April's Tab + Tip

April will be the first edition of a new monthly feature. Every month I will give a brief overview of this month's "bill" in terms of both the economic costs of this recession and the Obama Administration.

Economic Bill:

• 13.9% of household income is spent just making payments on household debt (4th Quarter 2008)



• Industrial production and capacity utilization are below 2002 levels as of March 2009



• 1.89% of all commercial bank loans are being charged off (read: noncollectable) for 4th Quarter 2008



• Unemployment was 8.5% nationally in March of 2009, this is 5.1 million jobs lost in the last 5 months!



• GDP was down 6.1% (annualized estimate) in the first quarter of 2009, following a 6.3% (annualized) decrease in the 4th quarter of 2008



• Just for reference, our economy was ~$13 trillion a year prior to the recession, so in two quarters economic output has dropped by ~$1.3 trillion!

Economic Tip: Brace yourself for more bad news and a long, slow recovery (see The Economic Outlook).

Obama's Bill:

(A picture is worth a thousand words)

Total Tab: $3.69 trillion+$0.787 trillion+$0.410 trillion-$0.0001 trillion= $4.8869 Trillion

Total Bill: $4.8869 Trillion in planned spending through 2010 and $1.3 Trillion economic losses so far = Over $5 Trillion is total cost!

Tip for April: To top it all off both spending and economic losses are likely to keep rising. I encourage you to think about $4.8869 Trillion of your dollars when you go to the polls in 4 years!

Chrysler R.I.P.

Well it has happened: a U.S. automaker is likely headed into bankruptcy. The fact that Chrysler or even G.M. for that matter would end up bankrupt is not really all that surprising. The U.S. auto industry has been hurting since the late 70s and has never really managed to forge a lasting turnaround. The reasons are plentiful: failure to adapt to changing customer demands, slow response time, lack of innovation where it matters, poor quality, inefficient manufacturing, failure to adopt new technologies rapidly, competitive issues from U.S. taxes and regulation, poor financial management, poor strategic leadership, and the UAW.

The major culprit here is in fact the UAW. The complexity of union labor rules and sheer cost of all the benefits and concessions mean that the average UAW worker is paid well above the market wage - bleeding the automakers dry. The fact of the matter is that the price American consumers are willing to pay for a new vehicle simply cannot sustain such lavish pay and benefits. If the UAW does not learn this lesson soon G.M. and maybe Ford (though it is in a much better position) will fare the same.

Honestly, I think bankruptcy is probably the only way G.M. or Chrysler will ever survive in the long term (though for Chrysler it will probably not be as an independent company). Only under court protection can they clear off some of the toxic and crushing liabilities they are carrying. Even after bankruptcy the automakers would face a long and difficult road. If they cannot change their culture and persuade the union to be a team player any gains will be short lived.

The thing that really irritates me is that if we were going to let Chrysler and G.M. end up in bankruptcy court anyway couldn't we have let it happen before giving them billions of dollars in taxpayer loans? I mean seriously how did they go from too big to fail a few months back to dead meat today? It seems to me that the current administration doesn't so much have a plan as a motto: "Just throw billions of dollars at the problem and if that doesn't work then walk away and let them fight it out in court, all the while saying 'We told you so'." There is a nice little video showing all the politicians vow not to let the automakers fail on "The Lonely Conservative."

I think part of the problem is that at his fundamental core President Obama is a socialist and he despises capitalism (which, by the way is, what made America great). His goals during this recession seem more about promoting his agenda and lending money to every business enterprise he can find so that later he can gag them when he rams universal health care and tax hikes down our throats (just ask the CEO of BofA, if only he could tell you).

Check out this brief article too.

And as a parting thought think about this - Is America still free and are companies "private" if we all owe the government for our houses, jobs, and cars?

Obama and Fox News

The video below show's President Obama making a thinly veiled poke at Fox News . Maybe the news coverage is getting to him? Also, see this article on The Lonely Conservative.

ACLU Vs. Religion

Click here to read an interesting article about the ACLU and its attack on Christianity and Judaism.

The Economic Outlook

The American economy as we have known it since the mid-1980s is quickly and not so quietly coming to an end. The question on everyone's mind is, when will it be over? It is fairly clear what must happen for the economy to recover - the difficult part is determining when it will happen. Recently there have been some small bright spots of economic news. Citigroup, Goldman Sacs, and a few other companies are posting stronger earnings and banks are making headway into clearing out bad loans. Many economists now believe the pace of economic decline will slow for the second quarter and perhaps reverse by year's end. That's the good news, here is the bad: We are entering the most dangerous and difficult part of the business cycle - the bottom.

