A Better Economic Stimulus Plan

January 9, 2009
The airwaves are filled with talk of the President-Elect’s economic stimulus plan – its magnitude, its cost and whether or not it will really work. The Congressional Budget Office announced that, not even counting such a plan, the budget deficit this year is expected to soar to $1.2 trillion. Include Mr. Obama’s plan and the annual deficit could approach $2 trillion. And Mr. Obama readily admits that trillion dollar deficits could be with us for years to come. For a nation already drowning in debt, that’s a bitter pill to swallow. In the long run, it could do more harm than good, perhaps leading to hyperinflation, the very last thing that income-challenged Americans need.

There’s a much better way to do this. Restoring a balance of trade with a return to the tariff policies successfully employed by this nation for the first 171 years of our history, prior to the signing of the Global Agreement on Tariffs and Trade in 1947, would grow our GDP (Gross Domestic Product) by $700 billion, not just for one year or two but every year from now on. And the program wouldn’t cost a dime. In fact, instead of adding trillions in debt, between the tariffs collected on imports and the tax revenue collected on the higher GDP, federal tax revenues would easily swell by $500 billion per year. Second and third shifts would be added at auto and parts plants across the country. Idled plants would be restarted. At the same time, the profit potential needed to justify domestic production of other products would be restored. Instead of creating a mere three million jobs under Mr. Obama’s plan, many of which would be temporary, six million permanent, high-paying manufacturing jobs would come home and millions of additional construction jobs would be created to rebuild America’s manufacturing infrastructure.

Sure, it’d be a tough sell with the global community. But if we are on the brink of “an economic catastrophe from which we may not be able to recover” as Mr. Obama claims, then this is no time for timidity. Over the past three decades, our trade deficit has poured $9 trillion into the global economy. We’ve done our part and we’re tapped out. It’s time for the rest of the world to stand on their own two feet. Mr. Obama has said that only the government can pull us out of this rapidly deepening recession, and he’s right. But fixing our broken trade policy is a far more effective way to do it than with any deficit spending programs. It’s time to stop pretending that we can have a vibrant economy with an emaciated manufacturing base. We need long-term solutions that fix our economy and our balance sheet permanently, not short-term gimmicks that make us feel better now at the expense of future generations.

 


3rd Quarter Update of 2008 Predictions

October 9, 2008

 It’s time for my end-of-the-3rd-quarter review of my 2008 Predictions, which I wrote in November of 2007. To put it mildly, financial and economic conditions began unraveling at a frightening pace this quarter. It’s now clear that, as pessimistic as my forecasts for the economy seemed a year ago, nearly every measure of the economy will be far worse by the end of the year. Even I continue to be amazed by the power of the theory I presented in Five Short Blasts. The consequences of running colossal trade deficits and casting our work force into the global labor glut, by trading freely with overpopulated nations, are destroying our nation’s economy at an alarming rate. If you haven’t read the book, I strongly encourage you to do so, not for my sake but yours, so that you too can see our economy for what it really is and perhaps adjust your investing strategy accordingly.

Here’s some high-lights of my predictions vs. current conditions:

Prediction:

The credit crisis will deepen as the trade deficit continues to send hundreds of billions of dollars to foreigners who will demand safer investments with higher returns in the U.S., an ever-shrinking commodity.”

Results:

I guess you could say I nailed that one! Credit has seized up so badly that Congress just passed a gigantic bail-out of the financial industry to restore liquidity and get banks lending again. And each passing day brings news of yet another step by the Fed to nationalize the entire financial industry.

 

Prediction:

Tighter credit will definitely lead to a recession, deeper than economists are forecasting.

 Results:

Things have gotten so bad that economists would now be ecstatic if a recession was all we had. Central banks are pulling out all the stops in a desperate bid to head off a full-blown depression.

 Prediction:

Unemployment in the U.S. will rise to approximately 5.5%.

 Results:

Unemployment rose to 6.1% in August, a rate that inexplicably held steady while the economy lost another 159,000 jobs in September. And weekly first-time jobless claims are soaring. I wouldn’t be at all surprised if unemployment soars to 7.5% by the end of the year. Of course, this is merely the “official” government figure, one that is highly suspect when 17% of the work force is filing for unemployment each year.

