For those of us asking if things could possibly get any worse (or more expensive) for the U.S. in Afghanistan, the answer is a resounding “yes”.  The owners of  Kabul Bank, many of whom are related to Afghan president Hamid Karsai, announced yesterday that the bank would almost certainly collapse as result of millions of dollars of investment & loan losses, combined with millions more stolen by the banks’ directors.  The news of Kabul Bank’s financial problems has, predictably, brought about  a panic among depositors, anxious to withdraw their money before its too late.  Unlike  U.S. financial institutions, the banks in Afghanistan offer no  insurance for their depositors, and no real chance for recovering their money once the bank has gone under.  It is probably for this reason that most Afghanis do not keep their money in the banking system.  In reaction to the mounting crisis in confidence in Afghanistan’s banking system, President Karsai promised the government would guarantee deposits, and that the two men who presided over Kabul Bank in a “reckless and free-wheeling manner” would be fired.

Like almost everything in Afghanistan, economics and politics are inextricably intertwined.  Politicians from Karsai on down the line were most likely well aware of Kabul Bank’s “irregularities”, but shielded it from scrutiny for as long as they received personal, financial gain.  In typical Karsai fashion, the Afghan president told Secretary of Defense, Robert Gates, that the crisis had been invented by the Western media for the purpose of raising baseless fear among Afghans.  Time and again Karsai has been criticized for tolerating rampant corruption, and time and again he has blamed outside forces (usually the U.S.) for all of Afghanistan’s ills.

When Kabul Bank finally does collapse, there is little doubt that Karsai will call upon the beleaguered taxpayers of the U.S.A. to bail it out; and why not?  The American government has overlooked the excesses of corruption-riddled  government for almost ten years in its futile and relentless campaign against the Taliban and al Qaeda.  Karsai knows full well that the American government will not risk the total collapse of the Afghan financial system  (such as it is) if it would imperil the military mission.  After all, what’s a few billion dollars in bailout money compared to the almost $10 billion a month it takes to keep the military operation going?

The collapse of Kabul Bank, and the high level of  corruption at all levels of government in Afghanistan, should be yet another warning shot across the bow of the Obama Administration.  Afghanistan is a lost cause, and always will be a lost cause.   It is time to accelerate the time schedule for pulling out of this backward, mountainous and tribal country, before Hamid Karsai asks the American taxpayers to bail out Afghanistan’s auto industry (if they had one).

Rich

Once again, the Senate Republicans have chosen to live up to their “Party of No”  reputation by blocking  a bill intended to provide assistance to small businesses.  The bill, sponsored by the Obama Administration, was intended to provide $30 billion in loans for small businesses, combined with tax relief for a ten year period.  In addition, the bill was to provide another $1.5 billion in grants to state lending programs that are currently running low on cash.  Clearly, the intent of the legislation was to stimulate economic activity and job creation by putting sorely needed  funds into the hands of  America’s economic engine; small businesses.  Predictably, the Senate Republicans refused to support anything proposed by the Democrats, regardless of whether it was in the best interests of the American people.  The Republican political strategy has been, and continues to be, to ensure that no legislation with a  potential  to help the economy improve will be considered.  An improvement in economic activity and a reduction in unemployment prior to the November Congressional elections would be the Republican’s worst nightmare.  Senate Minority leader, Mitch McConnell attempted to justify his party’s appalling, obstructionist  behavior by saying they didn’t want to increase the National debt, even if it meant jobs could be created by small businesses.  In a nutshell, the Republican Party talks a lot about their support for small businesses, but is not willing to support anything that will improve their situation.

The effects of the “Great Recession” , that began almost three years ago, in 2008,  have continued  to linger throughout 2010.  The nation’s Gross Domestic Product for the quarter ended June 30  showed a increase of a paltry 1.6% , and will probably show an increase of 2.0%, or so, again in the third quarter.  Although the Obama Administration has taken bold, decisive moves to save the American economic system from collapse, still more needs to be done to help economic activities regain momentum.  The newly proposed “business aid bill” was the kind of legislation to do just that.

In Shakespeare’s “Julius Caesar”, Mark Antony speaks to the people of Rome after the  assassination  of Julius Caesar.  He starts off by flattering Caesar’s murderer, Brutus, by saying “. . . the evil that men do lives after them, the good is oft interred with their bones.  So let it be with Caesar.  The noble Brutus hath told you he was ambitious.  If  it were so,  it was a grievous fault and grievously hath he answered for it here under the leave of  Brutus and the rest. . .”  Much like Brutus, the Republicans, under the leadership of Mitch McConnell, have metaphorically tried to oust the Obama Administration, and any chance they may have had to improve the condition of middle class Americans.  They have told the American people that bills such as the Health care Reform Bill, or the Financial System reform Bill, or the “business aid bill” are  not good for America.  In the end of Julius Caesar, Brutus (i.e. Mitch McConnell) is exposed for his crimes, and forced to flee from Rome.  In November, the Republicans should be held accountable for two years worth of obstructionist politics, and be forced to flee from Washington DC.

Rich

Eighty years ago, during the depth of the Great Depression, President Roosevelt warned the American people that “. . . we have nothing to fear except fear itself “.  Although economic conditions across America are certainly much better than they were during the Depression, Roosevelt’s advice still holds true today.  The economic recovery that started in the second quarter of 2009 seems to have ground to a halt, at least temporarily, as businesses and investors adopt a “wait and see” attitude.  The mood in America can be best summed-up as neither pessimistic nor optimistic about the future; just fearful.   In other words, the economy has gone from a somewhat anemic growth rate of over 3 %  in 2009, to a growth rate of less than 1% presently.  By almost every measuring stick, the American economy is simply treading water, and waiting for something, either good or bad, to happen.  So, what is it that causing businesses and investors to be so cautious?