The current recession has taken an enormous toll on jobs, profits, economic growth, inflation, credit markets, and stock markets (didn't think I'd forget that one did you!) because it is at its core a painful deleveraging process. Our economy has been running overloaded with debt and now we have to shed that excess debt, which is a very slow and painful process. Where do we go from here? There are really two major paths that I see the economy taking and a lot of gray area in between. Here are my two cents on the economy - no guarantee included!

The first road is the more pleasant of the two. In the remainder of this year some hard choices will have to be made by the Federal Reserve and the Obama administration. Much of the current improvement is the result of temporary boosts to consumer income from stimulus efforts that will fade by the end of the second quarter. If the recovery is to start by that time the government will need to engineer a rapid completion to the deleveraging. If they get it right we might expect the economy to bottom out at the end of the second quarter and then stay relatively sluggish through the rest of the year. Unemployment is all but certain to rise through most of the rest of the year. We will be lucky to avoid hitting 10%. Mild deflation is also probable through the end of the year, though I would not expect anything severe. The credit markets will recover slowly as banks get better capitalized and more certain of borrowers' credit, but don't look for major recovery until the job market improves (think Q2 2010). It will likely be several years before the economy is at full employment again (unemployment of ~5%). The stock market is probably already near a bottom and if the economy bottoms this quarter should make a strong showing through year's end, but then who can really predict the stock market anyway! That doesn't sound so bad right. The trick is what is required to get us there.

In order for the economy to start a sustainable, long-term recovery like the one described above a lot of things needs to happen simultaneously. First, the Federal Government needs to do three major tasks and has to get them right. 1. Taxes must remain relatively low and not unduly burden businesses or individuals (this means all taxes - even on "the rich"). 2. The $700 billion bankruptcy, excuse me stimulus, package must be spent wisely. This means spending on infrastructure, education, and investment: the three things that drive truly sustainable, long-term growth. 3. Regulation must be reasonable, clear, and as minimal as possible. Second, the Federal Reserve has to engineer a very soft landing and very, very careful recovery. This means the Fed must be prepared to soak up liquidity and raise interest rates to prevent another unsustainable bubble or sky high inflation (which is a real risk), without grinding the recovery to a halt. This is NOT a small feat! Third, financial firms must clean up the junk and stand ready to lend. This is probably something the market will take care of, but we should watch it closely.

And now for the second path I spoke of earlier...If the government and business fail to do those three things effectively and with perfect timing we will see at best sky high inflation from too much liquidity and rapid growth or a deep depression the likes of which the world has never seen.

Which outcome is more likely? The government's track record on these delicate issues is not very encouraging. I would hope that collectively we would have learned from history, but the election of the most liberal President in American history suggests otherwise. Some of the things Obama, Bernanke, and company are doing are good and I can almost see light on the other side except for the mountain of debt that is rising from Capital Hill. My best advice is to hope for the best and plan for the worst. Let your representatives know how you feel and that you care. Guard your retirement savings from inflation. And most of all...pray.

Obama's Foreign Policy

The recent extended foreign policy trip by President Obama has so many implications, most of them negative, for America in the near future. This clip of an interview of Newt Gingrich by Sean Hannity does a pretty good job of summing up the issues.

It is incredible that an American President would so clearly imply that America is at fault for most of the current global economic crisis. Obama apologized his way across Europe and got nothing in return. Perhaps the most ridiculous part is Obama's bow to the King of Saudi Arabia. Now I for one don't really see it as a problem if an American President wants to bow to the leader of another nation out of respect. Particularly in Saudi Arabia where this is the custom. The thing that really pushes my buttons is the fact that Obama's administration seems to feel they must lie about this and blame the height differential. Seriously, I don't buy that - but check it out for yourself.

