Today much chatter focused around the most recent polling numbers which are showing a slide in President Obama's support... Although that may be true, it is extremely worthy to note that the Republican opposition, slid even much further... Therefore it can be assumed by most bright people, that these numbers do not reflect a shift from "blue" to "red"...
Instead, the double slide portrays a neutral frustration over the reality that nothing is happening on the ground... After all, where are all the changes we were promised?
As a historian, it would be worthy to note that those we hold accountable as heroes today, had extreme difficulty during their own times of achieving anything of notability at all...
Three examples come to mind: Abraham Lincoln, Ronald Reagan, and Franklin Roosevelt.
Abraham Lincoln will probably be considered as our greatest president. However he barely hung on against McClellan during his second election in '64.
In trying to do the right thing, he was pillorized for what appeared to be indecisiveness.. Only after his death, when history finally finished with its evaluation of Mr. Lincoln, did the magnitude, brilliance, and the hairbreadth shades of his decision-making become known. He is famous today because he did right. He was decisive. He did not stick with McClellan; he went with Grant.
Jimmy Carter, on the other hand, was hugely popular upon his introduction of squeaky clean Southern values into the corruption stained facades of Washington DC. However, after a short grace period, history was not as kind to his indecisiveness.. Although, he was a brilliant man, he didn't get it right in a timely fashion. Iran and stagflation beat him.
Ronald Reagan, was pillorized and lampooned up to the convention itself... However his decisive action of firing the air traffic control strikers, and using US military personal to man the towers, had severe reprecussions across the labor movements continuing up to this day. His bullet, and charm against the Carter whiny voiced Mondale, gave him a landslide in 84. But in 83, most of us thought he was a one termer... However, he made a bold move; he got it right.
Franklin Roosevelt's pattern is very similar to that of Barack Obama today. Both were elected on the advent of Great Depressions, and both tried too hard to reach out to Republicans to show concilliation and inclusiont... They fought him harder for the effort. Finally, Roosevelt decided to reach out instead to the American people, gain their trust with fireside chats, and ride over and flatten the pompous over puffed opposition into two dimensional nothingness... The republican party never recovered until the Democrats got ga ga over McGovern, a choice that allowed republicans to again capture the aura of appearing main stream.. Because Roosevelt totally made them a non entitiy, their time span of being out of power, (Eisenhower was not one of them) ranged over thirty years....
Today almost everywhere, you will hear praises for Lincoln, Reagan, and Roosevelt.. In other places, you may still may hear Carter's name being bashed about from time to time...
The difference is not in the quality of the men.. It is in the perception of what they got done.
Today's low poll numbers reflect only what Americans see.. You miss seeing it in the White House... Up there, the people come to you... Out here, we pass by those more unfortunate and fondly remember the Clinton years... Why, we ask, has nothing been done to take us back there?
So herein lies your answer.
You want high poll numbers? Then put the wealthy's money beck into the hands of those who spend it, day after day. Do that, and do that quickly. If you succeed, Mr. Obama, you will again get back the reputation you deserve.. But until that happens, there is nothing you can do to stop the slide of your power across and through your hands, no matter how tightly you grasp your fingers...
You need to take some decisive action to make events go your way... Like Roosevelt, Reagan, and Lincoln, you need to confront and overwhelm your enemies. Playing into their hands by appearing concilliatory, will only serve to destroy America's self esteem. You will just be another nice guy who was unable to deliver upon his promises.
Like roaches running though across your kitchen floor, no matter how often you take her out for dinner, you will never get your spouse's approval and respect, until you eradicate that insidious problem for good.
Just thought I'd let you know what people out here are thinking.....
My concept is borrowed from the game of basketball.. When one is down in points, one gambles on applying a full court press.
For my plan to work, as a nation, we go "full court press".
What does "full court press" mean? That is a legitimate question for non basketball players to ask. It means that you pressure the other team up and down the entire length of the court to force a turnover; you try everything you can; you expend every amount of effort; the opposite of what one usually does, which is to conserve energy by pressuring the team only underneath one's own basket and underneath theirs.
On a broad scale here is what we need to do. Short term.
1) Jump start the economy. Put money in the hands of purchasers.
2) Pay some type of compensation to those out of work.
3) Rebuild our infrastructure, (green energy included).
4) Re-establish some type of manufacturing base back inside this country.
5) Open access to short term credit; it needs to be readily available, even if just for the daily business transactions that often go unnoticed, but are essential for the running of our economy.
Long term:
1) We need to spend within our means, both personally and as a nation.
2) We need to pay down the deficit, reducing our national interest payment.
3) We need to control our spending on entitlements: Social Security and Medicare.
Despite the gloom there are some exciting bright spots in our current mess.
One, we have proved beyond a reasonable doubt that privatization of Social Security is a very, very, very, very bad idea. That argument, by today's events, has been proved to be extremely dangerous.
Two, we are now given unlimited opportunities to fix long term problems that before seemed insurmountable under the old system, because back then..... we had to play by "old rules".
Three, we have historical accounts of what did and didn't work in a previous Great Depression and we have at our finger tips a vast information system, allowing anyone to bring forward the next "great idea" which just may turn the tide.
Four, we have at the top of our government, an extremely gifted group of individuals who are each charged with bringing major changes to bear in their respective areas.
Five, we finally have a Congress working in sync with the Executive Branch in order to pass the necessary changes required by today's events.
So let's jump start the economy. There are several ways to do so.
One is a tax check to spend at will. Most of which will go to pay bills to stave off bankruptcy and do nothing to generate new manufactured products or services.
The second is have the mortgage companies contribute their part. Figure out how, and run a three month moratorium on paying off the mortgage.
The third is to have banks again guarantee loans to businesses at very low rates, so businesses can spend freely without fear of going under.
The final, is to have the government get directly involved in large massive projects giving some good employment opportunities to work on projects that if left to free enterprise, would never get done because of the low rate of return on their investment.
This is organized as outlined above.. Click the links above to go to the chapter for further detail on that topic.
Hopefully our search of big, bold ideas will need to go no further than the words on these pages. (all 59104 of them.)
Who purchases things? Who ever it is that does so, they need to get snapping..... kavips
Here is an interesting question. What happens in a Great Depression?
Let's trace the fallout from one single event: General Motors going out of business. As soon as that happens, its now unemployed workers must cut back on their spending. Sales drop precipitously in neighboring restaurants, and a percentage of those food service employees are quickly laid off.. None of those ex restaurant employees can now buy anything at the supermarket, so it too lays off a percentage of its stock clerks. With everyone in survival mode, the local gas stations no longer can move the amount of gas they are used to selling, and they too, must add their layoffs to the pot... Even insurance salespersons begin to lose a flood of accounts as they expire and fail to get renewed; now they too shop less, contributing to an additional scarcity of business, stopping by the supermarket now for only emergencies. Because of plummeting sales, the supermarket has no choice; again it must make drastic cuts. One week later the gas station does likewise and cuts everyone but its owner, who himself becomes the sole employee, manning it from Monday through Friday, 8 am to 5 pm. Fewer and less people working creates even less economic action, which in turn, causes fewer people to work, which causes even less economic action. The downward spiral grows wider. Left alone,... it is unstoppable. Eventually one very wealthy person, the last man standing with any money, buys up the entire town for pennies on the dollar.
But wait,....aren't there a lot of other towns supplying parts to GM, simultaneously undergoing the same scenario? Yes. Across this nation, in every village, town, or city, because of GM's folding, the same downward spiral occurs.... As people lose their jobs it causes more people lose their jobs; the reason they lose them is because their neighbors lost their jobs first... The unemployment curve which once climbed steadily, suddenly shifts, and rises exponentially.
Obviously the critical point where we should attack this economic problem is at it's very beginning... Keeping GM afloat. As one can see from this projected downward spiral, which widens as time progresses, the longer one waits to apply a fix, the higher becomes one's cost to correct it. Eventually the price of fixing becomes just too high; money runs out, and there is nothing more which can be done. To succeed, one has to nip it in the bud.
The four best methods for doing so are discussed below.
A) re-running the stimulus tax check scheme.
B) putting a moratorium on household mortgages for three months.
C) have banks flood lending markets with very low rates.
D) creating a WPA to build public works, funded by the Federal government.
Method one is the idea we found to be the most politically expedient; it was the first idea that occurred, after all it was just this past year we tried it. Although its impact or effect on our economy is still debatable, most public opinion polls taken beforehand did show that once it was received, paying down one's bills was almost every recipient's first plan of action. Even though the second quarter of 2008 showed some growth, that positivity was short lived. Today as we look backwards from 6 months past, we see there was little residual effect from that stimulus package, except for the admonition that things would have been much worse had we not followed through on it. What is almost forgotten however, it that this stimulus money is not paid for in advance by taxpayers, but is borrowed (as is a large portion of our budget) from various lenders charging us various rates of interest. Not only do we have to pay back the stimulus funds, but when that time comes and we do have to pay them back.....we will be paying back far more than we received,... due to the interest that is now accruing daily.
Fortunately we can learn from past mistakes. We can choose to put our "shot-in-the-arm" purchase on our national credit card, and continue to say "we are living well". But on the day of reckoning when we do pay it back, our economy could be doing far more poorly than it is now... (which means (1) it won't get paid back; or (2) that we will really suffer horrible economic hardships when we do pay it back, much worse than we suffer now).
Our investigation discovered that a stimulus package succeeds only when a nation is not buried under debt. Normally, if extra money gets placed in our hand, we spend it. A stimulus tax check should work in theory. If everyone spends their check simultaneously, their extra purchases deplete retailer's inventories, which if restocked, would create new activity and growth in the manufacturing sector; therefore in theory....the economy should grow. But as it stands right now, when everyone is mired so deeply in debt , the bailout money gets used to write off existing red ink. What winds up happening is that as I write a check to my debt company, who then uses my money to write off a check to their debt company, which in turn, flips those funds over to their debt company... Everyone passes the money around and around, and instead of manufacturing jobs being started, it is only red ink that gets written off. No new investment gets placed into projects that create new wealth. Bottom line: all that is happening within each and every one of today's economic stimulus packages,... is that we are borrowing from our nation's public debt, to pay-off our nation's private debt. The public debt is still owed by the public; so nothing really changes, except the terms of the loan, and name of the entity to whom we owe!
The next option holds much more promise: that of granting a stay for three straight months on paying off one's mortgage. Stop for a second,......... now imagine how quickly you could get your personal finances in line, seriously, if you were allowed to go without paying three months worth of mortgages?
Month one would be dedicated towards catching up on bills. Month two, would be dedicated to getting completely caught up, and possibly ahead on bills. Month three would be spent on buying cool stuff. Bouncing this idea around to a lot of people, the same exuberant reaction comes from almost every household: this works for them.
So how would this affect those financial institutions actually in charge of handling the notes? Before I go forward with that task, we need to take a moment to familiarize everyone with the difference between real wealth, and "virtual" wealth.
Real wealth is what we are familiar with; it is something we can touch. Our car for instance. "Virtual" wealth is something seen primarily on a computer screen. We all know what real wealth is: as little kids we saw Scrooge McDuck's money room in our Disney Books ... Virtual wealth is the same thing, except it has "pretend" value. This homily should help explain how "virtual" wealth accumulates it's value.
Let's assume that somehow you were able to convince me to purchase some gravel which you picked up alongside the highway while you were walking forward to meet me.. I look it over, decide to buy it, thinking hopefully that I can sell it at a profit sometime later, and pocket the difference. And why not?.. I certainly don't need rocks, ... but I could use some extra cash. However my wallet is short of funds and our transaction which we are discussing,... is in jeopardy. To keep it afloat, you decide to take one dollar for every ten of which you are asking, and when I sell the rocks off later, I will give you nine more dollars at that time...
So here is how "virtual value" works. The real value is $1 dollar for the pile of rocks I received, because that was all of the out of pocket expense that I paid you.. However, instead of $1 dollar, I write down its value at $10, because eventually that is value of what it will cost me. But in truth, it will not actually cost me $10, until ... that moment after it is sold.. Sound complicated? It really isn't....
Here is why. You made $1 dollar selling me the rocks. They cost you nothing to acquire. Now that I have the rocks, if they go worthless it will only cost me a dollar anyway. So I lose a dollar.
However... in some computer, it shows on file that you are carrying the value of $9 dollars owed to you by me as an asset (money coming to you), and I am also carrying my value at $10 as an asset so that I can sell it if needed, so between the two of us, we stand to lose $19 dollars if the gravel market goes to zero. And it's all really just make believe money, since only $1 dollar actually changed hands. *
Our current crises is predominately over "make believe" money; it is over stuff which we thought was owed to us, based on its arbitrary value at the time we made an agreement. We still have the objects of which we paid for in our possession.
Background explanation over.
So back to the mortgage write off. I lend you $100,000 for your house, and give you a payment book. Now that I've given you the money, I have a lien on your house, and I collect the money plus interest over time... If you do not pay me back, say skip a month, I do not lose anything except "anticipated earnings". I am not in the hole any more or less because you did not pay. I do not have to pay anyone for the house. Everything stays the same, except the additional income I thought I would receive... It simply does not come in when I expected it... which is exactly the same thing that would occur during a restructuring bankruptcy. For a while you pay nothing, until eventually you catch up and resume payments and pay off the loan..
Under our agreement, if you couldn't pay in a timely fashion, I had the right to sell your home and pay your debt for you. In a thriving economy that is possible. But, as a lender, if no one out there has any interest in buying the house, and I unload it at the going rate market value which costs me money instead of making it, I stand to lose all my money I gave you. Obviously it would be better for me to allow you a small grace period, which will cost me nothing in real money (only the virtual money I thought would be coming in), but will guarantee that over the life's value of the loan, I will lose nothing... Between losing everything and losing nothing, being a rational person, as your lender, I would prefer to take the latter course of action.
To nip another argument before it gets started, allow me to reiterate with one other example. Let's switch roles, you and I .... Let's pretend that you are a mortgage company worth one hundred million dollars, and you have lien on a 1000 mortgages worth $100,000 dollars each. During the good times your monthly income averages $900 per mortgage for a combined total of $900,000 per month. Out of that monthly amount, you pay off your employees, utilities, maintenance service contracts, and costs charged to you by other banks. You keep the difference as profit. Speculation suggests that even without the moratorium, this March you will be faced with a 75% failure rate as people accept the fact that they just can't pay. Your monthly income suddenly drops to $225,000. (down from $900,000).
In the following month, April, 50% of those who were late, will pay their late March payment, but will still not have enough cash available to make their payments for both months. The other 50% will be down by two months on their payments, with no real hope of ever making it up. In virtual terms, by the end of April, your business will be down $1,012,500 dollars. This is sort of the black hole to where all our bailout money is currently being applied... However, disregarding the "virtual" losses, your actual losses would be only the money spent on paying your employees, utilities, maintenance service contracts, and those costs charged to you by other banks. For you still have lien on those 1000 properties. At today's zero value, those liens are worthless. But if the economy ever takes off again, by tomorrow they could be worth $100,000,000 if one could find a sufficient number of buyers willing to purchase them at the price you paid.....
So all that mortgage companies simply need to do in order to sustain themselves for three months of no income, is to pay their expenses. And they could again pick up where they left off starting on the fourth month. After all, it does not help our overall economic problem if we lay off numbers of financial service workers, because we were helping the economy by canceling three months worth of mortgages.
The above example is based on estimates which show that twenty five percent of mortgages will continued to be paid through April.. However the boost of this economic impact would be minimized, if only those people in dire financial straits were only the ones given a grace period. Those others fully capable of continuing to pay, would find themselves penalized for having been good creditors and paying their full amounts on time.... Not fair.
If it is to work, the three month grace period must be applied across the economic strata .... covering everybody. Everyone, no matter how poor or how wealthy, needs this same privilege. Remember, our primary goal here is not to stop foreclosures; it is to jump start the economy. To tip the balance of our economy, we need every bit of money pumped back into our system. We especially need those still untouched by our failing economy, who can still afford to keep their mortgages current, to throw their cash into the economy and sweeten the pot.....
As we all heard during the 1930's, back then banks went on "holidays" for up to weeks at a time. None of those "holiday" banks ever threw in the towel during the time they were closed; however, had they remained opened, bank runs being made on them would have put them under. The same principal holds forth with our mortgage industry and financial institutions today. They will lose no money over their three month closings, but will instead gain the benefit of still being solvent three months from now; something which is doubtful if the dangerous current trends run unabated....
This plan has several major advantages, and a couple minor disadvantages. The major advantage can be dreamed of by every mortgage payer today. "Gee, if only we didn't have to pay the mortgage this month". This plan does not require Federally borrowed money like a stimulus package that someday will need to be paid back. This plan does not cause a single dollar to be lost to those businesses who lend money. This plan places a tremendous amount of spending money into the hands of purchasers within three months. The minor disadvantage will be determining who will pay for those employees who usually receive their income from these lending institutions....
The Federal Reserves estimates that this action will put 3.5 Trillion into our economy each month. There is no way federally funded mandates could match that level of impact. There is even perhaps some poetic justice in that since mortgage companies were the ones who first put the global economy into this mess, they should be the ones responsible for pulling us out......
Technically this action could be done very cheaply through the issuance of an Executive Order: stating that no part of the Justice Department will hear or prosecute any cases regarding any unpaid mortgages falling inside the three moratorium months of 2009. If there is no recourse in the Federal courts for not paying one's mortgage, then by de facto the moratorium is in place. For if you, the mortgage payee, are being pardoned by the Federal Government for not paying your mortgage...then why pay it?
In other alternative situations the same plan could also be passed by Congress, State Legislatures, etc, etc, by anyone who wanted to bask in the warm accolades of regular people....
The next item (much less interesting) is that of dropping interest rates to the floor. After the recession following 9/11, that same thing happened and the housing market took off... quite possibly to our detriment today.... In late December 08 the Federal Reserve dropped the interest rate on inter bank lending to half a point, and speculation was that that it may go to zero, or even negative during the next few months... Zero interest rate? As happened during the last time we had low rates, the purchase of homes became remarkably cheaper... In late December, the Fed released information confirming that a record number of applicants inquired that week about re-financing just after the news was announced....
This has possibilities, but it must have the support from other factors of our economy to be effective. Just cutting down the cost of building a business, the cost of buying large purchases on credit, the cost of taking on a bridge loans to cover a brief, rocky, financial moment that one finds himself, ..... can, if available, provide an incentive to switch money now lying dormant in a safe account, over to flipping a new business that may hopefully one day generate new fresh money towards the GNP.
However for it to work,... banks have to lend...
That openness towards lending did not happen during the previous Great Depression, and from what little evidence is available to be seen thus far, it appears that banks are loath to let money again slip beyond control of their fingers...
That fear revolves around the habit that banks have of "calling in a loan". When a bank lends money, it has the right to receive full payment if requested on demand. All banks lend to other banks. If one bank is in trouble needing cash, it calls in its loan. Unfortunately that poor bank holding the loan just called in, now has to ante up a considerable amount of cash rather quickly. Most likely, it will also call in its loans in order to pay off its loan that got called in earlier. The pyramid scheme fans out as each bank triggers two or three additional banks to call in their own loans as well.
A banks only defense in this scenario, is to have huge stocks of money available in cash, for those times when their neighbors call in their loans... Therefore banks are loath to lend out their reserves. If a bank puts most of its money back into the economy, jump starting it as quick as possible by investing in neighboring factories, production units, and houses, and automobiles,..... and then gets "THE CALL"..... it can't unload all those properties in time to prevent its going under.. But if it has cash, it simply says "here it is...." So one can rant, rave, and rail at banks for not lending out their reserves..... but it would be foolish for anyone to place a monetary bet upon any bank that would make the choice of being altruistic, over it's own survival...... Until the problem of calling in loans has been eliminated, credit will remain frozen.
(The problem can be quickly fixed by changing those rules regarding the "calling in of a loan"... most particular in its regard their "timing" or lead time, leading up to that act.) As an extreme example, changing the rules to allow a bank a full year to comply, would relieve much stress on any financial institution getting the call. Any bank given a year could figure out how to get liquidity to pay off that "call". In an area where every bank lends to every other bank, the threat of going under would be abated. Keeping money tied up in reserves, at 0 percent, is costly if one could otherwise get 10 or 11 percent upon it.... Remove this threat...and the credit markets rapidly open up.
Again this action can be done cheaply by an executive order aimed at the Federal Reserve, stating that over a certain period of time, a bank has up until one year from the date its loan is called, to ante up... The bank originally calling for the loan has no worries... it has a year.. The chain reaction of calling in loans is never begun. Banks no longer need more than the required reserves on hand and lending becomes easier because banks are in the business to make money too...... Or again a law regarding such could be passed by Congress, state legislature, etc, etc, or anybody else desirous of basking in the adulation of the public's citizenry.
(Although the "effectiveness of various tactics" will be written about in another chapter, the best option available today to initiate open credit, would be to issue a national Executive Order stating the obvious, and within it: installing an expiration or Sunset Date, by which it had to be passed and endorsed by another governing branch or legislative body if it were to continue further.)
So dropping the interest rate to zero, CAN put money into the hands of those purchasers who refinance existing loans, and CAN create new business opportunities since the cost of opening a factory will become much cheaper, if and only if, banks are given some way out of having to instantly pack up all their reserves and ship them out at a moment's notice .......
Finally the most popular idea leaked out by the initial transition team's encampment, was: creating a WPA to build massive public works funded by the Federal government. For those too young to remember, the former WPA was a Federal Program run like a business, but was funded with the taxpayer's money.... and not by the purchase of private stock.... The principal is simple.. If banks won't lend to start capital improvements, the the Federal Government will lend the money to itself (or a division thereof), and something at last will get started. During the last Great Depression, some examples of massive public works built include the planting of a wind break across the entire Great Plains, of building dams along the Tennessee River (TVA), as well as up and down the Colorado and Columbia Rivers... It also included building the Golden Gate, as well as the building of the then ultra modern Pennsylvania Turnpike across the Appalachians...
These local investments spur the economy in their respective areas. Concrete is needed, heavy machinery is needed, as well as are paid personnel. Those people then need to spend their paychecks and money enters the economy.
If one looks back to the last Great Depression, one sees that within the local areas, Public Works did jump start economies on a scale relevant perhaps to the size of a county or a township. But after the job was finished, the work moved away, a little further down the line perhaps, and the brief high level of economic activity was not sustained. As the extra workers move out, that area fell back into a recession. Only in a case like the Tennessee Valley Authority, where continuous activity lasted for decades, was any long term economic viability enhanced.
