This Economic Circus

So sad, and so laughable – all at the same time!

Mr. Jeub:
My daugthers visit your site often to read your daughter’s blog and I find it very disheartening and unchristian that you are poking fun at President Obama like that… I did not vote for the man nor do I agree with his policies however I do raise my children to be respectful of others and continue to pray for guidiance for this young or any president as the guide our beloved country. He may make many blunders but are we no better by producing and spreading these ugly cartoons? My daughters will be banned from your opening site as they question why they should continue to respect and pray for this president if he is ruining their future. However after deep prayer and thought; I will continue to allow them to visit your daughter’s blog as they find it up lifting and remindful to keep Jesus close to their heart. There are other ways to show your disagreements with the president then to sink to the all time lows of many lost christians at the time of elections. The cartoons of Sentor McCain and his family was just as horrible as the ones of President Obama. Please consider that as you post other cartoons that you do make a huge impact on others lives. Thank you and we will continue praying for your new little one and a speedy recovery for Mrs. Jeub.
God Bless,
Frank and Merry Lange

Jeubs,

That cartoon’s right on the money (or…. the lack of it! … heh heh)

I love the visual format to communicate the truth succinctly and quickly. It falls right in line with both the Proverbs and the parable of the foolish man building on the sand. It reminds me of why I love fables so much; it’s a great way to communicate wisdom. The same foolishness that we teach our children to avoid in racking up debt in their first year of college is the same foolishness that any President can commit in his first year of office. Proverbs is Proverbs, no matter how high or low the office.

Jonathan Harris
Cottonwood, CA

I am going to try my best to address this subject in a very objective, fact-based, non-partisan manner. Is it not counterintuitive to everyone that you – as an individual, corporation, or country – can not spend your way out of debt or to future prosperity by borrowing more money? Is the conclusion not self-evident and irrefutable? I don’t care if it was my father who was president of the U.S., I would not be supporting him if we were making the kinds of decisions that Obama has been making – including signing the largest emergency spending bill in U.S. history that absolutely no one who voted on it read ahead of time! See, this is not an attack or criticism of an individual (Obama), it is a critique of every elected leader – Republican and Democrat – who has voted time and again against the best interests of our country. It is a criticism of a philosphy. The idea that we are going to somehow fix our economy and help people by adding to their already unbearable debt burden (future taxes to pay for increased spending now) is not unique to Republicans or Democrats – both parties have been doing it for decades!! So, no one can criticize this post as being partisan. I would have been equally critical of McCain, Ron Paul, or Hillary Clinton had they been in Obama’s position this year and made the same misguided decisions. I happen to think that Greenspan and Bernanke are incompetent too – so I am an equal-opportunity criticizer.

I’m convinced a major problem with America is an uneducated. financially-illiterate electorate – and this is not an ad hominem attack on any particular political party or its supporters. Here is what I mean. People – including our elected leaders – do not understand basic math and economics. If they did, they would never vote for (in the case of our leaders) or support (in the case of our citizens) federal programs that are mathematically impossible to ever pay for. They would not write things like “the fact is we dont know if Obamas methods of trying to save the economy will work.” We do know, for a fact, that what is being tried by this administration will not work. It is common sense, with basic science, math, and history to support it. You can not spend your way to prosperity – study the past 20 years of Japan and you will not only agree, but you will have an idea as to where our country is headed. Japan’s debt as a percentage of GDP is unprecedented and is now an anchor on its economy. Europe is actually worse off than we are in many ways, and for the same reasons – too much debt, too much social spending, not enough economic productivity. Our debt is quickly headed to those levels. Why experiment with policy that is doomed to failure when other countries have already tried this in the past? Is the “change” promised by Obama really worth extending what would have been a deep, but short (2-3 year) depression into a prolonged 20+year depression?

The spending under the Bush Administration was bad enough, but just in the past three months, it has exploded beyond our ability to ever repay.

Somehow, the failed experiment that caused this house of cards to implode in the first place – the lending of money to people who couldn’t possibly ever repay it (subprime and Alt-A mortgages) is considered worthy of trying at the federal government level in an effort to stimulate the economy. That’s right – the government is borrowing money (a mortgage to be repaid by future tax payers) that it knows it can not possibly ever repay. The only difference is that while millions have had their homes foreclosed on when the money ran out, the federal goverment will continue to print and borrow and run up an astronomical debt to keep the game going.