For one thing, companies in America are hesitant to hire new workers because they are uncertain about the effects of health care reform and financial system reform.  In addition, businesses  and investors are very wary about  the possibility of rising taxes  when the Bush Tax Cuts expire at the end of 2010.  In short, many companies are ready to hire, but need to see for themselves that the cloud of uncertainty looming over the economy has finally started to lift. A few key economic indicators , such as housing, durable goods orders and consumer sentiment are due to be released this week.  Positive results may give companies some added confidence that some “wind” has once again begun to fill the sails of the American economy.  Even so, it is unlikely that unemployment will move much from a stubbornly high 9.7%.

When it comes to the question of when  the economy will finally go back to healthy a “healthy” growth rate of 5 or 6 percent and low unemployment rates of 4 or 5 percent, the answer is “not until the real estate crisis is over, property values start going up instead of down, and banks are rid of millions of units of foreclosed properties”.  The Great Recession in America was fueled by the real estate crisis, and won’t be totally over until the real estate woes are resolved.

As time goes by, and U.S.  economy grinds slowly forward into the coming year, companies will become more confident that government reforms will not have a major impact on their “bottom lines”.  This will be the impetus behind a significant increase in hiring, a boom in consumer confidence and a higher demand for housing.  By the second quarter of 2011, companies will replace their “fearful” attitude with an attitude of confidence in the future.  When that happens, we can truly say that the Great Recession” is over.

Rich

It wasn’t so long ago, during the “Cold War”, that Americans viewed China as an impoverished, Communist  nation without much hope of feeding its burgeoning population, and without much export production to sell to the rest of the world.  How times have changed!  Over the last ten years China’s economy has surpassed those of Germany, Canada, Spain, Italy,  France, and now Japan.  While China has been becoming an economic powerhouse, the U.S. has been surpassed by a number of countries in areas such as consumer incomes, standard of living and health care.  The net result of it all is that China has now become the world’s largest creditor nation, and the U.S. has become the world’s largest debtor nation.  What went wrong?

To start off with, China has made higher education a top priority.  For example, Chinese universities will graduate 500,000 engineering students this year, while U.S. universities will graduate only 150,000.  In addition, China has now become the worlds largest internet market, as measured by the number of users.  In terms of personal income, China has gone through the early phases of  industrial development, where low cost labor has given the economy a much-need jump start.  They are now entering the next phase, where workers will be allowed to form labor unions and strike for better conditions.  In fact, a primary goal of China’s central planners is to continue to rapidly develop a consumer-driven, domestic economy in order to rely less heavily on the export business.  There is little question that the Chinese have been “eating America’s lunch” for the last few years, but does this mean China’s meteoric rise in economic power and influence is sustainable over the long run?  Is answer is probably “no”.

Chinese Communist Party officials have been quick to gloat over their country’s economic successes, and equally quick to blame the excesses of American-style capitalism for  the “great recession”, ignoring the fact that the introduction of capitalistic principles into their own economy was largely responsible for the economic boom they are experiencing today.   The sustainability of China’s economic boom will depend upon it’s ability to loosen the iron grip of the Communist Party, and to greatly improve its record on human rights.  It’s ultimate failure to do so will cause widespread social unrest, and ultimately, an unraveling of  China’s economic miracle.  I suppose that when the Chinese economy finally does collapse, at least they will still have a few trillion dollars of American I.O.U. ‘s to live off.

Rich

Former President, George H. W.  Bush, learned the hard way that the old mantra   “It’s the economy, stupid!” was political truth.  It was primarily due to problems in the economy that Bush ended up losing an almost insurmountable lead over Bill Clinton in a period of a few short months before the election.  In spite of a  successful military operation to throw Saddam Hussein and his Iraqi invaders out of Kuwait, Mr. Bush went on to lose his bid for re-election.  Since then, most U.S. politicians have recognized that absolutely nothing is more important to voters than their own economic well being.  This is why the latest jobs report, showing the unemployment rate unchanged at 9.5% in July, is like throwing raw meat to the Republicans.

Both ends of the political spectrum are lining up to spin the jobs report to suit their own agendas, and both sides are using the  report to advocate for entirely different policies.  Coming from the left, White House economic adviser Christina Romer said the disappointing report proves the need for more government intervention in order to revive the economy.  The Obama Administration has been consistent in saying that the economic recovery is still too fragile to be cut off from government stimulus programs, and that more support will be needed to motivate employers to begin hiring.  In addition, federal government  support for state and local jurisdictions must to continue, in order to avoid mass-layoffs from cash-strapped state coffers.  Coming from the right, House Republican Whip, Eric Cantor, insisted that the Obama Administration’s, deficit-producing stimulus programs have done little to stimulate job growth.  He has called for an extension of the Bush tax cuts, claiming that keeping tax rates low will be the most effective way to produce job-creating growth in the private sector.

There is little doubt that Republicans will remember how George H. W. Bush’ presidential campaign was derailed by a faltering economy in 1992, and use the same reasoning to take down as many Democrats as possible in the upcoming, mid-term election.  The danger is that many extremist right-wingers, such as Sharron Angle and Rand Paul, may get swept into power by a disgruntled electorate, hell-bent on punishing Democrats for not turning the economy around swiftly enough.   At a time when the fragile American, economic recovery needs support more than ever, newly elected, right wing politicians will ensure that all progressive legislation is brought to a screeching halt.  Middle class Americans, who have relied heavily on government assistance programs to keep food on the table will be thrown to the proverbial wolves.

Although the Republicans will campaign heavily against the Obama Administration’s stimulus programs, they will not able to offer the American people a viable alternative, other than the dis-credited concept of  “trickle-down economics”.   As the November mid-term elections rapidly approach, independent voters across the country should not be fooled into believing that the Republicans offer anything more than a return to the days of Bush-43.  If, in fact, too many candidates like Angle and Rand get elected, we may be facing a return to the days of Herbert Hoover.  This is a scenario that is too frightening to imagine, and certainly something we must avoid at all costs.

