Is it just me, or does our leader look like Alfred E. Newman of Mad Magazine (Mad Magazine-www.dccomics.com/mad/). Below, courtesy of Mad Magazine is Alfred E. Obama. Check it out.
The basic Obama solution to our economic crisis using FDR’s and Keynesian policies of the 30’s quite frankly don’t work. They did not work then, and they won’t work now. Attached is a chart of the unemployment rate during the depression. Sadly the War reduced unemployment, not Politicians spending plans. In 1938, unemployment started to rise again. By 1939, the inception of WW II, unemployment rates finally declined.
You don’t have to be an economist to realize that our problem today, is the unemployment level. Large unemployment rates create social and economic problems. You can’t fix the housing problem by screwing around with mortgage rates, principal reductions, and extending the mortgage life, if the mortgagee does not have a job. You can’t fix the problem of toxic assets by changing accounting principles (mark to market). If the assets stink, they stink.
The current unemployment problem is very much like the classic question, “what came first, the chicken or the egg? If you believe in evolutionary theory, the egg came first. What came first, employment or unemployment? If you believe in a free market economics, the employer came first. Give American Business and employees some incentives. Reduce payroll taxes, give tax credits for fixed asset purchases, allow a tax deduction for dividends, and lower income tax rates for the top individual tax brackets. Let’s face reality; for Economic growth, entrepreneurs make much better employers than the US Government.
Our leaders gave money to the Banks, and are now upset because the banks “won’t lend money”. How can they be upset? Banks don’t want to make risky loans and good companies don’t want to borrow. The “Geithner” joint venture between our Government and Hedge Funds will bid on toxic assets (now referred to as “Legacy Assets”) of banks and other financial companies. Obviously, in an un-leveraged world, the bids will be at less than book value. Ah, but our leaders have given the Hedge Funds 6 to 1 leverage. Now they can bid much more since the leverage is non-recourse. Bank of America as of 12/31/08 was leveraged 18.95 to 1 (if you believe their Financial Statements). The Balance Sheet indicates an asset “Investments” totaling $1.375 Trillion, and a Tangible Net Worth of $86.583 Billion. Assuming the investment is worth a generous 75% of carrying value, the loss would be $343.75 Billion or almost 4 times their net worth. I don’t think Bank of America will sell their assets at a deep discount, and I also don’t think the hedge funds would pay a premium for stinky assets. Good luck with your plan Geithner. In my opinion most of the large banks, AIG, Auto Makers, should be placed in receivership, letting the receivers restructure the failed companies.
The war continues between deflation and inflation. Below is a chart of inflation expectations. The chart measures the yield difference of the 10 year T-Bond and
the Treasury 10 year Inflation Indexed Bond (TIP). Currently, Inflation expectations are rising. Investors sense a rising price level in the immediate future. Do you think it’s because of all the money being printed by our beloved leaders in Washington? Below is a graph of the 10 year TIP and Gold. Both prices are rising.
One of the most powerful economic tools the United States has is our Dollars status as the main Reserve World Currency. If the US lost its reserve status, we would not be able to print the money our debt is denominated in. It would also mean that our creditors would no longer hoard dollars as a safe haven or as a store of value. Taking away the reserve status of the US Dollar would be one of the most significant ways to weaken the USA. China recently called for an extension of the use of SDR’s (special drawing rights) created by the International Monetary Fund (IMF), and the eventual replacement of the dollar as the World’s reserve currency. China, Russia and most of Europe bristles at the thought of the US as the perpetual world economic power. The Achilles heel of the USA is the dollar, and the powers that oppose the US know it. On March 27, at the United Nations, the UN Advisory Committee said: “World leaders should give urgent attention to reaching consensus on creating a global reserve system that would replace the US Dollar as the main international currency.
We as a County are in big trouble. If we lose our Reserve status, Richard Russell (http://www.dowtheroyletters.com/) writes, “…if it happens it will happen through the United Nations by “Order” of the World. God help us.
I still think stocks are still overvalued, and recommend staying liquid, with a little Gold as a hedge against inflation and panic. Get out of debt, and prepare for a continuing struggle between deflation (in the short run) and inflation in the long run.
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