Prediction:

Look for the Bush administration to take a “budget deficit be damned” approach and start pouring large amounts of cash into the economy in a futile effort to pull the economy out of recession ahead of the presidential election.

Results:

What probably looked like an alarmist prediction at the time has been blown away by reality. Is it even possible to keep track of the money that the Fed and the Treasury are throwing at the financial crisis?

Prediction:

The federal budget deficit will swell to $400 billion per year.

Results:

Now, shrinking the federal budget deficit to something less than $400 billion per year seems an impossible dream. There’s probably no way to know just how large our budget deficit is now, with all of the Enron-style off-balance-sheet actions by the Treasury and the Fed. It may actually be close to $2 trillion and growing fast!

Long-Shot Prediction:

There will be at least one Enron-style collapse of a major financial institution as off-balance-sheet schemes unravel.

Results:

I think we can all agree that the collapses of Bear-Stearns, Lehman Brothers, Merrill Lynch, AIG, Fannie Mae and Freddie Mac are sufficient evidence that I got this one right. But not in my wildest dreams did I think that that the entire financial system could collapse.

Long-Shot Prediction:

Either Chrysler will be broken up and sold off (and thus cease to exist) to raise capital for Cerberus or Ford will declare bankruptcy.

Results:

Hasn’t happened yet, but now there’s increased talk that all of the “Big Three” are teetering on collapse as the sales volume that they depend on so heavily for cash flow to keep them going has literally dried up in the past month. All of them will need huge infusion of government cash to keep them going.

So my 2008 Predictions made a lot of good calls but I’d be less than honest if I didn’t admit to blowing a few pretty badly, especially the following:

Prediction:

The Fed will not respond with significant interest rate cuts, at least not as much as the stock market would like. The Fed will be constrained by high inflation (lead by oil prices reaching $120/barrel by year-end and by higher food prices) and by the need to keep interest rates up to attract foreign investment. The Fed will end the year with rates not less than 3.75%.

Results:

The Fed just lowered rates from 2% to 1.5%. However, these rates have been rendered almost meaningless by economic conditions that have overwhelmed the ability of interest rates to have any impact. In normal times, a 50-basis-point cut would have triggered a huge rally on Wall Street. Instead, it did almost nothing to halt the free fall. Banks are ignoring the Fed rates, keeping rates high if they are willing to lend at all.

Prediction:

The U.S. stock market will be flat in ‘08 as measured in terms of the S&P 500.

Results:

It seems I couldn’t possibly have blown this call any more badly, although the year isn’t over yet. But it’s very, very difficult to see how the market can recover at all this year, with the possible exception of a wave of optimism accompanying the election of Obama, very similar to what happened in ’92 when Clinton was elected, sparking a big market rally in the middle of a recession.

For a complete review, visit my 2008 Predictions page.

Watch for my 2009 Predictions in November following the election!


The United States: A Financial White Hole or An Empty Well?

September 17, 2008

http://www.reuters.com/article/idINLG62875220080917?virtualBrandChannel=10112&sp=true

This Reuters article has some interesting global reaction to the government’s bail-out of AIG.  But what I find really rich is the following excerpt:

“The world urgently needs to create a diversified currency and financial system and fair and just financial order that is not dependent on the United States,” Shi Jianxun, a professor at Shanghai’s Tongji University said in the overseas edition of The People’s Daily.

So now the parasitic, overpopulated economies of the world who prey on America’s market to support their bloated labor forces have the gall to complain about the side effects.  Just exactly what did they expect would happen when they had finally drained every last drop of blood from America’s economy?  Did they think that the United States is like a “white hole” of dollars – a financial equivalent of the theoretical astronomical phenomenon that gushes matter into space from an invisible and seemingly limitless supply? 

In my 2008 Predictions, I forecast another Asian financial crisis like the one in the late ’90s.  As the recession is beginning to spread across the globe, currencies in Asia are falling as the competition for the shrinking American market intensifies.  The following excerpt from this same article may be an indication that it’s begun: 

Bank of Korea Governor Lee Seong-tae said the credit crisis triggered last year by U.S. mortgage defaults would drag on and hurt the global economy.

“We need to prepare for potential foreign fund outflow from the bond markets in the medium term,” he said.

