Sunday, June 27, 2010

What Do The American Financial ‘Panics’ of 1785; 1792; 1819; 1837; 1857; 1873; 1893; 1907 and 1929 Have In Common With The One We Are Still Dealing With Today?

They all eventually ‘went away’.  Didn’t they?  We are still here, aren’t we?

We have had some real humdingers of financial panics throughout our history, just as has been the case in every other civilization throughout the history of mankind.

To some extent or the other, they almost always have started with over-speculation in real-estate across the country, lenient lending policies by the banking industry and lax oversight of the financial institutions by Congress and regulators at Treasury and other agencies.

The bubble pops, loans can’t be paid back, banking institutions fail…..and we seem to do it every 20 years or so.  Take another look at the sequence above for the ‘Panics’, as they used to be called.

But here is what we simply do not understand:  If they happen like clockwork every 20 years, why don’t we smarten up and try to avoid the next big one?

Because unless we get our collective act together as a nation and a government, the next one might really be a doozy and put the current one to shame.  Do you want any part of that one?

More seasoned veterans of the financial world tell us that the financial industry is like a herd of lemmings.  Lemmings will travel in a pack so tightly and reverently that if the lead lemming happens to find a cliff and goes over it, so will every other last lemming in the herd.

Apparently the same is true in the financial industry.  One bank starts making a lot of money with some new financial instrument such as ‘derivatives’ or ‘credit default swaps”, (there was a similar insurance instrument in the Panic of 1857, if you can believe that) or just plain making tons of loans in hot growth areas places like Florida, Las Vegas or California....until they stop being such hot growth areas.

The other factor seems to be that the young pups in the banking industry must not be paying a whole heckuva lot attention during the ‘Panic’ that happens early in their career. Why?  Because within the next 20 years or so, when they are in the executive suites making millions of dollars between their prime earnings years of  45-55, they repeat the very same mistakes as their forebears and make excessively risky loans once again.  Perhaps they are just trying to make the ‘big score’ once before retiring or they just plain don’t want to see the warning signs coming.  But it happens over and over again, just like clockwork.

Is there a gas leak going on somewhere? Can’t we turn this thing off just once in awhile?  Will every person in the financial industry today take a good look around today at the financial carnage from personal to commercial real estate to business and job destruction and solemnly swear:  “I will never abuse debt again and make overly risky loans in my lifetime!”

Do we Americans, or any humanoids for that matter, ever learn from our past mistakes?  What good is going to college and learning about history if we are always going to be doomed to repeat it?

But here’s what really and truly fascinates us:  somehow, someway these financial panics seem to clear themselves up once all the bad loans and investments are written off or recognized as losses and then the economic miracle known as 'the American free-enterprise system' starts to work its magic again.

Man!  Won’t that feel nice again when the ‘good times’ return?

We don’t know when it will happen, or where it will start to happen.  All we do know from history is that it ‘will happen’…sometime in the future.

We believe now is one of the golden chances that history only brings along maybe once in a generation, or maybe even only once a century, for a massive reset button to be hit that will put America in the driver’s seat for the rest of this century.

And if we don't hit the right re-set buttons soon, President Obama might see his name in the history books get abused as badly as the name of our 8th US President Martin Van 'Ruin' was before the 1840 election, which he lost in a resounding fashion during an economic slump that mirrors our 'recent unpleasantness'.

We already know that we have to do something about this enormous debt or else the interest alone on it will be a millstone around our necks.

We also know that our tax system is inefficient and unbalanced.

And we know that without a productive vibrant workforce and economy, no one is going to be happy again.

So why not let’s do the right thing and pull it altogether in the ‘Great Massive Compromise Bill of 2011’ that historians will be writing about in 3011?

Assuming America is still around then, of course……It will be.  We are sure of it.  Aren't you?

President Martin Van Buren courtesy of http://www.americanpresidents.org/gallery/

Wednesday, June 23, 2010

Have You Ever Wondered ‘Why’ This Recession Is Taking So Long To Get Out Of?

It seems like it is never going to end, doesn’t it?  It is getting to be ‘Kind of a Drag’, as the Buckinghams used to sing.

There are lots of reasons why this recession is taking so long to break out of.  We happen to think that the Obama White House and Congress have played two very wrong cards in their efforts to turn around the economy: 1) excessive direct federal spending when a good jolt of business-targeted tax cuts would have jump-started the economy and 2) laying down a never-ending list of new humongous federal programs that will have to be paid one day with higher taxes on business, frustrating new investment and subsequent job creation.

But a friend of ours who worked in Washington for years in Congress and at OMB as an analyst pointed out a very important dynamic that many of us do not know about, which is why guys like him are now known as 'experts', because they worked inside the belly of the beast for so long.

His explanation helps explain clearly ‘why’ this recession is stretching into multiple years instead of being just a brief 6-12 months setback as in past recessions for most people.

It all has to do with the Federal Reserve’s balance sheet (click on link) which we first raised to your attention earlier this year.

Oddly enough, this gentleman told us the following story on the same day that another friend called to say:

“I am finally retiring from the Fed after decades of public service this year.  God Bless America!”  And he was the one who told us about how the balance sheet will be reduced like just so many digits on a computer game screen that all the younger people can do blindfolded several months ago.

Anyway, here is what is ‘really’ going on about why this recession is lingering on, and on, and on according to both of these guys:

‘There is very little, in fact, scant discussion being given to the now $2 trillion-plus Federal Reserve balance sheet.

While real estate and commercial property assets put on the Fed books were a ‘boost’ to the economy when bought during the meltdown of 2008-09, because that injection of money at least arrested the rapid rate of decline in real estate values, we are now faced with the "drag" of those very same toxic assets being paid down by borrowers.