The added benefit was that we did get some great dams, which are then able to provide electricity over wide swaths of rural areas... or a turnpike... or a nuclear plant.... or a massive bridge....something of lasting value...
But proposing public works as a method to rebuild the economy, doesn't seem to pan out, based on historical evidence... Essentially the amount of public work that can be done at one time, is just too small to make a dent on the national economy. Building Hoover Dam does not relieve those living in the Hoovervilles of Indiana. Building the Golden Gate Bridge, does not assist those starving in St. Louis, the Gateway to the West. Another Bridge to Nowhere, helps very few people somewhere else....
And that is that is fallacy behind using public works to grow our economy. It's handsome bucket of water being thrown upon a blazing house. The silver lining of that program is that since we are we paying for unemployment anyway, this option provides a better return to our investment (again we will be using borrowed dollars to pay its way). Paying someone to reforest a clear-cut forest instead of watching Ellen DeGeneres on television, is arguably the better use of our tax dollars. Paying someone to demolish condemned city properties does more far more public good than seeing that money going to seed criminal activity.....
So the money spent towards unemployment, supplementing the welfare of those citizens out of work, could be better spent on Public Works with those same wages being applied to those same people who were underemployed. Again, an Executive Order directed towards the Department of Labor, could require that only those working in the service of their country (assuming other factors were not in play), would be eligible to receive future unemployment benefits. We would then scramble to figure how to accommodate that directive.
Review:
The four possibilities were:
A) Tax stimulus checks B) 3 month moratorium on mortgages C) Dropping the Fed's interest rate very low D) Building Public Works
Although all have the propensity to help jump start our economy, the one having the greatest impact upon our economy in the shortest amount of time, ie putting the most money into the hands of purchasers, is Plan B: a 3 month moratorium on mortgages.
Those without money,... can't buy much... kavips
During the thirties, it was acceptable that those thrown out of work were simply out of luck... Some lived, some died and if you were one of the unlucky ones, you had our sympathy, but not our resources... Those resources we saved for ourselves, because more sooner than later, if circumstances folded differently, we might find ourselves destitute along side of you...
Today our mentality is different, in part because during the past Great Depression, we figured out that leaving humanity alone, was more costly than giving them something to do.. Because of our earlier insolence, we all recognize that paying some compensation to those put out of work, is a national requirement.
What is the cost of unemployment?
I recently revisited that cost on a personal level when I forgot to eat for a day and then realized too late, that I was completely out of food; it was far too cold and windy that night to go shopping .. I decided to tough it out till daylight. As the night hours crawled by one by one, I reflected that it had been a long time since I was ever hungry. (I am not talking about the little two-hour-starve thing; it's the 36-hour-fast thing I'm talking about..) I asked myself to what extremes would I go after spending 4 weeks in the condition I was feeling by the end of that time?... Let's just say it changed my perspective a little.....
A) We need unemployment insurance; it is not a luxury.
B) Education and retraining for yesterday's economy is not the answer.
C) Tie the receipt of Unemployment Compensation to some type of "Service to America" platform.
Society can NOT afford the higher cost of having NO unemployment insurance. It can do without the crime, the black markets, and general malaise associated with very hungry people who have nothing to eat. We do not need to remake America in the image of the old Time's Square of the seventies..... We need to prevent that natural trend from occurring.
Currently only 37% of our unemployed are in receipt of benefits. Only 37%. The increase in working women, the prevalence of two-earner couples, and the reality of single working parents, is not reflected in most states’ Unemployment Insurance eligibility criteria, which fails to take the impact that family considerations — such as the need to care for a sick child or the collapse of child-care arrangements — can have on woman’s employment histories. In most states, workers who lose employment for such a reason and are trying to find a new job are denied unemployment benefits.
Unemployment only supplies 60% up to a certain level, of one's former compensation. Currently, unemployment is tagged to finding additional work. Today's unemployment checks are given out, but only after proof of looking-for-work is forthcoming. But how fair is that.... when and if there is no work to be found?
Back during the Great Depression, estimates show unemployment was as high as 25 percent. One out of four heads of households was not working. It became the duty of the other three, to make sure those did not starve and die. Shelters and soup kitchens were just one way of accomplishing that...
Today we hear discussion of our need for re-training. Training can most often be considered a scam proposed by those who make their money on "instruction." After all, what does training actually give to unemployed workers? A new title? Are they now considered to be among the "trained unemployed"? ..... Could the amount being spent on training, be better served to hire workers who actually "do something" lasting... like building a road that is sorely needed. Consider "that" a form of on-the-job training......
One version of unemployment benefits is titled Self Employment Benefits. These are paid to citizens who have lost their jobs and are trying to start a small business. To date, Delaware, Maine, Maryland, New Jersey, New York, Oregon and Pennsylvania have Self-Employment Assistance programs. Under these programs, States can pay a self-employed allowance, instead of regular unemployment insurance benefits, to help unemployed workers while they are establishing businesses and becoming self-employed. Participants receive weekly allowances while they are getting their businesses off the ground.
The problem is that if the economy is not moving, those businesses will fail as well. And then what? Will we have a glut of out-of-work business owners who have used up all their unemployment benefits? Now were the economy vibrant, this plan could provide much needed growth. It is a much better use of public money over that of paying someone to watch TV... But when there is a glut of under utilized nail parlors, how does adding one more help anyone?
Recently the Federal government extended the time to apply for unemployment benefits. If there is no work found during the first 26 weeks, what makes one think that 13 more will do the trick? Sooner or later one must come to the conclusion, that there is too little work to be found. We are paying ex workers to go on a journey to futility....
Review: here is what we have found so far.
We cannot afford "not" to pay our unemployed. The current system pays them a lot of money, and gets no return on our investment.
Answer?
Tie unemployment compensation to "serving America", similar to terms used in the reimbursement of college tuition to guarantee that every child had a right to higher education. Volunteers are in desperate supply, especially now that businesses cannot afford extra labor. Volunteering in a soup kitchen, would be worthy of unemployment compensation. Assisting a parental teacher's aide in a rowdy high school, would be worthy of unemployment compensation. Picking up litter along a highway, or city street, would be worthy of unemployment compensation. In the inner cities, keeping youth off the streets by organizing a basketball league, would be worthy of unemployment compensation.
In all, we are giving citizens the opportunity to give back some of what they've gotten,... back to "WE, the people".
In doing so, we have formed a more perfect union.... More often than not, we will receive more back... than we gave... After all, everyone needs to be needed. There is no better cause than putting one's talents to good use for our nation, especially in its dire time of need.
Stories of the last Great Depression are fraught with glimpses of how time stood still. There was no one to pay for picking up litter, so it never was.. There was no one to pay for cutting grass along the highways, so it was left alone. Other civilizations have used their populations to achieve great works. Recently, all eyes should turn to China, who as late as 20 years ago, was just a few years past Mao.... But people built dams for food. People planted hillsides for a daily bowl of rice. Whatever it took to survive, people accepted as a necessity. But, if unemployment progresses to 25%, with only 1 out of every 4 people still working, we will need someway of keeping that one alive, while at the same time providing an opportunity for them to live with dignity. I can think of a no better way to live than doing service for one's country.
With this economic crises we have an opportunity to realign America. We sort of steered ourselves down the wrong path by worshiping our markets a little too much.. While chasing the dollars across our oceans, we sort of forgot that volunteering our time over here was important also. We can relearn that lesson.
In essence, to really make America a better place, we need to tie unemployment benefits with service being done in the name of America... Bringing proof of one's volunteerism, instead of one's job searches, would benefit America as a whole. As we shrink our state and national budgets over these next ten years, we will need to find a way to continue those services upon which we have grown so dependent. The best way to do both, (shrink the cost, grow the service) is to use volunteers. Since we can't have volunteers starve or freeze, we will need to pay them a little so they can sustain themselves for their food and shelter... When work returns, we know where to find new workers....
Whereas extending unemployment benefits over longer gaps of time, retraining the American work force, and tying unemployment to the service of one's country, all act to mitigate the pain our upcoming Great Depression will bring, the latter,.... linking unemployment compensation to service volunteering for our country, will provide the greatest return to America for all the money it invests into its out-of-work labor force......
A bridge to the future, if collapsed, takes you no where... --kavips
This chapter looks at rebuilding our infrastructure. We have highway problems, energy problems, educational problems, as well as health problems, environmental problems, and social problems. Can rebuilding our infrastructure be a tool to begin the mending process?
Up to now very little has been spent on maintaining our highways. Most highway money was earmarked for new growth.. It was as if no one gave consideration of the fact that maintenance of what we already had up and running was a cost that needed budgeted in.. After all, what political points are ever given for repairing a road before it goes bad? (Damn it, why are they tearing up good highway, costing me twenty five minutes in each direction?) But with the August 1, 2007 collapse of the Interstate 35 Bridge in Minneapolis, we see what happens when highway infrastructure is ignored.
For example in the United States alone, 25% of our bridges are deficient. In Delaware, 15.4 % of our bridges are either functionally or structurally deficient, which is actually good when compared to our fellow small state Rhode Island with 52.9% of its bridges deficient. As one travels back and forth, one crosses an unknown number of tiny bridges; of these, one out of four is deficient. How would you like to be on the I 95 bridge across the Susquehanna... when its time came to fall?..... or perhaps driving across the Chesapeake Bay Bridge between Kent Island and Annapolis? Thinking "one out of four" may raise your apprehension rate the next time you find yourself traveling unknowingly across a potential deathtrap...
The need to improve our infrastructure is obviously there. So if we have the labor available, how will we pay for the construction and repairs with our treasury bottomed out?
That depends on whether bonds still had any worth, meaning whether or not anyone still had any interest in buying them... Normally bonds are sold at a low interest rate, and the money taken in is used for construction. The notes are paid back in regular payments. But if there is no demand for, or more money out there with which to buy the notes, who will fund the infrastructure investment?
Today the bottom line is that the money will have to come from the Treasury. Being broke, that also means the Treasury will no choice but to print more money in order to accommodate the economy's need. As more money starts chasing fewer goods, inflation looks at us dead center down it's barrel. Unfortunately we are in such dire straits, that we have no choice but risk the chance of inflation just to keep the next Great Depression at bay....
The same scenario applies to our efforts to revamp our educational system. Now estimated to require between 45 to 50 billion (how much was AIG's bailout?) the infrastructure of our schools systems faces the same challenge of acquiring minimum funding, as does that of rebuilding our highway system.. Up until August of this year it could still have been done. Now due to insufficient funds, this accomplishment is unlikely. But if we choose to go forward, we will have to do so again funded by printed money with inflation drawing another bead upon the target on our own purchasing power..
Even today, there is enough work to employ every man, woman and child in America if we can find the resources to pay for them doing so... Work such as environmentally cleaning up Superfund Sites, energetically laying new transmission lines, socially integrating our square pegs into round holes, educationally teaching problem readers to become literate, or simply maintaining hospice care over those citizens who cannot survive long enough to see America turn its corner; yes, work can be found...
But the underlying question still remains as to how we will be able to fund the privilege of keeping America employed... and at whose expense? If we were unable to solve these problems during the past 8 years of plenty, how will we deal with them during a time of shortage?
Fortunately, we are not the first group of people in our lifetimes to rebuild our world around us... Three examples of what can be accomplished, are found in three post war states who after war's end, found themselves under American influence. That would be Germany, Japan, and South Korea. These are the models we need to turn to. Someway and somehow they bounced back from complete devastation to becoming the the second, third, and fourteenth largest economies behind that of the United States...
At war's end, there were very poor resources to spread around. Everything possible needed fixed at once. But with a small amount of seed money provided by the Marshall plan, a major currency adjustment, and a release from price controls, the German population pulled themselves up and today have roaring economies better than do any of our allies of that past conflict. (It doesn't seem fair.)
History shows us that for two years after the war, while post war punitive policies were kept in place, all of the occupied countries' economies decreased. The Soviet sector opted to maintain those policies and their economy continued to suffer accordingly until German Reunification in 1990. However in the western Allied sector, starting in 1948 with the abolition of price controls and most post war rationing, along with the devaluation of their currency designed to shrink the amount (by 93% contraction) of the money in circulation, their economy took off; lost days decreased by half, and industrial production climbed within six months by 50%. Both nations were blessed with the post war abundance of skilled cheap labor; therefore both nations were able to increase the flow of money into and around their country.
Rising to the challenge imposed upon them by history, all three countries had able leadership which was effective in communicating this to each countries' populations: ... that their time and effort were to be properly considered as an investment. Their rewards would not be reaped immediately, ...but would someday be magnificent. Their leadership was also effective in communicating that timing was critical. If they did not begin immediately... their nation's dreams would never materialize. It was their competent leadership that marshaled the populations of both WWII nations back to work "on the cheap" and that.... the bottom line, is how both counties bounced back. Not dictatorially, but economically. One should note that both of the two occupied economies fared much better than our Allies, who received far more Marshall Plan aid than did the conquered nations, and who did not have to pay for war repatriations as did both of the war-torn countries.
From here I pulled this little piece of history, showing the progressiveness that forced the German economy forward.....
Colonel:“How dare you relax our rationing system, when there is a widespread food shortage?”
Erhard:“But, Herr Oberst. I have not relaxed rationing; I have abolished it! Henceforth, the only rationing ticket the people will need will be the deutschemark. And they will work hard to get these deutschemarks, just wait and see.”
That they did.
Obviously sitting in our armchairs looking forward, we too understand that we will face the specter of inflation. It MUST come with the copious amounts of money we are currently and anticipated soon to be printing. However as does any nation in a war, our country does what is needed. Currently and just like it was after WWII, the US right now is the only global entity strong enough to expand its money supply fast enough to put most of its citizens back to work. As we begin earning extra spendable income, our demand increases; when that demand pushes up prices, more and more entrepreneurs race to fill in the vacuum of goods... bringing them back down. Greed is good.
As for actual rebuilding of infrastructure, postwar Japan offers a slightly different model. In Japan we meshed the government, banking system, and large industrial players to fund, construct, and grow their infrastructure during the sixties. The local banks, backed by the government of Japan, used a system of overloaning. This policy is one which the Bank of Japan guarantees all loans issued by city banks to their industrial conglomerates. Because there was a shortage of capital in Japan at the time, industrial conglomerates borrowed beyond their capacity to repay, often beyond their own net worth, thereby causing city banks in turn to over borrow from the Bank of Japan. This gave the national Bank of Japan complete control over all dependent local banks until the loans were repaid.
The primary difference between the Japan of then and America today, is that today, the money is still not being lent out by those banks receiving Federal assistance. Instead, today's over loaning is being wasted on the buying up of other banks; today that mass infusion of capital is being used to consolidate the financial industry, instead of financing large projects that actually put citizens to work, and in turn funnel money back through the economy.
The question remains. Does rebuilding our infrastructure get us back on our feet?
Yes and no. The economic impact on the local level at the location where the federally funded project is being built, is huge. But it is a localized effect. For an economic turnaround to be effective, infrastructure building must occur simultaneously in almost every town or village across the United States. If funded solely by the federal government, that significant cost would appear prohibitive. But if instead of being funded solely by the Federal Government, it is done as did the Japanese during their infrastructural rebuild, (where all local banks simultaneously financed local projects close to their locations), much more capital becomes available. If we place our bets on the option that local banks WILL lend out the money, if we guarantee that they lose none of the amount lent out,.... then that outcome could start some infrastructure development in the very near future somewhere near every community's small bank, no matter where it may be located.
So if as a nation, we choose this plan, and we attempt the Japanese-tried approach, the question next arises over which infrastructural improvements will return the largest investment? The consensus seems to be that Energy, Education, and Technological advancement lead the pack.
As we now all know, even during prosperous times our nation gives up a large percentage of its income to other overseas nations just for oil. By simply keeping that dollar amount in the United States we could provide our economy a substantial boost. Furthermore, manufacturing and exporting new technology which help frees the rest of the world from their dependence on oil, would certainly assist us in turning the trade balance back in our favor. Both of these lines of thought converge to point out this: the increase of our energy independency could become the primary viaduct which could bring America back into prominence.
As for increasing our energy independency, there are several options for doing so. One, is to create new sources. Here is one startling fact: there is enough potential wind power in North Dakota alone to cover 25% of America's energy needs. The problem is getting it to where it needs to be used. Building transmission lines from America's heartland out to its extremities, where its largest users are, should be a first priority. For one, it actually uses the free market plan and opens markets to a cheaper supplier of that required product. Two, transmission costs are a significant portion of the energy costs we pay for electrical energy today. Three, poorly outdated transmission grids eat up a lot of energy that could instead be used to power America.
Likewise building transmission lines from our local shores to major metropolitan areas, provides those city areas with cheaper electricity from off shore wind, thereby increasing the likelihood that more wind power generating companies will set up off-shore. The larger the wind farms are off shore, the better our economy will weather that upcoming Depression that appears to be looming off our horizon... And if hydrogen is one day destined to become our replacement fuel, then locating their manufacturing plants in close proximity to offshore wind farms, in order to capitalize on a wind farm's free excess energy during non peak hours..... could certainly help build an industrial base to back up the tourist economies of rural shoreline counties.,.
Directly related to the new technology of wind power, would be the need to construct electrical storage facilities in areas that have no jobs. Western Pennsylvania and West Virginia would be ideal localities to build closed circuit water generators that use free excess wind power during non-peak times to pump water up a hill to reservoirs on top, from which water can then be released during peak times, flowing downhill turning a series of giant generators as it falls to the valley floor. These massive projects would put large numbers of Americans to work in those areas desperately needing new development.
But these three investment strategies are all dependent on the knowledge that wind driven energy will be a big player in the years to come. No one will make such an major investment in a climate of doubt. The Federal government over the next few years ... has to make that clear.
For other hard hit areas, an investment in solar power out in America's Southwest can do the same. A conglomerate of local banks issuing out loans, guaranteed by the Federal Banking System, should have sufficient resources necessary to begin the immediate construction of a series of large solar farms in that area. With such an investment to attract large numbers of employees to that area hardest hit by the housing crises, local banks could with the Federal bank's support., begin paying workers who in turn would help out the local banks by buying back some of those foreclosed mortgages at market prices...
But unquestionably, the largest saving can be made by simply conserving more energy in our homes and businesses. Just re-insulating every home in America, can save the cost of its installation within a year. According to the Department of Energy, re-insulating a home can save between 5% and 22% of its energy costs per year. At their estimated energy cost of $1500 a year (seems low, doesn't it), the range would be from $75 dollars to $300 dollars a year. So paying someone a bounty of $75 dollars for each house, just to infra-red, then re-caulk it's leaky windows and insulate it's doors, would see its return within one year on every dwelling visited. Paying someone to go through a city's public housing could save that city government tremendous amounts of money which could be better spent putting its citizens back to work.
Educational infrastructure is likewise needed. Our nation's schools for the most part, have not been updated on a grand scale since they were originally built for the influx of baby boomers ... What is more important than structural additions to existing buildings, is a revamping of the educational process itself.
America needs to regain their technological prowess... Our educational system ranks behind most of Europe and civilized Asia. One Duke study concluded that 137,437 engineering graduated in the United States, compared to 112,000 for India and 351,537 for China. Of course the quality of those foreign engineers are open to debate. But still, with lopsided numbers like that, it is obvious that over time.... we lose the technological war. Today... whoever is driving the global need for technology... drives the global economy.
Putting additional parents or motivators inside of class rooms, increasing allocations for science supplies (simply dropping sodium into water turns most students on to science as well as instantly explains the clarity of the periodic table), and increasing the social status of the "geeks" in teenage classrooms, are just some of the ways we can rebuild our educational infrastructural needs, without large investments of cash... Where we most often complain that the educational system is broken and in dire need of fixing, at the core of the problem is broken down people. Whether it is administrators, teachers, school board members, parents, or the students themselves, what we have throughout our education system is a group of talented, but leaderless individuals. All are spinning their wheels independently in their effort of trying to find some type of traction in improving education. Often within the same schools, different partners are spinning in opposite ways.
What American education needs is a grand goal, one that is set nationally and bought into by all of its people. Once again, America needs to be challenged. At its forefront it needs a leader capable and willing to stake his reputation on meeting and achieving that goal.. And most importantly, that challenge needs to me made without any financial strings attached. You know: the usual "we need to invest $$$ in .......". Instead, what is needed by our incoming leadership is to voice a measurable goal such as this one for example: that says by 2015 we will as a nation, turn out as many engineers as does China..... (Goal reaching against a competitor worked for reaching the moon). Perhaps to achieve it, some additional funding may be necessary. But what is more important, is that is sends a real signal to students that fun and games as they have been portrayed on children's TV, can no longer be tolerated within our high schools. Every young person now has the survivalist duty to apply themselves to the best of their ability, for the honor of their country in whatever the direction their talents lead them... (With proper leadership, this can be done fairly cheaply: it takes just one big speech.)
The long term return on this cheap investment is that by 2020, our engineers should be in the field working at top notch organizations, benefit them and us from their training and expertise.... The longer we wait... the further behind China and India we find ourselves... We are already talking twelve years from now before we can get any return on both ours, and our student's investment....
Likewise, tying in with improvement of our educational output, is our need to advance ourselves further along the road of technological innovation, ie. creating new patients. For which ever nation builds the most savvy technical gadgets, that is the country from whom all others will want to buy...
But in today's economical climate one must realize that a risky investment on some new technological device, untested in the market place, will have difficulty finding financiers. Once again, the Federal government, if it is spending its resources elsewhere, has the option of only printing more money to pay for this investment, assuming that private lenders are too scared to lend. Therefore as mentioned above, as in the post-WWII-Japanese model where the small city banks overloan to businesses and corporations allowing them to invest in research and development, if these loans are themselves guaranteed by the national bank, private lending can fulfill the need.
A very strong incentive to promote new research and development by corporations, would be to allow all such expenses devoted to the creation of new products, to become tax deductible under the newer higher rates that will be forthcoming shortly. Every bit of money spent on research and development, is our nation's best investment. Innovative new products lead to the quickest economic turnaround as those new developed ideas soon become commercially viable...
Other areas where infrastructure can also be propped up by an infusion of small loans made by city banks which are then guaranteed by the Federal Reserve, are in the areas of environmental protection, health care, social services. Western forest fire fighting companies, environmental detoxification companies, and tree reforestation companies, could begin putting people to work.
