Monday 29 August 2011
All Together Now
A recent article by Tom Friedman of the New York Times accurately describes the issues that the word faces at this time. Please read: http://www.nytimes.com/2011/08/28/opinion/sunday/friedman-all-together-now.html?_r=1&partner=rssnyt&emc=rss.
Wednesday 24 August 2011
On Jack Layton
Much has been written about Jack Layton, the man, the politician and his life. He was, no doubt, a wonderful man about which we will have much to remember. His recent exploits changed the face of Canadian voting. But that's not what I want to post today.
Canada is a strange country in a political sense. Once ruled by the mighty Liberal Party, almost continuously from the mid 1930's to the late 1950's when a western interloper, John Diefenbaker, swept Parliament with his vision of Canada. I would venture to say that he was one of the few Prime Ministers with a larger view. Pierre Trudeau was another. What was common to all these parties was that they had a strong sense of free market philosophy that was enveloped by a curious sense of socialist safety net that included the Canada Pension Plan, Unemployment Insurance (as it was then known) and, most famously, national health insurance. This social safety net is the "third rail" of Canadian politics; touch it and (at least politically) you die.
How did this come about? In the 1930's this came about by the Liberals thieving, almost wholly, the party platform of the CCF, a strongly socialist party. Since the socialists (who evolved into the current NDP) rarely had power (and never had power federally) they become the conscience of the Canadian electorate. They were almost always based in the western provinces where fringe and other lunatic parties (such as Social Credit) almost always flourish. Our modern Conservative party is similarly based in the west and was, similarly, a fringe party until they merged with the Progressive Conservatives (a curious name for a conservative party). Western Canada was also a curious place for socialist parties to flourish. In Winnipeg the immigrant Jews from Eastern Europe who were exposed to communism came to Canada and had to settle for socialism (although the Canadian Communist Party was based in Winnipeg). The CCF, Canada's first national socialist party to mount a national election campaign was similarly based in Winnipeg. What Canadians did not want were socialists in power. Apparently, what Canadians wanted were social democratic ideas and ideals watched over by Liberal centrists such as MacKenzie King and Louis St. Laurent. Trudeau was a socialist long before joining the Liberal party.
Whenever there was a social democratic platform idea that would appeal to voters generally, the Liberal party purloined it. You can trace most social safety net legislation right back to the CCF and the NDP. They have been a steady resource for the Liberals and even the Conservatives who have, in name at least, ceased to be "progressive". Historically, the Liberal party was the recipient of social democratic ideas that helped it identify with the man in the street. However, as the NDP started to move more to the political center the Liberal party, bereft of any new ideas, became largely irrelevant. And so the NDP became Canada's "conscience in chief"--Her Majesty's Loyal Oppositiion. It was Jack Layton's brilliant strategy that brought that about.
It is tragic that he died too soon. He was a man of great civility who could have made an enormous difference in Canada's politics. While the Conservatives had a field day in mounting attach ads against the Liberals it would have had a great deal of trouble in doing so against Jack Layton. It would have most certainly backfired. So, we may have missed the chance to see more civility creep into Canadian politics. It will be interesting to see where the new leader takes the NDP but one thing is sure, they will sorely miss Jack Layton. As will we all.
Bernie.
Canada is a strange country in a political sense. Once ruled by the mighty Liberal Party, almost continuously from the mid 1930's to the late 1950's when a western interloper, John Diefenbaker, swept Parliament with his vision of Canada. I would venture to say that he was one of the few Prime Ministers with a larger view. Pierre Trudeau was another. What was common to all these parties was that they had a strong sense of free market philosophy that was enveloped by a curious sense of socialist safety net that included the Canada Pension Plan, Unemployment Insurance (as it was then known) and, most famously, national health insurance. This social safety net is the "third rail" of Canadian politics; touch it and (at least politically) you die.