When the Fed bought mortgages from the collapsing banks, they put $1.5 trillion (created out of thin air) into the economy which was paid to bondholders, developers, realtors, closing attorneys, appraisers and so on and then this money was reused to pay grocers, department stores, buy cars etc. by these same people.

The good old ‘multiplier’ effect and ‘velocity of money’ phenomenon.  All the things we should have learned in high school economics classes. Money invested into something gets used to pay people who use that money to buy other things.  The very life-blood of a healthy, vigorous economy based on private sector investment and activity.

Back in the ‘good old days’, this is what happened when people took a loan out from their ‘friendly neighborhood bank’ (remember them?), bought a house and furniture and appliances and all that money got circulated throughout the local economy and kept people employed for decades at a time.

Today, things are much different.  An owner of a mortgage now owned by the Federal Reserve earns a living (hopefully he/she is still gainfully employed), and makes a $2,000 per month mortgage payment. Of that, say $400 goes to taxes. The remaining $1,600 goes to pay principal and interest, both of which now go to the Federal Reserve who holds their mortgage, NOT the local bank.

The "drag" on the economy happens after the employer pays salary to the same employee who then uses $2000 per month to pay for the house mortgage; $400 to taxes, $1600 to principal and interest.  Instead of being "multiplied" in the economy by 2:1, 3:1, or 4:1 by going to the local bank, re-lent, spent at a grocery store or used at a local department store by others, that $1,600 now goes into the abyss at the US Federal Reserve as loans are paid down to zero.

‘And this money is never to be seen again.’

The Fed is not a commercial lending institution.  Its primary function in life is to provide a solid and sound currency for the US economy and grow the money supply in a responsible manner to account for a growing population base and (hopefully!) a growing economy again one day.

The money now paid to the Fed ‘evaporates’ as the Federal Reserve sheet declines in balances. As these loans are paid down, they are not recycled through the economy in the form of new loans.  They are deleted like so many digits in a computer video game once again!

Who says ‘video games are stupid and a waste of time and talent?”  You might be able to get a high-paying job at the Fed pushing buttons all day long deleting these assets it seems to us.  It might be a lifetime job, sad to say, based on the enormous amount of personal and commercial real estate mortgages that need to be cleaned up nowadays.

Some experts now expect that reducing the Federal Reserve balance sheet of mortgages will slow the economy by perhaps 1% of GDP (from where it would have been otherwise) while they are paying it down over the next what? 3 years? 5?  Please don’t say 10.

With a GDP still over $14 trillion in value, still larger than China with its billion+ people by a factor of 3, that ‘drag’ on the economy represents job loss and production/service value loss of close to $140 billion per year in 2010, 2011 and beyond. If we had that sort of extra growth in the economy instead of 'wasting' it paying down problem loans, a lot of people would be able to get back on their feet and keep more businesses from going under.

It is also quite clear to see why the Fed is reluctant to sell the mortgages they now own  into the current depressed real estate market. Such a glut of new assets on the market would drive an already depressed real estate market down even further and faster. It would cause even a larger abyss of economic activity lost.

Fortunes delayed; jobs not created.'

So there really is no silver bullet or magic carpet ride to get us out of this current situation, ladies and gentlemen.  We are just going to have to hold tight and let the Fed work off its inventory of excessive assets before things will get better.

In the meantime, you college grads, you might want to apply for a job at the Fed and use your video games skills to delete all these loans when paid.  They might be able to use your services tapping away at these digits on a screen for years.

courtesy of www.poststar.com

Monday, June 21, 2010

Could Mr. Alvin Greene of South Carolina Do A Better Job In The U.S. Senate?

We wonder:  Could a total newcomer to politics and everyday citizen such as Mr. Alvin Greene do a good  job in Congress?

Or rather, could he do a better job than the people who are already there?

Mr. Greene, who by all indications, is a legitimate citizen of the United States of America who resides in the great state of South Carolina, and who meets the constitutional requirements of having lived in the US at least 9 years and is now over the age of 30, has as much right to run for the US Senate as any one else does in this country, as long as he is not a convicted felon.

He paid his $10,000 filing fee and received 60% of the Democrats voting in the primary to vote for him instead of the other more experienced politicians on the ballot.  That sounds like a 'democracy' to us, as messy as they can be sometimes but a free vote of free people in a state. The losing candidates now apparently feel as if their election to the US Senate was ‘stolen’ from them somehow by Mr. Greene.

60%!  That is a landslide of biblical proportions in any modern-day American election, ladies and gentlemen!

Mr. Greene has suffered his share of insults and demeaning comments from the chattering heads and the powers-that-be from South Carolina to Washington. And he might yet disqualify himself if he is convicted on the obscenity charges leveled against him.

All of the chattering heads from both political parties are saying this in a very snooty, condescending manner, as if they are British Lords harrumphing over the whole incident: “How can this man be qualified to run and serve in the august US Senate?’

Let's look at the following questions:

  1. Has the national debt exploded over the last decade under leadership from both parties in Washington?
  2. Do we have annual budget deficits of over $1.3 trillion staring us in the face...for the rest of our lives?
  3. Do we have close to $75 trillion now in unfunded future liabilities to pay for as a result of this Congress and those in the past recklessly passing legislation without any regard to how to pay for it in higher taxes or spending spending cuts elsewhere?
  4. Do we have a 'fair and equitable' tax system in America?
  5. Are you paying too much in tax each year to Washington...or too little?
  6. Do you think the health care 'reform' (sic) bill that Congress passed will save or cost more money?
  7. Do you think we have really dealt with our energy dependence on foreign oil imported from the Middle East?
  8. Are things generally going in the 'right direction' or the 'wrong direction' in America today?