It could work like this. A company such as Guardian, on call for disaster, receives a payroll loan from a small bank guaranteed by the Federal Government to keep itself afloat until money comes in from charging an oil tanking firm for the mess they made... Most of that loan money is used to buy necessary additional equipment, which puts someone to work in the manufacturing plant where that piece of equipment came ..... As work eventually comes in, the Federally guaranteed loan is paid back to banks... In this and most cases, no direct Federal investment is required. They just stand behind the guarantee.
In the health care industry, private companies providing hospice care, watching over psychiatric patients, creating new MRI's, handling billing requests and follow up from insurance claims, can now receive a private loan from a small bank guaranteed by the Federal Government to carry them over until their money returns. Needing new equipment keeps a job at the plant where that piece was manufactured...
Companies specializing in assisting the poor, handicapped, impoverished, hungry, homeless, can also stay afloat by these private loans over lent by their banks, but guaranteed by the Federal Government. When the money returns from their clients, the loans are paid off.
In each of these areas, existing goods and services are maintained. The businesses don't fold. Here is a different way of looking at it. This Keynesian jolt of economic activity is metaphorically like starting a heart of a human being temporarily stopped in cardiac arrest. At that time, all the systems are in place to work.... the heart just needs pressed to get started..... Our economy is like that. Inattention to the core of our economic problem, which is money not flowing out of banks, will lead to the same result to us as it would to a patient who does not get his heart restarted....
So this chapter can be summed up this way. The Federal Reserve is given responsibility for making sure that all projects having a viable chance of success, receive funding from, and eventually pay back... the small local banks making those loans. The Fed just guarantees the loans won't fail....
Those out going loans should be focused on projects giving us our biggest bang for our money. Those areas providing the best return on their investment, are in the areas of energy, education, and technological advancement......
Instead of direct investment, the use of Federal guarantees in these three areas, coupled with the Federal Reserve's monitoring the effects of inflation, are one way our nation can capitalize on its current hardship, and pull itself out through our effort, grit, and tenacity....
He said build something; I said with what?-- kavips
Some of you remember the "giant sucking sound"?
Ross Perot, Reform Party candidate for the US President in 1992, coined the term during one debate (4:45) to represent how dropping protective tariffs for NAFTA... would suck our manufacturing jobs to undeveloped nations south of our border...
Today we see evidence that it was true. Although China, India, and Southeast Asia are contenders for stealing our manufacturing base as well.
There is no real industrial manufacturing base left in the United States, which is one of the reasons that bailing out our car manufacturers has become a national emergency. At the exact moment when we need a manufacturing base to prime the pump of our economy, it is missing. Gone. It is not there.
The Free Trade agreements do well for our nation's consumers; they bode ill for those working at high wages. I remember buying the cheapest shovel I could find for $25 dollars back in '92. Last summer the same brand was still on the shelf for $25 dollars, but the one I bought cost me $4. I figured I could buy 6 replacements before breaking even.... My choice gave me $21 dollars to spend on other items.... Free Trade works for American consumers...
But for someone costing more than $1 a day, for someone with pension costs, health insurance costs, and vacation costs, free trade is something to fear. For the sucking sound of job loss continues up until the point occurs where the cost of doing business here, drops down to meet the climbing rate of the cost of doing business elsewhere....... At $18 dollars an hour here, and $1 dollar an hour there, when both settle out around $9 the flow of jobs is abated.
But you can't force a company to not make money. If it gets so bad that they can't stay in business, they have every reason to shut their doors.... Even if WE were able to close off the imports of all products made more cheaply elsewhere than domestically...... we would be paying much more than necessary for those products we bought. Most of us would choose to go without that unnecessary expense, before paying what we considered exorbitantly high prices.
Furthermore, closing down imports would turn us into a trade island. Other nation's $4 shovels would continue to be snapped up on the world market, while we sat on a huge inventory of $25 dollar ones.... As soon as our nation's market was saturated, its one shovel plant would have to close, (provided no bailout was forthcoming to keep it solvent and afloat....) They could not sell any more of what they had....
I mentioned in a previous chapter that it was lower labor costs which were responsible for propelling Germany, Japan, and South Korea out of their economic paralysis following the ends of wars. Writing on the wall says that for us to survive... we probably will have to do the same.
Just having health care removed from corporate responsibility, could significantly impact how this is done. If the burden of providing huge sums for medical insurance was suddenly lifted off of business' shoulders, its cost of doing business in the US would drop significantly without touching the amount paid out in wages.
So what would it take to get manufacturing jobs to come back to the United States of America.
Bottom line....the entire process from raw materials to final delivery, needs to be cheaper here ..... than somewhere else...
That cheapness doesn't mean we are forced to sacrifice wages... After all, wages are the fuel that drives our economy. After all, wages are what buys those goods and services which America makes. After all large scale cutting-back on wages, cuts back on the money supply that buys what we produce.... Cutting wages is the final resort: our very last line of defense. It is in other areas where we need to look if we wish to get our nation to bypass this economic bump in the road...
One different and novel method would be to shorten the accounting rule on how one claims depreciation. One of the reasons that trading in mortgage securities was so profitable and lucrative was because the full cost of buying those securities was immediately deducted from the purchased amount creating an expense that matched the asset. However upon buying a piece of equipment under depreciation, a large amount of capital is required up front... and is not costed out except in little pieces over a very long time.
Building a business is capital intensive. Buying securities ... was not. Considering the global shortage of capital right now, changing the rules for even a short time, could be considered to be sort of a tax break. If banks were lending (those loans guaranteed by the Federal Reserve), and.... purchases made this year could be written off totally... meaning no taxes would be paid on that amount.... this would be the goldmine year for a business to expand, buy, update, renovate, modernize, and become more efficient. And if each one of every businesses started ordering materials, .....well, you see what that would do to our economy.......
Since a business will be carrying a lot of expenditures this year, the chances are that their tax payment will be minimal. That does not do well for our nation's Treasury... we sorely need that money... but, if one waits long enough... upon the following year, all those new pieces of equipment will have been completely depreciated, so that when the rules return to normal, the profit below the depreciation line is higher than it would have been had we left everything alone! And the Fed's taxable portion of that amount, would be higher in its dollar amount, even though its marginal rate did not change. The same boost in more taxable dollars, would occur each year up until that time when the equipment would have finished its cycle of depreciation. Basically for the Federal treasury, it is the same principle as having a business skip a monthly mortgage payment, by agreeing to pay a token amount more each month after that grace period to achieve balance.
Another concept is to change our definition of what constitutes manufacturing... The old days are gone, thanks to technology. If one looks at our assembly lines today, one does not see a myriad of men running around at breakneck speed to keep up with the assembly line... Instead one sees (in the words of Robert Reich) "a lot of numerically- controlled machine tools and robots, and a few technicians sitting behind computer consoles. The old-style assembly line factory worker is going the way of the bank teller, telephone operator, and service-station attendant."
"But there's a different way to think about manufacturing, and here we're doing much better. Take a close look at any manufactured item -- a pen, a cup, a car, a dress -- and see who's actually earning what portion of its purchase price. Much of it goes to Americans, even if the factory that made it is located in Asia. More and more of any item's value is going to researchers and designers, engineers, entrepreneurs, marketers, advertisers, distributors, bankers, lawyers, wholesalers, retailers. None of them is considered a manufacturing worker, but they are the future of manufacturing. " a different way to think about manufacturing, and here we're doing much better."
"The loss of blue-collar manufacturing jobs is a huge problem for America. That's because many young people with only high school degrees no longer have access to middle-class wages. But that problem, which has been growing for years, won't be solved by an Assistant Secretary for Manufacturing or any get- tough trade policy. To solve it we need good schools, ready access to technical skills and community colleges, and companies that continuously retrain and upgrade their workforce." Robert Reich 2003.
Robots are here to stay. What is needed to maintain them, is an educated workforce that can design them, program them, maintain them, market them, and sell them.... Education puts higher costing jobs back on the family's table. If America is to compete, then we need to be the ones making the most technologically advanced pieces of machinery that are bought by technicians from other countries... We don't want our workers competing for $1 an hour jobs, yet we need those products which are cheaply made so we don't have to spend prodigious amounts of our income on simple necessities. We waste a lot of time in today's schools. Currently Delaware schools lose 1 month every year talking up Black History month. We need to start asking hard questions on how that helps America compete against someone from India or China? It doesn't? One example of where our priorities are wrong, and we know it, but we do it anyway.
If one asks Americans whether we need more manufacturing, the choice is overwhelming.... In one unscientific poll, 99.13% said they would be willing to pay more for a product if it was made in America. The unscientific nature of that poll is suggested by the lack of determination of just "how much" those Americans would be willing to pay over the cost of a foreign import.... As in that true story about Lowe's $25 dollar shovel... are they willing to pay 600% more? If you remember ... this one shopper wasn't... He figured the could get six shovels for the price of one, and bet that his shovel would hold up well against those odds. (He was right too, by the way).
Another traditional way to protect local manufacturing jobs, would be to forcefully devalue our currency. If we artificially keep our currency at a lower rate per exchange with other nations as does China, our products, even if costing the same to produce, will be cheaper to buy... Again this would be a short term solution, since as our economy began to grow due to an increase of factory orders, our currency would gain value and then rise.
The downside is that it would make traveling through Europe expensive, but that would be a small price to pay for not having the Great Depression at our doorstep. A more significant negative would be that the global economy would prefer to peg their prices upon the Euro, and the once almighty America dollar, would fall quickly out of favor...
Speaking of traveling, the high fuel prices paid last summer point to another element as to why manufacturers would want to return to America. Keep in mind that many manufacturing jobs went offshore for cheaper labor. The downside of doing so is that one must pay to transport the product back here to market. With the influx of $4.33 dollars for a gallon of gas, the cost of getting foreign products into stores, climbed rather significantly. At some point it will be cheaper to again build in America and pay the American rate, instead of building cheaply offshore and then giving back the savings to those responsible for transporting ones product back to our shores to sell.... If a fuel tax is levied as has been discussed, it could turn America into a land of new manufacturing opportunities. The less miles traveled... the lower the cost that would be incurred.
In the same vein, the imposition of Carbon taxes would bring manufacturing back to America. If America imposes Carbon taxes and China does not, then all those Chinese products being imported are subject to carbon tax tariffs making them too expensive and unmarketable on these shores. Carbon taxes especially when coupled with high energy costs, make manufacturing closer to home, the cheaper alternative.
Cheap energy can really bring American manufacturing back onto these shores. That energy would be wind at 2.3 cents per kilowatt/hour, being made with free fuel turning the rotors of 7MW generators perched on tall towers dotted across America. Pushing forward with subsidies to initiate the building large wind farms, would be advantageous in not only putting workers to work on building the towers as well as installing the rotors, but also in lowering our energy costs so that any company moving here would still do better than it's competitor languishing oversees.
Some say our brand new baby boom may bring jobs back to America. In 2007 America broke its record for the most births per year. That last record had held from 1957. With a workforce growing by 4,300,000 persons per year, and China's one baby policy still in effect, our labor pool may appear more attractive 18 years into the future. This may not sound as far fetched as one would initially think. Most business decisions are sketched out over a fifteen year time frame... which means in most better run companies today, some employee has already started the research that will ultimately become the foundation of the plan... The idea is to get companies to reinvest here... not elsewhere. Grand trends that happen in our future can be a valid part of convincing someone to open an American manufacturing plant....
Likewise tougher and better American regulation can return manufacturing back to America. That may not make sense to anyone who has not done business in third world environments, where capriciousness blows with the wind. One of the classic blunders invested in the third world is the huge oil investment made in the Niger delta, now rendered cost prohibitive by the actions of local guerrillas. Another occurred last winter, when toy manufactures suffered significant losses because toys contained lead. And it was last year when animal enthusiasts bought everything American so that their pets would not keel over dead? In an arena where paying off a string of corrupt politicians is considered just a cost of doing business, the uncertainty of knowing just how long those politicians will last, has firms thinking again about the stability of doing business on American shores... RegalWare. Inc has brought back all of its plastic manufacturing back to Kewaskum, Wisconsin. As their CEO Jeffery Reigle states:
About three years ago, the company, with the guidance of consultants TBM, started evaluating its operations to become more efficient. A particular concern was how long it was taking to deliver cookware to customers. The overseas manufacturers emerged as a key bottleneck. Since the company brought production home earlier this year, delivery times to one major customer, Reigle says, have gone from 30 to 60 days to as little as 24 to 48 hours.
Even if Regal Ware's prices are 8% to 10% higher than buying direct from China, the its cash flow from Regal Ware products has increased 10% because the seller can turn over inventory more quickly.
Other pressures that motivate a manufacturer (or outsourced work) to move their manufacturing back from overseas: 1) bad experience with foreign vendors, partners, suppliers, local government, employees, 2) updated product portfolios and the pursuit of short lead-time or customization, 3) good utilization of automation, 4) overheated competition and lack of patient protection from improving foreign competitors, and 5) finding the made-in-USA label sells really well overseas. Not to mention liability issues where shoddy work, or tainted raw materials can upon being discovered, totally disrupt normal business flow.
The overall rising costs in China, from wages to taxes and to utilities, are definitely in the spotlight. American businesses may have realized through the years, from observing work transfer first to Mexico and then to Asia, that no country will be low-cost forever. Low cost is not everything. Consistency and trust in the quality also considerations a consumer factors in when making a purchasing decision. Tightening our quality standards, our environmental regulations, and stressing our attention to detail, will have the effect of increasing the value of the label "Made in America" That label is already the one preferred by wealthy Chinese who like us, have care and concerns for their children as well... Knowing how their countrymen sometimes operate, they prefer American.
So far missing in this analysis is all mention of imposing tariffs on imports for any reason. Pat Buchanan has been making the argument to stem free trade for years.
To date one of the more interesting aspects, is his distinction between how foreign trade works with VAT taxes and against corporate taxes... VAT (Value Added Tax) are used by almost every civilized state other than us. American's have held off because of the huge populist sentiment that permeates their politics. (VAT's being a consumer tax, are regressive). The VAT works on this principal: at each step of a manufacturing process, just the value added ... is taxed. In America, when one buys a bag of flour on sale at $2 dollars a pound, and assuming a 6% sales tax, one pays 12 cents additional in sales tax. In Europe, Japan, and other industrialized nations, each step is taxed and the consumer pays the final price posted, Over there the fuel, seed, and fertilizer used in the growing of the wheat is taxed. When harvested, the silo operator taxes the farmer, who in turn has the taxes paid on his raw materials, deducted from the amount he is called to pay. The regional distributor taxes the silo operator, who in turn deducts the amount of tax he paid to receive each farmers wheat. The mill operator tacks on his charge which is paid for by the regional distributor, and when selling the product to a distributor, he credits the amount he paid... and so it goes right up to the last person to sell you the bag of flour.. Each entity buys the product with the tax attached, attaches their tax and gets credit for the tax they paid when they purchased their raw material. That way, each entity is taxed only on the value they added to the product.
Since just my telling of it appears so complicated, one can get an idea of how keeping track of every step in the process, must run tax agencies bonkers. Instead of trimming the IRS, we would be growing it by leaps and bounds. Which is why in frugal America... VAT's have not yet been moved out of any committee....
The bright side is that this amount replaces corporate income taxes: zero corporate income tax. The downer is that we would be paying $2.12 for our flour .... before a state even had a chance to tack on their 6% sales tax. Together, we would be paying a 12.36% tax on all products. Your $150 grocery bill would cost $168.54. Whereas that seems like a lot to Delaware citizens who are used to no sales tax, to those in other states already immune to a 6% sales tax, the difference would be only an additional $9.54 dollars.. The average American would be paying roughly per month, four times that amount on groceries or $38.16 for the privilege of doing away with corporate income taxes...
But... and here is the argument when applied to free trade....
Foreign cars arriving here, have their portion of the VAT's deducted by their home corporations. We, without a VAT, must pay the full amount of the VAT expected in foreign countries, when we drop our cars off there. Roughly a 15% charge is added to the purchase price of any American car in a VAT country, while they receive a 15% credit for selling cars in ours... It is hard for American cars to compete as imports.
Perhaps we could recognize this constraint being placed on what is now, ... the taxpayer's car company, and use this opportunity to initiate a VAT solely on the car manufacturing sector of our economy to see whether or not its principal holds up under actual international trade. The worst case scenario is that American cars may cost us 15% more, and the best case is that US manufacturing plants go into full production due to the overseas high demand of affordable "American quality" vehicles....
Finally, we come to the heavy hitter part of the intellectual argument. If we are talking about changing import taxes, what about tariffs?
Tariffs limit free trade. How? Tariffs make imports more expensive, thereby making domestically produced products cheaper by comparison. Tariffs become a means of keeping prices higher for all Americans thereby enabling American companies to remain solvent as well as increase their profit margins. Tariffs once imposed, cause retaliatory tariffs against us which shut out our imports from entering new markets, causing plant shutdowns and layoffs.
Protectionist tariffs are often blamed for the increase in the severity of the Great Depression which occurred after the passage of the Smoot Hawley Act of 1930. Intended to protect America businesses and force up prices by limiting cheaper foreign competition, those companies protected went under, because no one bought any of their higher priced goods. Imports plunged 66% from US$4.4 billion (1929) to US$1.5 billion (1933), and exports fell 61% from US$5.4 billion to US$2.1 billion, both drops far more than the 50% fall in the GDP.
It did little to protect America jobs. Unemployment was at 7.8% in 1930 when the Smoot-Hawley tariff was passed, but it jumped to 16.3% in 1931, 24.9% in 1932, and 25.1% in 1933.
Today, one cannot help but to invoke the image of Ronald Reagan when discussing "Free Trade". Above anyone, he is the person responsible for bringing that term into modern consciousness. However, even the harbinger of free trade was quick to slap tariff duties on "motorcycles over 7 liters" to protect Harley Davidson from going under.
The Cato Foundation was quick to criticize this action. In a policy piece titled "Taking America For A Ride" they were quick to point out the economic hardship facing America. Concluding that:
"the new tariff will unambiguously prove to be a setback for the American economy. ITC specialists predict that the tariff hike will raise prices 10 percent the first year. Other officials believe that the price increase might be as high as 17 percent. The ITC estimated an increase of 12.5 percent for the second year."
They went on to predict that 20,000 less motorcycles would be sold the first two years, with an increase of 8,000 to 10,000 Harley's being sold over the same period...
But they were wrong. Initially the goal was to jump the current tariff of 4.4 percent to 49.4 percent and keep it there for a year; lower the rate to 39.4 percent in the second year, to 24.4 percent in the third year, to 19.4 percent in the fourth year, and to 14.4 percent in the fifth year. After the fifth year the tariff is to return to 4.4 percent. During the amendment process lines were added that allowed numbers of BMW's, Italian, and English manufacturers to slip through unaffected. The Japanese were given the same amount as were the other foreign bikes in without tariffs, but... due to the size of their market share, a large percentage of their imports were affected.
Bottom line: Harley Davidson is still around today. They would not have been had this tariff not been imposed. Harley Davidson took this time to retool, refinance, and modernize their brand, becoming a better company for it. Able to make better motorcycles, their market share increased to make them enough profit allowing them to call for the removal of the tariff a year earlier than planned.
Furthermore, solely because of the tariff, two Japanese companies, Honda and Kawasaki increased production at their American plants since they were not affected by the tariffs, in turn providing additional work for American workers.
So why was one tariff a success and the other an abysmal failure? The difference is scale. The Harley Davidson tariff was limited to Japanese manufacturers who used their protected high prices at home to subsidize dumping into the America market, which ultimately drove down motorcycle prices so low that Harley Davidson was unable to keep up. The tariff was limited to five years, and designed with a specific purpose: equalize the playing field. It was not done to protect American workers (they were few in number); it was not done to keep a lazy and insolvent company afloat forever; it was done to allow the free market to work. Now, every time a "hog" pulls alongside of you, you can thank Ronald Reagan.
Protectionism ( the imposition of trade barriers) has its purpose. With today's economy one should expect to see and hear labor unions clamoring for more and more "protection". It's a plea that is hard to resist. After all, we could all be in the same boat some day, and certainly would appreciate someone bailing out our leaky vessel.... How can one "not" protect American workers?
The answer to that question is this: that we, the rank and file Americans, have to realize that protectionism is a form of war. As we recently found out, when a nation goes to war, it had better be sure beforehand that it will end up on the winning side. For once a war is started, the costs are always higher then expected. And if the enemy has a method (not in your calculations) of outmaneuvering you,... you never get the chance to say... "oh...never mind... let's call this off and pretend like it never happened..." For once you hurt someone... they will do their darnedest to hurt you back.
The Smoot Hawley Act hurt a lot of people indiscriminately. The Harley Davidson tariff did so with precision. It's the difference between accomplishing the same goal with either an all out war, or with a deniable, dark-ops special operation. One must take into account, and not be surprised, by the retaliatory measures which be taken against us.
As an aside, it is worth noting that an interesting observation came from the removal of the Smoot Hawley Tariff as WWII came into closure. The world emphatically sought assurances that no Smoot Hawley Act would ever be passed again. This bitter hate led to the Bretton Woods Agreement, in 1944, a great lessening of global tariffs starting in December 1945, and the General Agreement on Tariffs and Trade, in the 1950s. However it is interesting to note that special provisions were made for national security. Due to globalization in the 20's and 30's, Britain and France had ceded their watch making to Germany and Switzerland. Later they discovered that the lack of a watch industry was a great handicap in building defense equipment during the war. Both nations determined never to be without a watch industry again and placed embargoes on watch imports after WW II. (Lewis E. Lloyd, Tariffs: The Case For Protection, 1955, p. 137-139). The US is in somewhat the same danger today.
When dealing with protectionism, it is important to first sift through all the facts to see who is benefiting from whom. When George Bush protected the American Steel Industry in 2003, business went to China costing our nation 200,000 American manufacturing jobs.... Yet when one goes shopping for jeans, and sees articles from the Philippines, Malaysia, and made in America all at the same price, it puts a hole in the argument that free trade lowers prices for all Americans. Obviously instead, it increases profits for those who move their business to cheap labor areas off shore, then selling it back to us at the rate we are used to paying... Again that is why one must be leery of free trade pronouncements being made by large multinational corporations. They may benefit someone else, and not America.