Here is an analogy for our federal government: say your family lived on a monthly budget of $5,000, and you spend every penny of that to make ends meet. Your income suddenly drops to $4,000 per month, but the expenses remain the same. The only way to avoid defaulting is to (a) increase income back to $5,000 right away, (b) reduce expenses to $4,000, or (c) borrow money every month that you can’t possibly repay without eventually addressing (a) or (b). Now, if you knew your income was not going to increase in a meaningful way in the next few years, who among us would expect a positive outcome some day in the future if we began borrowing at double-digit interest rates on a credit card every month to maintain our current standard of living in order to make up that $1,000 monthly shortfall? Honestly. After one year, your family’s finances would be in shambles – in the hole $12,000 + compounding interest that you would have to pay back some day on that same $48,000 annual salary. Yes, it is possible you could get a 25% increase in income through a promotion, second job, or better job, but don’t count on that in the next couple of years. Yet, that is exactly what our federal government is counting on – the improbable (impossible) reality of a miraculous economic rebound that will flood the tax coffers with enough money to repay all of this debt within 10 years or so. This is the same misguided, optimistic philosophy that led Bush to believe he could wage two major military conflicts without creating a huge deficit. If it didn’t work for Bush during the economic boom years, why would it work for Obama during a Depression?!? Suffering the effects of NAFTA and globalization over the past 15 years, you and I both know that any economic recovery in this country will be anything but robust and lasting over the next 10 years. Many of the reliable middle-class jobs were exported to other countries years ago. Only a complete crash in the U.S. dollar would convince U.S. companies to bring those jobs back home where the cost of doing business would then be competitive with wages being paid in emerging markets.

Let’s bring this analogy into context of the federal government. For many years, our federal government has consistently spent more money each year than it takes in through tax revenues. How does it make up the difference? Since our country went off of the gold standard, we have taken the liberty as a country to print money with absolutely nothing of value to back it other than an IOU to bond holders – through debt issued by the Dept. of Treasury. Our country technically went bankrupt/insolvent awhile back (this is not hyperbole – do your research), so now the Federal Reserve is actually printing money out of thin air (without anything of substance to back it up), and the Treasury is monetizing that debt through issuing IOU’s to anyone dumb enough to buy treasury bonds and notes. In fact – free investment advice to anyone looking to make some easy money this year and next: short the treasury bond market later this year when the Federal Reserve has exhausted its $1.5 trillion commitment to buy treasuries. When that happens, the bubble in treasuries will burst, bonds will drop like a rock, and rates will increase rather dramatically. It is simple supply and demand: without the Fed buying, 10-year T-bond yields went from a record low of 2.05% to over 3.00% in no time. Once the Fed steps out of the way, bond yields have nowhere to go but up; eventually the yield will revert to the mean (long-term average), which is much, much higher than the current 2.90%. All this to say, the government has borrowed more money than it can ever possibly repay at TODAY’s rate of financing (bonds sold in the 2.00 to 5.00% range over the past couple of years). What do you expect will happen when our federal government has to borrow more money to pay for all of our programs, and there aren’t enough buyers of our debt at reasonable interest rates? Economics 101: rates will go sky high in order to generate enough buyers of our debt. This in turn will cause huge losses to current bond holders who bought when yields were much lower (i.e., Japan, China).

So, are American household finances like the federal government, or is the federal government managing its finances like American households? I’m not sure who is following who, but we have managed a trifecta of financial incompetence in America, and apparently successfully exported it to other countries as well: our households, corporations, and government are all leveraged to the max and struggling to survive the Depression that we are in. Your reward for being prudent – if you were – is that you get to subsidize the mistakes of the foolish. This is not only being legislated at the federal level for taxpayers to bail out the banks and borrowers, but at the G20 conference, the smaller nations were voicing their complaint that they were being asked/required to help pay for the mistakes of the larger nations who caused this mess (i.e., the U.S., U.K., France).