Rich

An event of great importance to the American people will occur on December 31, 2010.  At the end of this year the tax reductions put in place during the Bush Administration will expire.  Without approval by Congress to extend the tax reductions, the top personal income tax rate will climb from 35% to 39.6%, and the federal tax on dividends will increase from 15% to 39.6%.  This event is not of great importance because it imposes a slightly higher tax burden on those that are relatively well-off;  it is of great importance because the American people will be given an opportunity to choose fiscal responsibility over runaway deficit spending.  For a country that has become addicted to living ( and fighting its wars) with borrowed money this will not be an easy decision.

Most economists will agree that raising tax rates, especially on the top earners, will reduce the incentives for growth.  The theory is that a relatively low tax rate on dividends will motivate investors to put their money into job-creating enterprises  that will, in turn, pay out dividends, and provide them with a low-taxed source of income.   Many Centrist Democrats and Republicans see the continuation of tax reductions on dividend income as a key factor in helping to pull America out of the current economic  recession, and instrumental in the creation of new jobs.    The principle of providing  rewards for the wealthy, as an incentive for economic growth and job creation for the middle class is the essence of “trickle-down” economics.  The results of the Bush tax cuts and the “trickle-down” economics that were put into play in 2001 and 2003,  are an estimated $300 billion yearly reduction in tax revenues, an unemployment rate nearing ten percent, and a national debt of almost $8 trillion.  Although the Bush tax cuts may have, in fact, helped to boost investment and create jobs in the past, they have greatly reduced the ability of the federal government to provide vital services without borrowing the funds from foreigners.

Although no-one looks forward to paying higher taxes to the federal government, we Americans have all created (over time) a social welfare system that has become more costly than anyone would have imagined.  The funding requirements of Social Security, Medicare, unemployment compensation, etc. cannot be ignored by allowing the well-off citizens of America to continue to underpay their taxes by claiming a lower rate on “dividend income”.  Both dividend income and earned income must be treated equally, and the marginal tax rate must be adjusted upward until government deficits are significantly reduced.  Congress will soon be given the unique opportunity to do something about reducing America’s skyrocketing national debt.  Let’s hope that they show the courage to set a new course of fiscal responsibility, rather than extending the tax cuts that have helped America to become the largest debtor nation in the world.

Rich

The latest embarrassment for the Obama Administration was the WikiLeaks release of classified documents related to America’s faltering policy in Afghanistan.  Fortunately,  the U.S. government tends to “over-classify” documents, therefore much of the “sensitive” information was of dubious strategic value to America’s enemies.  However, the released documents did put the national spotlight on just how convoluted the U.S. policy in the region really is, and just how difficult (if not impossible) it will be to accomplish America’s  strategic objectives.  Thomas Friedman, from the The York Times, summed it up well when he reported ” . . . although the terrorist attack of 911 was basically planned, executed and funded by radical Pakistanis and Saudis, we responded by attacking Iraq and Afghanistan.  Why?  Because Pakistan has nukes that we fear and Saudi Arabia has oil that we crave”.  The thought was that building a democracy in Iraq would somehow influence reform in Saudi Arabia, and eliminating al Qaida in Afghanistan would somehow make Pakistan, and its nuclear arsenal, less of a target for take-over by radical Islamic factions.  In point of fact, both strategies have failed miserably.

In the cases of Pakistan and Afghanistan, both countries have leaders that support America’s objectives in public, gladly accept billions of dollars of American aid, yet make side bargains with America’s enemies.  While American soldiers are dying in Afghanistan, President Karzai is making huge mining deals with the Chinese government, and negotiating peace deals with the Taliban to cut them in on the Chinese mining revenue.  Pakistan, on the other hand, is obsessed with its perceived threat from India, and uses its military resources only sparingly to fight Taliban and al Qaida insurgents.  Neither country has the slightest interest in bringing about democratic reforms for the betterment of their people, and neither country  has a population that is the least bit sympathetic to America, or to American interests in the region.

In the case of Saudi Arabia, the ruling monarchy and the wealthy elite are tolerated by the highly radicalized Wahhabi fundamentalist establishment.  In essence, the Wahhabis are allowed to impose a puritanical form of Islam on the rest of society, and to export their fundamentalism to the rest of the Muslim world.  This arrangement is not likely to change any time soon.  Much of the money used to fund terrorist activities come from Saudi Arabian oil sales to (yes, you guessed it) the United States of America.

The fact that the U.S. needs both Pakistan and Saudi Arabia to remain strategic “friends” puts America between the proverbial “rock and a hard place”, because neither country has a population that is in any way interested in friendship with the U.S.  It is time for the United States to realize that its dependence on imported oil has forced it to make a “pact with the devil”.  The development of alternative energy sources is very rapidly becoming a high priority if the U.S. is to maintain its independence in dealing with the real threats to world peace; Saudi Arabia and Pakistan.

Rich

“Let the games begin”  was the rallying cry made four days ago by top U.S. and South Korean military commanders, as the two nations engaged in high publicized, joint military exercises along Korea’s east coast.  Although the  exercises were touted as routine military drills, the message sent to North Korea was clear and unambiguous; the United States is ready, willing and able to counter any acts of aggression initiated by Pyongyang.   An equally clear message was delivered to South Korea concerning the United States government’s resolve to support them should North Korea launch an attack.  There is little doubt among politicians in the U.S. and South Korea that it was time to let Pyongyang know that further acts of aggression (similar to the torpedoing of the Cheonan) will not be tolerated.  However, there is plenty of doubt that the joint military exercises will have any impact at all on North Korea’s plans to  further develop nuclear weapons capabilities.