Capital has been fleeing emerging markets as investors stung by the upheaval on Wall Street shun risky assets. Seoul has spent more than $30 billion this year to support the won, which has tumbled 17 percent in 2008 against the dollar.

India’s central bank has sprung regularly to the rupee’s defense, buying it in the currency market and exacerbating a shortage of local currency. After the rupee’s biggest one-day fall in a decade on Tuesday, the central bank said it would make it easier for banks to get cash. On Wednesday, it injected 47.36 billion rupees ($1.01 billion) into the banking system at the first of its tenders.

Those who believe that last night’s government bail-out of AIG has averted a global financial calamity are in for a rude awakening.  It’s done nothing to address the fundamental problem – that the global economy is predicated upon the United States functioning as a financial white hole, gushing money endlessly into the rest of the world.  Now, perhaps too late, we can peer down into that hole and see that the well has run dry.


Architect of Globalization Befuddled by Financial Crisis

September 14, 2008

This morning, Alan Greenspan, former chairman of the Federal Reserve, appeared as George Stephanopoulos’ guest on ABC’s “this week” Sunday morning political talk show. He had more of a “deer in the headlights” look about him than I’ve ever seen. It’s clear that he’s completely befuddled by the breadth and depth of the current financial crisis, and admitted that it’s a much worse situation than he ever faced during his tenure at the Fed. He spoke of the crisis as a “hundred-year event,” a financial crisis the likes of which may only arise every hundred years or so. He suggested that, perhaps, it’s just a natural correction in the process of globalization, a road bump in the golden highway to global nirvana.

Stephanopoulos questioned Greenspan about the imminent collapse of Lehman Bros. and whether or not the Fed should bail them out like they did for Bear Stearns, Fannie Mae and Freddie Mac. Greenspan’s response was “no,” explaining that “it’s unsustainable” for the Fed to continue bailing out these huge financial institutions. (At least he understands that much.) When asked when we could look for this financial crisis to end, Greenspan said that it would end when the housing market stabilized, perhaps sometime early next year.

At this point, I would have loved to be seated there next to George. “Mr. Greenspan, will housing prices need to fall to a level more consistent with Americans’ median income in order for this stabilization to take place?” I would have asked. “Yes, I suppose that’s true, and blah, blah, blah, blah, blah, blah …,” he would have responded.

“But with Americans’ median income stagnant or declining, as it has been for decades now, thanks to the trade deficit and loss of manufacturing jobs, then how can home prices ever stabilize?” I would have continued. I’m sure I’d have gotten a response that was heavy on optimism about the effects of fiscal stimulus, and equally heavy on denial about the role of the trade deficit.

Greenspan had one final slap in the face for American workers. When Stephanopoulos then questioned Greenspan about the domestic auto industry and whether the Fed should have a role in bailing them out too (since each of the “Big Three” are now pressing Congress for low-interest loans totaling billions), his answer was an emphatic “no!” Stephanopoulos replied, “But isn’t it unfair to bail out the big bankers and leave average folks like auto workers in the lurch?”  Greenspan then rationalized that the big financial institutions are extremely critical to the economy and that “even the auto workers have a stake in seeing those companies survive.” At this point, I wanted to scream at the television, “and just where the hell do you think those auto workers got the money to deposit in those institutions?!?!”

This was so illustrative of the problem with our chief economists, a problem that continues to escalate under the administration of his former apprentice, Ben Bernanke. Banks, lenders, brokerage houses – these are the only cogs in the economic machine that matter to them. They see manufacturing as grunt work, something almost unworthy of an advanced society, a nuisance to be farmed out to the unsophisticated who have nothing better to do.

There are economists out there who are challenging the premises upon which globalization is based, but the globalization cheerleaders are a close-minded bunch. They have the upper hand and the financial backing. Until that day when their failed theories culminate in a complete financial melt-down, they may continue to hold sway. But logic will ultimately prevail and history will judge Greenspan and his ilk harshly.


“Global economy a world of hurt for U.S. workers” by Cynthia Tucker

April 26, 2008

http://www.ajc.com/opinion/content/opinion/tucker/stories/2008/04/25/tucked_0427.html

This op-ed piece is by Cynthia Tucker, columnist for the Atlanta Journal-Constitution.  She has appeared on the PBS News Hour with Jim Lehrer many times over the years and is a highly respected journalist.