The big difference between GM and the federal government is that GM didn’t have the option of printing money to stay in business. Tax revenues at all levels will be down due to the Depression that we are in – just as automotive sales are down. Rather than cutting spending to compensate for reduced income and balance the budget like the auto manufacturers (and other industries) are being forced to do, the federal government chose the nuclear option: print more money and go into more debt than has ever been contemplated in the history of the world. Looking at GM, again, consider that they did borrow a huge amount of money from the federal government recently (over $13 billion in the past six months?), and it only delayed the inevitable (insolvency). Why? Because the underlying fundamentals of the economy and its own business model did not change. Likewise, the federal government is borrowing trillions of dollars, and it will only delay the inevitable day of reckoning since the economy won’t be rebounding anytime soon (not in 2009 or 2010), and it is actually increasing spending rather than reducing it. You can’t stimulate an economy by adding more future debt (future tax burden and debt servicing through interest payments to treasury bond holders) to every consumer in America! Remember that stimulus check you got in the mail/bank account in 2008 from the IRS? Consider it a cash-advance check – with an interest rate attached to it. If it was $1,200, you will eventually repay it, with interest in the form of future taxes.

To distill abstract concepts down into something concrete, if not sobering, let’s look at some numbers.

(1) The federal government only took in $2.524 trillion in taxes (not that I’m a proponent of increased taxes).
(2) Taxes from individuals were $1.146 trillion and corporations contributed $304 billion.
(3) The Obama administration is proposing an annual federal budget (I use the term budget loosely, because no one other than our government intentially creates a budget with the idea that you will be running in the red forever) in excess of $3.0 trillion.
(4) My grade-school children can tell you there is a problem if you want to spend $3 trillion, but you are only expecting $2.5 trillion in revenue. Ever heard of a number line – we’re negative!!!
(5) What is the bare minimum we need to pay against the $60 trillion debt and unfunded future liabities to avoid default? Over $3.6 trillion per year, assuming a 6.0% annual interest rate. Since we obviously won’t be bringing enough tax receipts into the treasury next year to pay the minimum interest payment on the debt and fund future liabilities, much less pay the operating expenses of our country, how do we remain solvent and avoid default? We could reduce expenses, modify the social security program raise taxes, etc. Instead, we continue to print trillions and trillions of dollars through the issuance of worthless IOUs to those foolish enough to purchase and hold our treasury bonds. There simply is no other way when leaders refuse to reign in spending or raise taxes or some combination thereof.

To keep things simple, let’s make the naive assumption that our government could fund its entire proposed $2 trillion+ annual OPERATING budget on corporate taxes alone, leaving the repayment of all existing federal debt on the backs of individual taxpayers only. We will also assume that since corporations will be footing the entire bill for current operations, they won’t contribute a dime towards debt repayment. We know that our country is currently in debt over $60 trillion, including our future liabilities for medicare and social security (yes, these count in a GAAP world). According to the Bureau of Labor Statistics, there were approximately 154 million civilian employees and 22.5 million government employees as of March 2009. The average civilian employee earns $18.50 per hour and works 33.2 hours per week for a total annual income of $31,938.40. To keep things simple, let’s assume government employees earn the same average annual income. If the federal government confiscated 50% of all of the income earned by ALL American workers ($5,637,127,600,000), it would be just over $2.8 trillion annually. If our country stopped accumulating debt right now and repaid its existing debt at a rate of $233 billion monthly ($2.8 trillion annually), it would NEVER be repaid – ever!!! You could spend over 8,000 years repaying on a $60 trillion principal at $233 billion per month and it still won’t be repaid!! Do the math – I’m not making this up. My assumptions use a conservative 6.0% interest rate on our debt; some of the debt issued by Treasury in the 80′s is in the teens (%)! And you wonder why high-ranking Chinese officials have come out in recent months saying that they hate the U.S., and fear that they won’t get repaid? It’s because they won’t – ever! What if we had a long-term goal of eliminating our federal debt by 2039 (30 years from now). What would that take? How about $4.3 trillion dollars each year – assuming a fixed 6.0% – for 30 years would eliminate the $60 trillion debt we owe. $4.3 trillion is roughly 77% of the total gross earnings of our entire population. Could you live on 23% of your gross income so that you could do your “fair share” towards paying off this debt with the other 77%? Anyone? Not a chance.

As a country, our GDP in 2008 was $14.2 trillion. If you are an average American, you probably spend about 30% of your gross income on your mortgage payment (principal, interest, taxes, and insurance). Well, if our federal goverment committed to doing the same, our nation would be debt-free in 30 years just as your house would be paid for 30 years after incurring the debt: $4.3 trillion per year = 30.3% of $14.2 trillion in GDP. The problem is, our government can not raise taxes high enough (50% of GDP to account for debt repayment and ongoing operating expenses) to raise the revenue required to pay for all of the programs it has committed to and still have that 30% left over to pay down the debt over 30 years.