Protectionism helps the American worker as Ross Perot adequately explained. The downside is that protectionism hurts the American consumer as Al Gore showed Ross Perot in their 1993 debate over NAFTA on the Larry King show. Al presented Ross with a large picture of Smoot and Hawley shaking hands in a congratulatory ceremony. As with anything tainted with protectionism, we need to weigh the benefits against the risks. Sometimes the risk may be acceptable. But it is unconscionable for us to look at protectionism in a vacuum.... as one affecting just American workers. The proper yardstick to measure protectionism's effectiveness would be to measure its impact upon the total amount of money circulating throughout our system. Will protectionism grow the amount of money... or diminish it. Each case by case analysis needs to take that single measurement into consideration, otherwise we will be making a great mistake, sort of like Smoot and Hawley did during Hoover's administration.
Bottom line of this entire post:
Raising tariffs, like war, is a very unpredictable method of furthering a nation's wealth. Therefore other methods to increase our manufacturing base should be tried first.
Recognizing the severe nature of our economic situation, any policy change if enacted should be given expiration dates. A handout is helpful; continuous welfare is not.
To return American manufacturing jobs back to Americans, the entire process of acquiring raw materials to delivering the finished product, needs to be cheaper here in America, than it would be with foreign workers halfway around the globe. The best avenue for providing that benefit while getting the biggest bang for the buck, is to temporarily change our depreciation laws so that capital purchases can be written off entirely over one year. As opposed to the much talked about stimulus package amounting to no more than a national welfare check; this little change would have a lasting economic effect with less long term cost than a corporate tax cut. The second short term policy would be to use a budget reducing gasoline tax, to artificially raise fuel rates, making it expensive for foreign manufactures to ship here. Doing so would reward those businesses that built near their markets.
Both stimulate our economy without directly affecting retaliatory measures by our trading partners. Those two, one politically acceptable and one not, should be our first choice of action.
Longer term solutions involve 1) educating most of our youth to be technically savvy, 2) moving forward with a Carbon Tax benefiting technologically advanced societies over cheap working developing nations, and 3) developing cheap energy sources (2.3 cents per kilowatt/hour) for American manufacturing, would all keep American jobs in America...
What we do not want to do... is believe that we are an island and impose trade restrictions that isolate and collapse us further, instead of growing our way out of our current crises. We do want to lower all other costs so manufactures will want to set up shop here, on these shores, despite our higher wage levels......
The easiest way to become rich, is to take other people's money and give none of it back... -- kavips
Leap back two years ago. In a speech given before the New York Bankers Association (NYBA), OTS (Office of Thrift Supervision) Director John Reich expressed concerns about weakening credit quality at some financial institutions. Specifically, he identified inadequate loan documentation, misaligned loan pricing relative to credit risks, declining underwriting standards, liberalization of loan terms and an increasing reliance on wholesale funding as areas of concern to OTS. (Article from Mortgage Banking: May 1, 2006.)
It appears that banks have (two years too late) finally taken up his advice. Now that our economy is collapsing and the Federal Reserve is trying every trick it can think up to loosen credit, the amount of loans going out into the commercial market, can be best described in three words: shrink, shrank, shrunk.
As the new owner of $172.5 billion of preferred shares and warrants in 208 U.S. financial institutions, the Treasury Department hasn’t succeeded in thawing frozen credit markets, leaving taxpayers propping up an industry that won’t lend to them.
More than 8.5 trillion has been pledged by the Federal Reserve and U. S. Treasury to back up financial institutions. Instead of making it easier to obtain a loan, getting approval has become more difficult. Fed reported that about 85 percent of U.S. banks said they had tightened standards on commercial and industrial loans to companies with more than $50 million in annual sales, up from 60 percent in July. Ninety-five percent said they increased the cost of those loans. About 70 percent said they made it more difficult to obtain prime mortgages, and almost 65 percent said they did the same for consumer loans.
Not the best statistics to get the economy going again..
While mortgage rates have declined, they haven’t fallen as fast as bank borrowing rates, meaning financial institutions are demanding more profit for every dollar they lend.
Average rates on 30-year residential mortgages fell to 5.14 percent last month, according to data compiled by McLean, Virginia-based Freddie Mac. That’s down from 6.67 percent in June 2007, before the worst turmoil in the housing market. At the same time, the spread of mortgage rates over the 10-year Treasury bond yield rose to 2.958 percentage points from 1.567 or soared inexplicably 88.7%!
With the exception of GMAC, which immediately began offering loans to GM customers with lower credit scores in order to halt the decline in auto sales, most financial institutions that received TARP funds have been reluctant to lend.
If they can't make loans, many banks may hold on to the government capital until stability returns — or use the money to finance takeovers of weaker rivals. Pittsburgh-based PNC Financial Services Group Inc. did that last month when it acquired Cleveland-based National City Corp. — hours after receiving approval for $7.7 billion from the government.
But had they opened the gates holding back credit, last week's evidence shows what might have been the economic outcome of doing so.....
Mid-Michigan General Motors dealers say the loosening of credit requirements by GMAC Financial Services has prompted an increase in traffic to their showrooms. CNN reports that some dealers reported that 40% of their sales for the month came in the last two days. It was on Dec. 29, that the U.S. Treasury Department gave GMAC $5 billion from its $700 billion Troubled Asset Relief Program, and agreed to lend GM up to $1 billion to support GMAC.
"I've got a showroom full of people," Jim Messick, general manager of Graff Chevrolet of Mt. Pleasant, Michigan, said earlier this week. "It's really helped." "It's beyond hopeful. We have already seen an increase in sales by 20 percent. It's almost equal to what we were down," Machunsky said of his sales in New Hampshire.
With the economy slowing, banks are seeing a big decline in the number of people seeking loans because nervous consumers and small businesses are scaling back their borrowing. In fiscal 2008, the number of small business loans issued by banks plunged 30 percent compared with the previous year, according to the U.S. Small Business Administration. Over the same period, the dollar value of those loans fell from $20.6 billion to $17.96 billion, a 13 percent drop.
The pullback is partly a result of tighter credit availability among lenders and declining creditworthiness among borrowers. But it also reflects a big drop in consumer spending that is forcing small businesses across the country to put off expansion plans and cancel orders for new equipment.
The reluctance to take on loans boils down to fear.
The Treasury's goal is to revive lending — and thereby stem the credit crisis — by freeing up potentially massive amounts of loans. For every dollar a bank keeps as capital, it can lend out as much as $10, which means the $250 billion injection could in theory result in $2.5 trillion in available loans.
But banking experts say lending such a vast amount would be almost impossible given the economic downturn.
If small businesses see that the bailout is starting to take hold and confidence is returning, they will be more likely to seek loans, helping kick-start the economy's recovery, according to experts.
One example of a business owner looking for signs that it's safe to borrow again is James Duran, CEO of a Silicon Valley staffing company that does business with big tech companies like Google Inc. and Yahoo! Inc.
Last year, he had as many as 200 employees. Today, he's got just 15 — cutbacks that mirror job losses across his industry.
He said he has a $1 million line of credit to help build back his company but that he would be "crazy to use it now."
"Once I see this cloud of uncertainty lift and companies go back into hiring mode, I'll start using that money," he said. "But we're not even close to that."
What we are seeing is a circle of borrowers and lenders each depending upon the other to make the first move.. Banks are depending upon the economy to signal it's safe to lend again, and customers who seek those loans, are depending upon the economy to signal that it is safe to again apply for a loan. Neither one is moving until they see a change in the economy. It's the economy... stupid... all over again. And it goes further back than that: FDR said in speaking of the 1933 crises.... we have nothing to fear, but fear itself.
Since the practice of calling in loans greatly precipitated the Great Depression, a review of 1930's history is appropriate today in anticipation of what can again become our fate if we make the same mistakes, and follow the same choices.
When the stock market fell in 1929, brokers called in their loans, leveraged 10 to 1, which of course could not be paid back. Banks began to fail as debtors defaulted on debt and depositors attempted to withdraw their deposits en masse, triggering multiple bank runs. Government guarantees and Federal Reserve banking regulations to prevent such panics were ineffective or simply not used. Bank failures led to the loss of billions of dollars in assets. Outstanding debts became heavier to bear, because prices and incomes fell by 20–50% while the debts remained at the same dollar amount. After the panic of 1929, and during the first 10 months of 1930, 744 US banks failed. (In all, 9,000 banks failed during the 1930s). By April 1933, around $7 billion in deposits had been frozen in failed banks or those left unlicensed after the March Bank Holiday.
Bank failures snowballed as "desperate" bankers called in loans which the borrowers did not have time or money to repay. With future profits looking dismally poor, capital investment and construction slowed or completely ceased. In the face of bad loans and worsening future prospects, the surviving banks became even more conservative in their lending. Banks built up their capital reserves by making fewer loans, which exponentially intensified deflationary pressures. A vicious cycle developed; the downward spiral accelerated.
The liquidation of debt could not keep up with the fall of prices which it caused. The mass effect of the stampede to liquidate, increased the value of each dollar owed relative to the value of declining asset holdings. The very effort of individuals to lessen their burden of their percentage of debt, effectively increased it. Paradoxically, the more the debtors paid, the more they owed. This self-aggravating process turned a 1930 recession into a 1933 great depression.
Today, in order to open access to short term credit, our real focus must be focused on the psychology of how to alleviate that fear of losing one's money... Something that is simply said......but is hard to do.
Conclusion:
The economy must be fixed, or more appropriately..must be perceived to be fixed, before the buyout strategy to loosen credit within the markets can begin to take effect. As we saw with GMAC's bold move, loosening credit coupled with great deals, does move out old inventory. But as we still see today, the problem is in getting banks to do what GMAC just did. After all, it goes directly against the advice given to them two years ago.....
If we could owe this debt to ourselves instead of others, we'd be rich from all the compounded interest we'd be paying back... -- kavips
There is nothing that a strong dose of morphine can't cure.... at least to the person receiving the injection ..... Damn... No legs.... Ahhh... no problem.....
Obviously the long term plan is the one we need to tackle first, so short term fixes like the one above, are seen as steps in the right direction, and not random neural contractions found during a soon-to-be-eaten chicken's last minute.
4) We need a better trade balance with our trading partners.
5) We will need more cash in order to do all of the above.
We have been lulled into believing that we can spend money that we do not have... Hell we've been doing it for 8 years now... We did it for twelve years before that, starting with Ronald Reagan. And it was working fine up until late September.... Why can't we keep on the same path?
As we have now found out, there is a small problem with taking out loans.... It's called paying them back. To pay back a loan, some of the money that you are currently making needs to go back to those who invested in you at the beginning. Wait you say... why can't we get more people to invest in us, and use that money to pay off those who invested in us earlier?
It's been tried. And someone Madoff (made off) with a lot of other people's money by doing just that. But eventually somewhere along the line, one cannot find enough new people to pay off the old, and crash, the system collapses.. Sort of like our Social Security system today ....
So if we have a loan, we have to pay it back?
Yes, that seems to work best. Although often loans can be forgiven after it becomes clear that they will never be repaid, and that further attempts to repay will collapse the entire pyramid where everyone loses everything... In those cases, sharing the risk by writing off some of the debts, allows one to begin making money again at some point in the future.....
But choosing to default, or not paying off the loans, also makes it impossible to get loan money later when you really need it.
So how much do we owe?
That depends on how you want to count it.. When you get a loan, there is a price tag attached that is called interest. One pays back the loan plus the interest to the party that fronted the money. After all, that is why people lend money in the first place... to make more of it... So if you bought a loan for $100,000 dollars, you could pay $100,000 the next day and be done.. That is one way of counting how much you owe. But, over time, that house you are buying is going to cost you 2.15 times its amount, because of compounded interest. So saying that you owe $215,000 is also correct....
The current U.S. obligations as of September 30th..( before any of the bailouts were passed by Congress) stood at 56 Trillion dollars. Every man, women, and child now owes $184,000 dollars. If we pay that back over 10 years, that is $18,400 per year of our income going just to the Federal government. Which means that if your family is struggling on $60,000 a year right now, that you had better start planning on how you can survive on $41,600 over the next ten years.
It may not be as bad as it seems. If free health-care becomes a reality, a yearly out of pocket savings of $7800 is a step in the right direction. Now we have just $10,600 to make up.... And if we cancel further investments into our 401 K for ten years, depending on how much you put in yearly, that accounts for somewhere between another $2000 to $10,000 dollars of which you will soon be out of pocket.. One had better hope that Social Security is still there for you when you retire.....
This is not something we have options on. This is a reality that must happen. Of course we can choose to pay it out over a longer time frame and survive with less money leaving our household per year, but over the span of a long time, we will ultimately pay a lot more... It seems better to knock out the debt, learn to live within our means, and once that debt is paid, prosper again after hopefully having learned our lesson over not paying as you go.....
That means that any new money pouring in from the "tax to the max", must all be designated toward paying down the debt, and not be split off to other much needed projects. That is a hard choice to say no to... but once all debt is gone, less money will be required to be collected to fund those projects on a pay as you go basis. Our tax burden will be much less, giving us more money to spend, yet we will have ample money to fund the projects being built. The economy will grow in that scenario.
Of course this $184,000 is a shock figure designed to wake America up with a dose of reality. A bulk of the repayment will be paid back in the form of corporate taxes... starting as high as 50% and climbing perhaps to 90%. But the American consumer eventually also pays for those in the higher cost of each item he buys, since that payment will be embedded in the price he pays at the cash register.
The corporate rates mentioned above, were the same levels applied to corporate incomes after WWII, which continued and were not relaxed until under John F Kennedy's administration. Over this time frame, corporations will have to settle for just being in business. After all,... that is what most small businesses do; they are grateful each day they open their doors. There is going to be a new reality that permeates the American corporate business world.
The essence of our nation's problem is that we have lived off a credit card; one that will be paid by our children and grandchildren. And it has not just been our government that has done so.. Private debt, corporate debt, as well as government debt have all elevated our spending beyond where it should naturally be. This has been going on for so long that most investors thought that this debt/GDP ratio could continue rising indefinitely without ever overwhelming the economy and corporate earnings. In fact, the way it kept growing, we also started wondering if this could also go on forever. The total debt in round numbers is almost $52 trillion. This was not much changed this year due to the credit freeze, but rose $4.3 trillion in 2007, which was over 5 times the rise in GDP. The composition of the debt is $25 trillion in Corporate debt-both financial and non financial, $14 trillion in Household debt, and $13 trillion of Government debt-Federal and State & Local) and the GDP is $14.4 trillion. These debt composition numbers are rough estimates but all would agree that we currently owe 3.6 times our entire GDP....
This debt cycle really started in the early 1980's when the U.S. savings rate peaked at over 10% and continued downward until this year when it troughed at a negative savings rate. People once again spent everything they made and then some last year, pushing the U.S. personal savings rate to the lowest level since the Great Depression more than seven decades ago.
As anyone who has been on the wrong side of debt can tell you, once the savings rate goes negative, it becomes a lot harder on the next round to change it. For then we have to pay charges on that amount which we spent beyond our means... So not only do we have to cut back to live within our means, but we need to further cut back in order to live within our means AND pay back those pesky charges.....
Under compounded interest any wait to pay back the cost is expensive; sooner is better than later. If we borrow a dollar and are charged with 3% interest, we pay back that dollar and the three cents of interest we owe... If we wait one year and are charged 3% on the dollar-and-three-cents we owed but did not pay back, we now owe a dollar and six cents. That may not sound like much, but when it comes to big numbers, that 3% on our national debt of 10.6 Trillion, becomes $318 billion dollars. One chuckles when Republicans find themselves up in arms over bailouts costing these amounts, but yet when the same figure is just interest, it is just considered the price we pay for living "la-de-da" beyond our means... At 3%, want to know how much interest we will pay on just that 3% interest itself, if we skip a year? $9.8 billion just to pay the interest, on the interest, that we are too broke to pay... "Deficits don't matter" said Dick Cheney. When no one has money... where do we find that additional $9.8 billion to cough up?
But debt can be eradicated. Here is proof from a fellow posting his strategy.. It is a personal story to be sure, but it shows the proper mental attitude that must be created if one is about to embark on changing his lifestyle for the better....
Just the numbers of consumer debt are startling.... U.S. Household debt soared from 4.2 Trillion in 1990 (the first Bush president) to $13 trillion in 2008. During this period, the average American household dramatically increased its home mortgage debt, from almost $2.5 trillion in 1990 to nearly $10.5 trillion today. Similarly, consumer “revolving” or credit card debt quadrupled from $239 billion (B) to about $950B today. Moreover, the growth of U.S. credit card debt is substantially under-reported by the official U.S. Federal Reserve statistics, due to the tremendous volume of mortgage refinancings that were transacted between 2001 and 2005. At least $350B in consumer credit card debt was paid off through mortgage refinancings, home equity loans, and cash proceeds from the sale of real estate over this five- year period. This is consistent with the findings of Alan Greenspan and James Kennedy, who report that equity extraction was used to repay an average of about $50 billion of mortgage consumer debt between 1991 to 2005, about 3% of the outstanding balance of that debt at the beginning of the year.” Significantly, it averaged only $25.2B per year prior to 2001 (link to Manning's work)
So how do we responsibly pay down our national consumer debt? Judging from the data provided above, it cannot be done. But a reasonable approach would be to isolate consumer debt into three categories: a) Chapter 7 Bankruptcy; b) substantial debt relief in the range of 60 to 80 percent; and c) repayment of the full balance over a 5 year credit management plan. The first category (a) is for those right on the edge; we know bankruptcy is inevitable, so we get it done and over so that they can start their ten years of rebuilding their credit as soon as possible. The second category (b), is a win win for both lenders and debtors. Just enough of their debt is forgiven allowing them to be debt free in 3 years.. The third category (c) is solvent enough to pay all their debts over a 5 year period on a managed plan. As is done with any bankruptcy, applicants for these programs are mean tested to determine into which category they fall ... We can dream that all debts may someday be repaid. That is unrealistic. A practical approach moves forward, determining which debts are solvent and which are not, expeditiously processing those that are not, and in just a short time, all debt is secured and we know what our economy has to work with. No more surprises.
You can determine how your family finances can be resolved by using this calculator provided by the same Manning mentioned above.. I recommend that if you have unsecured debt, you play around with the credit card repayment section, seeing the differences that occur if you contributed your coffee fund, you movie allowance, your HBO bill towards paying down your credit card debt. Those little totals often taken for granted, can make years of a difference in pulling yourself out of debt.
We often hear pontificating towards our governments, local, state, and federal, end with the admonishment that since American consumers live within their means.... why can't the federal government do so as well...
That is not exactly true. We do a lousy job compared to our parents.
They and their parents bought savings bonds... Which brings us back full circle to our best idea of paying down our national debt... What if a percentage of everyone's pay check went toward buying themselves savings bonds. Unlike a tax, at the end of maturation, they get the entire bond returned to them with nominal interest tacked on.
Kind of like our parents and grandparents implemented for us growing up. A forced savings plan... "Oh but I want to spend it...." "No, we're putting it in savings"... With this plan, like a tax, the government has access to increased funds, but unlike a tax, it pays us back. This has three things going for it.
One it helps us save. The American saving's rate was negative last year. That means individuals spent more than they had... Obviously when the time comes to pay it back, it will not be good for the economy.
Two it provides a intermediate source of funding for our government. Instead of cutting taxes, this plan augments taxes... Since the money must be paid back upon maturation, the government needs to get a rate of return higher than what it is paying back..
Three. Using this money to decrease the Federal deficit, is a win win for all. Essentially we are using this program to buy up our own stock. It will be us who have control over our nation's destiny, and not.... it's foreign creditors.... Applying the entire amount bought in this fashion, to paying down our National Debt, will give us lower taxes in the future. The legislation initiating this program could earmark all revenue from these mandatory bought savings bonds, go towards decreasing our National Debt.
It will take great leadership to change our behavior. The bully pulpit is needed now more than ever. Since the 1980's, we have funded our economy by borrowing. Anyone can be given an unlimited credit card and then tell us he is living well. For a long time this nation has placed the acquisition of corporate profits as the prime gauge rating the welfare of our nation. Now, with acknowledgment that it will take 4 years of GDP to pay off all debt, private, corporate, and governmental, we understand our predicament.
Simply put: to survive, we need to acquire more money than we spend and use that extra amount to buy down debt. Once our debt is down, we can use that extra amount to spend again, exploding our economy through the roof of expectations.
My bills are too high to expect me to help out the economy.....-- kavips
One Trillion shy of all domestic Household debt (14T) , is the debt imposed upon us by "the borrowing of our governments"... local, state, and Federal (13T). The majority (10.4T) is our Federal debt. It should come as no surprise that tackling this task should be our first priority to insure that any short term economic gains we create, are not wiped out months or years later.
We were on a successful track to achieve this goal just 8 years ago... Budget surpluses were projected far into the future, and before our eyes, the whittling down of our national debt actually happened . Today, Generation X'rs and Y'rs simply accept that as fact, that balancing the budget is possible. Very few recognize how much of a miraculous achievement that thing is: a budget surplus... For until Clinton-Gore arrived, no one ever expected our national debt to decrease. But decrease it did and not only did it actually drop within our lifetimes, but a credible path was tracked showing it decreasing year by year to negligible amounts. And then ... with one election... things drastically changed. We stopped our Treasury from taking in enough money to cover its known expenses and instead, borrowed the amount to fund what was necessary.
In eight years we went from a projected $5 trillion dollar surplus to an actual $10.4 trillion dollar deficit; a flip flop of $15 trillion dollars! Political afficiendos will be quick to blame Republican philosophy and their elected president: George W. Bush. Unfortunately they are way off the mark. (I say unfortunately for if one party and one president were truly the problem.. the fix would be much easier to amend...)
The problem is a systemic one. The entire financing system of the Federal government is now broken; almost to a point where returning to the glory days of before 2000, is barely considered a laughable alternative. The problem can be best ascribed to a head on collision between a poorly timed demographic shift, and unreal expectations. Put simply in one word, entitlements; put in four words, Social Security, Medicaid, Medicare.
Here's how paying off our nation's trillion dollar debt benefits us.
Courtesy of Federal Budget 2009 (Right click for full image)
Looking at the image and being asked what can be cut under current law, one sees that only two areas of the above pie chart cover discretionary spending. The other four cover mandatory, non-discretionary items. That means that they get paid, ... irregardless. We have no choice but to pay them fully. We have to pay interest. We have to pay Social Security. We have to pay Medicare and Medicaid, as well as all other mandatory payments such as Treasury obligations.