We think that anyone in this nation should be able to do better than that, including you, the reader of this blog....don't you?

How could any walking, breathing human being NOT DO BETTER THAN THAT!????

You know, we have found over time that it actually takes a lot of work to avoid doing the right thing .  We know lots of friends from high-school or college days who spent way more time and energy avoiding classes and doing their homework than it would have taken to just do it in the first place.  (Although we are more than happy to report they are all fine, upstanding citizens of the first order today)

It sure seems as if Congress has done their very darndest best over the past decade to make sure our budget deficits continue to gush like the BP oil well in the Gulf and our national debt explodes at its fastest pace ever since WWII.  Congress has assiduously voted to raise spending at every behest and beck-and-call and cut taxes whenever possible without any regard to balancing the budget again.  Congress threw the only budget constraint that has ever worked, the PAYGO mechanism, off a speeding truck going over a bridge into the river basin below, never to be seen or used again like it had Kryptonite in it and they were all “Supermen”.

And they have all said for the past decade now: “Well, we have done a really good job, haven’t we?’

In 1816, 2/3's of the 14th Congress did not win re-election to the 15th Congress. The reason?  They voted themselves a 'pay raise' to an amount that was higher than almost everyone in the nation at that time: $1500 for each Member; Speaker Henry Clay of Kentucky got $3000 in what became known as 'The Salary Grab'.

They had economic difficulties in the young nation, similar to ours today.  They had just finished a war that many felt was unnecessary in the War of 1812.  And they were dealing with the national bank issue to stabilize the dollar and conduct government business across the nation.  (sound like the Fed to you?)

For some reason, the one issue the voters focused on was the salaries of their elected representatives....just like today whenever a pay raise is considered.  It is far easier to get mad about congressional salaries than the complications of international finance and budget deficits, isn't it?

But imagine a 2/3'd turnover in Congress in 2010....that would be close to 290 incumbents being voted out of office.  So it can happen.....

We are not as worried about congressional salaries as we are about all of the other things we need to be worried about nowadays like the economy, jobs, the dollar and the debt.  We might even come out trillions of dollars ahead in the long-run if we paid our representatives $1 million apiece....but ONLY after they had put their voting cards in the "No!" slot every once in awhile and balanced the budget again one day.

Maybe even a common, everyday person like Mr. Greene would cut spending for that kind of money.
courtesy of www.cbsnews.com

Wednesday, June 16, 2010

We Are Stuck Between a 'Rock and A Hard Place' Today....


Who would have ever thought Mick Jagger and the Rolling Stones would have come up with the perfect song, 'Rock and a Hard Place', on their 'Steel Wheels' album in 1989 to describe our current budget and economic situation in America in 2010?

(This song was originally going to be called 'Steel Wheels' but apparently it helps to have those same lyrics somewhere in the song and 'Steel Wheels' just doesn't make as much sense in the song as 'Rock and A Hard Place', now does it?)

You ought to go ahead and click on the link above and open it alongside as you read this...at least you will hear some good music to help assuage the sobering facts as they are today that we simply have to face up to and fix.

Here's the 'Rock':  We can't keeping running up this insane debt forever. It will catch up to us sooner or later..probably sooner than we think. Just take a look at Greece, Ireland, Spain, the EU.

Here's the 'Hard Place':  We have already done all the 'easy' things politically to make people happy in this country. Massive tax cuts; massive spending programs...all of which has led to the 'hard place' or day of reckoning when these accounts have to be balanced.... or at least moderated considerably from current baseline projections.

And that means massive tax increases or massive spending reductions...or both at the same time.

If you want a good chuckle about the veracity of any long-term budget or economic forecasts, take a good look at what the vaunted CBO predicted in August, 2003,  just under 7 short years ago,  mind you, after passage of the ‘EGTRRA’ (pronounced ‘extra’) Bush Tax Cuts:

"Budget deficits would end by 2011 and budget surpluses would return in 2012 to the tune of $166 billion and $211 billion in 2013."   Budget Surpluses.  Would Return.  In 2012.  Seriously.  (read it at 'Wishful Thinking')

Now take a quick look at the illuminating 'cake chart' above just put out by the same CBO as a projection for federal spending in 2020. Do you think it will be less than or more than that, especially in the rapidly-growing Medicare/Medicaid areas and the interest on the national debt section? (What the heck happens if and when interest rates return to 7-8% instead of the record low 3% nowadays?)

Extending all of the Bush tax cuts after the end of calendar year is just not going to happen.  It is not in the cards.

President Obama and the Democrat-controlled Congress have been very clear about their intention to allow those tax cuts aimed at people with income, whatever the source, over $250,000 in a single year to completely expire, never to be seen again.

But given the budget pressures we now face, just how far down the income ladder below $250,000 will President Obama and Congress go in order to prevent these budget deficits from completely getting out of control? In fact, a budget-wonky argument that holds water can be made that none of the Bush Tax Cuts should be extended because these budget deficits are simply so enormous right now.

The question remains:“Just how many of the Bush tax cuts are they going to keep in place going forward in 2011 and beyond? And will I be in that lucky mix?’

It will depend on how the markets and bond purchasers view the ‘seriousness’ of the United States to get its economic house in order. Before we become another Greece. Or Ireland. Or any of the other basket-cases in the EU today.