Look at this chart – it is parabolic and unsustainable:

http://creditwritedowns.s3.amazonaws.com/creditwritedowns.wordpress.com/files/2008/10/debt-to-gdp.png

The current point on the graph is at 423%.

I’ve been wondering for years when the rest of the world would realize that the Emperor (the U.S.) has no clothes. And this wondering of mine was during the Bush Administration. The Housing Crash was entirely foreseeable – I was predicting it in 2005 when I begged anyone who would listen not to buy a house in a bubble market (i.e, Las Vegas). So, for our leaders to say “nobody saw this coming” is disingenuous at best – many of us did.

Although my current federal income tax burden is low (OK – negative due to my family size), I do not agree, in principal, that my wealthier friends who do pay taxes should do so in part to subsidize the risks taken by irresponsible borrowers whose mortgage contracts are being rewritten to compensate for adverse market conditions. The government did not bail me out from the sizable investment losses I incurred during the stock market crash of 2000-2001. I would not expect them to compensate me from losses incurred if the value of my home drops. I understand that my personal budget has been subsidized by federal taxpayers through tax policy (child tax credit). I hope you would agree that in choosing to be open to having a large family, I have not engaged in moral hazard. Even though I earn a nice income, tax policy currenly favors me me to where wealth is being redistributed from those with fewer children to families like mine and the Jeubs. I want to be clear: I did not lobby for this tax policy, and it has never been a factor or motivation in having a lot of children. For our government to decide to redistribute wealth from some taxpayers to others who have engaged in moral hazard through the purchase of loans they could never repay really bothers me though.

For the wide-eyed optmists who agree with those who insist that our economy will begin a recovery later this year or in 2010, I ask you this: what industry will drive this recovery? We have about 18 million more houses (uninhabited) than we need in this country, so I’m thinking construction of anything other than roads and bridges is out of the question as a driver of the recovery for the next 3-4 years. We have more registered vehicles than we do licensed drivers in this country, and consumers have too much debt and too little confidence to consider borrowing more money to acquire yet another depreciating asset that they don’t even need! So, let’s count out the automotive industry as a driver of the recovery over the next two years. How about consumer electronics? Anyone need another big screen TV, computer, stereo? I didn’t think so. See, Americans have accumulated so much “stuff”, we’re like hung-over bar patrons at happy hour, or an engorged diner at an all-you-can-eat buffet. It doesn’t matter that we have the capacity to produce, or the desire the consume. If the need isn’t there, the ability to pay is lacking, and confidence is waning, there simply won’t be any economic activity to speak of. We were all living in a bubble that lasted for many years across multiple asset classes. It has popped. This is why the government stepped in with a massive fiscal stimulus, but it is also why it is a guaranteed failure. Another analogy: drug addicts (heroin/cocaine) would do anything – including kill – to avoid going through withdrawal. By providing the addict with a steady stream of their drug of choice, you keep them happy, but also continue a dangerous dependency that will eventually lead to premature death (among other thing). The Federal Reserve has recently discussed among themselves the conundrum it finds itself in by providing overly accomodative fiscal policy (0% interest rates, artificially lowering long-term interest rates by purchasing bonds) to stimulate growth: how does the Fed wean the addict (the U.S. consumer and the Federal Government) off of its drug (debt) without causing major withdrawal pains or a heart attack?

By now you’ve probably figured out that I am a free market advocate. I believe that for every good regulation imposed by the government to prevent abuses, there is another that stifles growth, innovation, and responsible risk-taking and eventually causes grave unintended consequences (case in point: loose, irresponsible lending policies imposed by our government on Fannie and Freddie earlier this decade, which in turn forced banking institutions to fail through massive loan defaults). Nearly everyone in congress is either corrupt or incompetent (some are both). So, I don’t trust any of my government leaders to have enough wisdom to know when the regulate, and how. Our government is broken and needs to be fixed. The “change” you voted for is just more of the same incompetence, corruption, and now destruction – it just has a different name and face. There is enough blame to go around, but I believe it is a Biblical principal that those to whom much is given (positions of leadership and responsibility), much is expected. Barack Obama, Nancy Pelosi, Harry Reid, and Barney Frank have much to answer for some day as leaders of our country and policy makers over the past three years. Likewise for those who came before them.

I could go on, and on, and write a book on this subject, but you probably get the point by now.

What Can we common Poeple do about the Bailout? Nothing.. we just have to wait and see if the company comes up and develops new cars and prototypes to please the americal consumer