The main thrust of his speech in economic terms was to “invest” in American infrastructure and education.  Invest is a key word for “spend”.  He was proposing another spending spree for America.  He also said he was going to “freeze” the discretionary budget over the next few years, and that would save $400B over 10 years. He did not mention any plan to solve the fiscal debt problem.  He proposed increasing taxes on oil companies and lowering the corporate tax rate to become more competitive internationally.

The analysis of his proposal is very simple to make.  From a concrete point of view, he proposed saving $40B/year (equivalent to $400B over 10 years on average) and he proposed increasing spending on infrastructure and education.  This would be a net increase in spending.  From a tax viewpoint, his corporate ideas are probably budget neutral – neither increasing or decreasing the deficit.

From an economic point of view, the President totally failed to address the main things facing America today.  They are:

1. An unemployment rate of 9.4% (actually closer to 20% to 25% for all people wanting a better job, or any job.)
2. A Federal Budget that is NOT balanced, and is increasing the fiscal debt by about $1 TRILLION every year for the next 10 years.
3. A Federal Debt of $14 TRILLION and rising fast.
   

In other words, President Obama’s proposals failed to solve our real problems.

Humpty Dumpty sat on a wall. Humpty Dumpty was carrying too much debt, and had a great fall.  All the President’s Horses and all the President’s Men (and his spending plans), couldn’t put Humpty together again.

That old English poem describes an obese person who fell off a wall.  I am using it as a metaphor to describe the US economy.  “Humpty” has already fallen off the wall, and lots of people, including the President, are trying to put him back up on that wall where he looks so big and strong and impressive.  Just ask the Chinese if they think Humpty is solid and responsible.  But, he fell off, and he is now broken.

The truth about the American Economy…….

I am going to get a little complex in my analysis of today’s US economy as it pertains to the US Federal Budget and the US Federal Debt.    Please be patient, and I will try to explain in some detail what is facing us.  First, let’s start with the facts:

1. The Total US Debt is over $14 TRILLION.  We are paying interest on that debt, as all of that debt is paid for by borrowed money that is guaranteed to be paid back through US Treasury Bills/Notes/Bonds. This is made up of:
   
   1. $10 TRILLION of public debt
   2. $4 TRILLION of money borrowed by other governmental agencies (like Social Security, etc.)
      
2. The Total US Federal Budget is about $3.5 TRILLION.  This is approximately make up of:
   
   1. $2.5 TRILLION from income to the government – think taxes, fees, etc.
   2. $1.0 TRILLION of borrowed money.
      
3. This means we are increasing our Total US Debt by $1.0 TRILLION each year, and the amount of interest we must pay goes UP.
4. At some point with an ever increasing debt, we will not be able to pay the interest on the debt.
5. This is a definition of “bankrupt.”  In other words, the US is technically bankrupt today.  (We are seeing the Rating Agency cowards just starting to point this out by threatening to lower the US Government’s creditworthiness.)
   

The threats…….

There are two major threats to the US economy going on right now.

1. We are increasing our debt each year, and this will end badly.  This is called deficit spending.
2. We have a massive debt, and the amount of interest we pay will balloon in the future when interest rates rise.  In other words, even if we balance the budget, we face a very bad future where our debt will cripple the nation.
   

The solution to the first problem is to balance the budget.  Simple to say, and very hard to do.  It takes very brave leaders to accomplish this goal, and it takes an electorate who support those leaders.  Let’s look a little closer at that solution.  To balance the budget, we must reduce spending by $1 TRILLION, or increase taxes by $1 TRILLION, or use a combination of those two techniques.  But, here are the problems:

Reduced spending by $1 TRILLION involves choosing what to cut.  And, we have a political standoff in America today. It doesn’t matter what the US House of Representatives (Republican led) does because the US Senate (Democrat led), and/or the President (a Democrat) will veto it.  In other words, we have a Republican/Democrat “standoff” with both sides standing in the middle of the road ready to draw their gun, but afraid they might get shot (not re-elected) if they do it.  In addition, any reduction in government spending is a negative for GDP.