The only two areas where we can slice, dice, and cut back on expenses, are between that of national defense, and everything else we think of as being "our government"; both together amount to a paltry 38% our our entire expenditures. 62% of our Budget is locked down, and commitments have already been determined where it will be spent.... long before the fiscal year even begins.
So one sees that if we were to pay down the National debt, we free up the interest payments ( 9% of our current budget) which can then be applied to other things we might need ten years from now.
Obviously our entitlement programs will have to be changed. One can see that ridding ourselves of Medicare and Medicaid as a governmental expense would go a long way to reducing our deficit, and ultimately be a big push bringing our interest payment closer to zero.... But doing so... brings up the ugly social issue of what to do with those Americans lacking health care....
Contrary to popular belief getting rid of these programs is not completely impossible. Except for the time-frame covering the past 40 years, mankind has survived OK without Medicare and Medicaid. Rome lasted a thousand years without it. We all know that if we suddenly became faced with an all-out-war against some type of alien invader (Independence Day),what money was currently designated as a mandatory expense to cover health costs, would instantly be moved to supplement our planet's defense with nary a whimper. Our sick would make due the best they could... perhaps even do better than they do now... (at least for those 2 million Americans a year who pick up a nosocomial infection!)
The writing is on the wall. One entitlement will have to fall in order to save this country. As America's retirees get older, the medicare problem is one costly extravagance that must be looked at closely to determine whether it helps or hurts our nations viability.
When compounded with Social Security's insolvency, the Medicare situation takes on an additional albatross around its neck. For as one thinks about it, we are using federal funds to extend the lives of those who are receiving Social Security. Using all and any expense available to keep someone resuscitated long enough to earn one more Social Security check, does not make practical or financial sense. We must rethink our commitment on how we will provide long term health care, based on today's prices... not those prices existing back when the Great Society was envisioned..... the 1960s.
Ultimately for governmental medical assistance to survive, we will have to suck the profits out of health care. There will be a few who protest. But if Medicare were suddenly to cease to exist, and health care became a cash only commodity, somehow we would survive. Who knows? When faced with no free blood pressure medicine, we might try other methods to keep alive... such as eating right and exercise.
The amount of people dying will never change. Everyone born will die at some point. All we are doing, is removing the unlimited amount of taxpayer money used to support the unreasonable assertion,that we have the right to use lots of other people's money to live as long as we selfishly can.
Think about this. Very few of us would purposefully bankrupt our own flesh and blood children by forcing them to pay out of pocket for our over-the-hill medical needs... With Medicare being fully funded by taxpayers..... it is doing just that...
Of course there is another method we can use to fund our budget and keep Medicaid and Medicare: bring in double the revenue...
But, because of the demographics of our aging population and the sparsity of those working young who are paying for the old people's expenses, keeping this cancerous expense on-board, and paying for it by saddling those still working with double taxes, is not a viable option.... One could argue that it is morally wrong. It would be saying to our children that "yes, we had the American Dream freely given to us by our parents; now you will have to work much harder, and earn even less, just to continue that dream for us."
The writing is on the wall... Sometime, somewhere in our future, it will have to go... Not disappear, mind you, but in its form now, funded as it is currently... it cannot last... The pie chart tells all. Tweaking 3 or 4 percent in any one category makes no dent upon our unfunded problem.. We must begin preparing ourselves for this uncompromising reality; one entitlement will have to go. Looking above we see the absence of Medicare and Medicaid in the Federal Budget, is more plausible than the loss of any other category.
If we were to wean ourselves away from that entitlement, and apply that amount in bulk towards our national debt as a payment of one half of one trillion per year, within 20 years.... our debt will be gone.
For when it comes down to discretionary spending... we are as low... as we can go... The cut has to come from Medicare/ Medicaid. What replaces it is a whole different discussion.....
So how high do taxes need to rise, (using today's figures without cutting out one entitlement), if we truly wish to decrease our national debt? Since the economy grew significantly during the Clinton years when all taxes were higher, those rates we can be assured do not stifle economic growth. As a first step, that would be the smartest move; let the Bush tax cuts expire. ...To those who argue that increased taxes constrain our economy, try and get a solid answer from them as to why the economy grew like magic when they were previously in place.
Since it has already once been done, it should not be hard to do it again. Right? Need more detail?
Let's look at the twentieth century as a whole.. This chart simply shows the highest marginal tax rate per year. It ranges from 7% in 1913 up to 94% in 1944-45. Graphically displayed it looks like this....
Graph Courtesy of Truth and Politics.org
Although the graph stops at 2003, this evidence shows the ending level extends at 35% through to 2008.
If one couples one's knowledge of history with numbers portrayed upon the graph, a correlating factor of 40% seems to be the ideal marginal tax rate.. When rates dip below that amount....they may last for a few years at that level, then they soar sky high for many years thereafter... It appears that languishing below 40% puts too much stress on the private sector. Something goes wrong, it buckles, and great governmental expense is taken to bring it back under control.
But if one uses the same evidence portrayed on the graph, and this time couples it with one's knowledge of economics, they notice that lower rates produced boom economies, and the higher rates stifled economic growth.
Recent knowledge ( ie. today's events) coming off of the experimenting and tinkering between 40 and 35 percent, leads one to believe that 35% is too low to sustain the economic viability of this country. As a nation we have socialized ourselves a bit too far to survive upon those lower rates.... 40% seems to be the optimum low that we can go....
Unfortunately because we played around with cutting underneath that magic number, we will be paying steep rates throughout the near future, very much like those which occurred between 1933 through 1963. Those who lived their full lives listening to Republican partisans constantly complaining about today's high taxes... well, thanks to them (Republican partisans), America's wealthy is about to find out just what "high taxes" really are.... As one can see from the chart, and can estimate from the amounts of the bailouts being currently given out.... the highest marginal tax rates for the wealthy, will climb higher than most of our wealthy has seen in their lifetime...
And because of that increase... our economy will slow.
The beauty within this chart is that it provides to all a sense of where the line needs to be drawn.. When we talk of raising taxes... we are speaking of returning to 40%, a level only 5% different from where we are now... What that means is ... instead of someone making a full billion dollars now, after future taxes are deducted that person would be still sitting on $950,000,000 dollars... Who wants $950,000,000 dollars? I do. I certainly would not fold my business just because I had to give an additional 50 million over to my government, a scare tactic some may make us try to believe. Especially since I already know that our economy functions more consistently with that additional 5% amount financing the support structure on which all businesses depend on.
So how much revenue does that paltry 5% increase raise? Try $390 billion dollars per year, based on current data provided for this year's third quarter.
True, that five percent does suck a little spending out of the economy, but if applied to the deficit, it reduces the amount borrowed which in turn lowers government's cost. Eventually when interest payments reach zero, we can again fund our government on a pay as you go plan, thereby balancing taxes with costs in a fine equilibrium....
So if we hold costs the same. How long and how high do we raise taxes to bring our deficit to nothing in 11 years... 2020. Debt -----Yr Expenses---Yr income----Yearly incremental amount 10.4T--------- 2.7T -------------2.6T ----------------------- 204 B
(The extra 100 Billion comes from above: it's the yearly difference between current expenses and income multiplied by 10 for each year.)
So how much does that cost us? 204 Billion is what percentage of 2.6 Trillion? 7.8%
We need a yearly increase of just 7.8 percent to pull us out of debt in ten years, assuming we continue to spend as much as we do now, and that we continue to receive as much national income as we do now........
That would make the highest marginal rate (35% + 7.8%) equal to 42.8%: just 2.8% higher than it was during the booming Clinton Presidency. Really.... is that not a lot of hardship to undertake?... Especially when one compares it what our predecessors, "the Greatest Generation" had to pay in order to give us the prosperous America which we inherited?......
And if that increase amount is spread across the entire spectrum of our sources of income.
Courtesy Federal Budget 2009 (Right Click for Full Image)
The actual cost to the top ranked taxpayers, could be less.... One would be well advised to realize that the stimulus packages perhaps costing up to 3 Trillion by the time politicians finish robbing our future, will extend these estimates considerably.
But seeing the numbers makes one realize that we are not at the end of financial stability.... The United States has vast resources at its disposal to throw towards the global economic meltdown, slowing and then stopping its progress. We need just a moderate revenue increase to make it happen as well as begin making plans for shedding responsibility for one of our hitherto guaranteed.... Federal entitlements.
The question is what is in it for us... Bottom line... a job.
Although distant and remote, the National Debt plays a huge role in our economy, just as do charges and credit card payments play a similar role in everyone's household finance. Think of all the spending you personally would be free to do, if you owed no one any money and could pocket what you earned.... That same principal holds for our government as well.
Those of us who still have jobs today are worried. Those of us without... are worried even more. Our jobs and long term security, depend upon our Federal Government getting costs in line and living within their means as well.... As with any investment, paying out an additional 7.8 percent is affordable if one gets a payback of a higher return...
Those living in the 90's saw it with their own eyes... Dropping the debt creates long term stability and that.... creates jobs.
Sometimes to see truth, you just have to sweep away the clutter ..... -- kavips
During our previous discussion over the National Debt, it became obvious that our deficit problems stem from these two entitlements: Social Security and Medicare.
Doing away with both will easily bring our national budget into balance, but that act will wreck inconceivable havoc upon the life of every American citizen. Doing just the opposite, offering free unlimited health-care as well as a full blown retirement package to every aging American citizen, unfortunately is no longer affordable when one factors in both demographic and economic factors.
So what do we do?
If one opens one's mind to possibilities, we have five choices. Simply put, they are these.
a) Keep both as they are: b) Keep both with modifications c) Get rid of one; keep the other as is: d) Get rid of one; modify the other: e):Get rid of both:.
These are our alternatives. The purpose of this chapter is to look at each one and decide which appears to be the best solution.....
Our first option is to keep these two entitlements as they are without changes. Let's review the data. In a famous CBS interview, the former head of the Government Accountability Office (GAO), David Walker laid it out clearly. "The cancer", Walker says, "(is the) massive entitlement programs which we can no longer afford, exacerbated by a demographic glitch that began more than 60 years ago, a dramatic spike in the fertility rate called the baby boom."
Let's go straight to the bottom line: how much will it cost us?
The following predictions are based on GAO simulations (2004). If we do nothing about our two entitlements, and if we wish to balance the budget by 2040, we will need to:
1) cut federal spending by 60% (impossible) 2) raise Federal taxes to 2.5 times of today's intake (impossible) 3) achieve sustainable economic growth in double digit range, every year till 2079 (impossible)
This gorilla-in-the-room problem belies the fact that there will soon be more people collecting benefits, than there will be those contributing. Old estimates (2004) predicted that this year (2009) would be the year when that subtle switch would occur. During 2009, our surplus stops growing, and we start down the other side; the pool from which we pay benefits, begins to shrink. By 2017 (the first year of the next presidency) the costs of paying out benefits, rise higher than the actual taxes bringing in the revenue. By 2041, the Social Security trust fund will be completely gone.
After that, if we truly wish to continue these entitlements, we must so on a pay-as-you-go plan, year to year; today's current level of taxes brings in only three fourths (74-78%) of the needed annual revenue...
So we wonder: just how much additional money are we discussing per year? For Social Security ... we are speaking in the realm of Billions....
Currently (2007) Social Security Benefits cost 4.3% of GDP and are expected by 2035 to peak at 6.1% percent of GDP... If the GDP at that point is close to $15 Trillion dollars, our annual benefits (at that future level of 6.1%) level out at $915 Billion dollars, and the shortfall amount, (25% of that), is extra we need to step up and pay beyond what we pay now..... That total is $228 Billion Dollars more each year, which is half the amount of last year's discretionary federal budget! ... Per person, assuming an estimated 330 million national population, each citizen will pay $690 more per year into Social Security which will amount to a charge of $1.89 per person per day. After 2041.....one bread winner in a family of four would need to cough up $2760 extra dollars every year.
That is IF..... nothing is done. Which brings us to the second option.
Keeping both with modifications. The Social Security's own trust report says this:
Social Security could be brought into actuarial balance over the next 75 years in various ways, including an immediate increase of 14 percent in payroll tax revenues (from 12.4 percent to 14.1 percent) or an immediate reduction in benefits of 12 percent or some combination of the two.
It's a small price to pay for solvency. But we must remember that Social Security is the easier of the two entitlements to fix. As David Walker, (former)GAO is quick to point out.., "the Medicare problem is five times greater than the Social Security problem. The problem with Medicare", Walker says, "is people keep living longer, and medical costs keep rising at twice the rate of inflation!" No! That doesn't sound good.
Congress made things worse in Dec. 2003 when they expanded the Medicare program to include prescription drug coverage. "The prescription drug bill was probably the most fiscally irresponsible piece of legislation since the 1960s," Walker argues.
When asked why, Walker says on tape, "Well,.... we promise way more than we can afford to keep. Eight trillion dollars added to what was already a $15 to $20 trillion under-funding. We're not being realistic. We can't afford the promises we've already made, much less to be able (to afford those) piling on top of 'em."
With one stroke of the pen, the federal government increased existing Medicare obligations nearly 40 percent over the next 75 years. Walker says, "We’d have to have eight trillion dollars today invested in treasury rates, to deliver on that promise," Walker explains. When asked how much we actually have, Walker replies, "Zip."
So where's that money going to come from?
It's gonna come from additional taxes, or it's gonna come from restructuring these promises, or it's gonna come from cutting other spending,
As a nation, we have promised unlimited health care to each of our senior citizens who will never see the bill, and our government is borrowing that money (at interest) to pay for that privilege. Obviously this is absolutely unsustainable! More so it is abominably immoral to our children. As a nation we simply cannot keep up.
So what modifications are on the table? Some being mentioned are 1) means-testing supplicants for benefits, 2) increasing payroll taxes, 3) increasing the retirement age, 4) cutting back on benefits, and 5) paying cheaply for preventative health-care so fewer citizens require the more costly operations. But none of these options cover the looming demographic shift of baby boomers who are now beginning to reach retirement. Here is a pictorial representation of the problem....
(Right Click on Image for Full View.)
Means-testing supplicants for benefits, is the second surest method to stretch out our resources so those who solely rely on these two Social Services can still have them available despite their catastrophic cost.
But there are two opposing sides to implementing "means testing". Those with high incomes who paid more of the burden, feel they should at least get something back in return... This group uses social security and medicare at relative high percentage rates. The opposite side argues, that because today's crises is drying up funding, those with high incomes who can otherwise pay out-of-pocket for their expenses, should have their benefits allotted to those who earned less over their lifetimes... That last argument is a fancy way of bluntly saying that "those with money are funding the health care of those without"...
Whereas we balk at the concept of having the rich pay the costs of the poor, the social cost of returning to the alternative, .... say Victorian England's version of dealing with the poor, bothers us as well.. It at least opens our perspective that the option we currently have of keeping both social entitlements solvent (even if it is a bad option), may be cheaper and better than the alternative of eliminating either or both Social Security and Medicare altogether. The ultimate answer lies in this one question that needs to be asked? In the future ... how much of today's corporate or small business profit will need to be siphoned off to cover other unforeseen expenses; expenses that the current entitlements prevent from happening?
If you could imagine this futuristic scene: an unsecured retail store just sitting in the middle of a town that is full of people who had not eaten a full meal in months.... How many dollars, how much additional money would be needed to bolster that store's security, to insure that business was present and ready to do business the following morning? Is the small amount we pay out for entitlements cheaper than the costs we will have to bear for abandoning them?
To find the answer that is required, we need to investigate alternative models to help us determine whether or not, the alternative costs of doing away with our entitlements, would be more, or less costly than keeping Social Security and Medicare as they stand today....
Whereas "means testing" may create a line in the sand and prevent some leakage slipping upward into taking care of the well-to-do, it also may allow a greater problem to become exacerbated. That would be to alienate to our detriment, those few providing the majority of the funding for these two programs in the first place... For they are already paying out far more than they will ever receive... If we push too hard and force them to pay for something they will never use, our American virtue of fairness will one day catch up to this arrangement, and allow them to opt out of the system entirely, because basically, we will all agree it is the fair thing to do. If that event ever happens, our entitlement problem just fell over the canyon wall.
However the surest method of entitlement solvency lies in increasing our payroll taxes. Yes, these are regressive taxes but if we would just be willing to pay 12% to 14% percent more in FICA taxes, which raises their rate from 12.4% to 14.1% percent, it would save social security.. That is an increase of 1.7% per paycheck... At 1.7% percent on an income of $60,000, the average family would receive $1020 less per year in take home pay.... But that extra $1020 would be enough to keep Social Security solvent for years to come...
These are hard facts we deal with. We can write our Congressmen and say "you must protect Social Security".... But when they follow our orders, and our time comes to ante up $1020 that we do not have.... we begin to wonder how on earth we will ever survive on what little we have left....
The ultimate question is: can you afford an additional $1020 each year of less income? That averages out to $19.61 per week, or .49 cents for every hour you work! That is the unmentioned bottom line that is required to keep Social Security solvent for years to come... Whereas some of you may doubt whether you can afford that increase... those of you still wondering how you can survive on $20 less per week, ... must balance that cost against the cost of having no money available to you after you quit working.
Now if that increase is coupled simultaneously with a larger decrease in Health Care costs, then perhaps the 14.1% increase is affordable after all.. This is why all arguments on dealing with entitlements must take place in an open forum. For there are consequences out there that are so remote and yet so overwhelming, that no one person can see all the options while staring at the drawing board... Only with the give and take of offering a plan, and then having it modified under sharp criticism, can we forge from such diverse outtakes as exists across the American spectrum, a solution that is workable over an immense span of time.....
Most likely that increased cost will be split between the business and the employee as is currently done today.. Per person $510 or half of the $1020 will be paid by the employer, with the additional $510 being supplemented by the employee... However we must factor that this too creates a drag upon the economy. Every business must now pay $51,000 over what they currently pay now for every hundred employees on their payroll... A small business with 100 employees and $1 million in sales, loses 5.1% off their margin. If every similar business was losing around 5.1% off their benefit line, it would be hard to convince such a business to re-invest in people in order to get America back to work... Far better instead it would appear for that business to invest in a machine that does the correct job each and every time, and over its work-life costs less than a human being...
However, sobering as this increased cost is, if this moderate increase is dropped into place simultaneously with the exiting of having-to-provide-medical-insurance to each and every one of its employees, this solvency issue could become a big win for business, and the hiring of human beings would be less negative than it was before...
The second option, the one of increasing the retirement age, confronts the Social Security problem in two ways; although it does not completely solve the entitlement problem, it is the best option available to stem some of the ebbing of money away from the trust fund.... Jumping the retirement age upwards by 5 years from 65 to 70, adds 5 additional years of tax money pouring into the system, while also decreasing by 5 years the amount of benefits that are needing to be paid out..... If we garnish 5 years of extra funding and lose up to 5 years of paying out benefits, just moving up the retirement age by 5 years gains 10 years of funding per future retiree.. This is easy to do, and benefits all that do it... Some may protest having to wait longer to retire... It is not so bad if waiting 5 years is framed as helping out one's country.... Sort of like doing one's duty as a citizen.... For those fortunate to have private accounts with anything left since November, the additional 5 years of compounding can make a huge difference in how one passes the time during their retirement.....
All evidence points to a net benefit with no negatives, of raising the retirement age.
Cutting back on benefits, the third option, is the normal way unimaginative managers struggle to control costs. Although some monitoring of the government's money is always required, mandating the spending of every penny and watching every penny being spent, is a costly waste of time. Furthermore, cutting back is the worst option.. for even though it may help balance the budget over the course of one year, in doing so it jeopardizes the balance of all fundamental economic structures that exists today...
Cutting back on our aging population's social security income places tremendous detrimental effects upon our entire economy. Just as taking one's foot off a car's accelerator causes it to slow down, anytime one tinkers with the income flowing into America's citizens by reducing it, they decelerate the economy... With less income suddenly entering the fuel line, people have no choice but to cut back...
Thereby saying "yes" to Social Security cuts, ie. a reduction of benefits per person, does indeed cut down on the amount of Federal money being paid out; it also depresses the economy by that exact same amount which is being removed... In a booming economy, that cost saving device might have a different consequence than if it were to take effect today. Now, at the historic moment when we desperately need Federal money priming economic transactions all across our country, to diminish the pay-out to those receiving Social Security, hurts the very economy from which we need to acquire the additional income required to pay out those benefits in the first place... Instead of helping solvency, we aggravate its spiraling out of control...
Representing 4.3% of our GDP, we do reap benefits from all that Social Security money moving through the grid of our markets. Cutting back Social Security payments impacts a huge economic detriment. This plan should be used when default has become the last and only option.... When one wants to start a car's engine, shutting down or decreasing its fuel supply, is the wrong way to get it started.
Our last option, the one of paying cheaply for preventative health-care so that fewer citizens require the more costly operations, is the true, best scenario, long-term approach to our reducing our nation's future costs... Take just one example: one gastric operation costs as much as 100 colonoscopies. If everyone received a colonoscopy and we had not one gastric operation because of early detection and removal.... consider the savings that would be at our disposal.. If we tackle our top four killers, strokes, heart attacks, breast and prostate cancer with detection and prevention as mandatory practices, then the total payout amount from the Fed to physicians and hospital corporations, could be greatly reduced... Unfortunately there is little data in the United States to verify whether or not this theory has merit upon our human population... But there is large veterinary evidence currently embraced by the United States agribusiness community, that speaks quite well of the cost savings being found through preventative care... Likewise, other countries which decided not to leave something as important as human health care to speculators and money hoarders.... can also provide similar evidence which backs moving health care towards a preventative direction. We can glimpse hope for our own medical future by looking hard at some of their historical statistical evidence....
Lifespans. Obviously as a society we dream of achieving as long as life as possible. It would make sense to find out which form of society has the longest lifespan and then do what they do... As I said, it makes sense.. According to the CIA, the top ten countries ranked by lifespans are as follows...
Macau ..........84.33 years Andorra.........82.67 years Japan............82.07 years Singapore.....81.89 yrs. San Marino...81.88 Hong Kong...81.77 Australia.......81.53 Canada........81.16 France.........80.87 Sweden.......80.74
The United States (78.14 years) is ranked at 46th behind such countries as Bosnia Herzegovina (42), Jordan (39), and Greece (25)... At first glance it appears that living in a small country or municipality can lengthen your lifetime.... Out of the top ten, only five would be considered "real countries". But if one thinks for a moment, the benefit of having a territory consisting of only urban area, makes sense out of these figures. One has only to remember the access one has to medical care in our metropolitan areas versus what one finds across the vast expanse of rural America, where one might live 30 minutes away from emergency medical care often requiring a full hour round trip. If one looks down the CIA's list, rural nations as well as those suffering extreme poverty, tend to have shorter lifespans..