In a  sense, the United States and South Korea have engaged in the same kind of “saber rattling” as North Korean dictator, Kim Jong Il.  In fact, North Korea initially made threats they would intervene militarily if the U.S. and South Korean conducted  the joint exercises off the east coast.  Like most threats from Kim Jung Il, his words  have proven to be empty rhetoric.  It is yet to be seen whether or not U.S. and South Korean forces would actually retaliate if another minor (or even major) provocation occurred, or whether, in fact, the U.S. is doing some saber rattling of its own.

Lying slightly below the surface of simmering hostilities on the Korean Peninsula, are the Chinese and American spheres of influence.  The Chinese support of North Korea, both economically and politically, is not likely to waver as long as Kim Jung Il refrains from taking actions that would be counter to Chinese interests.  Time and time again, the Chinese have blocked severe U.N.  Security Council sanctions against North Korea, including a resolution blaming them for the torpedo attack on the Cheonan.  Consequently, Kim Jung Il will not make a serious military move, including the use of nuclear weapons, without the consent and approval of the Chinese.  Likewise, the South Korean military will not make a serious military move against the North Koreans (even a retaliatory strike) without the approval of the U.S.

The joint military exercises among the U.S. and South Koreans amount to nothing more than another shot over the bow in the “war of words” going on in East Asia.  Most likely, the rapidly growing economic relationship between the U.S. and China will help to ensure that a military conflict in Korea doesn’t ruin the chances of continued economic prosperity for both countries.   In the meantime, China will not alienate North Korea with sanctions or words of reproof; they will simply keep the North Koreans isolated, hungry, and dependent.

Rich

Alleluia!  It looks like the Federal Reserve policy makers and most  of America’s leading economists are finally coming  to the same conclusion about the future of the U.S. economy.   They aren’t saying that we are headed for a “double-dip” recession, or that somehow the economy will plunge into another “Great Depression”;  and they are not warning us about an impending crash in the stock market, or an end to American life as we know it.  What they are saying is that the U.S. is headed for an extended period (perhaps ten years or more) of very slow economic growth.  Much like Japan in the decade of the 1990′s, the U.S. may suffer through a period  that will feel to many people like a never-ending recession, where the economy does not grow fast enough to recoup jobs, and investments in  stocks and homes will continue to lose value.  The sad truth is that an anemic growth rate of 1% , or even less, is not out of the question.  The robust economic growth experienced in the past was built upon unsustainable deficit spending,  by the government and by households across the country, and the next ten years or so will be spent “paying the piper”.

As the smoke from the frightening economic meltdown of 2007/2008 continues to clear, there will emerge a new “economic landscape” over the horizon for America.  The landscape will be characterized by continuing high unemployment (between 9% and 10%), a significant reduction in Social Security and Medicare,  and a stagnation in consumer spending.  Borrowing restrictions will be much greater for businesses and consumers, and the “buy it on credit”  binge of earlier decades will be a thing of the past.  Services provided by state and municipal entities will be cut to the bone, or eliminated altogether, as government at every level struggles  to cope with shrinking subsides from the U.S. Treasury.

To be sure, America will survive its  “lost decade”,   just like it has survived even greater challenges in the past.   Unfortunately, there is very little that can be done to avoid this prolonged period of “economic adjustment”.  The effects of past excesses must now be addressed and “paid for” by a recession-weary public, and federal government will no longer be able to borrow its way back to good economic times.  The “die is cast”.  Just ask the Japanese; they’ll tell you what it feels  like to lose a decade.

Rich

In the 1980′s and the early 1990′s  I worked in the International Banking Division of a large regional bank in Western Pennsylvania.    A large part of my responsibilities was in the area of  “foreign exchange” purchases and sales.  Because of that experience, I have found particular interest  in the fate of the relatively “new”  European currency, the euro.  Prior to the  time of the euro’s creation,  Western Europe had risen from the ashes of the Second World War, and had become an inter-connected, economic powerhouse comprised of many small nations.  These sovereign nations  knew that their ability to compete with external economic powers, such as the United States and Japan, was dependent upon a free flow of capital and labor between their borders.  They also knew that their ability to co-operate and to compete was being hampered by the need for each individual country to maintain its  own separate currency, its own separate Central bank, and its own separate fiscal and monetary policy.  Out of pure economic necessity, the euro was born, and the sixteen nations comprising the newly created EU, agreed to scrap their individual currencies and to use the euro as a common “currency of exchange”.

Although all the nations of the EU  knew the hidden perils of sharing a currency while maintaining their own national sovereignty, most economists thought that the benefits of expanded economic activity brought about by the euro would outweigh the loss of  flexibility in maintaining separate currencies.  Over the last twenty years or so, the economic prognosticators have been correct;  Europe has flourished.  The deep, world-wide economic recession, starting in 2008, however, has put a strain on the EU, and consequently on the euro, that no one had anticipated.  For the first time since the euro was created, many economists are beginning to think the “unthinkable”; that perhaps the breakup of the “euro zone” may be the only way for the strong nations within the EU to survive.

Well known and highly respected economic analyst Roger Bootle, from Capital Economics,  recently said that the threatened breakup of the euro zone, which many people see as a potential disaster, would actually open the door to renewed economic growth, not just for the weaker members of the zone, but for Europe as a whole.  For example, Greece’s  debt crisis has driven down the euro and forced governments from Spain to Italy to institute austerity measures, significantly clouding their outlook for recovery for many years to come.  On the other hand, an abandonment of the euro would help Germany restore a strong Deutsche  Mark, which would expand its ability restore economic growth.

Although it is yet to be seen whether the euro will be scrapped, the notion of a common currency among a group of sovereign nations will remain  fundamentally flawed.  In a sense, the euro, like socialism, looks good on paper, but will not work over the long run.  Just like socialism, the poor will eventually sap the vitality of the wealthy.  I say good riddance to the euro; let each nation stand or fall on its own merits, and benefit or suffer from its own economic policies.