How did this come about? In the 1930's this came about by the Liberals thieving, almost wholly, the party platform of the CCF, a strongly socialist party. Since the socialists (who evolved into the current NDP) rarely had power (and never had power federally) they become the conscience of the Canadian electorate. They were almost always based in the western provinces where fringe and other lunatic parties (such as Social Credit) almost always flourish. Our modern Conservative party is similarly based in the west and was, similarly, a fringe party until they merged with the Progressive Conservatives (a curious name for a conservative party). Western Canada was also a curious place for socialist parties to flourish. In Winnipeg the immigrant Jews from Eastern Europe who were exposed to communism came to Canada and had to settle for socialism (although the Canadian Communist Party was based in Winnipeg). The CCF, Canada's first national socialist party to mount a national election campaign was similarly based in Winnipeg. What Canadians did not want were socialists in power. Apparently, what Canadians wanted were social democratic ideas and ideals watched over by Liberal centrists such as MacKenzie King and Louis St. Laurent. Trudeau was a socialist long before joining the Liberal party.
Whenever there was a social democratic platform idea that would appeal to voters generally, the Liberal party purloined it. You can trace most social safety net legislation right back to the CCF and the NDP. They have been a steady resource for the Liberals and even the Conservatives who have, in name at least, ceased to be "progressive". Historically, the Liberal party was the recipient of social democratic ideas that helped it identify with the man in the street. However, as the NDP started to move more to the political center the Liberal party, bereft of any new ideas, became largely irrelevant. And so the NDP became Canada's "conscience in chief"--Her Majesty's Loyal Oppositiion. It was Jack Layton's brilliant strategy that brought that about.
It is tragic that he died too soon. He was a man of great civility who could have made an enormous difference in Canada's politics. While the Conservatives had a field day in mounting attach ads against the Liberals it would have had a great deal of trouble in doing so against Jack Layton. It would have most certainly backfired. So, we may have missed the chance to see more civility creep into Canadian politics. It will be interesting to see where the new leader takes the NDP but one thing is sure, they will sorely miss Jack Layton. As will we all.
Bernie.
Monday 22 August 2011
The Help
I had avoided going to see the movie, The Help, because of the tepid reviews. However, we went out of curiosity and out of recommendations of friends who had gone and enjoyed the movie. I did see, however, what the reviewers were talking about concerning the artistic value of the movie and then, something occurred to me.
A long time ago I had a discussion with my oldest granddaughter about a novel that she had been reading. It was about the segregated American south. I asked her how she like the novel. As an aside, she is an English major at university so that the "ask" was not out of mere curiosity. She said that she "liked" it. "Liked", I asked? "Weren't you scandalized by segregation?" "No", she said, "that was a long time ago".
And then it struck me. I had lived through segregation. I had lived through virulent a Anti-Sematism. I had lived through the holocaust. For me, it was not a long time ago. I can remember when the "coloured" could not drink from the same water fountain as the "whites". For my granddaughter her novel was historical. For me, it was visceral. And the movie, The Help, was visceral too. I can tell you for sure (without knowing it) that the reviewers had not lived through it. For them the movie lacked certain artistic values. For me it made me almost physically sick.
I cannot say that I enjoyed the movie. I cannot say that I enjoy books and movies about the holocaust. Enjoy is not the right word. What I can say, however, that for most of the south, from Georgia through Mississippi through Alabama, much of the attitudes represented in the movie as still in vogue. True we now call the "coloureds" African Americans, and they can all vote and hold public office. True that African Americans can now go to integrated schools in the south but, let me tell you, that the social attitudes to the blacks of the region have not changed much from the attitudes in the 60s. I had occasion to work for an extended period of time in Alabama two years ago and was appalled by the general attitude that whites had against blacks. I have similarly worked in Georgia and the attitude towards blacks has not changed since the Civil War. It is more genteel, it is more hidden. But it's there.
Sometimes it is hard to remember that the American South was first populated by the French. This part of the land did not go through the French Revolution and aristocracy and hierarchal societies die hard. These hierarchal divisions can be seen as much among whites as they can be seen among blacks and other minorities. For black slaves insert Hispanic day labour. There is still white trash. There are still golf clubs that do not admit women and Jews. Attitudes die hard.
So, go see the movie. Not as entertainment but as a reminder of the capability of men and women in modern times want to "own" others. If you feel sick after watching the movie then it has done its job.
Bernie.