But even so, several of the top ten nations have vast expanses of rural areas. Both Canada and Australian do rather well on the chart of life expectancy... France and Sweden also have large areas unsettled by cities and suburbs, as does parts of Japan.... How do they do so well and what take-away can we pull from those five societies who all seem to have discovered the secret of living well....
If one focuses on diet, perhaps there is some magic in eating sushi, or kangaroo, or berries, or drinking wine, or vodka out of bottles with a blue label...
But if one focuses on their medical care one sees some interesting correlations... Here is a smattering of several of them as correlated by Wikipedia...
A) In the Japanese health care system, healthcare services, including free screening examinations for particular diseases, prenatal care, and infectious disease control, are provided by national and local governments. Payment for personal medical services is offered through a universal health care insurance system that provides relative equality of access, with fees set by a government committee.
B) The Swedish health care system is a socialized, public health care system. It is informally divided into 7 sections: "Close-to-home care" (primary care clinics, maternity care clinics, out-patient psychiatric clinics, etc.), emergency care, elective care, in-patient care, out-patient care, specialist care, and dental care. A person seeking care first contacts a clinic for a doctor's appointment, and may then be referred to a specialist by the clinic physician, who may in turn recommend either in-patient or out-patient treatment, or an elective care option. All emergent cases are treated by an emergency department at a hospital.
C) Health care in Canada is funded and delivered through a publicly-funded health care system, with most services provided by private entities. Health care spending in Canada is projected to reach $160 billion, or 10.6% of GDP, in 2007. This is slightly above the average for OECD countries. In Canada, the various levels of government pay for about 70% of Canadians' health care costs, which is slightly below the OECD average. Under the terms of the Canada Health Act, the publicly-funded insurance plans are required to pay for medically necessary care, but only if it is delivered in hospitals or by physicians. There is considerable variation across the provinces/territories as to the extent to which such costs as outpatient prescription drugs, physical therapy, long-term care, home care, dental care and even ambulance services are covered.
D) Healthcare in France is funded by compulsory national insurance. Social Security in France is calculated as a percentage of income.Doctors and dentists establish private practices. Patients are free to choose which they visit. A patient is expected to pay and claim up to 85% of the cost from the state. France has a high standard of care. The health system was ranked first by the World Health Organization in 1997 and 2000.
E) Health care in Australia is provided by both private and government institutions. Primary health care remains the responsibility of the federal government, elements of which (such as the operation of hospitals) are overseen by individual states. In Australia the current system, known as Medicare, was instituted in 1984. It coexists with a private health system. Medicare is funded partly by a 1.5% income tax levy (with exceptions for low-income earners), but mostly out of general revenue. An additional levy of 1% is imposed on high-income earners without private health insurance. As well as Medicare, there is a separate Pharmaceutical Benefits Scheme that heavily subsidizes prescription medications. In 2005, Australia spent 8.8% of GDP on health care, or US$3,181 per capita. Of that, approximately 67% was government expenditure.
I chose these links because they open up ALL of the questions which we in the US must become familiar before making our "choice of a century". These show some of the benefits as well as the costs coming from national medical plans which are run and which are funded primarily by government taxation.. Bottom line which should not be missed by pawing at the details, is that in each of these nations, people live longer than they do here... For there, ALL have unlimited access to medical care.
Granted, it is incontestable that the citizens of those nations live longer. The real question now lies in how much does it cost them? Surprisingly for most, the United States spends more on health care per capita than any nation in the world. True, because of it our system does have some benefits. Therefore the real question at hand is for us to weigh the loss of those benefits against the gains brought on by increased affordability.
As of 2008, here is our track record: The World Health Organization (WHO), in 2000, ranked the U.S. health care system as the highest in cost, first in responsiveness, 37th in overall performance, and 72nd by overall level of health. Obviously if one thinks hard about it, concepts such as overall performance and overall health, are purely subjective... However, it should not negate the fact that our current for-profit system guarantees our position as number one in responsiveness.. Other countries in the top ten included Japan, Canada, and Sweden, in part because the study noted that those governments had also invested in enough infrastructure to insure that their patient's accessibility to health care was sufficient where needed.. For example, in some countries, health care accessibility includes a vast system of air ambulances....
As for filtering out cost factors, by removing the profit piece of 38% that is tacked onto every medical transaction occurring within the United States, other countries are able to provide services to their constituents for less... One method that is successfully used in other societies to keep their doctors happy and on board, is to link a physician's income to a single fee per patient. Whether one has a cold, or a gastric bypass, the doctor and nurse staff receive the same income per transaction... The fees in most of the nations listed above were set by regional districts, which helped account for those cost differences varying from region to region... Likewise because of those local boards setting fees, some form of petition was allowable for a physician to argue his case among his peers if he felt that the transaction fee for a certain medical practice was set too low...
There are many options out there to minimize costs.. Japan pays a 70-30 split. The government pays 70% and the citizen covers 30%. Sweden's split is 85-15. Canada is 70-30. France is 85-15. Australia is 67 to 33... But translated to US Dollars, the cost of health in each of these countries is still far lower than it is in the United States.. Japan spent $2908 per capita. Sweden pays $3149. Canada ($5170), Australia ($3181), and France ($3374) which are cheap when compared to the United States per capita health cost ($7900). So where does the difference go?
Courtesy of ADECRI (Right Click for Larger Image)
In the words of the National Coalition on Health Care: "Experts agree that our health care system is riddled with inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste and fraud. These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families." Despite arguments to the contrary, when one looks at the magnitude of cost between our private health systems and those of other government-run health systems, the bang for the buck is simply not there. Anyone who argues otherwise should be suspected of trying to protect his lucrative piece in America's health care system. For every piece of evidence we now have, shows our system fails at delivering quality health care at reasonable prices, whereas other systems... do just that...
Cancer rates? How does our nation stack up against others when it comes to surviving cancer?
There is good news there: the national cancer rate has declined.. "“The significant decline in cancer death rates demonstrates important progress in the fight against cancer that has been achieved through effective tobacco control, screening, early detection, and appropriate treatment," said Centers for Disease Control and Prevention (CDC) Director, Julie L. Gerberding, M.D. “As a nation, we must commit to continuing and enhancing these important public health efforts.” Again it was public (not private) health programs, that were responsible for creating this decrease in cancer... However across the board, cancer rates are higher in modern developed countries than in those which are poorly or undeveloped... Not to be shocked, really. Living past the age of 40 opens the door to quite a few strains of cancer that may lie latent but never become diagnosed in an inhabitant from an impoverished country who dies long before reaching that age, thereby improving that nation's cancer rate statistic in a rather sad fashion. So when measuring the incidences of cancer in many varying societies, those countries with better care and diagnosing abilities, tend to have higher rates of cancers... Meaning that if one goes to one's physician long enough, eventually some form of cancer will manifest itself....
Currently the US cancer rate as of 2004 (filed 2008 ) averages out at 970.1 cancers per 100,000 of our population.... But what really matters to us is our ranking in the number of deaths being caused by various cancers; the rationale being that a good health care system would have fewer deaths per segment of their population than one that was not so good... So based again on 2004 data, we see that the United States is ranked as the 9th highest at deaths by cancer with 321.9 per 100,000 people, compared to Australia (10th), France (12th), and Sweden (14th). Canada and Japan do not show upon the chart. Again, as for getting the most of our bang for every buck spent, considering that we are paying the most per capita of anyone for health care, we are not doing very well.
Our health system was touted by insurance companies during our last attempt to establish national health care, as being the best in the world... Unfortunately that was a prideful remark appealing to America's emotions, but had little relevance in fact... It has only been with the soaring of health care costs that corresponded with the time frame of the Bush Administration, coupled with a decrease in hospitalization caused by soaring out-of-pocket costs, that significant data has been made available to America's citizens making it known to them that this is simply not true..
If one take the statistic of "Percentage Of Life Lived in Ill Health > Female (most recent)" by country , one sees the United States is 6th... following Mexico(1), Poland(2), Turkey(3), Slovokia(4), and Hungary(5). Or that the United States ranks 2nd in child maltreatment deaths, or 165th in Tuberculosis treatment success. But when it comes to obesity, we are number one. Those nations with nationalized health care system treating their citizens to longer lifespans are ranked in obesity: Australia (6th), Canada (11th), Sweden (21st), France (23rd), and Japan (28th).
As expected, when it comes to catering to the wealthy, our health care system stands up fairly well. We rank number one in plastic surgery;
So without going too far off topic, one can see that the argument that states our United States health care is the best system in the world, has some reasonable flaws. It may be good for some endowed with lots of wealth, but when it is stacked against other systems and when one looks at statistics to make their comparison, our system does not rank well... A preponderance of evidence leads one to conclude that money can be saved by switching to a different health care system,... a system that is focused on prevention, and not on gouging the poor sucker who just happens to get sick. It is far cheaper to prevent a costly disease, than it is to treat it... In the United States' current system, private health insurers shy away from paying out for preventative health care items, knowing full well that the odds are that another provider will be the one who will reap the benefit of their current patient "who will not get sick"... Why should they whittle down their profit margin to enable another company "not" to have to pay out a benefit? Such is the logic in "for profit" health care.
Is there any other proof on this planet that preventative health care on such a massive scale can drop costs considerably? Absolutely. The graphic below (right click to see full image) shows how us humans have capitalized on prevention when it comes to making or costing us money when raising animals....
Courtesy of Journal of Dairy Research (Right Click for larger image)
That last topic may have gotten us off track. For if you think back we were initially discussing the five options we had to deal with the problem of two entitlements: Social Security and Medicaid/Medicare. So far we have looked at the dismal picture of 1) keeping them as they are... (it doesn't work).. and 2) keeping both with some modifications.... As we looked, we have seen various modifications as methods of salvaging one or both of the programs... But if you have gotten a good grasp of the numbers, no doubt as we extolled through the changes that could help ease the financial situation in which we find ourselves, you gradually got the sinking feeling down in the pit of your stomach that none of those fixes would be enough...
In an all to familiar setting common to many Americans today, our listing of the options above was sort of like those hopeful scenarios and arguments being made just two weeks before one finds they are about to be laid off.. As soon as that event occurs, when they look back... they see that even two weeks ago that it was inevitable; they simply chose to hope at that time for options that were still open, and they still held out something would turn up to save the day... Then, ... came the pink slip. No one getting laid off in today's world was a being who was not needed. There was just no money left to pay them anymore.... Their output was fine; there were no moral, ethical, efficiency standards that caused the job loss... There was just not enough money to pay them.....
Unfortunately, it is the same with our entitlements. We are paying over $500 Billion dollars a year for each.... Their costs grow as Baby Boomers age, and the number of workers paying into their benefit pool shrinks... Just looking at the costs, and the inability of having the money to pay for it in the future, we need to wise up and figure out a plan...
This is the part of the solution that no one talks about... If you listen to David Walker, he makes allusions but never focuses directly on that question which "must not be named." Which of the two programs do we scrap... Medicare/Medicaid? or Social Security? Since I have no qualms, we're going there...
Getting rid of Social Security: Pros and Cons? Most of the literature on Social Security comes from the year 2005, just after Bush's second term began and he began to privatize Social Security.
Perhaps we should review what Social Security is? And how it's been abused?
Here is the argument against Social Security.... "The promise of secure retirements is a "hoax." Taxes paid by workers are "wasted" by the government rather than invested prudently. And "the so-called reserve fund ... is no reserve at all" because it contains nothing but government IOUs." Sound familiar?
If it does you must be at least older than 70. Even then... you would have had to have been just 7 years old when you heard it... It was originally uttered by Alf Landon, who was running as the Republican nominee against Franklin D. Roosevelt's second presidential term...
Social Security is a tax on employees. They pay part and their employer pays part. But it is still considered by all employers as part of an employee's compensation and on every financial statement it is included in a category listed under "labor". The government collects this employee tax and uses it to pay out pensions to those no longer working. Back when Social Security was created there were far more workers working, than retirees who were not... Solvency was not an issue. The government collected what was needed to then pay out....
But in 1982 under Ronald Reagan, Social Security taxes were accelerated to build up future funds in advance to pay for the bubble of baby boomers expected to retire by 2006. The plan authored by Alan Greenspan, sunk accelerated collections of SSA tax into government bonds in the Social Security Trust Fund. Government grew and income taxes went down financed by a long term debt obligation whose repayment horizon lay in the distant future.
Under Clinton, the force feeding of SSA collections into government began to be referred to as the Social Security Surplus. Clinton used it to pay down other national debt, rightly assessing that in order for the debt to the Trust Fund to be repaid, we would need a solvent government. Paying down the extra-Social Security debt and balancing the budget seemed to assure that the government’s indebtedness to the Greenspan plan could be serviced.
Given the apparent surplus created by the SSA tax it became impossible to resist the lowering of other taxes. In 2004 SSA collected $566 billion and paid out $421 billion with the difference of $145 billion going into the Trust Fund, that's 25% of all collected. Of that $145 billion... the Bush administration used all of it for that year's current operation of government. The gamble was done. Today we are faced with figuring out how we can pay back that money, lent to our government by the future retirees of the Social Security Trust Fund. The Republican gamble was devious: they never had any intention of repaying the Social Security trust fund...
Instead of reimbursement, we got a noisy push to privatize Social Security; in other words, remove Social Security from out and beyond the control of the government. By relieving the government from their responsibility of having to pay back the borrowed money from the Boomer's retirement, they could pay off a few benefits to those already in the plan, and quietly shut down it's operation by turning over the trust fund to investment bankers. This would continue to keep income taxes at low levels. We were using an accelerated tax rate on employees to fund a large portion of the government, and by liquidating the trust fund so we never had to pay it back, we could continue keeping wealthy corporate taxes at very low levels...
But as recent events have shown, putting a nation's pension solely in the hands of stock market investors and financiers, IS extremely risky. It is far better to put our trust back into the American people themselves.. So once again we need to decide whether paying BACK all that money we cut in taxes just to keeping Social Security solvent, ... is worthwhile; or whether we should abandon FDR's program as a dream whose monthly payments just rose too high.....
In the short term, abandoning Social Security would save over $500 billion a year. Up until this past year, that was more than our yearly national budget. It's abandonment would quickly bring us back to solvency. Basically it requires that America defaults on a loan it made to itself... which surprisingly is not as bad as it may sound. Really! It is not.
We do it all the time. It is similar to those who borrow hardship loans against their IRA or Keogh plans and never catch up on the chance to pay it back; they just get fewer benefits when it's their time to cross over... Or to those who borrowed low interest loans from their own life insurance policy yet never get a chance to pay it back; they just get fewer benefits when it's their time to cross over..... Or those who borrow loans from their parents and it gets deducted from their portion of the last will and testament; they just get fewer benefits when their parents cross over.....
So as long as there are other venues for covering the nation's elderly, especially those dependent on social security, we could default on that promise made and survive. Like those examples above, we just wind up with a less rosy future than planned... that's all....
So up to this point in time, all the tricks used to balance Social Security were based on moving money from one sector to another. But as the bill comes due, the revelation slowly dawns that the only way to guarantee that Social Security benefits get into the hands of retirees (both now and in the future), is through increased FICA or income taxes. It's the only solution that seems to make sense.
The Social Security Administration has numerous plans to mitigate the transition of the baby boomers into the future when fewer people are working. What they lack is control over the political climate that has trended toward naked politically conservative self interest in the last decade. The fix is to answer the question: Is Social Security worth it? Is it worth the gradual doubling of the FICA tax by 2060 to once again become a pay as you go system?
Is it worth the pain? A great question. Perhaps instead, we should switch now and look at the per-person dollars-and-cents cost of NOT raising the FICA tax and of doing away with Social Security all together... If one has no safety net of Social Security there to catch him upon retirement, he has no choice but to save for himself.. He will be in charge of his own retirement...
So how much does one save? Again based on 2004 figures:
According to the Bureau of Labor and Statistics, the median hourly wage of Americans is $13.01 or $27,039 per year or $2,253 per month. Half the population makes more and half make less. Federal taxes on that amount are $3,698. State taxes would be another $811, not enough to be effectively deductible. $3,698 plus $811 is $4,509. $27,039 minus $4509 equals $22,529. So the median take home pay is about $1,877 a month, excluding FICA. Since inflation will be factored into any savings plan automatically, it is not important to adjust the numbers for inflation. At the end of a savings plan, the amount saved will be nominally higher, but the buying power should be about the same. Say a person is very frugal and spends about $500 an month on rent, $195 on utilities, takes the bus to work for $30, $300 on food, buys clothes at the Goodwill for $15, has employer paid health insurance and no dependents, the person might be able to save $877 a month. After 40 years at 3% interest after taxes, the median earner could have $812,000. If a person manages to save $812,000 during his lifetime and retires, he could withdraw about $3,423 a month, at current interest rates, for 30 years before all the money was gone. Good for him.
But.... what if everyone else is doing exactly the same as is our little enterpriser?
Personal consumption being nominally two thirds of the economy,... its drop (by half) would shrink the GDP by a third. Savings (being done by everybody) would be so abundant (because no one was spending), that the total lack of demand (for borrowed money), would cause the local interest rates and prices to collapse. And the frugal individual above would probably lose his job and his savings interest would plummet to nothing. Or put another way, if people start being strictly responsible for their own retirement, it will cause as much or more pain to the economy than the raising of the FICA tax. For if you withdraw money out of the consumer part of the economy in the form of personal savings, it will probably have considerably more negative impact on the economy, than the collecting and redirecting money back into the economy through the raising of the FICA tax.
Or put another way, if we personally saved as much as Social Security takes out and received a 3% return on our investment, at retirement we would receive $355 a month. But, wait. Social Security gives us $937 a month. How?
They do it by absorbing the risk of hundreds of millions of people. Most people won’t live 30 years after retirement, but no one person can behave as if he won’t. This is the unsung beauty of Social Security, it is a giant lottery that you win by living longer than anyone else.
I should mention that other "beauty of Social Security": one that is certainly to be appreciated in these times of collapsing financial markets. Social Security is not a personal asset... You could be bankrupt; get completely wiped out: have nothing to your name. Social Security will still be there for you.. Unlike any financial annuity or mutual fund, it cannot be taken. It keeps paying long after your personal finances have evaporated over to negative numbers.
But the prime point in favor of keeping Social Security, is that it plays a big role in our economy. Were it to default suddenly, our economy would be (4.3% of our GDP) poorer... That loss would not hold at 4.3% of GDP. It would erode profits, jobs, and cash flow throughout our nation's commerce. It would be one more tamping of that brake pedal slowing down the nations' economy... Compared to that, the modest increase in FICA taxes (1.2%) even though it takes some money out of the economy today, would when cashed out, create a benefit 3 times its cost (4.3%), whenever it gets used at some point in the future...
Therefore, when seen over the entire length of its program, the removal of Social Security is more expensive than the cost required to save it, by a factor of three to one.
Which brings us to dissolving Medicaid/Medicare.... What costs or savings would that bring?
We begin with this ancient historical quote referencing Newt Gingrich, then speaker of the House:
"The Speaker says, ‘‘We don’t want to get rid of Medicare in round one because that’s not politically smart. We don’t think that’s the right way to go through a transition. But we believe that Medicare is going to wither on the vine,’’ again talking about section 1862 and talking about the Social Security Act, talking about Medicare. That is very debatable on this floor because that is a serious attempt to dismantle Medicare, Madam Speaker...."
Obviously getting rid of Medicare is nothing new.... but equally obvious (as one can glean from this description of just one little cut to North Dakota's senior citizens), is that any tweaking of the Medicare Plan that reduces any tiny fraction of a cost saving benefit, expends just far too much political capital to ever get done.
"To their credit, Sens. Kent Conrad and Byron Dorgan and Rep. Earl Pomeroy have resisted enormous pressure from the administration and have taken leadership roles in Congress to stop these cuts, (which) as planned, (will cause) North Dakota seniors to lose over $1.3 million in essential health benefits this year alone. Their joint letter warns they are "deeply concerned that high-quality skilled nursing care for America's seniors will be threatened - and reductions in spending of this magnitude would severely alter not only the quality of nursing home care, but also access to nursing home care for our nation's seniors." The letter also references AHCA's finding that the Medicare cuts will hurt the state economy and cause North Dakota to lose $2.7 million in total economic benefits and $1.29 million in lost wages."
Do you see the problem? All that was over the impact of just $1.3 million, (million as in "m") dollars of cuts made to just one of fifty states. A paltry $1.3 million dollars... out of that year's medicare budget of $560 Billion (with a "b") dollars, amounting only to a national percentage of 0.000002.3%. As someone once said, if the government gave away free cars, then stopped the program in mid tracks, it would be impossible to argue that free cars were not necessary for the country's survival... Even though we survived for how many years without them?
(Editor's note: a free $20,000 car per household would cost this nation, assuming the Bureau of Census estimate of 113,568 households for 2009, $2.27 Trillion dollars.)
Thus it becomes readily apparent to any savvy politico, that cutting back on entitlements piece by piece, line by line, is an impossibility... Because of that, I am afraid that therefore, it makes more sense to scrap the entire program entirely... (it takes just as much effort as the cutting out of $1.3 million dollars) or ...raise the revenue to continue paying for it ... as it currently is..
If we scrap the entire program, we are saving our government $560 billion a year. But in doing so we are taking the health care industry off of it's $560 Billion dollar life support. Yet while doing that, we are simultaneously saving American taxpayers close to $560 Billion a year in payroll taxes... So if one looks at the entire system and sees it as a giant circle, one can glimpse that there is no net gain or net loss to the system that comes out of eradicating Medicare... All we are doing with the Medicare cut, is to interrupt the shuffling of money away from the economy back to the economy..... bypassing the circuitous route that takes the money away from the employee and hands it over first to the government, and from there through the medical profession, where it is then matriculated down to those making their living from the medical field, who then go out and return it back to the economy...