Increased taxes involves taking more money out of the pockets of US taxpayers (individuals and companies).  The increase in taxes would decrease the amount of money these parties can and would spend.  Increasing taxes is known to slow GDP growth.  Reducing taxes is known to increase GDP growth.   So, if the taxing method is used at all, it would be done knowing that GDP will get hit.

But, let’s say we can wave a magic wand and balance the budget, we are still left with a massive Debt.  We must pay down the debt too.  That means we must continue to cut spending, and/or continue to raise taxes.  The ramification of these actions are reduced spending means a reduced GDP, and increased taxes means a reduced GDP.  So, the outcome is a reduced GDP – perhaps a negative GDP; in other words a recession or depression.

I am sorry to be so negative, but these are just the facts.  Remember that Sergeant Friday said “Just the facts, M’am.”

Can we cut spending enough to solve the problem??????

This is a complex notion, and to more accurately analyze the impact of spending cuts, we must also look at interest rates over time.  In other words, we must look at a multi-year analysis of spending cuts in an environment of increasing interest rates.  Interest rates are going up, and to ignore this fact is folly; so let’s stay in reality and don’t be afraid of the truth.

Let me explain the impact of rising interest rates on the debt payment by the government.  First of all, the FED has created an environment of historically low interest rates:

1. The FED Funds Rate is zero.
2. Longer term rates like 10 Year Treasury Rates are being lowered today by Quantitative Easing 2, and sit at 3.4% .
   

These are the rates that determine the amount of interest paid on our debt.  So, having done this, the US Treasury is selling as much long term debt as possible – and stick with me on this.  If the Treasury sells a 5 year Treasury Note, that means the interest rate it pays on that note is fixed for 5 years.  It doesn’t have to repay the principal amount for 5 years.  With historically low interest rates, it pays for the US Treasury to lock in lower long term interest payments before interest rates rise.  And this is exactly what the US Government has been doing.  In other words, it has created a low interest rate environment through the FED, and locked in low interest rate loan (via Treasury sales) through the US Treasury.

The US Treasury Bills/Notes/Bonds outstanding have all different terms (the term of the instrument is the length of time the debt exists before the principal is paid back to the lender).  The terms outstanding on all these debts varies from “days” to 40 years.  The bond market calls this a “ladder” of debt, in case you ever run into it in the future.

However, and this is the point of this diatribe, over time those bills/notes/bonds will expire, and the principle must be repaid.  That repayment is typically done by selling a new bill/note/bond – but the next time around, it will have a higher interest rate as interest rates will rise.

Because of the laddering of the existing US debt, an increase  in interest rates will not have a proportionate effect on the interest payments immediately.  This is a very complex topic, but as interest rates rise (and they will rise by an unpredictable amount over time because it is the markets who determine longer term interest rates), the amount of interest paid by the government will rise over time. For example, if the average duration (term) of the US debt is 4 years, it will take about 4 years for an interest rate rise to take full effect.

With that as a background, now let’s look at the effect of cutting governmental spending.

Larry Lindsey, a former FED Governor and White House Advisor has analyzed some of the more popularly discussed budget cuts, to show their effect over time.  He has included a rising interest rate regime.  This analysis assumes that all is well with the US economy and we are not in an environment where inflation will rise its ugly head in the future – so take that into consideration when looking at it.

What his analysis tells me is that with a “normal” interest rate rise, the amount of interest paid on our debt will increase over $800B in 8 years.  The spending cuts suggested don’t come close to compensating for that increased interest rate outlay.

Conclusions…….