Here's where the 'rock gets much, much harder', almost diamond-like, for us going forward in our opinion:

1) There is zero room for interest rates to fall further which is what helped stimulate the economic boom in 1994 under Bill Clinton (where would interest rates have to go then today to achieve the same economic stimulus as in the '90's...into negative territory?); and

2) There is little chance we can get another significant 'peace dividend' as we did after Iraq War I in the '90's as well given the defense-readiness posture against Al Qaeda we need to maintain for the rest of our lifetimes in all likelihood; and

3) There is not a very high degree of probability that we will ever see massive increases in capital gains tax revenue as what occurred during the "Internet Boom Days'...by some accounts, close to $100 billion/year of 'unanticipated' revenue realizations over CBO projections from 1997-2000.

So where is the economic stimulus going to come from today?  If we have to allow all of these Bush Tax Cuts to expire at the end of the year, they will pretty much put a damper on getting out of this Recession that is not being solved by all of the billions in stimulus money that has been spent so far, won't it?

The one single monumental issue that no one has had the courage to tackle is the clear and incontrovertible evidence that we are running out of resources to pay for our exploding entitlements programs.

There is a huge surge of now-retiring Boomers about to drain both the Social Security and Medicare reservoirs.  The continued insistence of Congress and the White House to keep passing new entitlements, Medicare Part D in 2003; health care in 2010, without paying for them with higher taxes and/or offsetting spending cuts, has not helped the budget situation one little bit at all.

And the one reliable thing that has been quietly increasing tax revenues to the federal government for the past 26 years since 1984, in sort of a sneaky, stealth bomber sorta way, the so-called ‘Social Security Surplus’, has peaked and is going to go down as well right now! In just 7 years, in 2017, there will be not be any SS cash ‘surplus’ any more. In fact, due to the recession, SS is technically in bankrupt status today….expenses going out exceed SS payroll taxes coming in!  Today!  Right this very minute!

Without the cushion of the so-called Social Security surplus over the past 20 years at least, revenues to the federal government would have averaged closer to 16.8% of GDP, not the 18.5%-to-19% of GDP you hear many commentators use as 'justification' to cut taxes further.

So it seems as if all we can do is throw up our hands and say: ‘Holy cow, Batman! What is going to happen then?’

You might be reminded of the song by The Who with the line: “I hope I die before I get old….”

But this is one of those times in our nation's history when great leaders have to step up and lead and great compromises are called for and have to happen, for the long-term benefit of our nation. President Obama, if he is to become the leader we all hope he will be one day, should tell all the Americans that he has decided, as our Chief Executive Officer, that all of these Bush Tax Cuts will expire as of midnight, December 31, 2010 because the government needs all of that increased revenue to pay for all the government services we already had and to which he has added mightily during his very short term in office.

You might not like it, but he said he wants more government 'to change things' and if he is going to be true to his word, then he should propose all of the taxes necessary to pay for it all as well.

We think the fact that President Obama will be in office for the next 30 months for sure sets the stage for a potential 'Massive Compromise' on the order of 'The Great Compromise', 'The Missouri Compromise of 1820', 'The Compromise of 1850' or any other bi-partisan deal leaders have hammered out for Americans in the past.  'The Massive Compromise Act of 2011' is just waiting to be passed and it would make the extremely successful 1997 Budget Act look like a piker by comparison.

And it will get us out from between 'The Rock' and 'The Hard Place' for decades to come...

(continued...)


Courtesy of www.cbo.gov


Lyrics to 'Rock and a Hard Place' by The Rolling Stones:

'The fields of Eden
Are full of trash
And if we beg and we borrow and steal
We'll never get it back
People are hungry
They crowd around
And the city gets bigger as the country
comes begging to town

Stuck between a rock
And a hard place
Between a rock and a hard place

this talk of freedom
And human rights
Means bullying and private wars and
chucking all the dust in your eyes
And peasant people
Poorer than dirt
Who are caught in the crossfire with nothing
to lose but their shirts

Stuck between a rock
And a hard place
Between a rock and a hard place

You'd better stop, put on a kind face
Between a rock and a hard place

We're in the same boat
On the same sea
And we're sailing south
On the same breeze
Building dream churches
With silver spires
And our rogue children
Are playing with loaded dice

Between a rock and a hard place
You'd better stop

Give me the truth now
Don't want no sham
I'd be hung drawn and quartered for a sheep
just as well as a lamb

Stuck between a rock
And a hard place
Between a rock and a hard place
You'd better put a stop
Put on a kind face
Can't you see what you've done to me....

courtesy http://www.lyricsmode.com/lyrics/r/rolling_stones/rock_and_a_hard_place.html

Sunday, June 13, 2010

‘But Isn’t the GOP Going to Romp This Fall...and Won't That Mean I Get To Keep MY Bush Tax Cuts?’

When it comes to keeping the Bush Tax Cuts, or 'repealing' Obamacare for that matter, lots of people think (and hope...and pray) the world is going to change on a dime this fall when the Republicans ride in on their horses like the Fifth Cavalry to 'Save the Republic!'

Given all the voter anger out there, it sure seems like there could be a massive sea-change this fall. But will it be 'enough' to change things at all?

We are not so sure there is a tsunami coming that will sweep in 100 new GOP Congressmen and 15 Senators like some people love to dream about. We are concerned that there has been way too much 'counting of chickens before they have hatched' on both the Republican and Tea Party side of things so far this year.

We were positively stunned when we voted this spring in the primaries to see that less than 7% of all registered voters took the time and effort to get out of their house and vote, even with a 30-day voting period before primary day. That meant that less than 4% of all adults over the age of 18 who were eligible to vote actually voted and made all the decisions on the candidates the rest of us will be voting on in November.

That meager voter participation in the primaries doesn’t seem to confirm to us that there is a massive tide of voter anger building to ‘throw all the incumbent bums out!’. Does it look that way to you?

