Friday, September 20, 2013

My View

Random ruminations from your resident curmudgeon...

The U.S. Census Bureau (USCB) on Tuesday released its latest report on income, poverty, and health insurance coverage for our country through the end of 2012. The results are dismal. According to the USCB, personal income has dropped 8.3% since the end of 2007. As companies move to a part time work force to avoid the onerous cost of Obamacare, this trend does not look to reverse itself in the near future. Lower wages and less benefits are the characteristics of the jobs that our economy is producing now. The U-6 unemployment rate (the rate calculated to reflect those that have dropped out of the workforce completely and those that no longer receive unemployment benefits) stands at nearly 15%. For African Americans, that number is nearly doubled. The breakdown of average income by population sub-groups also shows some startling numbers. Asian households have an average income of $68,600 (and were the only demographic group to show an increase in average income over the past five years); non- Hispanic whites had an average household income of $57,000; Hispanic households averaged $39,000; and African American households averaged $33,000. According to the USCB, nearly one third (31%) of the U.S. population has experienced poverty for at least two months over the last three years. The are stark and sad figures, but behind these numbers are families and individuals that are struggling financially. How do we correct this situation? There are no simple answers, but a good place to start would be to allow businesses freedom from the onerous burden of high taxes and undue regulation. Establish certainty about the tax code and the regulatory environment so that the business community will have confidence to begin to expand and hire. Oh yeah, we all need to fundamentally re-think the role of government. The notion that we can have people in Washington centrally plan our economy is a fallacy and will come to a very bad end. Washington works for us, not the other way around. Until we enforce that notion, these negative trends will continue.

The only member of my family with a personal trainer is the dog.

Our government debt continues to spiral out of control, and the Federal Reserve this week said it would not slow down its current printing of dollars, defying expectations. While the stock market cheered this action, know that eventually, the printing of dollars will end and when it does, it will end badly. There are those that say the end won't be so bad, and the federal government will not default on its debt. History says otherwise. In 1979, the federal government- in the middle of another budget crisis- failed to pay the principal on $120 million in U.S. Treasury bills that were matured, which resulted in a class action lawsuit (Barton v. United States). In 1934 FDR, by executive order, refused to pay back Liberty bonds that were supposed to be paid back in gold or gold backed currency. He issued U.S. dollars, backed by the "full faith and credit of the United States", and then proceeded to orchestrate a 40% devaluation of the dollar. Friends, the precedent is there for a default action, from the extreme of non-payment to a repayment that is worth less than the original investment. And understand what a default of either kind means for our country. Foreigners own roughly one third of the U.S. debt in the form of Treasury bills and bonds. If we default and don't pay them, our access to global debt markets (in essence, our credit card) would dry up and the entire global payment system would be shaken to its foundations. If we pay foreign creditors (bondholders) but default on the holdings of the Federal Reserve (which has been buying massive amounts of Treasuries as part of their money printing), then the value of our own currency is going to collapse and our dollars will be worth significantly less, if not worthless. If we default on the holdings in the Social Security Trust Fund, everyone that is receiving or has been promised a benefit is, to use a highly technical financial term, screwed. With our nation's indebtedness careening out of control, we must get involved to get our elected representatives to exact some fiscal discipline in Washington. If we fail to do so, the results will be horrific.

I am not a complete idiot. I have had some parts removed.

The U.S. is not alone in the printing of money and profligate government spending. Since the end of 2008, when there was fear of a global financial meltdown, the G-7 nations (the worlds largest developed nations/economies) have added $18 TRILLION in new debt on top of the $140 trillion that was on the books. Surely all that stimulus and new money would jump start the global economies, right? Well, through the end of August, that $18 trillion in new money/debt from around the globe has generated $1 trillion in new economic growth, according to data compiled by Deutsche Bank. To put this is more realistic terms, for every $18 dollars spent by central banks around the world, there was a corresponding $1 in new economic activity. So what, you say? Well, just keep this in mind: in the low interest rate environment that we currently enjoy, most nations can carry their massive debt load and pay the interest without consuming their budgets. Let interest rates rise, however, and the interest payments begin to consume more of the annual budget, crowding out expenditures for things like defense, education, and social programs. And rates do note have to go far before this becomes a problem; in fact, many target a rate on the benchmark 10 year Treasury bond of 3.5% as the trouble spot. We care currently at 2.73% on the 10 year Treasury. When those interest payments become onerous, either other programs will have to be cut, or someone isn't going to get paid (see: default, in the item above). Pay attention to interest rates and the increases in our national debt. They will impact all of us in the future.

Mirrors don't lie, and fortunately for me, they can't laugh either.

And that, my friends, is my view.

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