1. Nothing will get done (in the economic sense) over the next 2 years, as the political “standoff” continues.  What is going on in Washington today is just a positioning for the 2012 election.  There may be good intentions of reduced spending, but the reality is that spending cuts will only happen around the margins.
2. We are currently positioned to have increasing Total Debt for 2 years.
3. Interest rates will eventually start going up, and when that happens, we will be put into an even worse position.
4. The current proposals in Washington don’t solve the real problems – there isn’t a balanced budget, and there is no plan to reduce the debt.

Bonds got scared by the PPI, and increased interest rates – bad news for us all.  However, the scare of inflation remains even thought the argument of deflation versus inflation rages.

In the news today….

Retails Sales – rose in June by 0.6%.  Where did this increase come from?  From increased gasoline prices paid at the pump, and (surprisingly) increased sales at auto dealers for new cars (this is a one time bump, unless the government comes out with some incentives that just can’t be resisted.)  Without these two areas, retail sales rose 0.3% – an increase which is good, but a fairly poor increase.

Unemployment – the truth – from Mort Zuckerman of the WSJ.  Zuckerman went on to say that the first Stimulus package was a failure because it didn’t create jobs – as had been promised – it only produced pork for the politicians.

1. 185,000 workers in the June number were the product of statistical sampling, but could not be verified by the government.
2. Companies are asking employees to take unpaid leave.
3. 1.4 million unemployed workers weren’t counted because they’re not searching for work.
4. Part-time employment has doubled to 9 million.
5. The work week is 48 minutes shorter than when the recession began.
6. The number of long-term unemployed (4.4 million) is at an all-time high.
7. There were no wage gains in June.
8. The goods-producing sector lost over 223,000 jobs just in June.
9. When business picks up, businesses will just add hours to existing workers, rather than create new jobs.
10. Old business lines are being eliminated entirely, not shrunk down, decreasing the odds that the unemployed will be able to find work.

I couldn’t have stated it more eloquently.  The US economy is in a mess.

Unemployment rate – “will continue to climb for several months.”  This quoted from President Obama today.  Can we believe what the President says?  I think not.  He said that unemployment wouldn’t exceed 8% if the Stimulus Bill was passed (in a big hurry).  That was a lie – or was he just mis-reading the economy as VP Biden stated?  A major sector of economists predicted unemployment much higher than 8% when the President made that statement – so the current situation couldn’t be “unknown.”  I, even, predicted 10% unemployment rate by year end long before the President made his 8% statement.  

So, if the President is wrong this time around, it will be longer than “several months” before we top out on unemployment.  This is an interesting prediction model to use:  Predict the opposite of the President’s statements.

President not a citizen?? – this is the gift that just keeps giving.  An Army Major has filed a court case so he won’t go to Afghanistan on the orders of a President who is not legitimate.  I feel this is a gimmick, but fun for the press to follow.  Naturally, only the conservative press will follow this story.

PPI – The Producer Price Index (or wholesale price index) jumped 1.8% last month.  The “experts” are saying this is nothing to worry about, but the markets thought differently, as interest rates rose.

Here are the last numbers for today:
Dow Jones 30 Industrial – 8360 (up 28 points)
10 Year Treasury Bond – 3.45% (up 0.10%)
Euro – $1.3940
Gold – $923 (no change)
Oil – $59.52 (down $0.17)
Gasoline $1.65 (up $0.01)

Bonds moved sideways.

The Dollar lost some ground today.

Oil and gasoline gained a little.

Gold gained $7 today – a nice day, but I declare it a sideways move.

In the news today…..

President Obama is off to the G20 Meeting in London.  What’s going to happen?  Well the news so far has been about the disagreements among the various leaders.  This is probably mostly grandstanding for their individual constituents.  For example, Germany’s leader, Merkel, is saying that stimulus is stupid as it leads to inflation or hyperinflation, and the Germans know more about this than most countries.  France’s Sarkosy is telling Obama that he is WAY TOO Socialist – and this coming from France is almost laughable – but he’s serious about it.  Is there anything that will be agreed at this meeting?  Probably not in the area of economic stimulus.  Most countries are just mad at the USA because we started this mess.