Rich

The old adage about  how “Nero fiddled while Rome burned”  has never applied more to the U.S. Congress than it does today.  As most Americans are enjoying the Independence Day  weekend, Congress is set to begin its mid-summer break, and won’t be returning to Washington until July 12.  It’s not that a holiday from work, even for elected officials, is such a bad thing;  it’s just that 1.7 million non-elected Americans are left wondering how to makes ends meet,  now that their unemployment compensation has expired.  As payments rapidly grind to a halt, the unemployed will spend at least the next two weeks worrying about when or if an extension will be forthcoming.  As usual, the Congressional Democrats and Republicans are pointing at each other for the failure to pass an extension bill before the break, and both parties are claiming the high ground.

Speaking for the Republicans, Senate Minority Leader Mitch McConnell said he really does believe that an extension is necessary in an economy with a 9.5% unemployment rate.  He does, however, oppose increasing the federal deficit to fund the extended benefits.   In fact, the majority of Republicans have agreed to support extended unemployment benefits if the extension is paid for with unused stimulus money; a stipulation that the Obama Administration and most Democrats have vehemently opposed.

Harry Reid, speaking for the Democrats, accused the Republicans of abandoning a large segment of unemployed Americans at a time when government help is most needed.  He went on to blame the Republicans of approving every single tax break for the wealthy during the Bush Administration, but not caring about ordinary, working people who lost their jobs through no fault of their own.  And so “the beat goes on”, and the finger pointing continues as the “fires” of unemployment continues to destroy the life savings of the middle class.

Over the last several weeks the economic data, and the capital market’s reaction to that data, have shown that the economic recovery in the United States is still very fragile.  Consumer confidence is  very low, the real estate market remains in a deep slump, retail sales are sluggish, and good jobs are hard to come by.  Regardless of the ballooning national debt, the country remains at a critical stage where additional stimulus programs are desperately needed to bring the economy back to good economic health.  Although we all worry about the future effects of continued deficit spending, the continuation of support for the unemployed is one area where funding must continue.  Not only must Congress pass the unemployment extension bill without further delay, but it must assure Americans that compensation will continue until specific, national  economic criteria are met.  Balancing the budget, or at least reducing the budget deficit, can not and should not be done on the backs of the unemployed.

Rich

We’ve all heard the dire predictions about the future of  America’s Social Security System.  We’ve heard about how the year 2010 marks the first time in the history of social security that the agency is actually spending more money than it is taking in.  In fact, the economic pundits and sooth-sayers have warned the American people that future government deficits will rise by many trillions of dollars if  things continue along the current course, and if changes are not made to put social security on a more sound financial footing.  There are many different reasons why the social security system is in deep financial trouble, including the advent of the “baby-boomers” reaching the traditional retirement age.  Over the last sixty years, or so, the payment of social security has been an “unbroken” contract between generations of Americans; a contract that has remained essentially unchanged from one decade to the next.   However, many Americans are now beginning to question whether this “inter-generational” contract should be significantly altered  (i.e. modernized) to reflect the fact that Americans are living longer, and to confront the reality that the country can no longer afford social security under its present form.  Most of us agree that something must be done fairly soon to stave off an impending disaster.  Exactly what actions should be taken has become a major “bone of contention.”

In a recent interview with the Pittsburgh Tribune-Review, House Minority Leader John Boehner suggested raising the retirement age to 70, for those people with at least 20 years until retirement.  In addition, Mr. Boehner said he would favor tying cost-of-living adjustments to the consumer price index,  rather than basing it on wage inflation.  Most importantly, however, Mr. Boehner wants to limit social security payments to those who need them.   Although raising the retirement age is certainly not a new idea, changing social security from an “entitlement” system to a new form of “elder welfare” is both a new idea and a disturbing one.   Even more disturbing was Mr. Boehner’s  statement that ensuring there’s enough money to pay for the war in Afghanistan will require reforming the country’s entitlement system.  In other words, Americans must give up their social security entitlement, forget about reasonable unemployment benefits, forgo medicaid and public assistance, and depend upon “trickle-down” economics so the country has plenty of available cash to fight lots of nasty little wars.

As usual, Mr. Boehner, the leader of the Party of No, has shown his total disregard for middle-class America.  It is no secret that changing the retirement age to 70 will disproportionately effect many segments of the population who are struggling to stay physically able to work until age 65, let alone until the age of 70.  Even more absurd is the notion of somehow “means testing” retirees to determine whether they are poor enough to deserve receiving payments from a system they supported with their taxes over a lifetime.   In typical fashion, Mr. Boehner wants to see the problem of social security solvency laid on the backs of the middle class and the working poor, rather than see social security taxes raised on the rich and the corporations, and rather than see the social security tax rate applied to all earned income, with no limitations or ceilings.

In the years to come, the American people will have to come up with solutions to the pending crisis in social security that are fair to those who paid into the system all of their lives, yet doesn’t bankrupt America in the meantime.  We can, and we must, come up with better answers than Mr. Boehner’s mis-guided suggestions.

Rich

On Friday, The Commerce Department revised downward its estimate of how much the U.S. economy grew during the first quarter of 2010. It turns out that GNP (gross national product) growth was an anemic 2.7%, or about half of GNP growth in the fourth quarter of 2009. These figures confirmed what most people already knew; the U.S. economy is recovering from the worst recession since the Great Depression of the 1930′s at a snail’s pace, and the resultant unemployment figures are unlikely to change any time soon. Even the paltry 2.7% growth experienced in the first quarter was largely a result of the building up of depleted inventories, home sales fueled by government incentives, and the influx of billions of dollars in federal stimulus money. To put the newly released “growth” number into perspective; economists estimate it will take a sustained growth rate of 5% over the period of one year to move the unemployment rate (currently 9.7%) by one percentage point. The last recovery, after the downturn in the 1980′s, showed GNP growth of 7 to 9 percent for five quarters in a row. At this point in time, a significant, job-producing growth rate of anywhere near 7 to 9 percent seems almost inconceivable.