A long time ago I had a discussion with my oldest granddaughter about a novel that she had been reading. It was about the segregated American south. I asked her how she like the novel. As an aside, she is an English major at university so that the "ask" was not out of mere curiosity. She said that she "liked" it. "Liked", I asked? "Weren't you scandalized by segregation?" "No", she said, "that was a long time ago".
And then it struck me. I had lived through segregation. I had lived through virulent a Anti-Sematism. I had lived through the holocaust. For me, it was not a long time ago. I can remember when the "coloured" could not drink from the same water fountain as the "whites". For my granddaughter her novel was historical. For me, it was visceral. And the movie, The Help, was visceral too. I can tell you for sure (without knowing it) that the reviewers had not lived through it. For them the movie lacked certain artistic values. For me it made me almost physically sick.
I cannot say that I enjoyed the movie. I cannot say that I enjoy books and movies about the holocaust. Enjoy is not the right word. What I can say, however, that for most of the south, from Georgia through Mississippi through Alabama, much of the attitudes represented in the movie as still in vogue. True we now call the "coloureds" African Americans, and they can all vote and hold public office. True that African Americans can now go to integrated schools in the south but, let me tell you, that the social attitudes to the blacks of the region have not changed much from the attitudes in the 60s. I had occasion to work for an extended period of time in Alabama two years ago and was appalled by the general attitude that whites had against blacks. I have similarly worked in Georgia and the attitude towards blacks has not changed since the Civil War. It is more genteel, it is more hidden. But it's there.
Sometimes it is hard to remember that the American South was first populated by the French. This part of the land did not go through the French Revolution and aristocracy and hierarchal societies die hard. These hierarchal divisions can be seen as much among whites as they can be seen among blacks and other minorities. For black slaves insert Hispanic day labour. There is still white trash. There are still golf clubs that do not admit women and Jews. Attitudes die hard.
So, go see the movie. Not as entertainment but as a reminder of the capability of men and women in modern times want to "own" others. If you feel sick after watching the movie then it has done its job.
Bernie.
Friday 19 August 2011
Duh....It's The Jobs, Stupid
The markets flail wildly in order to make some sense of the senseless. This week it's jobs. Last week it's the European mess. The market, while imperfect, is one of the only things that takes the economic temperature of the world on a daily basis. Sometimes fever spikes and markets go into steep decline. But over the long haul the the market has been pretty good at assessing the performance of companies, countries and economies.
The world is in a mess. The Arab spring uprising has produced few concrete results. Libya may be lurching toward a populist takeover. Syria is doing what it has always done best: kill its inhabitants (See: From Beirut to Jerusalem, Friedman). Dubai is stagnant and the oil producing nations are being paid in currencies that have been devaluing over the past several years (hence the price increases in fuel--the US dollar goes down, prices go up to compensate). The Palestinian and Israeli "peace" accord is anything but peaceful. India and Pakistan are at each other's throats. Europe and the Euro are in an economic mess as strong countries are increasingly asked to prop up weak countries. Canada is pretty much asleep. Any staying asleep seems like a pretty good strategy.
The US is between a rock and a hard place. The stimulus money has had little effect on jobs. Multinational companies are holding vast sums of money abroad. About 13 million Americans are jobless and 48 million are on food stamps. Foreclosed homes number in the millions. The American dream has become the American nightmare. Add to this the stalemate in Washington and the lunatic right wing of the Republic party and you have a receipe for disaster.
And, throughout this you expect the markets to be stable? The market is a mirror to our actions and, frankly, it does not like what it sees. Some of my money manager friends point to charts and bond yields and US treasuries and say that it's not as bad as I think. But it's as bad as I believe it to be. Maybe worse.
I am a great believer in tipping point theory. Things go along until they don't and then things unravel exponentially. The US economy is largely dependent on consumer consumption for it to survive. In the past year the consumers who were employed spent more on savings and paying down debt but kept the economy barely alive through purchases. Unemployed people don't buy; they are consumers of social welfare resources funded by bankrupt states. At some point the process has to run out of steam. The market sees this clearly. There is no political or fiscal help and sadly no leadership. Stay tuned.