But, way back in the shadows of the meeting is something that could get agreed.  It’s the international regulation of the financial institutions that caused this mess.  And here is where the dirty little secret may be hidden from the public.  The idea on the table is for the IMF to regulate international financial institutions, and our FED/Treasury would dance to the tune of the IMF.  This is not the same question of whether or not the US Dollar will remain the world’s reserve currency.  For now, that question is settled; it will remain the world’s reserve currency.

Are we willing to give up our financial sovereignty????  That’s the secret question being asked, but totally ignored by the press.  See if you can find this story in your press readings.  The real discussion will be between the idea of the IMF being in charge versus each nation being in charge and harmonizing “how” to regulate within their borders.  Conspiracy theorists are saying this could really be a big step toward a “one world government.”

Housing Prices fell 19% in January 2008 to January 2009.  And the price fall is ACCELERATING.  This is the real bad news.  This one measure of the US economy is probably the most important measure today as it drives everything else.  I am sorry to say that our economy is still tanking in spite of the fact that this measure is a “lagging” measure of the economy, and not a predictor of the future.  It just doesn’t look good.  If we were looking for a more positive picture it would include the stabilization of home prices in a few areas, rather than a drop in all areas as was reported.

2009 Predictions

I continue to believe that the economy will have a negative GDP growth each quarter of 2009 with the first quarter being the worst number.  2010 should turn this around, and we will have positive growth in 2010 overall, but probably less than 1% growth.  Another way of describing our condition is that we are having an L-shaped recovery, and not a u-shaped or v-shaped recovery as many have predicted.  An L-shaped recovery is one where there is little or no recovery when we hit the bottom, and that’s what 2010 will look like.

I continue to predict that unemployment will hit 10% in the 4th Q of 2009, and will stay at 10% throughout 2010.

The stock market has seen a recent “bear market rally” and as the poor economic news continues to disappoint everyone, the market should retest its lows.  It probably won’t crash through those lows, but it certainly should hit them again.   When it hits those lows, that’s the time to jump back into stocks.

Inflation remain the hardest thing to predict.  We have seen no inflation so far in 2009, but have seen the slight increases in prices that could be a precursor to inflation.  I’ll continue to watch inflation closely.  I am predicting that inflation will hit in the 4th Q 2009.

Bonds are a very complex story.  US Treasuries will be controlled by the FED in the foreseeable future, and remain at low interest rates.  Corporate bonds are a different story, and depends on the underlying business.  Some bond holders will lose some of the capital as they will be asked to take a “haircut”.  For example, this will happen to GM bondholders.  Why hasn’t this happened to Wall St firm bondholders?  I suspect that no one wants to face the fallout of that happening – probably a renewed credit crisis.  However, it is definitely “unfair” to ask GM bondholders to take a loss, and not have unsustainable bank bondholders to do the same.  How about Citigroup?  How about B of A?  It depends on the results of the “stress test” that the government is performing right now.

Tonight’s Dinner Conversation…..

I am very grateful my wife suggested having a “Dinner Conversation” part of this article.  Here is today’s thought.

Barney Frank, one of the scumbags in Congress who caused our housing mess, has come up with a bill that gives Secretary of Treasury, Geithner, the power to set the pay of ALL employees of companies that receive TARP money or Fannie/Freddie money.  Can you imagine what this means?

1. Total control (prosecutor, judge and jury) of everyone’s salary in that company.
2. The need to expand the Treasury to establish a department to evaluate everyone’s compensation and establish “reasonableness.”
3. The ability to SET an employee’s salary.
4. Oh, by the way, did I mention this power is RETROACTIVE?
5. This is socialism at its core.

So, the question for you tonight is “Is this the type of CHANGE that you voted for (if you voted for Obama), or is this the type of America you want to live in?”

Don’t get too excited yet.  The bill has to pass the Senate before it would go to the President for signature.  And, you can bet that Obama would sign it, and not veto it.  Would you want our President to sign or veto a bill like this?
 