We would rest a lot easier if the Republicans in Congress had offered solid proposals such as Paul Ryan's 'Roadmap for the Future' budget package for a vote on the floor of the House as a indication of how fiscally tough they intend to be if given the keys to the majority once again this fall.  Alas, they have adopted the 'rope-a-dope' strategy Muhammad Ali used to fell George Foreman in the "Rumble in the Jungle' in 1974; hey! maybe it will work for them this time around as it did for Ali.

Realistically, a 45-seat pickup for the GOP in the House and a 5-6 gain in the Senate is entirely possible and would be monumental in scope.  However, it would only be on par with many mid-term elections in a Presidential first term where voters decide to clip the wings of the 'messiah' they just put into the White House two years previous.

First-term presidential terms almost always prove the old adage: ‘Be careful for what you pray for (and vote for) and say you want…because you might just get it!’

Look at the recent British campaigns where the same sort of voter anger against the incumbent party was detected prior to the election. The Brits wound up with a mixed Parliament, a coalition government being formed with no real mandate either way, liberal or conservative.

We should have been so lucky in America over the past decade. ‘Stalemated government’ would have at least mitigated the massive increase of federal debt since 2002; nothing major would have passed without considerable compromise; and major spending or tax-cutting bills might have at least had the chance of being ‘paid for’ by spending cuts or tax hikes elsewhere.

Under 'unified government' under either of the established, and possibly ossified, major parties in the US since 2000, all we got was a total mess.

We are thinking about printing up T-shirts that say: “Congress Gave Me All The Tax Cuts and Spending Programs I Ever Wanted...and All My Children Got Was This Lousy $24 Trillion National Debt!’

Place your order today.

In the absence of very clear voter mandates to be fiscally responsible, politicians in Washington, or anywhere in history, tend to default to ‘the easy thing’ which is: 1) cut taxes; and/or 2) raise spending. Classic definition of political cowardice and pandering through the ages. The problem is that we can’t afford to do either any more in America.

Our point here, especially in context to whether the Bush Tax Cuts are going to be extended or not at the end of this year, is to point out that regardless of what happens in this fall’s general election, the cards are 99% all in the hands of President Barack Obama in the White House. And it will stay that way for the next 2 years for sure until he is either defeated in 2012 or returned to office which means he will hold the cards for another 4 years until 2017.

Unless the GOP gets to 280 Members of Congress in November, up from 175 or so today, and 60 GOP Senators, up from 41 today, both highly unlikely events, there is no way the GOP can override any of his expected vetoes of any effort to extend these Bush Tax Cuts beyond the end of 2010...about 200 days from today.

President Obama might be politically-pliable enough to be forced into an agreement like Bill Clinton was in 1997 with the GOP Congress. We don't know because he has not had to compromise very much with a Congress that virtually agrees with him on every issue so far. We find it impossible to believe that he would agree to a full, permanent extension of all the Bush Tax Cuts under any circumstance, especially given his seething disdain for people who make over $250,000. There is also the nagging reality and 'inconvenient truth' that foreign investors (see "Xie") will demand much more rapid progress on reducing these enormous deficits going forward.

President Obama's philosophy seems to be crystal clear by now; he is determined to redistribute as much wealth as he can during his presidential term and the only place you can redistribute wealth ‘from’ is from people who have it or can make it.

You can’t redistribute wealth from poor people who don’t have it in the first place.

And our reading of the tea leaves indicates that President Obama considers any income source between $75,000 and $100,000 or so to be 'fair game' when it comes to higher taxes. Even if a person earning $45,000 receives a one-time windfall of $250,001 from gains received from the disposal of an asset such as a farm or rental property or from an inheritance of an estate...he/she would be in the cross-hairs of higher taxation under President Obama.

President Obama seems to feel that the producer of any 'high net-income' owes it to the federal government to pay a much higher rate of tax than under current law.

Do you agree with President Obama? Honestly? Deep-down-in-your-heart sort of agreement? How about if it is you paying the higher taxes?

When did the American people hand over the rights to their hard work, creativity and assets to a single entity in Washington, DC to make the final decisions on how your hard-earned and 'sweated-over' money should be collected, confiscated, divvied-up and spent?

Many of you will soon be bidding a fond farewell to the Bush Tax Cuts you have known and loved over the past 7-8 years.  But if that is so, perhaps something positive could come out of it in the form of a 'deal' to get us out of this ditch we seem to find ourselves now mired in....

(continued…)

Courtesy of www.trueslant.com

Friday, June 11, 2010

Let's Look At The American Budget Deficit Fiasco As If You Were The Chinese Finance Minister....

Suppose you are Xie Zuran (second from right) and you have the enviable (unenviable?) job as Minister of Finance for the People's Republic of China.

(It is still so odd to see the word "republic' being applied to both the communist government of China and the free representative democracy of the United States at the same time.  Especially when many people think there is more 'free enterprise' going on in China today than in America...mull on that for a moment)

If we were Mr. Zuran, here's what we think we would say to the US Treasury Secretary or President Obama direct to his face about the potential repeal of the Bush Tax Cuts.  It would be the sort of conversation that highlights the hidden, but deadly dangers of getting too over-extended with debt to foreign bond-holders:

"Are you completely out of your mind, Mr. President?

You shouldn't be considering any extension of the Bush Tax Cuts, at all, ever!  Let them expire; you have to, Mr. President!

We, the Chinese, the best friend you Americans have had in the world when it comes to financing your debt since the Dutch from 1776-1789, are now sitting on over $1 trillion in dollar-denominated bonds and financial instruments, including cash.

We have been the largest and most consistent purchaser of your debt offerings over the past decade when your country, for some unknown reason to us, has decided to spend way beyond your means and abandon all known principles of sound financial management.