Bernie
The world is in a mess. The Arab spring uprising has produced few concrete results. Libya may be lurching toward a populist takeover. Syria is doing what it has always done best: kill its inhabitants (See: From Beirut to Jerusalem, Friedman). Dubai is stagnant and the oil producing nations are being paid in currencies that have been devaluing over the past several years (hence the price increases in fuel--the US dollar goes down, prices go up to compensate). The Palestinian and Israeli "peace" accord is anything but peaceful. India and Pakistan are at each other's throats. Europe and the Euro are in an economic mess as strong countries are increasingly asked to prop up weak countries. Canada is pretty much asleep. Any staying asleep seems like a pretty good strategy.
The US is between a rock and a hard place. The stimulus money has had little effect on jobs. Multinational companies are holding vast sums of money abroad. About 13 million Americans are jobless and 48 million are on food stamps. Foreclosed homes number in the millions. The American dream has become the American nightmare. Add to this the stalemate in Washington and the lunatic right wing of the Republic party and you have a receipe for disaster.
And, throughout this you expect the markets to be stable? The market is a mirror to our actions and, frankly, it does not like what it sees. Some of my money manager friends point to charts and bond yields and US treasuries and say that it's not as bad as I think. But it's as bad as I believe it to be. Maybe worse.
I am a great believer in tipping point theory. Things go along until they don't and then things unravel exponentially. The US economy is largely dependent on consumer consumption for it to survive. In the past year the consumers who were employed spent more on savings and paying down debt but kept the economy barely alive through purchases. Unemployed people don't buy; they are consumers of social welfare resources funded by bankrupt states. At some point the process has to run out of steam. The market sees this clearly. There is no political or fiscal help and sadly no leadership. Stay tuned.
Bernie
Tuesday 16 August 2011
Learning to Fail
Two disparate items came together to form this post. One was a reading of The Last Lecture by Randy Pausch. The other was a conversation that I had with my nephew about the innovation and creativity that drives the US economy. You will remember that Randy Pausch was a computer engineering professor that found out that he had terminal pancreatic cancer. His university sponsored a lecture series for professors who were asked to give a lecture as if it were the last thing that they did in life. For Pausch, this was a real life event. The book has a number of homilies about life and living that, at first reading, seem obvious. However, a reminder of first principles never hurts and, after some reading, you find yourself enjoying the conventional wisdom that we seem to forget. In any event Pausch died and the book was published posthumously. For the curious, here is the link to the actual lecture: ttp://www.youtube.com/watch?v=ji5_MqicxSo.
What also comes to mind is the book The Startup Nation by Dan Senor and Saul Singer. This book chronicles the amazing number of innovative startups in Israel. On a per capita basis Israel is by far the largest producer of creative and innovative ideas on the planet.
What also comes to mind is the book The Startup Nation by Dan Senor and Saul Singer. This book chronicles the amazing number of innovative startups in Israel. On a per capita basis Israel is by far the largest producer of creative and innovative ideas on the planet.
Regarding my conversation with my nephew, he opined that the US would come around because it was and will be the world leader in innovation and creativity. My rejoinder was that the US was not great because if its successes in innovative technology but because it embraced failure as a mechanism by which good ideas come out of many failures. This observation was made well before I saw the same sentiment in Pausch's book.
The US rewards failure as much as it rewards success. As Pausch points out in his book many companies hire CEOs from failed companies because they have learned from experience what works and what doesn't. Also, the US has a large enough capital market to fund enough failures so that the successes shine through. Theses capital funds have been extended to Israel that boasts the largest investment in venture capital in the world outside of the United States.
One of the reasons that the US has always lead in innovation is that the market picks the winners and the losers. In countries where the central government makes investments in innovation it is the government that picks the winners and more often the losers. Governments are not good as this; the market is. While China and Korea have gifted innovators their talents are more focused on engineering--that is making an innovative idea work in the real world. And they are good at it. But as for innovation, they lag far behind the US and Israel.
Canada is a small country that has a very shallow venture investment pool. What innovation there is is soon lost to the US in a manner similar to Israel. Mature companies are less likely to grow in Canada before they are sold off to their American investors. Also, the depth of venture capital in Canada does not allow for much failure. Therefore, the cream does not rise to the top. There are a few examples of Canadian successes but they pale in comparison to innovative ideas and companies in Boston and Silicon Valley.