The Truth About The Obama Budget

Stanford's Michael Boskin hits the nail on the head when he describes Obama's proposed budget. Probably one of largest misconceptions about the state of the federal budget and taxes is the notion that Obama will lower taxes for 95% of Americans (ostensibly those making less than $250,000 a year). And yes, technically what Obama is proposing will not directly raise taxes on those making less that $250,000. The catch is that even though you don't directly pay the Treasury you will pay for the added cost of government under Obama. If you really ask yourself, how would you prefer to be taxed: openly or indirectly? I prefer openly simply because it is a lot easier to sneak in tax hikes if the public doesn't know they're being taxed! How is Obama secretly taxing us, you ask? First, consider one of Obama's biggest domestic policy promises - expanded health care coverage. The current government health care program, Medicare, is not funded through income taxes, but a payroll tax which falls disproportionately on lower income individuals. How could this be true? Simple payroll taxes are paid by all individuals that have a job, and by their employer, and it is a flat rate not based on income (currently ~7.65%). Since this tax is not part of your federal income tax return it is also never refunded to you in part or whole. Making it the largest tax paid by low income earners. If Obama's health care plans involve increases in these taxes they will fall disproportionally on working middle-class Americans and their employers. You may be saying to yourself "Wait a minute, no one has talked about raising the payroll tax rate." You're right Obama hasn't proposed it, but it is a logical way to pay for the health care proposals that he is pushing for - especially since most American know little about this tax. So in the interests of posterity I thought it should be mentioned, but I digress.

This brings me to the second method by which Obama is raising taxes on individuals. This one is both downright underhanded and a little complicated so bear with me. As Boskin's article points out, Obama is going to add at least $6.5 trillion, yes trillion, to the national debt. Let me put this in perspective: there are ~300 million Americans so $6.5 trillion comes out to about $21,500 per person. And make no mistake every single dollar borrowed today must be paid back by our children and grandchildren, with interest. The real kicker here is that the savings rate in this nation is less than 5%. This means that most of the trillions of dollars we are borrowing are coming from other nations. Paying interest on this $6.5 trillion isn't really a problem if most of the bonds are held by U.S. citizens because we just paying ourselves on our debt. It is the fact that we are paying interest to foreign nations that really drains wealth out of this country. It gets even better, though. As the Federal government continues to borrow the debt service becomes more and more burdensome, in turn the credit worthiness of the government begins to deteriorate. The parties buying U.S. sovereign debt demand higher and higher interest rates to offset the increasing riskiness of Treasuries. Let me be clear, the current debt load is not extreme enough to have huge impacts on the credit rating of the Federal government, but it does have small impacts. Those increases result in higher borrow costs for the U.S. government which translates into more tax dollars needed just to pay the interest (or more debt). These costs alone do affect taxpayers indirectly, but the largest impacts come from other channels. The interest rates prevailing on U.S. government bonds are the benchmark rates for most market interest rates (including the prime rate that is the basis for mortgage and auto loan rates). As the U.S. government's borrowing costs rise so do the costs for every single American. This is the real tax that we will pay for Obama's massive debt addiction. We will pay it every day on our mortgages, car loans, credit card bills, and inflation.

The scary part is that the $6.5 trillion doesn't include the trillions of additional dollars the Federal Reserve and Treasury have pledged for the economic bailout. The next time you pay your mortgage think about the real cost of all this debt and whether it is worth it or not.

Down the Path of Britain

Check out this Fox News interview.

General Motors (A Division of the U.S. Treasury)

Ok, seriously I don't even know where to begin to explain what went wrong here. The major U.S. car makers have been getting their butts kicked by foreign manufacturers for years. Basically everybody involved with these companies was to blame. Until recently these problems were left to GM to solve since they are, after all, GM's problems. This is one of the hallmarks of the American economic system, and one of our greatest strengths. The creativity and rapid advancement that stems from such individual economic freedoms is what made America great. The flip side of this is that every once in a while our economy will stumble, and the current deleveraging was a long time coming. What really makes this recession unique is the willingness on the part of Americans to tolerate such huge changes in the scope of government involvement in our lives and economy.

A case in point is that the government went from basically making loans to GM and Chrysler to forcing the resignation of GM's CEO in very short order. It is shocking that such a thing could happen in the U.S. without huge public debate or outrage, but it did and with barely a whisper of protest. Don't worry, it gets even worse - the article linked to in this post's title details the horrors of government intrusion. Barely had 24 hours passed on Obama forcing Waggoner out and now there is talk of dictating who can serve on the board of directors. It's now official folks: General Motors is a de facto state owned and operated company! The really incredible part of all this is that by replacing Waggoner Obama is implying that he believes that his administration is better suited to pick leaders to run companies than shareholders. I doubt very much that Obama has the industry knowledge possessed by, oh I don't know, Waggoner! Not to mention the fact that the President's track record of nominating leaders is not very good - just look at his nominations for cabinet positions. This is just one more brick in what is turning out to be a fairly short road to socialism and this administration is barely 60 days old.



The precedents set with GM and the current economic stimulus and bailout plans will have long reaching and I fear disastrous consequences for the long-term vitality of our economy.

Great Video Clip

This is a nice little video that I think sums up a lot of our current problems. Enjoy!