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EXILED FROM MAIN STREET
STOP BREAKING DOWN
Stocks fell 10% into early June, a month historically
weak for stocks and many broke 200 day moving averages. The S & P
500 then rallied 7% and finished with the strongest June since 1999
and 2000. The presidential election will increase market volatility
and dampen investor sentiment but valuations are compelling, earnings
expectations modest and sizable cash balances remain on the sidelines.
The demand for dollars has been exceeding the supply. Middle East countries
and European companies were buying ten year Treasury debt yielding 1.53%,
the lowest recorded rate in two centuries. So far this year, the Treasury
has auctioned $1.076 trillion of notes and bonds and for each dollar
borrowed, $3.16 was offered. To fight deflation, the Federal Reserve
has been buying 61% of the total net issuance of our debt but money is
not going through the system fast enough to create any velocity, meaning,
inflation will remain low and the recovery will remain slow.
TORN AND FRAYED
The Federal Reserve says the median net worth of the American family
fell 39% from 2007 to 2010.
- Total net worth for American families has returned to 1992 levels.
- The median net income fell 8% to $45,800.
- The median home lost $55,000 in equity value.
- The median stock market based retirement account value fell by 7% or
$ 44,000.
February 2008: Congress rejects a budget that increased spending by
3%, for one that increased 18%.
At the time:
- The unemployment rate was 4.4%.
- Taxes were 18.5% of GDP, above their post-war average.
- The federal deficit was $160 billion after declining 3 years in a row.
Since then:
- Federal jobs have increased by 11.4% or 225,000.
- 4% or 4,600,000 of all private sector job have vanished.
- We have an extra 7.6 million new workers who have joined the workforce.
In February 2009, the Congressional Budget Office (CBO) predicted the
economy would grow 4.4% in 2011 but it only grew 1.7%. New business start-ups
are at an all-time low and government dependency is at an all- time high
with 1 in 7 Americans using food stamps and 1 in 6 classified as being
poor.
Wealth destruction and credit contractions occur in depressions. Without
credit, money does not grow.
YOU CAN'T ALWAYS GET WHAT YOU WANT
Government officials have limits paying salaries so generous benefit
packages were granted in exchange for votes. With no taxpayer representation,
public service employees received pension and health care plans, sick
days, vacation and overtime, benefits virtually nonexistent in the private
sector, whose costs are not seen until years after those government officials
making the commitments leave office.
Assumptions were made based upon the bull markets of the 80’s and 90’s
that a portfolio allocated 60% stocks and 40% bonds could earn a 7-8%
total return over time. If bonds yield 4%, stocks must rise 10% to earn
that 8%. Most pension plans are allocated in this manner and few are
getting much satisfaction finding a quality 4% yield in a world flooded
with cheap dollars.
- For most States, spending grew 6% and employment grew 10% over the
last decade.
- Total government pension funds have nearly $2 trillion in unfunded
liabilities.
- Connecticut, Illinois, Kentucky and Rhode Island do not have 55% of promised
pensions.
- The State of California saw their pension costs increase 2,000% from
1999-2009.
- San Diego’s pension cost went from $43 million in 2001 to $231 million
last year.
- San Jose’s pension costs went from $73 million in 2001 to $224 million
last year.
Frank Ziedler was the last socialist to head a major US city as Milwaukee’s
mayor during the 1950s and wrote in 1969 “The rise of government unions
can mean considerable loss of control over the budget, and tax rates
because they put a competing power in charge of public business next
to elected officials”.
LET IT BLEED
On New Year’s Day, taxes are expected to increase for everyone with income,
dividends, capital gains, or estates. New corporate, payroll, and alternative
minimum taxes, will hit the economy and along with 21 new taxes or fees, penalties
or mandates that may exist for Obamacare. Forcing any tax increase on a fragile
economy with no job growth will only increase the deficit and not add to revenues.
Most of the recent tax breaks went to lower and middle income Americans who
can expect to send an additional $4,000 on average next year to Washington
DC. While it is true the rich will pay more in taxes, that will not put any
extra money into anyone’s pocket nor help them find a job.
The C.B.O. expects the economy to grow 4.4% next year but if the largest tax
increase in human history and $110 billion in accompanying spending cuts are
not stopped, the economy will shrink 1.3% in the first half of 2013 and grow
0.5% all year.
Since 2009, Congress has:
- Spent over $10.6 trillion dollars.
- Spent over $1 trillion more each year then it collected.
- Added extra $ 5 trillion new dollars to our national debt.
- Increased the mandatory federal spending rate by 27%.
- The budget deficit at 9.5% of the economy is the highest since WWII
- Federal spending at 23.4% of GDP is the highest since World War II
- The federal debt at 70% of GDP is the highest since after World War II
WHEN THE WHIP COMES DOWN
Governments in the U.S. and Europe are interfering with private banks, by
forcing them to buy government debt. If the debt goes bad, the banks fail,
like the last time government forced banks to lower lending standards in order
to support the housing market.
- In 2000, the federal government owed $5.6 trillion.
- Last year, we paid $ 450 billion or 2% interest on that debt.
- In 2011, we collected $ 2.6 trillion in taxes but spent $3.7 trillion.
- Today, the federal government owes $15.7 trillion dollars.
After the dollar left the gold standard, Saudi Arabia agreed to accept only
US dollars for oil. As other OPEC members followed, commodities began to be
priced in dollars. To facilitate trade, central bankers kept larger reserves
of dollars on hand, which the Federal Reserve printed without much inflation
and this allowed Americans to import more than they exported, consume more
than they produced, and spend more than they earned.
As demand increases for the Chinese Yuan, dollar demand will decrease and
reserves will be sold causing the dollar to lose value and inflation to return.
This will set the stage for our next financial crisis involving escalating
federal debt with a less valuable currency. Time is not on our side.
TUMBLING DICE
The free market is an intricate system of voluntary economic social and cultural
interactions, motivated by the needs and desires of individual and community.
It operates under rules of cooperation and serves a harmony of interests that
support a civil society of ordered liberty.
Government could never produce on a sustainable basis the abundance of food,
housing, medicine and energy we need but the free market does. Bureaucrats
could never design a more productive system which creates an unlimited array
of consumer goods that add comfort, value and security to improve the quality
of life for more people.
From Greece to Egypt, Wisconsin to Xinjiang, Penn State to Katie Holmes individuals
are demanding freedom from domination. Useless, corrupt inefficient ideas and
systems which do not contribute to the growth and prosperity of the organism
will fade away and die, allowing newer ideas and systems to regenerate in their
place. Punishing people with excessive taxation, spending, inflation and regulation
will not contribute to anyone’s economic or political freedom and so these
barriers must be removed.
HAPPY
Without capital, there is no business. With business, there are no jobs. Without
job’s, there are no taxes.
30 years ago, Congress passed a budget based on free market principles and
43 million new jobs and $30 trillion dollars in new wealth were created in
25 years.
Since 2007, the number of pawn shops in Florida has doubled. In San Francisco,
the repo business is booming for yachts. Bankruptcy attorneys, foreclosure
administrators, food stamp card makers, unemployment office workers, and regulators
are all doing well.
Economic policies are needed that encourage growth with a strong dollar, and
contain real tax, tort, regulatory and entitlement reform. As the largest economic
power in the world, we are the most logical choice to pull the world back to
prosperity and will do so again as soon as we toss these last remnants of socialism
onto the trash heap of history. |
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