One of the distressing facts of modern life is that embracing failure is not taught as a life skill. Where soccer games have no score or where everyone wins a trophy, there will be no striving for success in the light of failure. Failure is an evolving process that, with perseverance, leads to success. It is best learned young. Failure to learn that lesson results in adults that are mired in entitlement and rarely strive to overcome their failures.
So, fail away until you succeed. You'll be a better person for it.
Bernie.
Wednesday 10 August 2011
Withholder in Chief
Lest you think that I am an uncritical supporter of President Obama, read the following article in the Times by Maureen Dowd. See:http://www.nytimes.com/2011/08/10/opinion/withholder-in-chief.html?ref=opinion
Monday 8 August 2011
The Morning After
If the US thought that the downgrading of its credit rating would go unnoticed, think again. First, all the news agencies flocked to the story like vultures to roadkill. Then, the politicians started pointing fingers at one another. Then the President spoke words of reassurance to the American people saying that, in his estimation, America was still triple A.
As stated an an earlier post, the downgrading of US credit had little to do with America's ability to pay its bills. It has everything to do with what has become a dysfunctional government--from whatever party's standpoint you wish to view this mess. No one gets it.
First, let me point to an anomaly. In the wake of a 600+ point drubbing that the Dow took today, there was still a flock to US Treasury Bills. This is because America is still the richest man in the poorhouse. The state of the world economy is so fragile that investors are still willing to bank on the greenback. This will have the twofold effect of holding interest rates down (competition for Treasury bills is based on what interest rate the buyer is willing to accept) and fuelling a demand for US dollars, which will have a negative effect on US exports. The interest stuff is good. A stronger dollar is bad.
Standard and Poor has spoken truth to power. And there is no one listening. Canada went through this in the 1990s. Britain and other European countries are going through it now. It is time for the US to get its fiscal house together in an atmosphere where no one wants to give an inch. The Republicans are being held hostage by the Tea Party candidates who were elected on the promise of no new taxes and substantial cutting of government programs. The Democrats have already given away the farm in agreeing to deep cuts to social safety net programs. The President seems to be stunned in not knowing what to do. The wrangle about the debt ceiling was left largely to Congress with little or no leadership by the President aside from have an interminable number of meetings that seemed to go nowhere. The bully pulpit of the presidency is largely vacant in an atmosphere where opponents do not even call the President, president. They call him Obama. They may as well call him "boy" in the most negative racial sense. No one is going to give President Obama an inch with an election on the horizon. In other words more gridlock.
So why has the market tanked? One would have thought that the downgrading that was constantly touted would have already been priced into the market. What does the market know that we don't know? It knows that US corporations who are holding a trillion dollars offshore are not likely to bring it back into the US without some fundamental tax reform. It knows that there are over 13 million Americans who are unemployed and 48 million Americans who are on food stamps. It knows that whatever fiscal plan is worked out by the elite bipartisan committee won't work without tax increases. While the Dow was off 5.5% the S&P (representing a wider range of companies) was off almost 1 percentage point lower than the Dow. Read for this that the disapproval of the fundamentals is more widespread than the limited representation that the Dow portrays. NASDAQ was lower by over 1.5%. The king has no clothes.
It will be interesting to see how low the Dow is going to go in the next few days before buying or profit taking takes over. Many stocks are now at a rediculously low price/earnings ratio and are ripe for the picking. However, 10 years ago who would have said that General Motors and Chrysler would have needed bankruptcy protection. The uncertainty in the US is palpable. Wall street is a reflection of Main street. This is a solid vote against all of the political parties and the President. And no one seems to be listening.
Bernie
As stated an an earlier post, the downgrading of US credit had little to do with America's ability to pay its bills. It has everything to do with what has become a dysfunctional government--from whatever party's standpoint you wish to view this mess. No one gets it.
