in free enterprise. If you are rich enough or comfortable enough or have enough job security, then what do you care about people that can't find work or are in danger losing their job. In a sense, it is the preoccupation with pipedreams, that enables the liberal elite to ignore the economic plight of the average American or Western European. The average guy is pummelled by the government-only approach to the economy. But, what do Obama and his group care, except for their interest in re-election.

The controversy over the Boeing plant in South Carolina typifies the way this game is cynically played. The Obama Administration could care less if thousands of jobs are shipped out of the country so long as no non-union employees get hired in South Carolina by Boeing. It is not enough to be an American citizen to merit Obama's interest, you have to be a prospective union member as well. Obama could stop the travesty going on in the Boeing plant dispute, but he chooses not to. That tells us a lot about Obama.

In the end, you have to decide what kind of economy you want. China and Asia are choosing to have a dynamic economy with rising standards of living and increasing economic power. The US and the West have thrown in the towel and prefer political theater to economic progress. Not a pretty picture for those that need jobs and a future in the Western world.

Friday, September 9, 2011

Wasn't Listening to Me....Obviously

I was sorely disappointed that the President did not follow my advice in Thursday night's speech and offer up the repeal of his entire first two and a half years in office. I guess there wasn't much chance of that after all.

What he did was promise to push for more of the same measures that have stifled economic recovery in the US and he seemed truly unaware of the real reasons that the economy is adrift. So, at least, you can say one thing for the man -- he is consistent and (intellectually) deaf.

So, what's the future look like. If the pundits are right that folks are souring on the tea party, then the future cannot be very good. The main agenda for the tea party is rolling back the size and scope of government and tackling our national debt problems. If that is truly out of favor, then we will eventually be making the kind of headlines that Greece is making, without any savior (Germany) as a prospective bailor.

In the short run, though, what happens with the economy? How bad can it get? It can get worse, but not a lot worse. There are too many unemployed resources out there for things to deteriorate too much from here. Businesses will have to spend a fair amount of time figuring out how to do end-runs around government policies. There is simply no way, other than out-sourcing and labor-saving, to operate a growth business with the current climate of government intervention. It will take some time.

The price will be paid, not by Jeffrey Immelt (GE's CEO) or Warren Buffett or the various wealthy folks who support the Obama Administration. No indeed. The losers from the Obama Stagnation will be the poor, the minorities, the unemployed, and large swaths of middle America. The rich and comfortable and the public employees and union members who still have jobs will cheer the Obama crushing-machine on. While those, least able to protect themselves will be savaged by the big government suffocation promoted by the Obama Administration and its allies.

So, look for very slow, anemic economic growth in the US and Western Europe. Perhaps, another mild downturn, but nothing big on the downside. Stock markets should fare well, even though volatile. There will be rolling defaults in Western Europe and effective defaults among selected states in the US. But, all will survive the Obama policies in time.

Saturday, September 3, 2011

My Advice to the President

Dear President Obama:

Your decision to request that the EPA suspend its new regulations on ozone that could have easily cost another one million jobs is a good one. Build on it. In your speech on the 8th of September, make the ozone regulation suspension the start of something big.

Announce that you are now suspending all new regulations that are the result of Dodd-Frank, Obamacare, the 2009 Credit Card reform act, new NLRB rules such as the Boeing-South Carolina fiasco. Further, you are suggesting that Congress impose limits on lawsuits against business when the businesses themselves are not at fault (but their employees might be). You are further going to request that Congress suspend minimum wage laws and family leave act provisions until unemployment sinks below six percent. Finally, you are going to ask Congress to exempt all companies with less than $ 50 billion market capitalization from the absurd provisions of Sarbanes-Oxley.

It is okay to say that all of these onerous things will come back once the economy is healthy again, but, for now, we should be brushing them aside so that folks can go back to work.

Once unemployment is below six percent and economic growth is consistently above three percent, then you can go back to demonizing business and imposing roadblocks to growth and employment. You will still do a lot of damage with your policies, but the country would be in a better position to withstand your assault on capitalism at that point.

If you do this Mr. President, you will steal the thunder from Republicans, and virtually guarantee your re-election next year. But, more important by far, the US economy will have a chance to recover and American workers can once again go back to work.

Your Pal,

Ed Burton

Friday, September 2, 2011

More Lawsuits By The Obama Team

FHFA is now suing the major banks for subprime lending problems. Just what the economy needs. Why not just pass a law saying that no one but rich people can take out mortgage loans? That would accomplish the same agenda as this lawsuit by FHFA. I guess the Obama folks still don't get it. People other than Obama and Buffett need a chance in this economy. Suing the banks just makes more certain that they won't get that chance.

No Jobs, No Surprise

The jobs report this morning was startling -- no new jobs created in the US economy for the month of August! It seems that Obama was listening this time as he quickly suspended the onerous new ozone rules propagated by his EPA. While suspending the new regulations will not create jobs, it will at least prevent the wholesale destruction of existing jobs. That's a start. The Administration, really for the first time, has halted something that destroys jobs!

Hope springs eternal. Maybe the President is beginning to get a glimmer of why his policies are destroying the American economy. This would be good news indeed.