The great “economic machine” of the United States is currently like a finely tuned V-eight engine that is running on six cylinders, and there’s no telling when, or if, the Obama Administration’s “tune-up” of the economy will bring this engine back to full power. The stimulus money from the original spending bill is due to run out by year’s end, there is little to no appetite in Congress to pass additional stimulus legislation, unemployment compensation extensions are a thing of the past, and all of the individual state budgets are deeply underfunded. All of these factors combined together can mean only one thing for the American people; our “national credit card” in maxed out, and we are about to experience what life is like on C.O.D. The first impact of “life on C.O.D.” will be massive tax increases at the state and local level. Whereas the federal government always has the power to print lots of additional cash when tax revenues prove to be inadequate, the state and local governments can’t.  Pennsylvania, for example, faces a $1.0 billion shortfall in revenue, and is contemplating significant cut-backs in funding for public transportation, education, public welfare. In the meantime, most school districts within the state are contemplating raising property taxes to shore up woefully depleted teacher retirement funds.   The net result of cutting off the lucrative river of federal funds (albeit borrowed funds), combined with the inevitable increases in state and local taxes will be an American economy that struggles to stay afloat; and struggles even harder to create new jobs.

After a long and deep recession, which brought the American economy to the precipice of disaster, and after two years of federally funded economic stimulus programs, there is nothing left to do but put Adam Smith back in the driver’s seat.  This may mean a prolonged period of high unemployment, and a realization by the American people that trillions of dollars of wealth invested in the capital markets will never be fully recovered.  Once Americans come to the realization that abuses and excesses that were the root cause of the “Great Recession”  have resulted in a permanent loss of wealth (their wealth), we can get on with the enormous task that lies ahead of us;  rebuilding America on a firm foundation of growth,  based on productivity and not on borrowed funds.

Rich

In anticipation of this weekend’s meeting of the G-20, or the group of the twenty leading economies, the Chinese government announced the decision to let its currency, the yuan, gradually strengthen against  the U.S. dollar.   In essence, the Chinese have finally reacted to complaints that they deliberately kept the value of the yuan artificially low in order to increase Chinese exports.   Unlike the U.S. dollar or the Eurodollar, whose value is largely determined by supply and demand, the Yuan can only be traded at an official exchange rate set by the government.  The Chinese government can (and has) set the official exchange rate much lower than the actual value of the currency.  On the one hand this policy has made Chinese goods relatively cheap to overseas buyers;  on the other hand the policy has made foreign-made goods relatively expense for most Chinese buyers.  Although the policy to keep the Yuan “cheap” has helped the Chinese enormously in building up their export business, they knew that the Central Bank was essentially subsidizing the domestic economy.  In short, the policy was costing the Chinese billions of dollars in potential foreign exchange.

For the United States, China’s decision to allow the Yuan to rise in value is a mixed blessing.  For those U.S. exporters, such as Caterpillar, Apple Computers and Boeing, the prices for their products have become far more affordable for Chinese buyers.  The same holds true for exports from U.S. energy companies and coal producers.  In general, “capital” goods and energy products, that are used in the production of finished goods will see a much-desired spike in sales.  Over the long run, increases in U.S. exports could potentially create thousands of jobs in the U.S., and also help to alleviate the federal deficit.  The other side of the coin is that companies such as Walmart  and Costco have been able to offer U.S. consumers a competitive edge by relying heavily on artificially cheap, Chinese imports.  To that extent, U.S. consumers may see a rise in the cost of all the thousands of small, everyday items that are now being produced in China.  Eventually, however, other low-cost producers in countries such as Viet Nam will take over China’s position as the  ultimate “low-cost” producer.

For many, many years the United States has incurred enormous “balance of trade” deficits, where the flow of dollars out of the country to buy imports has greatly exceeded the flow of dollars into the country from the sale of exports.  The reason for the lopsided balance of trade is largely due to oil purchased from the Middle East and finished goods purchased from China.  Although this lopsided equation may be okay in the short term, over the long run it will drain America’s wealth.  For this reason, China’s decision to allow their currency to strengthen against the dollar should come as good news.  Ironically, the Dow Jones Industrial Average shot up by 185 points after China’s announcement, only to fall back into negative territory by the end of the trading day.  The stock market’s quick rise and fall may signal that losers in the U.S. might outweigh the gainers.  Only time will tell.

Rich

The Obama Administration’s efforts to combat unemployment continued on Saturday, when the President urged Congress to quickly approve nearly $50 billion in emergency aid to state and local governments. According to Mr. Obama, the money is needed to avoid “massive layoffs of teachers, police and firefighters”, and to support the fragile economic recovery. Although many economists say that more spending is needed to bring down persistently high unemployment, Congress has become weary of spending bills that contribute to greater deficits, and fearful of an electorate that is worried about the skyrocketing national debt. Regardless of the outcome of this specific spending bill, the question is not whether stimulus money can preserve jobs (at least over the short run), but whether stimulus money can actually bring down the unemployment rate over the long term.

During the prior two decades most economists defined the “normal” unemployment rate in America as around six percent. At that time, most people looking for a job could find one within six months or so, and the American economy was creating millions of new jobs in dozens of new industries. Due to the normal ups and downs of the economic cycle, it was expected that six percent of the workforce would be out of work at any given point in time. When the economy grew at accelerated rates, American industries often turned to foreigners to fill their ranks. Even during those times of accelerated growth, the unemployment rate doggedly stayed at around six percent. This was considered “normal”.