Here are the last numbers for today:
Dow Jones 30 Industrial – 7608 (up 87 points)
10 Year Treasury Bond – 2.69% (down 0.03%)
Euro – $1.3287
Gold – $925 (up $7)
Oil – $49.90 (up $1.49)
Gasoline – $1.42 (up $0.03)

Gold rose $70 today, a big blast.  This was also a unintended consequence, but a good one for those holding gold.

In the news today…..

Our new Attorney General is considering releasing some of the Guantanamo detainees (I’d call them terrorists) in the US. How would you like to have one of them as your neighbor?  They would probably go straight onto welfare too.  There are some folks from  a region of China being held there, and we don’t want to send them back to China because the (bad) Chinese think they are from a separatist group – so they want to get their hands on them, and kill them (with only one bullet of course).  I just don’t understand that kind of thinking.  It is wonderful to be humanitarian, but?????  These guys were trying to kill Americans, so this is what happens in war.  Okay, I know this isn’t a real economics story, but it is interesting, and you might not see it on the news.

President Obama has made his pick for the NCAA Basketball Tournament – March Madness.  The nickname of March Madness is highly appropriate to describe our President wasting his time on such a mundane thing – and not spending his time solving our economic problems.  Bad choice Mr. President.  You may think this is my opinion (which it is), but it also the opinion of a lot of prominent basketball personalities.

Unemployment Benefits – are at a RECORD level this month – no surprise there.  Should we be really excited about that?  Well, the trend is more important than the number or being a record.  The trend is going up – and that’s bad.  Any month’s record is just a backward looking statistic, and is therefore not a great predictor of the future – only a a story from the past.

New Unemployment Claims – this week were 646,000 – and this continues to be bad news, and portends a rise in the unemployment rate in the future.

Mortgage Rates – The 30 Year Fixed Rate Mortgage rate is 4.95%.  This is a direct reaction to yesterday’s FED announcement that it will be buying Treasury bonds.  Past history of the relationship of the 10 Year Treasury and the 30 Year Fixed Mortgage rate would indicate that mortgage rates could come down a small amount more.  LIBOR is also falling dramatically in response to the announcement.  This is all good news for the economy.
 

Here are the last numbers for today:
Dow Jones 30 Industrial – 7401 (down 86 points)
10 Year Treasury Bond – 2.60% (up 0.05%)
Euro – $1.3660
Gold – $959 (up $70)
Oil – $51.61 (up $3.47)
Gasoline – $1.44 (up $0.07)

Oil and gasoline rose a little.

Gold gained $14, and is coming back.  Gold continues to be a “buy”.

Unemployment Rate – rose to 8.1% from 7.6%.  This was an “unexpectedly” high increase.  More waves of layoffs are on the way.  Here’s the job loss trend: Dec – 681,000 jobs, Jan – 655,000 jobs, Feb – 651,000 jobs.  See any trend??  These numbers are just high, and will continue high for at least one or two more months – perhaps longer.  If part-time workers are included in the figures, the unemployment rate is 14.8% – a RECORD HIGH.  The work week is now 33.3 hours – a RECORD LOW.  I still contend that the unemployment rate will be 10% at the end of 2009; and I know I’m in the minority as all the “experts” are predicting the high 8%’s.

Food Stamps – the number of people receiving Food Stamps rose 700,000 people last month to a total of 31,800,000 people.  The total cost of Food Stamps at this rate is $51B per year.  This is a very big number and Food Stamps can be an important program to eliminate starvation in the US; and I just wanted all the readers to realize that one simple program, like Food Stamps, is extremely costly.

Lots of news related to Obama today……

The TWITTER co-founder has been invited to the White House to give his input on the economy, and ways to enhance its recovery.  His comment was “that this must mean they’re “really” out of ideas.”   While his comment must have been a joke (as no one would have been stupid enough to have insulted the White House), it carries a kernel of truth – as all good jokes carry.  TWITTER does not earn any money in the US, so why is he being consulted??  My conspiratorial mind thinks his communication skills will be used to continue spreading the “message.”