We thought the US was the World's Greatest Financial Power but what you are doing now is sort of crazy to us, to be honest about it.  We will keep buying your debt and cash instruments....but only as long as we think it will hold its value and we will not suffer financially from doing so.

We implore you to allow all of the Bush Tax Cuts to expire at the end of 2010. In fact, as a precondition for buying more US debt, we are demanding that you do so or else we will be less inclined to buy any more of your debt until and unless you get a handle on your deficit and debt problems.

The most immediate thing you can do that will show us that you are 'serious' about tackling your budget deficits would be to allow all of these Bush Tax Cuts to expire on December 31, 2010.  Go ahead; you desperately need $200-$300 billion of increased tax revenues per year to flow into the coffers of the US Treasury in Washington, DC from here on out and reduce these enormous budget deficits by at least 25% annually. Forever, now it seems.

We really don't care if you raise taxes or cut federal spending to balance your budgets.  What we want, and are demanding you do, is to radically reduce your budget deficits to significantly lessen the risk that the dollar will continue sliding in value.  Have you seen what happened to the euro when the Greek budget disaster erupted?  The euro is diving faster than the cormorants we Chinese use to fish with!

We know that whatever you do, you will always want to buy cheap imports from China for the foreseeable future.  And you will be dependent on our willingness to use the dollars you send to us to pay for cheap underwear to buy back your debt for a long time as well.

So you have got to take us seriously, Mr. President.  Just like Mexico and all of the Latin American countries who have had severe financial crises in the past.  They all had arrogant American 'demands' to 'get their financial house in order' shoved down their throats before any more IMF loans or aid was offered from Washington.

I'll bet you are sorry to see the shoe on the other foot now, huh, Mr. President?

Let the Bush Tax Cuts die.  Completely. In total. Or else!

I am remain your humble and sincere friend. Believe it or not.

I promise.

Xie Zuran"

courtesy of http://news.xinhuanet.com/english/2009-03/24/content_11062549.htm

Thursday, June 10, 2010

The Next Tax Bill Starts with the 'AMT'

The most potent political ‘weak point’ in all of these Bush tax cuts is the AMT provision. And that is where, what and how the next tax bill will start because it has to.

The ‘Alternative Minimum Tax’…an oxymoron if there ever was one.

There is no ‘alternative’ to paying it.  It is sort of like the payroll tax in that it is a set tax that you can not get around in any way, shape or form once you enter its dangerous territory, namely income between $150,000 and $415,000 per year.

And there is hardly any ‘minimum’ to it in terms of income level that you can earn before being subject to the AMT anymore. According to some tax experts, depending on the mix of tax deductions a person has for the year, the AMT could affect people making as low as $75,000 in 2011. That seems pretty low for what started out as a ‘millionaire’s tax’, don’t you think?

The AMT was passed in 1969 after it was discovered that 155 high-income taxpayers had been able to avoid paying any taxes the previous year. They were smart enough and had sufficient resources to be able to pay the very best tax accountants and lawyers to find loopholes in the general tax code to reduce their tax exposure to zero.

There is nothing ‘illegal’ about that, is there? In fact, it seems like almost some sort of patriotic duty to limit your tax payments to any sort of concentrated taxing authority, doesn't it?  Or was the Revolution fought against the capriciousness of King George III primarily for another reason of which we are not fully aware?

Anyway, without some sort of comprehensive reconciliation tax bill this year to raise the AMT threshold to a higher inflation-adjusted level by this December 31, 2010, 27 million more taxpayers are going to go stark-raving mad next year when their tax bill for calendar year 2011 increases by, let’s say for the sake of argument, $2500 and they have not set aside the money for it by April 15, 2012.

The 'AMT Trap' virtually guarantees that something has to be done this year.   When you make 27 million people furious, including maybe you for the first time, in one fell swoop,  that is how revolutions start…marching in the streets with tar-and-feathering sort of stuff.

For some reason, the Obama White House and the Democrats who control Congress have paid scant attention to the expiration of the Bush tax cuts by the end of the year. They have said they want to keep all the tax breaks that help people making under $250,000/year, but until they pass a bill, everyone is at risk of losing their tax cuts, including people making under $250,000.

Since there has been no budget resolution passed yet by Congress, there is no real framework for a reconciliation bill to be passed later this year. Budget reconciliation bills normally would allow amendments on AMT and other Bush tax cut provision extensions. Congress has already circumvented ‘normal’ budget proceedings in Congress this year by invoking the ‘reconciliation’ process to clean up certain parts of the health care bill.

Will they now attempt to break all records for ‘normal’ Congressional procedures by trying to pass 2 reconciliation bills in the same year for the first time ever?

Since no tax bill has been drafted up yet in Congress, any and all options are still 'on the table', according to one staff person. There is an incredible tension building between dealing with the enormous debt by allowing the tax cuts to expire and not wanting to have millions of people go crazy by paying much higher taxes next year.

There is some talk on Capitol Hill about extending all of the 'middle-class'  tax cuts for 1-2 years but not the high-income tax cuts. Talk about confusion at tax time!  That would never work, we don't think, simply due to the accounting procedures and the new forms that would be necessary.

We think a more logical process would have Congress taking up an typical ‘tax-extender’ bill, such as an extension of the research-and-development tax credit, which usually is a vehicle for mischief and special favors at the end of a Congressional session near Christmas time.

The tax bill will probably be presented after the elections in November and voted on and passed near the end of the year at Christmas time. Why make everyone mad before the elections?  Especially everyone who gets socked with the AMT or who loses their tax reductions.

The majority party in charge of Congress 'adds-on' to the bill as if they are 'gifts' for favored sectors of the economy and people. Hence the name, 'Christmas tree amendments'.  Democrat congressional leaders and staff will add-on amendments they like and not add-on extensions to the Bush tax cuts they hate.