She absolutely hits the nail on the head with this piece in which she takes John McCain to task, but her criticism could apply equally to virtually any politician.  This editorial is a must read!  Following are a couple of key quotes:

“The campaign stop, part of McCain’s tour of “forgotten places,” highlighted the senator’s reputed penchant for straight talk, for refusing to pander no matter how unpopular his message. “Protectionism and isolationism have never worked in American history,” McCain said, according to The Associated Press.

He may be right, but McCain’s message would be more palatable if he were offering hard-pressed workers something other than the same dried-out message about education and job training. Retraining for what?”

Exactly!  I’ve wanted to scream the same question at the television every time I hear another politician suggest “job retraining” for displaced workers!  And I can’t let McCain’s lie that “Protectionism and isolationism have never worked…” pass.  The fact is that for the first 170 years of our nation’s history, we relied upon tariffs for all of our federal revenue and to afford domestic industry the protection it needed to grow.  As a result, we built ourselves into the most powerful, wealthy nation the world had ever seen – its preeminent industrial power and the envy of every nation.  By contrast, since turning toward “free” trade with the signing of the Global Agreement on Tariffs and Trade in 1947, our nation has been reduced to a skid row bum, literally begging the rest of the world for cash to keep us afloat.  McCain was right when he said he knew almost nothing about economics. 

“Here’s what the new economy has done for the average American: precious little. In 2000, median yearly household income, in 2006 dollars, was $49,447, according to The Wall Street Journal, which crunched data from the Census Bureau. By 2006, median household income had fallen to $48,223.”

In 1973 it was $40,000.  Take away the enormous increase enjoyed by the top one or two percent, and factor out the understatement of inflation by the Consumer Price Index, and you’d find that it has actually declined since then.  In other words, Americans are worse off today than they were 35 years ago. 

“… Princeton economist Alan Blinder, a longtime proponent of cross-border commerce, now says that it will create more severe social and economic upheaval than he once believed. He predicts that 30 million to 40 million American jobs are likely to be shipped overseas in the next 10 to 20 years, some of them in white-collar occupations such as financial analyst, microbiologist, graphic designer, radiologist and, oddly, economist.”

Alan Blinder is a former Fed governor and a long-time cheerleader for “free” trade and the supposed “benefits” it was going to bring to America.  Thanks for nothing, Alan!

“Those who still put great faith in free trade — Democrats and Republicans alike — need to look beyond their platitudes to see the displacement and anxiety it has created among middle-class workers. Their worries are not born of ideology but of a hard and bitter experience that has left them anxious about the future. When the factory where you’ve worked for years shuts down or your company stops offering health insurance, you’re not much interested in hearing about Adam Smith and theories of comparative advantage.”

It’s especially encouraging to hear someone call into question Ricardo’s (not Smith’s) principle of comparative advantage, the economic theory upon which the concept of “free” trade is based!

It’s great to see more and more prominent economists and journalists beginning to wake up to what’s being done to our country by “free” (blind!) trade. 

Pete


Author Opposes Free Trade with S. Korea

January 11, 2008

S. Korea has a population density of 1257 people per square mile, compared to America’s 83 per square mile.  It is almost four times as densely populated as China and 50% more densely populated than Japan.  As predicted by the theory presented in Five Short Blasts, free trade with such a country will be a sure-fire loser.

I’m neutral regarding free trade with Panama and Columbia.  They are slightly more densely populated than the U.S. – between 100 and 110 people per square mile.  These countries are no threat to American workers. 

“Tom Donahue, president of the U.S. Chamber of Commerce, told reporters earlier in the week that business will work to get approval of the agreements, rejecting suggestions of any type of trade moratorium.  ‘We are the largest exporting nation in the world,’ Donahue said. ‘The suggestion that we back off trade agreements, trade expansion, is to suggest that we stop providing opportunities for American workers and American communities to participate in the global economy.’”

This is a common tactic used by blind traders.  They focus only on exports.  He ignores the fact that we are also the biggest importing nation in the world, importing much more than we export.  The net result is a huge subtraction from our GDP and a huge loss of jobs.  He speaks of our trade policy as an “opportunity” for American workers and American communities.  It is, in fact, just the opposite.  It has paved the road to our bankruptcy. 

Pete