First, let me point to an anomaly. In the wake of a 600+ point drubbing that the Dow took today, there was still a flock to US Treasury Bills. This is because America is still the richest man in the poorhouse. The state of the world economy is so fragile that investors are still willing to bank on the greenback. This will have the twofold effect of holding interest rates down (competition for Treasury bills is based on what interest rate the buyer is willing to accept) and fuelling a demand for US dollars, which will have a negative effect on US exports. The interest stuff is good. A stronger dollar is bad.
Standard and Poor has spoken truth to power. And there is no one listening. Canada went through this in the 1990s. Britain and other European countries are going through it now. It is time for the US to get its fiscal house together in an atmosphere where no one wants to give an inch. The Republicans are being held hostage by the Tea Party candidates who were elected on the promise of no new taxes and substantial cutting of government programs. The Democrats have already given away the farm in agreeing to deep cuts to social safety net programs. The President seems to be stunned in not knowing what to do. The wrangle about the debt ceiling was left largely to Congress with little or no leadership by the President aside from have an interminable number of meetings that seemed to go nowhere. The bully pulpit of the presidency is largely vacant in an atmosphere where opponents do not even call the President, president. They call him Obama. They may as well call him "boy" in the most negative racial sense. No one is going to give President Obama an inch with an election on the horizon. In other words more gridlock.
So why has the market tanked? One would have thought that the downgrading that was constantly touted would have already been priced into the market. What does the market know that we don't know? It knows that US corporations who are holding a trillion dollars offshore are not likely to bring it back into the US without some fundamental tax reform. It knows that there are over 13 million Americans who are unemployed and 48 million Americans who are on food stamps. It knows that whatever fiscal plan is worked out by the elite bipartisan committee won't work without tax increases. While the Dow was off 5.5% the S&P (representing a wider range of companies) was off almost 1 percentage point lower than the Dow. Read for this that the disapproval of the fundamentals is more widespread than the limited representation that the Dow portrays. NASDAQ was lower by over 1.5%. The king has no clothes.
It will be interesting to see how low the Dow is going to go in the next few days before buying or profit taking takes over. Many stocks are now at a rediculously low price/earnings ratio and are ripe for the picking. However, 10 years ago who would have said that General Motors and Chrysler would have needed bankruptcy protection. The uncertainty in the US is palpable. Wall street is a reflection of Main street. This is a solid vote against all of the political parties and the President. And no one seems to be listening.
Bernie
Sunday 7 August 2011
When The King Has No Clothes
The recent downgrading of the full faith and credit of the United States should come as no surprise. The US's credit rating has been on negative watch for some time. The other credit agencies have also had a negative watch on the US's credit rating and it would come as no surprise if the others, who had less gumption than did Standard and Poor, reduce their credit ratings to AA+.
If course this does not mean that the US will default on its debt. However, a country, like a person or business, cannot indefinitely go on borrowing 40 cents of every dollar it spends. In time, the mere servicing of the debt will outstrip all of the mandated expenditures (viz, social security, Medicate, etc) that a country is required to make. While the US sovereign debt is not overly high as related to GDP, continued borrowing will have, in time, a snowballing effect. Once over the edge it will be difficult to retrench. For example, see Greece.
While most of the wounds in the US were self inflicted (this need not have happened has the debt ceiling been raised without much political fuss) there are a number of disturbing fundamentals that are most worrisome. First there are 13 million people who are unemployed. Many will never be employed again. Then there are millions of homes under foreclosure and there is no short term likelihood that the housing market will turn around. Also consider that there are 48 million Americans (that is 16% of each man, woman and child) on food stamps. The separation between "haves" and "have nots" is growing wider. This against the political lunatic fringe who oppose even modest tax increased on the rich. Add to this crumbling infrastructure, the bankruptcy of many state and municipal governments and it is no wonder that credit agencies are having a second look at the full faith and credit of the United States.
I have recently seen a lot of the technical information coming out of wealth managers who are trying to convince customers to stay the course. Until recent slumps in the Dow, the markets have been doing quite well in a stagnant economy. Certainly the Fortune 200 companies are doing well. But they are doing so mostly abroad while trading on a cheap US dollar. They are sitting on a lot of cash that, unless there is a fundamental change in the US tax code, will remain offshore where it is doing the American economy little good.