Namely, anything that ‘looks’ like it is an extension to help middle-class taxpayers will be included in the bill.  Anything that ‘appears’ to be ‘sticking it to the rich’ or those making over $250k in income will be excluded from the extensions.

But what happens when an estate sells a family farm or small business for $2 million on January 2, 2011?  Try to imagine explaining to the 5 remaining family members why the government has to take 55% of the second million of net worth or $550,000 because estate taxes reverted back to their pre-Bush rates and thresholds 2 days before closing.

Why will there be such selective tax cut extensions? Because the Democrats will be in power until January 2, 2011 when the new Congress takes over. They can do a heckuva lot with a tax bill in a lame duck session this November/December; don’t let anyone kid you that they can’t. It will take years to unwind any tax changes, especially with a President in the White House who will not sign anything a new Republican Congress might pass in 2011.

We think the AMT thresholds will be raised....somewhat.  As budgeteers, we can see where committee staff might suggest that a 'few million extra' new higher-income taxpayers will be ‘allowed’ to pay the dreaded AMT who are on the ‘upper end’ of the middle class…however that is defined. If you are making anything over $75,000 income, you should be concerned because you could be at risk of being included in the new pool of AMT victims.  All the staff has to do is raise the thresholds below the rate of inflation and they will pick up millions of new AMT payers.

Revenues expected from the expiration of the Bush tax cuts are already built-in to current budget estimates. If the tax cuts are not allowed to expire, (think ‘double negative’), meaning the expiration of the tax cuts is ‘repealed’, US deficit numbers going forward worsen by between $200-300 billion per year.

Here are some other tax changes that will happen, according to some staff close to the process on Capitol Hill, effective January 1, 2011:

  1. The top rate on ordinary income will revert back up to 39.6%.
  2. The 10/15/25/28% income tax rates and income threshold levels will stay the same as today.
  3. The top tax rate on dividends will become 20%.
  4. The capital gains tax rate will go from $0 back up to 10% for lower-income brackets and from 15% back up to 20% for higher-income taxpayers.
  5. Child tax credit falls back to $500/child from $1000.
  6. Estate tax rates will revert back to 2001 levels with  the possible exception that the estate tax limit will be applied to estates of $3 million or more.
Check out the interactive budget projection website at the CBO. Play with it awhile and see what happens to the deficit/debt projections if we do extend all the Bush tax cuts for another decade…the numbers in the red make your hair stand straight up on end.

Any extension of the Bush tax cuts past the end of 2010 will only make the deficit numbers much worse than they already are today.

(to be continued…)

Courtesy of www.district87.org

Tuesday, June 8, 2010

What is Gonna Happen to (My) Bush Tax Cuts at the End of 2010?

People are always understandably more concerned about political issues when they directly affect their own pocketbooks and wallets.

Get ready then for a doozy.  Perhaps the biggest time-bomb facing you right now in a very direct personal way, even more than health care, is this:  ‘What is going to happen to ‘MY’ Bush Tax Cuts at the end of 2010?”

After all, you have had them for the past 8 years now and saying goodbye to them is not going to be easy.  Especially in this economy. But it could and probably will happen so you better get used to it.

One thing people forget in this age of ‘tax withholding’ is that the money you earn is yours first to keep and decide what to do with it on a personal basis, not the federal government’s.  Those ‘tax cuts’ represent money you earned to begin with; it is just a matter of how much you should be sending to the government on an annual basis that is the question

Making political predictions is as easy as making weather predictions:  You hit one or two big hurricanes or snowstorms right and you are a ‘genius’!  And if your predictions fail to come true, so what?  No one will remember your predictions in a couple of weeks anyway.

That is one reason why Jeanne Dixon became ‘famous’ with her prediction of the Kennedy Assassination.  She made so darn many predictions as a soothsayer that when the ‘big one’ actually happened ‘as she said it would’, suddenly she was on the cover of every magazine in America like a modern-day Oracle of Delphi.

So here’s the ‘real deal’, something you can take to the bank, if you have any money left:

“If nothing is done by Congress and the Obama White House by December 31, 2010, the end of this calendar year, your taxes are gonna go up, and in many cases such as estate taxes, way, way up, overnight by January 1, 2011.’

How can this be true in a democratic republic like ours where Congress is supposed to vote on such weighty matters as ‘increasing taxes’ before they excavate money from our back pockets?

The answer is quite simple: When the Bush Tax Cuts were passed in the 2003 EGTRRA (‘Eg-tra’, ‘extra’, get it?) legislation, there was a ‘sunset’ clause in the tax authorization bill that said that all of those tax cuts would expire on December 31, 2010. Passed by a GOP Congress; signed into law by former GOP President George W. Bush.

The reason was simple as well: Without the sun-setting of these provisions, the CBO forecasts for budget deficits going forward beyond 2010 could have been far larger in the second decade than the first.  And since no logical Administration wants to steer The Republic of the United States of America into the ditch of bankruptcy by irresponsible fiscal malfeasance (do they?), the Bush tax cuts were automatically set to expire at the stroke of midnight, December 31, 2010.

Pass the Bush tax cuts in 2003 and the world will look all rosy by 2010, right?

Apparently, that one did not turn out right for some reason.  Like the financial meltdown.  The Wall Street and Detroit bailouts. The ‘Cash for Clunkers’ deal. Too much real estate debt.  Derivatives. Credit Default Swaps. The Greatest Recession since the Depression.

We are now staring down the cannon barrel of $1.3 trillion annual deficits for the rest of the decade and an enormous national debt of $24 trillion that will drain close to $1 trillion in interest costs per year when all is said and done.