But this is where details matter. Let's say we stop Medicare immediately... No more taxes. No more reimbursements. Retirees who organized their work lives counting that Medicare would be there for them, do not see the benefit of no longer having Medicare deducted (1.5%) from their pay checks. Yet upon visiting their physician, they are still required to fork over their entire fee with no deductible. Likewise a young 20 year old with no thought of ever going to a physician, would receive his 1.5% weekly tax cut, and never notice its difference... At a wage of $8 dollars an hour, his 30 hour week gives him a tax cut off his $240 weekly gross amount... of three dollars and sixty cents...most of which goes towards the paying of his Verizon bill. No new spending gets created... But to those few still earning $250,000 a year, they in turn get an additional $3750 to play around with (whoopee).... Which gives us...the moral equivalent of having someone who does not need an additional $3750 (whatever) pocketing the difference while someone older dies from being financially cut off from their medication... The impact on who is affected, greatly distorts the circular argument that no ill effects occur.
That is the problem with all previous talk of dissolving Medicare/ Medicaid entitlements.. Discussion gets focused on what is fair, and no one ever gets to discuss what is it that we can afford..
The total amount of money, both public and private, spent on Health Care within these United States is..... $2.26 trillion. That includes a 6.1% jump over last year. Medicare grew 7.2% to $431 billion; Medicaid grew 6.4% to $329 billion; Private spending grew 5.8% to $1.2 Trillion;
Our first step would be to determine that exact line where Health Care becomes "not affordable". Once we determine that line, we chose not go over it.. The year 2000 was a very good economical year... If we choose to use that year as a base, we see we spent 13.7% of our GDP back then on health care... Since that seemed to work ok, and until we have a better target, we will let that be our benchmark percent... That means in 2007, our ideal health-care cap (13.7% of 2007's GDP), should have been at $1.9 Trillion dollars. If so, since we actually spent $2.24 Trillion, we are up $0.34 Trillion dollars over where it should have been, had we kept that line of our budget at target.... So how does one trim $340 Billion Dollars off of our entire nation's medical expenditures...?
To find that out, we need to first take a look at the roots underlying this question: Why does the United States spend more than other developed countries on Health Care? I can think of three possibilities.
One, is that we are sicker than citizens of other nations. Two, considering that as a nation we are rather wealthy, is it that we seek medical attention much more frequently than do other developed nations? And three, is that our prices for the care which we do seek, are higher when compared to those of everyone else?
Obviously we are not sicker. As a nation, we score well on health. If you examine our health by looking at 130 diseases and charting the incidence we have of those among our population, ....we do rather well.
Secondly, we actually seek medical attention far less than our developed world counterparts.. As this chart shows among civilized nations, Americans actually visit their doctor less per capita than citizens of all other such countries, except for Greece and Mexico.....
Therefore our high expenditures must come from the fact that our prices are simply too high... McKinsey analysts estimate that, even accounting for more consumption of health care services due to our higher income, the U.S. would spend half a trillion dollars less than it does currently if its medical care prices were comparable to those in OECD countries. Such a reduction in spending would reduce our overall spending on health care from its current level of 16 percent of GDP to 12 percent of GDP.
There you go. In a nutshell, that seems to be the direction we need to pursue... The 12 percent estimate mentioned above is below our target of 13.7% of our GDP. One might expect that as the cost drops, the quality of American health care would increase due to its being more accessible and more affordable.
So how do we drop costs?
There is only one way. Remove the for-profit component deeply rooted in health care from out of the equation, and treat health-care as we do an obligation similar to how we promote commerce, build new infrastructure, and educate our children. In other words, put it under "the people's" management, meaning government control.
As mentioned above, what works in other nations is the charging of flat fees for each visit. However, to keep physicians from milking the system by returning patients back to their office again and again (the auto repair shop syndrome), an incentive should be placed that tips the will of the physician more towards getting the problem correct on the first try... One suggested method is to reimburse a physician full price for their patient's first visit, 50% for the second, and 0% for each visit thereafter for the same condition.
A second factor that helps suppress medical prices elsewhere, is the stability that comes from having these prices set by regional boards of the physicians themselves. Since it now will cost the same to go to either Doctor A or Doctor B, if Doctor B has a better success rate, his wealth should increase at the expense of Doctor A... Over time more patients will choose him because of his success. They want to get well faster.
A third factor that suppress prices, is the simplification caused by already having prices preset, and payments quickly transpired based on a simple transaction. American physicians' largest cost is in obtaining payment. Large staffs are required to deal with a myriad assortment of insurance coverages, none of which have the same requirements. Often it is the physician's office worker who must themselves become the expert of each individual patient's insurance coverage; they must do so in order to advise the patient of that patient's most cost effective options....
But, ... if a physician sees 100 patients, and gets $75 dollars per visit, his take that day is $7500. Simple. That extra amount previously charged to pay those massive office staffs, which were required to achieve an 80% recovery, is no longer required.
The CDC estimates that 1.1 billion doctor visits were made in the United States last year.. At a per visit charge of $75 dollars, the net cost ( 1.1 billion X $75.00) equals a meager $82.5 Billion dollars.
So if the government were to begin tomorrow to supersede all current private and insurance payments now covering medical costs and simply charged $75 dollars per visit,.... for a cost less than the AIG bailout, all American medical visits could be free of charge to the patient, and cost the government $82.5 Billion dollars.
As a rough guide, the outlays for Medicare in 2007 amounted to $374 billion dollars which were spread among 43 million participants. The per person average spent on Medicare in 2007, then was $8697 dollars. If an average person went to a physician 4 times in one year, as research by the CCD subscribes... The average visit's charge would be $2174 dollars.
Of course we are comparing apples to oranges here, for the total outlays cover everything from prescriptions to dialysis... However one can still compare cheap apples to expensive oranges and make a selective choice.. But the primary reason our health care is a higher percentage of our GDP than any other civilized nation, is because our prices are just simply way too high.....
If on top of everything we pay today,.... we were add an extra payroll deduction for government paid doctors visits, nationally, $82.5 billion dollars divided by the number of American taxpayers (138 million), would cost each American taxpayer $597 dollars on the average each year... Per week, that amounts to $11.48 dollars....
So if we assess every American worker $11.48 a week, every American could then visit a physician, either private or in a hospital room, cost free. This does not aggravate the deficit; it is a pay as you go plan. This illustrates the cost savings available to us if we ditch our current system of for-profit medical care.
I don't know about you, but this saves my household $6500 per year..... How much does it save yours?
As we can see, both entitlements have benefits. Both are extremely costly... But if cutting one entitlement is absolutely necessary, the least damaging one to disappear is that one funding Medicare and Medicaid.. As we previously saw, eliminating Social Security as a government funded pension, impose an additional economic cost that would hit us with another three dollars for every dollar saved...
However eliminating Medicare, or replacing it with a different system of nationalized health care, such as the one above which bypasses the "for-profit" motive behind today's health care industry, can be done cost effectively while at the same time it improves the health care availability for everyone...The idea of replacing Medicare with a form of nationalized health care based on a per person fee scale, would drop our nation's amount spent on Health care to a level below our targeted 13.7% of our GDP.
The facts speak for themselves... Eliminate $374 billion. Replace it with an $82 billion plan under which all basic medical care is covered at no cost to the patient. Preventative health care can and will be available, enabling American citizens to take care of small problems earlier before they become costly boondoggles creating a personal financial crises.... No more will large numbers of American have to forgo getting a filling put in their teeth because of financial hardship, and then have to go deep into debt for that root canal over which they have no other choice but to get done... It could have been prevented for only $11.48 d
Even in the direst storms, it is nice to know the sun is burning 93 million miles away.... -- kavips
One, we have proven beyond a reasonable doubt that privatization of Social Security is a very, very, very, very bad idea. That argument, shown by today’s events, is now not only proven to be inane, but extremely dangerous. As briefly mentioned in the last chapter, Social Security whose purpose is to provide our nation with a safety net should the unthinkable ever happen, is the only plan that survives global economic meltdown. For it is funded (as is a ponzi scheme) by newcomers entering the plan and contributing their money. Privatization plans based on savings and investment can make no such claim of constant solvency. So despite all the problems caused by today's global meltdown, its economic trauma should keep Social Security safe at least through three more generations, ie. those who lived through these trying times and saw Social Security's benefit with their own eyes.... Anyone foolish enough in the near future to bring up Social Security privatization will over that span be met with a chorus of "uhh...Remember 2008".
Two, we are now given unlimited opportunities to fix long term problems that before seemed insurmountable under the old system, because back then….. we had to play by “old rules”. One of those old rules was that Medicare and Medicaid were here to stay. As mentioned in the previous chapter, replacing Medicare/Medicaid with a national insurance reimbursing physician's visits, opens the door to getting one costly entitlement out of way and replacing it with a less costly but far better service.....
Three, today, the collapsed economy because of its severity, forces us into a massive Keynesian economic expansion unrivaled since World War II.. The huge impact of that last expansive episode took us 17 years to get our tax rates back to normal. But because of that wise investment we made back then, the global economy got fixed, which then went on to provide a remarkable 60 years of unparalleled growth and low risk. We can be assured that tax rates will remain extremely high for the next decade in order to pay back the deficit we just recently incurred by cutting them.... And that is a good thing.
Four. It is hard to raise taxes. But that is exactly what is needed. Wealth is good for a society only as long as a portion of it is invested back into to real people, real jobs, and real things. Rewarding the pursuit of "virtual" wealth caused by placing "bets" on rising or falling values may be fun, but leaves no lasting collateral once the fun runs out.... Taxes, on the other hand, serve the noble purpose of recycling money down to where it does its best work... I know, I know; arguments have often been made to the contrary, but today we actually see results; ones we have rendered from following the tax cutter's plans. Unfortunately today's economy and events have proved once and for all, that despite the copious amounts of hot air once spouted aloud about their potential, their "cutting taxes" hypothesis turned out to be nothing more than simple "voodoo" economics after all...
But fortunately because of today's crises, we can again responsibly raise taxes on the wealthy and again fortunately for all (especially the wealthy), return this nation back to real prosperity. (Editors note: For fun, some snark is embedded above but in reality we will be only talking about the increase of a measly 5%).
Likewise for five, today's crises gives us the opportunity to expand government. Some say that is bad... To them, I say "oh, no, that's not what bad is... Bad is when you lose 50% of your retirement in 2 weeks because funding was pulled from the regulatory agencies responsible for monitoring the markets. THAT'S BAD!" There may be a point in the future where government does again get too big and too intrusive; but that time is not now... We are now at the point where if our government can't save us.... there is absolutely no one left who can... Our world is deep in a WWII-mode crises all over again; where only the United States is big enough to mount the adequate defense and then initiate a future counter attack...
Six. Over the past 8 years, it became obvious that our infrastructure most definitely needed reworked. This crises gives us the opportunity to fix it; for now, "progress" will no longer get tied up with cries of "over-spending"... Today's crises put that argument far, far behind us now... We are now more concerned with getting projects moving forward in the least wasteful manner possible. To our chagrin, it would be pure irony if the winning party that won by chastising the past administration for wasting "so much money" on "their pet project", were to open themselves to the same criticism, by recycling "the past administration's argument" in order to justify their "pet project's" waste of money today..... Putting every expense on line will solve it.... Just as we recently discovered our bailout money going towards a corporate jet... having the ability to sniff out corruption in short time, will over the long term, give us the trust we need to get things moving forward quickly... We desperately need that trust in order to be effective; the quickest route to achieve it.... is openness.
Seven, we have historical accounts of what did and didn’t work during a previous Great Depression and we have at our finger tips a vast information system, allowing anyone to bring forward the next “great idea” which just may turn the tide. This epistle is just one example... The tried and true proposals prescribed herein are options that have been researched against the past economic downturn, and have therefore been tested in real time. The novel solutions incorporated herein were built out of questioning why the American economy of the 1930s took so long to recover... and what eventually caused it to grow. These theories may be untested by time, but then... so is every new idea. At their core however, they hopefully have enough historical data to sway even the most skeptical towards implementing their solutions...
The greatest lesson taught by the Great Depression is that "time" is our greatest foe.. Waiting, or allowing things to break up completely before beginning to rebuild from the damaged pieces, means we live squalid lives for decades. Rapid fixes and follow-up solutions will make our lives more enjoyable... We can deal with the long term problems later. But 1933 tells us we needs to jump start it now...
The second lesson that Great Depression teaches us is that change is hard to accept. Even after receiving a mandate for change as did our current leader, FDR still tried to win over the opposition party... It was to no avail.. Eventually he scrapped his attempts at conciliatory moderation as it became obvious that they would oppose whatever he did. Still under the sway of the capitalist's philosophy that had ruled the previous decade, Roosevelt himself was guilty of inching far too slowly towards implementing direct government involvement. It took an upcoming war to finally sway him to embrace the direct injection of government borrowing into the economy on a massive scale. That made the difference.
Recently the U. S. House of Representatives voted 244 to 188 to pass the Economic Stimulus package; and every Republican lined up against it... As an observer of history it is interesting to note that the same Republican party made exactly the same political error during the Roosevelt's first term, virtually guaranteeing a one party system over the next 14 years... It is somewhat sad to see history repeat itself... Republicans, apparently are neither familiar with history, .....nor the internet.
Eight, we have at the top of our government, an extremely gifted group of individuals who are charged with bringing major changes to bear in their respective areas. It would be hard to note a more talented cabinet thorough out our history... ( I can maybe think of perhaps two...) Perhaps we should thank the economic crises that brought this group together.. With current challenges being great, political differences were put aside in the interest of saving our country. Our past president's litmus test was loyalty. This president's.... is expertise. There is great deft of political instincts now surrounding this president, as well as expert wisdom, unparalleled in recent executive branch appointments. It's ability to listen and think, seems to become the defining character trait we will forever associate with this administration..
Nine, we finally have a Congress working in sync with the Executive Branch in order to pass the necessary changes required by today’s events. Thanks to the American people, we were not given a stalemated Congress... Truly, the American people deserve their lion's share of credit for making quick progress possible... It was they who ascertained that the "right president" backed by the "right" party in Congress, would be the only solution to move this nation forward. Yes, they can change their minds in two years.. but for now when timing is at its most critical, our two branches can work in sync as they were designed to by our Constitution. The antique politics of loyal interference, received a big thumbs down by the American people on November 4th, 2008. The voters were wise. Thanks to the American people, we are given a two year window of opportunity to right our ship of state, repair its structural damage, and unfurl its sails once more to set a course for greatness not even fathomed back in the August of last summer.
This economic cloud does indeed have its silver lining.
But.... sometimes.... just the opposite occurs. We see the silver lining.... and forget the dark cloud lurking underneath.... Today there are several proposals working their way through Congress which could cause harm even in their attempts to brighten our financial landscape.
One is a tax check to spend at will, ... most of which will go to pay bills in order to stave off bankruptcy and will do nothing to generate either new manufactured products or new services.
Here it becomes clear just how far removed contributing authors to main stream media publications are from the reality that pervades the livelihood of everyday Americans.
Mr. Lindsey, a former Federal Reserve governor and assistant to President George W. Bush for economic policy, is president and CEO of the Lindsey Group. In a piece written to the Wall Street Journal, he uses this statement to demote the economic stimulus package that was dissed by every House Republican...
For a similar amount of money, the government could essentially cut the payroll tax in half, taking three points off the rate for both the employer and the employee. This would put $1,500 into the pocket of a typical worker!
This bragging about $1500 dollars, shows us they don't grasp the scale that's needed. The manager of my almost empty hair salon does... Her plan is exactly the same as Lindsey's, but adds an extra zero. In her words, "if they would just give us $15,000 dollars to pay our debts, the economy could be rolling in 30 days."
That's the need... Sure, anyone desperate for cash will take one tenth of it, or $1500 dollars, for it will buy some time. It won't create a turnaround in the economy, especially if a person is unemployed and not working. At best, the one tenth we receive will keep us from dropping..."as much.."
(Giving $15,000 to every American household irregardless of income level...at 117 million households: costs twice the Iraq War: $1.75 Trillion.)
But Lindsey's plan is really aimed at providing bonuses to his base (business interests) . For if you read the details under his plan, they too will get $1500 payroll tax deduction for every employee. Have 10 employees? They just got the $15,000 that you said you needed. His plan sucks money out of the economy; it does not put it back.
Remember this: no business has to make money in order to survive. They just have got... "not to lose it". On the other hand, working people DO have to make money in order to survive. For them, just "not-losing-money" is not an option that they have.. Whenever money is given out to any business, the benefit is political, not economic. Our economy is not bettered by corporations or companies making excessive profits. In fact, as one can see from the "Roaring Twenties", the Reagan/Bush1 years and the Bush 2 years, excessive corporate profits are just the symptoms of a swelling bubble that inevitably bursts spectacularly. We've seen it three times; just before each time, corporate profits soared. On the other hand sustained long termed growth as accomplished by plans formulated during the Eisenhower and the Clinton years, forces corporate money thorough fear of higher taxes back into the companies themselves, in order to hide their profits from being taxed. That re-investment created jobs, which then created more demand for goods and services, which created more re-investment, which then created more jobs, and the economic circle begins climbing.
One must remember that there are two kinds of investments. One, is investing in the building of a manufacturing plant or service industry that employees people... The other, is simply making bets that certain stock certificate will rise in value... One adds money to the economy, causing the economy to grow. The other, is "virtual". It does not affect the GDP. It does not create jobs. It has as much effect on the economy as betting on a horse.
For the recovery, if it is to happen, hinges on jobs. We need people who buy things. Giving loans to those at the top, for example a corporation like Macy's in order to keep that brand afloat, will be wasted because those who do the buying, are the ones who still won't have any money... Therefore in principal, if we are going to borrow a full $3000 dollars to give to every employee, in order to increase their spending which we hope will generate growth, it only makes sense to put that full $3000 directly into the hands of that employee. Splitting it 50/50 with a business dilutes its impact by half.
Republicans bet. Therefore their policies always help out those who play and bet with them.. Democrats don't. They work. Therefore their policies always help out those who work hard with them.. That is an over simplification to be sure, but if you are approaching this issue for your first time, this simplification gives you some insight and structure into how each party's actions correspond directly to their supporter's motives.
Now back to having a tax check to spend.... Didn't we just have one of those? Someone once said that insanity is doing the same thing over and over again and each time expecting a different result...
Has anyone ever thought of looking at the economic data from last summer and seeing what it's net effect was then, then modeling it on what impact it might have on today's economic situation?
What, no?
Well, now might be a good time! The stimulus of last summer was largely saved or used to pay down debt, despite George Bush imploring us to spend it as fast as we could. What was an annualized stimulus of 3% of GDP in the second quarter -- which is quite large -- only kept GDP growth positive for 1 quarter.
Considering the past quarter, it's long term effects were nil. Its impact on savings were wiped out. It's impact on debt was inconsequential.
As we see from these results, the Economic Stimulus Plan did little but raise the 2nd Quarter GDP 3%. After the funds were used, the collapse continued. All a stimulus plan does if it is not big enough, is buy three months of time...
We need something much bigger. Here is why. In November the average credit card debt alone amounted to $8320 dollars per household. Dropping a measly $1500 down off your credit card bill, will unfortunately, accomplish as little for the economy as if one dropped zero $0 dollars down. For if you still owe, ... you still owe... Your minimum payment stays the same. The economy does not improve if everyone's average debt drops from $8320 down to $6820. In fact, the economy actually gets hurt by those banks dependent upon the monthly 1.5% interest. Under this scenario, they lose (per household) $22 dollars in interest. Times twelve months this drop in income costs banks $264 dollars and if every household were to apply their stimulus check to their credit card bill, the yearly net loss to the banking industry would amount to 30.9 billion dollars; right at the time we are throwing money at them to keep them solvent.
The concept of stimulating the economy with a tax rebate is principally flawed. It is extremely flawed when consumer confidence is at an all time low such as it is now.... Tax cuts work only if the consumer spends all the extra amount that they receive. If the check just gets signed over to a bank, either in the form of an increased savings account... or of paying down debt,.... it doesn't really help the overall economy.
But one would think so however. After all, with that much money available to be lent out, the supply cost for credit should drop, causing the price of credit to inch downward, thereby increasing the volume of it that is bought and used... The increased borrowing should in principal eventually spur the economy forward....
Aye, now here's the rub.
If everyone is afraid to borrow because of sagging consumer confidence, the money just sits there. It does not get lent and there is no resulting positive impact upon the economy. Businesses have no customers and won't borrow; at this time they certainly do not need to invest in new plants and equipment (which is why they need a tax cut least of all). Likewise a consumer who anticipates losing his livelihood, won't spend and will instead, salt away every bit possible to enable him to survive should that happen.
The only people who will benefit from a tax cut and rebate... are the poor who live day to day.. Give them even a little money; it is spent that day. Unfortunately most of the items that they buy come from China, so the tax cut spurs little domestic manufacturing on these shores.
Realistically there are only two things that actually make the economy grow: population growth and gains in productivity. The former carries a lot of costs; the second is the only real fountain of prosperity. Tax cuts do absolutely nothing to aid our productivity.
On the other hand making a choice to use that money for infrastructure spending, for example rebuilding that I 35 bridge across the Mississippi, does increase efficiency by causing products to move faster between two points and actually does something solid to improve productivity.
For a tax cut to work, it has to spur consumption. The last one didn't and now that consumer and business confidence is even lower, obviously, this upcoming one will not either...
As mentioned earlier, those touting for the passage of a tax cut stimulus check, are not really looking out for the average American's interest. Other nefarious motives must be lurking behind their support for the receipt of a stimulus check in the mail....
For if they were truly concerned about our welfare, instead of wringing their limp hands over tax cuts, they should be working together to come up with something serious that eliminates our debt.
All that I am giving you.... is the gift of time.... -- kavips
What is a silver bullet? According to folklore it is the only thing that brings down a werewolf. Other bullets, indiscriminate of what weaponry they're fired from, are ineffective against that monster who possesses an aura of impenetrable magic. Our collective wisdom of doing what we always done, of trying what has always worked before, bounces off the charging entity... As our ineffectiveness becomes apparent in face of our own annihilation, we find ourselves wishing for any magic item that could neutralize the evil about to devour us; something that could slip past, disable and kill it... To everyone's surprise some unknown face steps out from the soon-to-be-annihilated crowd and fires one single silver bullet into the beast... The day is saved.
Today our global economy needs that silver bullet.
Appropriate measures must be taken to match the challenges set against us.