With the worst of the recession of ’08-’09 behind us, many economists are beginning to question whether fundamental changes have occurred within the U.S. and world economy; changes that may re-define what “normal” unemployment is. This is not just an academic question, but very relevant to government policy. The new “normal” unemployment rate may very well be closer to ten percent than to six percent. If so, the Obama Administration’s policy of fighting unemployment with government-sponsored stimulus programs may ultimately prove to be fruitless. In essence, the stimulus money may provide much-needed short run assistance, but will not move the unemployment rate from its new norm.

There are times during the history of many great nations, like the United States, when subsequent generations may not be better off (in economic terms) than their fore-bearers. America, I fear, is entering into such times. The temptation is for the government to “print” money to maintain the national standard of living, but giving in to this temptation will only delay the inevitable. Somehow, American must learn to live within its means, even if it results in continued high unemployment of ten percent, or more.

Rich

Most Americans realize, at least in principle, that  government is necessary to protect the rights of citizens; rights that are  granted to them under the U.S. Constitution, the fifty specific state constitutions, and the various other county and local charters.   However, the necessity to maintain governments (at every level) has become a ponderous burden to the citizens whose rights are being protected.  In fact, economists tell us that the average American works four or more months per year just to pay his federal, state and local taxes.   When the federal government has found it impossible to operate within its budget, it has simply “borrowed” the funds by creating U.S. debt obligations.  Although this method of obtaining funds is a lot easier (i.e. politically) than raising taxes on American citizens, the result will eventually be the same.  There seems to be little doubt that at some point in time, the people of America will be working until May, or perhaps June, every year to cover their taxes.

Of all the taxes imposed on Americans from every level of government, the most insidious are taxes on property; in particular, real estate taxes.  In essence, the imposition of real estate taxes ensures that nobody will ever really own their own home.  No matter how long it has taken to purchase a home and the land it sits upon, and no matter how much income the property owner has to live on, the local municipality has the constitutional right to seize the property and evict the owner for non-payment of real estate taxes.  Although property owners may think they own their  homes, the sad truth is that “ownership” is fully contingent upon  a steadily increasing  stream of real estate tax payments.  The deeds of ownership, that people work their whole lives to obtain,  do not grant the unconditional rights of ownership at all.

Most cities and municipalities across the country use property taxes to maintain school districts.  Since schools are very expensive to build and maintain, the majority of property taxes are used for this purpose.  For my wife and I, school taxes amount to about 80% the total property tax bill.  In April, our local  School Board of Directors approved a $100 million program to rebuild the high school and to shore up the recession-weakened teachers’ pension fund.  The cost of the project will be borrowed (of course), and the increase in property taxes will amount to about $100 per month for property owners.  The higher taxes must be paid by the gainfully employed, the unemployed, the senior citizens , and all who reside herein.  The citizens of our municipality were never asked to vote for this project, and a referendum was never held, yet the new school will be built.  Oh well, although we paid for it,  I guess we never really owned our own home anyway.  I wonder if its possible to own anything that the government does not have the power to take away?

Rich

It is very likely that the newly-minted “American Jobs and Closing Loopholes Act of 2010″ will go to the House of Representatives for approval by Wednesday, and to the Senate  by next Friday.  With the official unemployment rate in America stalled at ten percent, it should come as no surprise that another “jobs” bill was coming down the pike.  In essence, the bill continues the unprecedented expansion of unemployment benefits that started under President Bush in 2008, but has expanded considerably under president Obama.  At the present time, the unemployed can claim up to 99 weeks of unemployment benefits, which represents a near quadrupling of the 26 weeks of unemployment benefits received before the recession hit.  The new bill does not grant additional benefits beyond the 99 week limit, but expands the eligibility period to the end of 2010.  It is estimated that more than five million unemployed people will benefit from the expanded time frame.

With the unemployment rate at or near the ten percent level, there is little doubt that the recession is not over for millions of Americans, and that the expansion of the eligibility period to the end of 2010 is a necessary move.   As expected, most Republicans have opposed the expansion of unemployment benefits, saying that it will only encourage people to stay unemployed longer than necessary.  This ignores the fact that unemployment benefits not only help people out of work but improve the general economy, and that people receiving benefits are struggling to find work in a depressed economy where applicants far outnumber job openings.  The simple truth is that until the American economy can establish a sustainable recovery and significant job creation, it will be necessary to give the unemployed a period of almost two years to find gainful employment.

Although the 2010 “Jobs Bill” will provide an additional $47 billion for the unemployed, it will also provide $23 billion for states to prevent teacher layoffs, $65 billion to keep current payment rates for doctors under Medicare,  $24 billion to states for Medicaid, and $70 billion to states and municipalities to use for hiring additional personnel.   The shocking total of almost $230 billion dollars would have to be financed totally by increasing the deficit (i.e. printing money).  Even some of the most liberal-minded Democrats are expressing concerns over another huge growth in the federal deficit, and are questioning whether the $70 billion “state and local” provision is really necessary.

The answer to whether or not all of the provisions of the 2010 “Jobs Bill” are necessary is a resounding “yes”.   The Federal Government cannot simply cut off the safety net of unemployment benefits to those millions of people who have lost jobs due to the recession, and to the states that have lost tax revenues used to pay for Medicaid.   The government also cannot allow tax-strapped school districts to continue laying off teachers, and to compromise the education of America’s children.  At this particular time in American history, we must resist the temptation to shortchange  the unemployed, the children and the most vulnerable in our society in order to balance the national budget.  There will be time later to deal with the (admittedly) frightening level of national debt that the recession has caused.  We must all support the 2010 “Jobs Bill”, and let the President and Congress get on with the business of building America back up to its former level of economic greatness.