We are going to post a trilogy of sorts over the next couple of days outlining what we think is going to happen with these Bush tax cuts set to expire in 210 days, give or take a few. So you might want to stay tuned for the next couple of musings so you can tell all your friends what is going to happen before they occur and mystify them at the same time.

As always, there is a disclaimer: Consult your tax advisor and accountant before making any financial decisions.  We are not financial consultants and these views are solely the opinions of our authors.  We have seen it all before and there is nothing new under sun when it comes to politics or legislation, it seems.

Maybe even Jeanne Dixon would have gotten this prediction right way back when, sort of like a modern-day Nostradamus.

Picture courtesy of http://voices.washingtonpost.com/reliable-source/2009/07/rs-dixon27.html

Wednesday, June 2, 2010

Since When Did Offering Someone a Government Job Become a ‘Crime’?

Congressman Joe Sestak (PA) apparently has hoisted himself on his own petard by trying to find a campaign issue that would show he is ‘fighting against the machine’ in Washington.

He asserted he was offered the Secretary of the Navy position if he dropped out of the Senate primary against now soon-to-be-former Senator Arlen Specter, whom Sestak defeated in the most recent primary. And the Obama White House is denying it all as is everyone else in Washington.

Apparently, the story ‘worked’ for Sestak....at least for the primary season.

But the flack surrounding this 'job offer' does bring to question a very important question:  “Since when did offering someone such a prestigious position in the federal government as the Secretary of the United States Navy become a ‘crime’ in this country?”

President Teddy Roosevelt served with distinction as Secretary of the Navy before becoming McKinley’s Vice-President.  Being Secretary of the Navy, or the Army or the Air force or any military service of our nation is a high honor indeed because of the people you get to lead.  Only a very few people are qualified at any one time to be appointed to such an important public servant office.

We salute Admiral Sestak’s service to our nation in the U.S. Navy as we do anyone who has been brave enough and qualified enough to put on any US uniform to protect our freedom to write, argue, debate and speak about things like whether this appointment was a ‘crime’ or not.  Many-to-most of the later Boomer generation has never served in the military because we were the first 'Fortunate Generation' to not have mandatory conscription in the history of the Republic.

All of this hubbub about whether Bill Clinton or Rahm Emanuel offered Sestak the job or a non-paying job on some board in Washington diverts attention from the most important point of this election in the first place: Do the people of Pennsylvania want Admiral Sestak in the US Senate so he can vote 'aye' or 'nay' for any more spending programs and do their work in Washington for them?

We have some major concerns on this score, even though we can't vote for or against Congressman Sestak. Namely, were there any good accounting, economics, business administration 101, quantitative analysis or public administration classes being offered at the Naval Academy during his time there?  He voted for $3.5 trillion in new debt since 2008 by voting 'Aye' for all these humongous spending programs without off-setting revenues or spending cuts to keep our national debt from exploding into orbit.

By that line of reasoning, one might surmise that a fleet under former Admiral Joe Sestak routinely spent way over budget and never allocated scarce resources to optimal effect on the high seas.  We couldn’t fight a war for very long if we didn’t prioritize objectives and concentrated efforts to where they could be most useful to produce a victory.

That is the most troubling thing about this debate over whether he was or was not offered the Navy Secretary job: It diverts attention from his voting record while in office and it makes it even more difficult to find great, qualified people to serve in public office in the United States of America.

There have to be thousands of potentially great, civic-minded, 'citizen-politicians' out there looking at this Sestak mess and saying to themselves: “Why would I ever subject myself and my family to this inanity?’

Congressman Sestak had served with distinction in the US Navy for 31 years, retiring as an Admiral before running for Congress.  He was clearly qualified to be nominated by the President for the Navy Secretary position and if the Senate concurred, he probably would have served admirably as well. (Those two words, 'admiral' and 'admirably' are too close to not be related)

As Navy Secretary, he probably would get paid one-sixth of what he could make in a similar capacity in the private sector.  And he would be in-and-out of meetings with Congressional officials so often that a return to the battleship in harm's way might seem more attractive.

So ‘where’s the bribe’ in asking someone to serve in the public sector at a comparatively lower salary when it is so danged hard to get great people to serve in the first place?

Abraham Lincoln appointed 4 of his political opponents to his first Cabinet.  They were qualified people, no doubt but he said he did it solely to ‘keep an eye on them’ and ostensibly to keep them all out of the 1864 GOP primary.

Was that a ‘crime’?

We know tons of people who have been told that they would receive help in retiring their debt from a previous campaign if they would step aside in favor of another more favored candidate.  Fort Leavenworth, Kansas does not have enough room for politicians who have helped other people find jobs in the federal government after running for office and losing in a primary or general election….is that now ‘illegal’?

We would be horrified if we were to find that Congressman Sestak was offered a big bag of freshly minted cash in some parking deck next to the Watergate Hotel or perhaps a shipment of gold bullion to a Swiss bank account.

In fact, there is a big old safe in every single congressional office that is a throwback to the days when people actually walked in to a congressman’s office, plunked down cash in an envelope and asked for their vote on a bill.  One day, the chair of the House Administration Committee opened up his desk drawer and saw hundreds of thousands of crisp greenbacks in there and immediately requisitioned a safe for each of the 435 offices.

Now, that, ladies and gentlemen, is a flat-out-and-out bribe in the first degree.

Trying to get great people to serve in responsible positions in the federal government seems to falls slightly below that test. We don't have enough great 'citizen-politicians' willing to serve their nation in government service now as it is.  Do we want to chase the rest of them away as well by showing them 'how Washington really works' in this Sestak Caper?

bank safe pic courtesy of http://blog.makezine.com