The liberal leaning editorial page of the Wall St Journal disapproves of the methods of President Obama.  We are now seeing some real backlash at the “change” that Obama is bringing into the US.  As you know Wall St does not like Obama’s plans for the future.  In particular, it really doesn’t like the lack of any concrete plan to fix the banks – like Citigroup – and it doesn’t like the 10 year plan ending with the largest deficit you could ever conceive of.

If you’ve listened to Obama recently, he has stated that three main programs are needed to solve the economic crisis.  They are energy independence, education and health care reform.  From my way of thinking neither education nor health care reform have anything to do with our economic problems.  Energy independence, on the other hand, is a wonderful goal as the importing of foreign oil has been one of the root causes of the crisis.  However, energy independence as it relates to solar, wind, tidal, etc. won’t even come close to creating energy independence in the next 10 years.  Only drilling more oil accomplishes that together with nuclear, natural gas and coal.  However, all these are off Obama’s list.  Instead, Obama wants to create a carbon tax – and this is just another tax which will slow our economy further.

There are some things that Obama is doing to help our economy.  The FED printing tons of money, and the Congress/Treasury spending stimulus packages all help.  The Obama Mortgage Plan is a step to try to halt the decline in housing prices by keeping home owners in their homes.  However, none of these plans solve the problem.  They are just small steps in the right direction.  The problem remains.  House prices continue to decline.  Banks are bankrupt, but won’t admit it as they won’t value their toxic securities at the price someone is willing to pay – they can’t because they would be put out of business by the FDIC.

From my point of view, what’s wrong with allowing this banks to get destroyed?  Bankruptcy is probably too harsh, but nationalization isn’t harsh – it’s just the government taking the banks over, and then selling off the assets – just like in the S&L crisis era.

The stupid past behavior of Congress forcing banks to take bad home mortgages, and the current behavior in earmarks is just a sidehow – something for the press to talk about.

Obama is presiding over his OWN “Bear Market”.  A bear market is a decline of 20% or more.  Since Obama’s day of inauguration, the stock market has declined 20%.  Can Obama be blamed for the entire 20%??  No, the market was going down no matter what.  However, Wall St is striking back against Obama in the one way that it knows how to be heard.  Wall St, meaning the big money movers in all the markets including Hedge Funds, is selling, selling, selling.  So, you can bet that if Obama’s policies were different – like a concrete plan to fix the “toxic securities” in the banking system – then the decline wouldn’t approach 20%, and wouldn’t be an “official” bear market.  However, let’s look at the facts, and we are in an “Obama Bear Market”.  All the credit and all the blame floats to the top – and that’s Obama.  Oh, by the way, this 20% drop is the fastest drop in stocks for the past 90 years – that’s before The Great Depression.  The total deflation of this 20% decline is $1.7TRILLION – now we’re talking about a lot of money.

The White House continues its battle with Rush Limbaugh, Cramer and Santelli.  During yesterday’s Press Conference, Press Secretary Gibbs said that the White House was just having “fun” with those guys.  The US is in near a catastrophic meltdown, according to our President, and he is wasting time trying to discredit some media entertainers?  That isn’t very Presidential.  It seems to me that the White House should be above this type of battle.  I recognize that previous administrations, including Republican administrations, dealt in this type of wasted effort too.  I don’t condone any of that behavior.  However, it’s even more important during this crisis that the White House stay focused on solving our economic problems.

Here are the last numbers:
Dow Jones 30 Industrial – 6627 (up 33 points)
10 Year Treasury Bond – 2.83% (up 0.01%)
Euro – $1.2639
Gold – $943 (up $14)
Oil – $45.52 (up $1.91)
Gasoline – $1.33 (up $0.02)