Rich

Most Americans believe that the “Great Recession” of 2008 and 2009 began in 2006 with the crash of the residential real estate market.  The crash began rather slowly in the “hot” real estate markets of Florida, Arizona, Nevada and California, and then snow-balled into  a nation-wide catastrophe of plummeting home values and skyrocketing delinquency rates.  Everyone has their own idea on exactly who was to blame for the  real estate mess;  however, most folks believe that greed and the prospect of easy profits played a large role.  Unfortunately, not a whole lot has changed in the real estate business since the crash began.  Although many of the markets throughout the country have stabilized, and maybe even begun a slight up-tick, the “hot” markets continue to show ever-increasing delinquency rates on mortgages, and a further decline in  market value.  There may, however, be a slight glimmering of light on the residential real estate horizon.  Trans Union reported that the overall delinquency rate in the first quarter of 2010 slipped to 6.77 percent from 6.89 percent, representing the first decline in over four years.  Trans Union further speculated that the delinquency rate should continue to show a decline through the end of 2011, and level off at around 5 percent by year end.

For states like California, Florida, Nevada and Arizona, which are currently showing delinquency rates  between 11 and 18 percent, it would take a major miracle to bring delinquencies down to even half the levels being experienced elsewhere in the country.  The fact is that home values in those markets were so over-inflated, and finance companies were so lax in enforcing normal credit standards, that home-buyers are walking away from their mortgages by the thousand.  Even those who are still financially able to make their mortgage payments are questioning the wisdom of continuing to pay for housing that is worth half of what they paid for it.  From a strictly “business” viewpoint, many borrowers are, in fact, much better off by telling the finance companies to foreclose, and take back their collateral.  Borrowers are quickly finding out that foreclosing lenders cannot come after other assets, such as retirement funds,  and that within five years the foreclosure record will be removed from their credit histories.  Just as the granting of the mortgage by a financial institution was strictly a business transaction, the walking away from a mortgage by a borrower should also be viewed as strictly a business transaction.

As more and more residential real estate is foreclosed upon, the banks and finance companies will become the ultimate owner of millions of real estate units that should never have been built in the first place.  It will most likely be many years before the glut of bank-owned properties are finally sold off to the credit-worthy.  In the meantime, many residential property owners will continue to compare the remaining amount of their mortgages to the value of their property, and tell the banks “thanks, but no thanks”; the keys are under the door mat.

As expected,  the European Union and the International Monetary Fund (IMF) reached a long-awaited agreement with the Greek government to lend the cash-starved nation up to $160 billion over the next three years.  The  loan is basically a  massive bailout, or rescue package,  aimed at forestalling what would surely to be the largest sovereign debt default in recent European history.  This also marks the first time in the eleven year history of the euro that the nations in Europe  have had to come to the aid of one of their own.  The implications of a default on Greece’s sovereign debt is almost unthinkable, and would have sent a major shock wave throughout the EC and around the world.  In essence, a default would have left the Greek government in a state of bankruptcy, with no chance of receiving the credit necessary to participate in global trade.  The Greek economy would be relegated to a “cash only” status, and the standard of living in Greece would plummet.

Ironically, the standard of living in Greece may plummet anyway under the terms of the EU and IMF loans.  The sad fact is that Greece’s particular brand of socialism is primarily what has brought it to the brink of disaster.   By giving the ever-present labor  unions too much power in determining wages and hiring practices, and by demanding wage increases without higher levels of productivity, the country has had to borrow money to maintain its living standards.  In short, the Greeks have lived “high on the hog” at the expense of their creditors.  Unfortunately for Greece, the Gravy Train has just pulled out of town, and the country is now faced with the prospect of “working for a living”.

Needless-to-say, the labor unions (i.e. just about all workers in Greece) have unleashed violent protests at the prospect of reductions in salaries for state workers, more flexibility on who can be fired, increases in taxes, and even a hike in the retirement age.  Prime Minister George Papandreou bluntly warned Greeks to prepare for intense fiscal pain for a period of many years to come.  It is yet to be seen how successful the government will be in instituting greatly needed austerity programs.  One thing is sure;  Greek workers won’t be paid with money borrowed from foreigners for very much longer.

Rich

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I have to admit that my brain is tired after spending a few hours listening to the Senate hearings about how Goldman-Sachs took advantage of their own clients by deliberately pawning off sub-standard securities, while at the same time  positioning themselves to profit from the economic maelstrom that followed.  It reminded me of the Nuremberg trials, where all the high-ranking, Nazi officials claimed that they either knew nothing, or stated they were only taking orders from higher authority.  The testimony from the Goldman-Sachs executives seemed to be very evasive, as one would expect from high ranking corporate officials who have been greatly enriched by the economic misery they passed on the general public.  There seems to be little regret shown by those individuals who destroyed the value of so many 401-K plans, managed for the benefit of ordinary working folks like you and me.  Like so many other investment banks, Goldman-Sachs performed a necessary, free-market function by creating markets for buyers and sellers of securities; however, unlike other investment banks, Goldman-Sachs turned on their own customers when they saw a profit could be made by dumping sub-standard investments at premium prices.  In other words, Goldman-Sachs saw the crash in the Mortgage-Backed Securities market coming, and threw their customers and the U.S. taxpayers under the proverbial bus.  Many of them became very rich while doing this.

When “push comes to shove”, and the hearings and investigations are all over, Goldman-Sachs will likely be rebuked by the government, and perhaps fined for its actions.  It is unlikely, however, that the government will ever prove fraud charges against any Goldman executives, nor will any of the perpetrators ever do richly-deserved jail time.   The reputations of the Goldman executives may be somewhat tarnished, but their high-priced, Wall Street lawyers will somehow prove that the Goldman management team operated within the law (i.e. just barely).

Even as the Senate hearing are being conducted on Goldman-Sachs’ criminal culpability, the U.S. Congress is grappling with a financial reform bill, intended to prevent a similar disaster from occurring in the future.   Of course, the Republicans have joined together to defeat financial reform, just like they attempted to defeat health care reform.  Hopefully, the results of the financial reform bill will be similar to the health care reform bill; a defeat for the Republican opposition and a victory for the American public.

Rich