Looking at the Dow reminds me of the 18th century where ladies used perfume rather than soap and water. For a short time everything went well until the stench overcame the perfume. Jobs are created by small business and, until banks are willing to finance inventories, accounts receivable and equipment the economy will remain stagnant. And the Dow will continue to slide.
If the Dow continues to slide then it will take international markets with them. And so you have the making of a double dip recession. The only sanity on the block is the price of gold. It has always been and will continue to be a hedge currency. It is no surprise to see the price of gold skyrocket in the face of uncertainty.
If the short term looks gloomy then the long terms looks even worse for the US. The US does not appear to have the political will to marginalize the looneys and get on with government. The President, although well meaning is not, I believe, up to the job. He has tried to get bipartison support for reasonable fiscal legislation but the looneys seem to prevail--on both sides of the house. What the US needs is a wartime government with one goal--bringing the US back from the brink. It is unlikely that this will happen any time soon.
Bernie.
If course this does not mean that the US will default on its debt. However, a country, like a person or business, cannot indefinitely go on borrowing 40 cents of every dollar it spends. In time, the mere servicing of the debt will outstrip all of the mandated expenditures (viz, social security, Medicate, etc) that a country is required to make. While the US sovereign debt is not overly high as related to GDP, continued borrowing will have, in time, a snowballing effect. Once over the edge it will be difficult to retrench. For example, see Greece.
While most of the wounds in the US were self inflicted (this need not have happened has the debt ceiling been raised without much political fuss) there are a number of disturbing fundamentals that are most worrisome. First there are 13 million people who are unemployed. Many will never be employed again. Then there are millions of homes under foreclosure and there is no short term likelihood that the housing market will turn around. Also consider that there are 48 million Americans (that is 16% of each man, woman and child) on food stamps. The separation between "haves" and "have nots" is growing wider. This against the political lunatic fringe who oppose even modest tax increased on the rich. Add to this crumbling infrastructure, the bankruptcy of many state and municipal governments and it is no wonder that credit agencies are having a second look at the full faith and credit of the United States.
I have recently seen a lot of the technical information coming out of wealth managers who are trying to convince customers to stay the course. Until recent slumps in the Dow, the markets have been doing quite well in a stagnant economy. Certainly the Fortune 200 companies are doing well. But they are doing so mostly abroad while trading on a cheap US dollar. They are sitting on a lot of cash that, unless there is a fundamental change in the US tax code, will remain offshore where it is doing the American economy little good.
Looking at the Dow reminds me of the 18th century where ladies used perfume rather than soap and water. For a short time everything went well until the stench overcame the perfume. Jobs are created by small business and, until banks are willing to finance inventories, accounts receivable and equipment the economy will remain stagnant. And the Dow will continue to slide.
If the Dow continues to slide then it will take international markets with them. And so you have the making of a double dip recession. The only sanity on the block is the price of gold. It has always been and will continue to be a hedge currency. It is no surprise to see the price of gold skyrocket in the face of uncertainty.
If the short term looks gloomy then the long terms looks even worse for the US. The US does not appear to have the political will to marginalize the looneys and get on with government. The President, although well meaning is not, I believe, up to the job. He has tried to get bipartison support for reasonable fiscal legislation but the looneys seem to prevail--on both sides of the house. What the US needs is a wartime government with one goal--bringing the US back from the brink. It is unlikely that this will happen any time soon.
Bernie.
Tuesday 2 August 2011
So, Now What.
There was never any doubt that a deal would be done before Armagedon. The question was: what kind of deal. The Presidenbt got what he wanted: more borrowing room during a time frame that included his possible re-election. The Tea Pary got what it wanted: no new taxes and considerable cuts in spending. The Democrats got a new committee that will structure how the cuts will bite and even get some input on new revenues. The Democrates were the big losers in that there may be some considerable cuts in programs that they consider fundamental to Democratic ideology. For that, Obama may pay the ultimate price. Some Democrats may move away from supporting him and some undecided but left leaning moderates may swing the other way. The only saving grace is that the Republicans have mounted, so far, an exceedingly weak candidate list. A strong candidate could change the calculus significantly.
Wall Streed reacted with a sell off of healthcare and pharmaceutical stocks. Cuts to Medicare will have a profound effect on this sector. There is slmost no doubt that most doctors will no longer take Medicare reimbursement and charge full fare to the elderly. Medicade will suffer the same fate. So the poor and the elderly will be big losers.
Spending cuts, be they military or otherwise, will have a negative effect on job creation. There will be considerable downsizing of industries that were, previously, dependent on government spending. This at a time when the US desperately needs new jobs. The government will have to curtail its spending on stimulus items such as infrastructure spending. This will cost jobs as well. So, I think that the deal that was done on the spending side will get no traction in helping a recovery of the US economy.
One of the items that was not discussed is how to liberate the trillions of dollars that are locked up in corporate treasuries. Most of these funds are held offshore and suffer a tax penalty if they are brought back into the US. Bringing these funds home through a a reform of the tax legislation would do more for job creation than any money that the government can spend. Canada repatriates foreign source active income at no tax cost. The US should follow suit.
Think of it. There is really not much a government can do create jobs. In the short term they may build a few roads or airports but once these funds are expended the jobs usually go away. It is true that these funds work their way through the economy and give about a three for one boost to peripheral business. However, most small businesses cannot hire unless inventories and accounts receivables can be financed. Most of the banks in the US refuse to lend to small business. So, the only thing that spending cuts can do is to take money out of the economy and create a large degree of uncertainty that business translates into no jobs.
Today the US stock exchanges spoke truth to power. An over 200 point drop in the Dow was the report card that the economy sent to the politicians. An F-. Because the government borrows 40 cents on every dollar it spends it will still rely heavily on borrowing from foreign lenders, viz the Chinese. The Chinese cannot get the warm and fuzzies when they look upon the pitiful performance of both houses of Congress and the President. The US government can't borrow its way to prosperity.
What the US needs is the kind of government that forms in wartime--a coalition of both parties and the President for the welfare of the state at large. That is not likely to happen given the current state of American politics. Until then get used to many minus 200 point days on the Dow.
Wall Streed reacted with a sell off of healthcare and pharmaceutical stocks. Cuts to Medicare will have a profound effect on this sector. There is slmost no doubt that most doctors will no longer take Medicare reimbursement and charge full fare to the elderly. Medicade will suffer the same fate. So the poor and the elderly will be big losers.
Spending cuts, be they military or otherwise, will have a negative effect on job creation. There will be considerable downsizing of industries that were, previously, dependent on government spending. This at a time when the US desperately needs new jobs. The government will have to curtail its spending on stimulus items such as infrastructure spending. This will cost jobs as well. So, I think that the deal that was done on the spending side will get no traction in helping a recovery of the US economy.
One of the items that was not discussed is how to liberate the trillions of dollars that are locked up in corporate treasuries. Most of these funds are held offshore and suffer a tax penalty if they are brought back into the US. Bringing these funds home through a a reform of the tax legislation would do more for job creation than any money that the government can spend. Canada repatriates foreign source active income at no tax cost. The US should follow suit.
Think of it. There is really not much a government can do create jobs. In the short term they may build a few roads or airports but once these funds are expended the jobs usually go away. It is true that these funds work their way through the economy and give about a three for one boost to peripheral business. However, most small businesses cannot hire unless inventories and accounts receivables can be financed. Most of the banks in the US refuse to lend to small business. So, the only thing that spending cuts can do is to take money out of the economy and create a large degree of uncertainty that business translates into no jobs.
Today the US stock exchanges spoke truth to power. An over 200 point drop in the Dow was the report card that the economy sent to the politicians. An F-. Because the government borrows 40 cents on every dollar it spends it will still rely heavily on borrowing from foreign lenders, viz the Chinese. The Chinese cannot get the warm and fuzzies when they look upon the pitiful performance of both houses of Congress and the President. The US government can't borrow its way to prosperity.
What the US needs is the kind of government that forms in wartime--a coalition of both parties and the President for the welfare of the state at large. That is not likely to happen given the current state of American politics. Until then get used to many minus 200 point days on the Dow.
Subscribe to:
Posts (Atom)