When one visits a physician to request his help against fighting a severe infection such as strep, staph, or even meningitis, one does not expect their doctor to limit the medicine's dosage to a level that just barely keeps one from dying; one goes to get cured...
Here is an example of a conversation that one hopes never to hear in a hospital room:
Physician: "Your tests show us that your infection has now reached 99% of the lethal level... Untreated you cross the hundredth percentile in three days and die... We have determined that all you need is 2 micrograms of this antibiotic, which should just kill off 1% of the infection and keep it from growing any further.. As it grows a little, we will kill off a little, and thereby keep your total rate of infection from growing further and holding your lethal level at the mark of 99%. We are worried that if your body gets too much of this antibiotic, some of it may be wasted and pass through your system, and entering into your urine stream without being used effectively. Your insurance company, who I remind you is paying for your medicine, insists that we follow this procedure so they do not flush any of their future profits down your plumbing, if I may put it delicately.
Patient: "Nice meeting you. I'll find a new doctor now."
For those not clued in, the Physician represents those Republicans and conservative democrats more focused on waste than on survival. The patient is the global economy.
Survival makes mincemeat out of old priorities. Any paramedic who has pulled out a human being from a burning car, knows full well that there is a time and place to worry about a potential back injury. Burning the victim alive for fear one might damage his spinal cord, is a misappropriation of priorities. Any top gun pilot knows that when entering a dogfight with two boogies on one's tail, it is not the appropriate time to worry about the taxpayer's investment lying in each missile underneath his plane's wings. Exiting the dogfight in order to save millions of dollars is a misappropriation of priorities. Every citizen should know a little about the Heimlich maneuver. When a guest sitting next to you is obviously chocking, and because of your indecision has begun to turn blue,... to not attempt to save him because your inexperienced pressure might break one of his ribs... is a misappropriation of priorities.
The global economy is in a desperate situation.. To not do what is necessary to fix it, because it may cause taxes to rise in our future, is likewise a misappropriation of priorities....
Here is a quick review of those points previously mentioned. 1) We need to appreciate the scale of our sickness: our economy from top to bottom is about stop working. 2) We need to understand that we, the American people as well as those scattered across the planet looking towards us for leadership, don't care how; we just want the infection to go away... 3) If we don't die, once healed we can deal with the costs down the road....
Just heal us.
It is no secret that our crises was aggregated by mortgages. Nor is it a secret that the American large banks are the ones responsible for leveraging-out our global economy on the junk of unpaid mortgages. The collapsing housing market itself is a small bump in the road. But basing our entire economic structure upon the marketability of those collapsed mortgages, with the premise that their value would always rise, is the real scam perpetuated by our domestic securities brokers.
What our securities industry did, today defies belief, logic, and common sense. What they did was market unpayable mortgages as being worth lots of money. Despite it's insanity, those unpayable mortgages were further leveraged at rates 40 to 1 in some cases. As the "one" collapsed; so did the "40" loans which were collateralized with it...
Today people are out of work, because of the securities executive's lapse of judgment. Today our automobile industry is expiring because of what these people did. Today most of Europe's banks have been nationalized, because of what these people did... Tomorrow, our taxes are going to be out the roof.... because of what these people did...
As one looks at the facts of how we got here, one gets angry. As one gets angry one looks towards quick justice to punish those responsible. As one looks towards quick justice, lynchings of greedy financiers begin to look rather promising.... Make them pay with blood....
It wouldn't be the first time. Heaven knows they deserve it.
But we can learn something from those societies who repaid years of poverty with the actual blood of those who financially raped them... Long after the bloodletting was accomplished, they were still in poverty... In fact, leaving no one left who was competent enough to run the finances of their nation, their poverty extended down to absolutely every one living within those borders, for generations after generations...
Recent memory of the Soviet and Chinese blood lettings are examples how such unfettered justice can bring any nation to its economic knees, forcing it into some form of totalitarianism just to maintain any sense of order. North Korea is another example of what happens when a nation is run on anger; as a result, living conditions there are deplorable.
Perhaps a better tack would be to take a conquered population, and use them to help ourselves from out from our quagmire.. To do so would require forgiveness, a trait often associated with America by others living on this planet.... Proof of the effectiveness of forgiveness can today be seen in the rebuilt economies of both Germany and Japan, and to some extent... South Korea. As we saw from our earlier chapter, helping these nations achieve and regain their former prosperity, was one of the best investments and execution of policy ever made by this nation.
Today, we now apply that same tact and wisdom to our own financial internal problem.. It is to our mortgage brokers who we must now turn to bail out our nation; forget our congressional delegations.
It starts with this simple question. What would it take to cause a household to spend again?
Basically it would take a breather... a collective sigh of relief by everyone out there who is behind on their payments. What if ..... they were allowed to skip maybe a payment or two? Just to get some utility bills paid down, some credit card debt back under their cut-off lines, perhaps pay off the new heater, or new stove they were forced to buy. What if..... they were given 3 months with no mortgage payment and could then use that amount to catch up on their personal finances?
Then after three months, with their entire debt portfolio restructured, they could begin resuming payments and finally with sufficient money at their disposal, continue to pay off the entire loan including the added interest which accrued over those three months perhaps tacked on to one last payment at the loan's end....
There is a surreal beauty in this arrangement. The homeowner who has fallen behind three months, can now catch up.. The homeowner who is out of work, can survive hand to mouth for at least three months without worrying about his mortgage. The homeowner who is still current on his payments, can take care of other financial matters, and pay off his unsecured (credit card) debt currently robbing him blind with its high interest rates. Those doing rather well, suddenly have an opportunity equivalent to a tax refund they weren't expecting.. They can spend it pumping much needed money into the economy. Those investors (banks or mortgage brokers) who put up the money, actually turn out to make more off of the original loan than was ever anticipated due to the compounding of the three month's interest,... giving them a much higher margin on their return... The economy of the United States of America, after 90 days, has completely emerged out of its recession.
More details.... please.
The idea was simple. Instead of solving the economic crises by looking at the macro scale, we went to the other end and asked this simple question to a number of families... What do you need to get back on track? Our moment of truth came when one family head said: " Really, as long as my job holds out, all I need is to skip a couple of mortgage payments... After two months, I'll be caught up" Naturally everyone in the room looked at each other and thought, "Damn, that would work for me too." The more we thought about it and explored it from different angles, the better it looked from every perspective.
1) It frees up a large chunk of monthly family income.
2) It does not add to the national deficit.
3) It does not require any new investment.
4) It actually makes more money for those holding on to the titles.
5) It increases spending where we need it... on the household level
6) That spending can begin immediately, in most cases on the first day of each month.
7) It rewards those who have kept up on their payments; and brings back to neutral those who are behind; and freezes foreclosures.
8 ) Once put in place, it immediately reinstates confidence in America's banking system.
This is almost too good to be true. In fact it took a lot of probing to find any negatives that might arise from this action.. The only negative impact which we could discover was that some small mortgage companies rely on monthly payments to meet their payroll.. If that action was counteracted by part of the $900 billion dollar stimulus package, there would be .... no negatives.
So we began to estimate the impact... to see whether its glowing results would hold up....
We should remind ourselves just how important the US economy is to the economic function of the global economy. To put it into perspective, the Federal government guarantees roughly half of the $12 trillion dollar US mortgage market through Fannie and Freddy: roughly $6 trillion. For comparison purposes only, the entire 27 member states of the European Union in 2006 had an annual GDP of slightly more than $12 trillion, so the $6 trillion already guaranteed by the Fed, would be half the GDP of the combined European Union economies, and almost three times the GDP of the Federal Republic of Germany.
So if our nation's total mortgage amount is $12 trillion, the Federal Reserve reports roughly $500 billion per month is listed in this nation as a receivable from real estate.... Percentage wise, that is only 1/4th the consumer debt of this country which is almost $2 trillion dollars per month...
So let's play: "what if" just as an intellectual exercise and see how a one month mortgage holiday pans out....
As of last summer, 11.46% percent of our personal income was tied up feeding our mortgages. If we were to establish a mortgage holiday, what we are discussing is the release of ten percent of our personal income, or roughly half a trillion dollars into the economy each month. There is no way the US Government with its annual intake of $2 trillion, could finance something so massive. But, just by extending everyone's mortgage for just one month, presto, we suddenly have it in our financial system. Since the monthly GDP jumps between four and five trillion, we are speaking of a substantial jolt to our economy, sort of like an economic Heimlich maneuver with no serious side effects. And if we do this three month in a row, .... 1, 2, 3,.... the recession is gone.
How does this affect the mortgage industry? For one, they lose $500 billion each month for three, for a dip of 1.5 trillion... But, under this plan, all we did was just postpone the payments, not...eliminate them... That same 1.5 trillion WILL BE PAID at the end of the loan as well as the interest that accrued upon it.. Which means that an extra payment will probably be added... Instead of catching up on three payments, we will at the end of our loan's original expiration date , probably pay four.. an affordable sacrifice to be sure... At a .5% monthly rate (6% annually), the interest on that 1.5 trillion amounts to $7.5 billion a month.
How does this impact financial brokers?
As we saw above each month the mortgage payments make up one fourth of financial brokers income.. The other three fourths are represented by loans to consumers and business. Therefore this action will put them 25% down for just three months... Too high of a cost, perhaps?
Perhaps not. All across this country most businesses are down between 25% and 40% percent as a result of the derivative scam perpetuated by these financial institutions. And now that we have an option to pull ourselves out of the recession in as little as three months, with a $1.5 trillion boost to our economy that affects no one really and actually makes money over the long term of those loans still outstanding, and we fail to exercise that option because the whiners who brought us here, don't want to suffer their share of the 25% of pain felt across this country? Well? No pity from this quarter.
Today we are misguided in how we are dealing with the toxic mortgage crises... The U.S. Census chart 1152 shows us the problem, its cause and its solution.
Courtesy of US Dept of Census pub.1152 (Right click for full image)
Notice only a $2 billion dollar difference in the household sector between 1990 and 2007....Next look at commercial banks and the jump in their mortgage income from 2002 to 2007.. Notice how the heavily regulated savings institution sector was much more conservative. Next notice the GSE's ( Fannie and Freddie) jumped 186% in one year between 02 and 03 and since have been cutting back.. Notice how the private pools and security issuers have swelled the market.. All the while the household sector remained constant.
This chart shows that the debt held by these pools is not real debt but was arbitrarily bid up by financial institutions over the past four years... In other words if I have $10 dollars of bad debt that I'm stuck with, that at maturation might be worth $20 someday, and I sell it to you for $15 dollars, after which you then bundle ten separate $20 dollars bundles of debt together that will be worth $200 dollars someday, and sell them for $175 to someone who buys ten $200 bundles and conglomerates them into a bundle worth $2000 but sells them for $1850..... well, you get the idea... and the product being sold is worthless by itself. We discover that fact rapidly when we finally reach the point where no one wants it...
So we are now at the point of discussing whether to bail out banks that bought much more then $1850 of that bad debt...and now that they know it is worthless, they want to sell it to the government (future taxpayers) at their costs....$1850.... Originally the number of $10 debts we used should have fetched $1000, but the bidding war has them now priced at $1850... Which means that: the $850 has already been pocketed as profit by those along the process.. So in the large perspective of things financial, all that this bank bailout amounts to is: .... taxpayers borrowing money at interest, to pay for the previous profits made by financiers...
Bottom line... since we need those financiers, we may have no choice... The alternative scenario, that of "The Great(est) Depression", scares us even more..... For when 57.6% percent of home mortgages suddenly go into default, that creates a massive shock for our economic system to handle... No civilization ever studied, has remained intact after suffering an aftershock of that magnitude....
The problem and causes of this crises are now hardwired into those financial institutions. But embedded in this chart is not only the magnitude of the problem.... but a clue towards its solution as well. As one sees in this chart, the outstanding debt up to now has climbed... But getting an extension-of-three-months does nothing to alleviate or increase that amount of outstanding debt... For if no payments are forthcoming, and no additional loans are written across that time frame, the aggregate amount remains constant over the entire span of the three month holiday. The level of outstanding debt is not impacted by the policy of "not-paying-of-one's-mortgage", except of course by the interest that accrues over that additional amount of time... If you owe me $500 dollars and don't make a scheduled payment, you still owe me $500 dollars, plus the interest. At the loan's end, after all the principal is paid off and the additional interest is pocketed by the lender..... There is no overall negative impact.
So let's review. If we give ourselves a mortgage holiday for three months, we put a stimulus amounting to $500 billion dollars per month into the hands of households. In three months, $1.5 trillion will have flowed though the consumer side of our economy. Jobs will need to be quickly added to accommodate that large influx of money into our system... Those earning money with these new jobs will of course be able to buy more, and the economy begins growing... This stimulus begins instantly on the first day of the month.. Everyone's checking account is not deducted by their usual mortgage amount, and that money is instantly available to be spent towards other things.
Why three months? If two are necessary?
Again based on interviews with families, the data was presented in this fashion. During the first month, the most pressing bills, including utilities and collection agencies' unpaid medical and credit card bills would be paid. As per the Bush tax stimulus check, the first month would show little spending. The second month would allow further catching up of other bills, and provide a little excess left over which could then be spent.... The third month, that entire extra amount would be available for spending... By the end of that third month, the economy would be roaring again...
I'm curious as to whether or not you the reader feel the same... In our interviews we came across no one who was not excited by this prospect... Further controlled studies can be done by others who want to compare the enthusiasm between receiving a stimulus check for $500 to that of not paying one's mortgage for three months. Our results showed skepticism towards the tax check, and popular enthusiasm towards skipping one's mortgage....
Would not paying your mortgage for three months get you back on your feet? And would you mind tacking on one more month's payment at the end of your loan, for the privilege of getting your head above the financial flood swirling around us all?
As we looked at all the data and perused all of the options we could anticipate, this model became the closest thing in recent memory to that metaphor commonly used by today's politicians: a win, win, win situation... And it pulls the economy out of its doldrums without that tremendous amount of government borrowing that percentage-wise, rivals our nation's indebtedness during and after WWII.....
The concept is new when used on this scale, but it is really based on ancient tried and true principals found at the heart of our financial markets. It's simple.. If one is bankrupt, it is better to get a little breather, than lose everything... Our global economy is bankrupt. Getting a loan extension on the U. S. Home Mortgage debt for everyone at the same time is unheard of, but can, if chosen, be accomplished rather easily. Extensions are processed daily for individual loans around the country. Even Donald Trump's empire would not be here if this type of extension had been forbidden during the late 80's. We are just extending the loan for three months, and making every financial institution more money by doing so...
So who is out there who might oppose this?
Our best guess? Moralists, idiots, and bigots. The rest will see this opportunity as being beneficial to themselves, to their unemployed neighbors, to the stability of our financial institutions, to the country of the United States of America and eventually to the global economy as this nation pulls its head out from under the cloud of recession far faster than anyone ever imagined was possible...
All by just postponing three months of everyone's mortgage.
How do we do this then?
We came up with three ways, each dominated by a branch of the Federal Government.
Congress could briefly debate and vote overwhelmingly to postpone all single family mortgages for three months. But there may be some bogging down on some of the details.
Or the President could sign an Executive order and issue a directive that his Justice Department would not pursue and would overturn any lower court case punishing non payment of mortgages that occurred during the three month holiday... Effectively no one could collect from an unpaid mortgage, because under US Commerce laws any state ruling contrary against the three month mortgage holiday, could be overturned by Federal Court...
Finally the courts themselves could take it upon themselves, case by case, through either a judge's or juries' decision, that not paying one's mortgage payment during the declared mortgage holiday was not only legal, but one's patriotic duty.
In any of the three scenarios anyone attempting to collect upon a holiday mortgage payment, would be guaranteed to ultimately wind up paying all court costs, making the attempt to collect, pragmatically fruitless.
Secondly, there is precedent for closing financial down financial institutions and stock markets, whenever the market is spiraling out of control... Upon his inauguration, FDR promptly closed all banks until further notice. Surprisingly none of those closed banks lost money while they were closed... Only open banks facing runs, lost money.. Likewise, we remember the closing for several days of the New York Stock Exchange after 9/11.... While the market was closed, no stocks lost value... The same principal holds forth in putting mortgage lenders on holiday... Ultimately, as it did with banks and the markets, it restores confidence in the entire financial sector.
The moratorium placed on three months of home mortgage payments will get the attention of every financial markets. Coupled with other parts of the stimulus package, and with forecasts that in three months the entire American economy will be back to normal, as well as knowledge that financial institutions stand to make an additional month's income on all outstanding mortgages, our lending institutions will appear well positioned to reap any future profits... People will certainly be less skittish about dealing with commercial banks, as the money begins to cycle around and around... once again.... If you had the choice of investing either in the US or China, after that $1.5 trillion began flowing..... the United States, would certainly appear the safer bet.....
One additional benefit from arising from a three month mortgage holiday, is that it forces banks into more lending to both businesses and automobile purchases... If no income is incoming from mortgage payments for three months, then all new loans default to becoming the primary method of generating income. Every bank would be forced to scramble in order to find those new customers who were trustworthy, willing and able to borrow its money.... Those who simply sat on their assets for three months while doing nothing, would fail.
So even though the description itself has become a cliche, if there ever was a "silver bullet" developed that would kill a recession dead, it would be this one... : a three month holiday on paying one's mortgage..... Just try thinking of what you could do if you didn't have three months of mortgage, and you can plainly see... it would boot up the economy without swamping our children with governmental debt.
Compound it! It's in our nation's best interest to do so! -- kavips
Most people do not understand the role credit plays in one's everyday transactions... We use credit when we go out to eat; we order, and at the end hand a plastic card to our server, wait, sign a piece of paper, and move on... We know that we get a bill sometime, and that we have to look at it to make sure someone else is not using our number, and pay it hopefully before the deadline or due date. So when someone talks about credit being used by business we think of the transaction we have just made and say "yeah, I get it: Americans buy with credit cards."
Well, I hate to break it to you but that is not exactly what we mean when we say credit is important in everyday business transactions...
Perhaps one could understand better if we preceded with an example.... Let's take the restaurant we were just eating at and diagnose its transactions to comprehend how the use of credit fuels all our business transactions...
Let's go back to when the restaurant was originally built. Most people think that cash builds restaurants, but really it is banks that pay for the construction...You can see their signs at construction sites... It's simple, really. You, the business person, ask a bank for a start up amount... That amount should cover the cost of the building, start-up and running costs for a minimum of 6 months... Let's say you buy $4 million.. over 5 years at 6%, your monthly payback is $77,331. If you are a really good operator (25% after controllables), you will need sales of $309,324 dollars that month to break even... Your weekly sales must average $77331 dollars to meet that target...
So on a month you take in $310,000 in sales, and you have to cut payroll checks twice, as well as two cuts of invoice checks... But wait, 3/5ths of your sales are in credit cards. You will receive that reimbursement in a little over three months.. Currently you have only $124,000 in your bank account and all of that is needed to pay the 75% ($231,993) of your sales that is going to expenses....... You are short. The cash on hand just barely covers payroll (30% of 310,000 = $93,000)... Payroll is something that must be paid... and so you hold off on the other bills.. You have thirty days to pay them, and you can stretch it out to forty five by jawboning... So on the forty fifth day, you cut all the checks and dig into your surplus loan amount to cover them... Basically until your credit card payments start flowing in after the third month past your opening, all you will have cash which will mostly be used to cover payroll.
So during this time you bought food on credit, bought electricity on credit, bought liquor on credit, in fact, every invoice you signed while preparing for the opening, was a credit memo on which you were promising to pay... For example, the food distributor upon getting your order, has to buy your product from his wholesaler, and then store it on his premises until you are ready to order it.. He then has to wait 45 days before your payment check comes in for all that food.. So he takes out a loan to buy the food, and when you pay him... he pays back his bank..... Likewise, your electricity is supplied to you up front without a monthly payment... That distributor had to buy that electricity from the midwest, and got a loan to do so... When he gets your payment, he will pay it back...
So it is with all your suppliers. They are without money until you pay them... They also survive on "loan money" until you cut your check..after which they pay back their loan....
So what does it mean when they say credit is freezing up? It means your supplier cannot get his food for you unless he puts up his cash first. It means the electricity gets cut off until the electric company gets your cash. It means the repair company won't come out unless it gets paid in cash. It means that: since you don't have cash..... you are out of luck....
According to the Federal Reserve, approximately 60 percent of banks have decreased credit limits on commercial construction; 30 percent have reduced the account limit on business credit cards; and 50 percent have reduced credit lines to financial firms.
Approximately 65 percent of banks (good news is it's down from the 80% of October) said they are tightening lending standards and reducing the size and maturity of credit on commercial and industrial loans to middle- to large-market companies.
The day to day transactions needed to get goods and services from one point to another are in jeopardy.....It is especially clear if you break down this same transaction and follow it through its process from beginning to end.. How much credit does it take to get a jalapeno onto your taco?
Farming is all done on credit. The farmer considers his costs, his interest costs, and the price of his commodity, takes out a loan, and upon selling his product, pays it off.. Any extra he keeps. He repeats the process for the following crop.. A "no" from a bank, means no crop. His buyer, estimates the price of all the jalapenos he will buy from different farmers, calculates the interest, and then takes out a loan to pay off the farmers selling him jalapenos, and after selling the product, pays off the loan... Any extra he keeps. A "no" from a bank, means he is out of business. His seller. a major US Produce distributor, follows the same principal. It takes out a big loan to buy a large percentage of the entire season's crop of jalapenos... It calculates the interest as part of the cost of doing business, and sells the jalapenos to chain grocery stores, restaurants, and regional local produce companies. Upon receiving his payments, he pays off his loan, pocketing any extra he made for his distributorship... A "no" from his bank, means the jalapenos never make it across the border. The regional distributorship buying off the national distributorship, gets a loan to buy the product, and after receiving payment, pays off the loan and interest and uses to difference to fund his business.. Likewise,.. a "no" from the bank means the National Distributor will be throwing away some jalapenos.. The restaurant needs jalapenos and is expecting them on the next day... We have already discussed the payment method they use, and in forty five days, their check clears... The distributor deposits their check and writes one for the national distributor... That business takes that check to the bank and then writes its check to the Mexican buyer of the farmer's produce.. Upon receipt of that last check, the buyer cuts all his checks and sends them out to the farmers.... Upon receipt of all these checks, their recipients head to their local banks... Hopefully the amount they get, covers the loan and its interest... As we saw during the last decade in our own America with Farm Aid concerts year after year after year.... quite often it is not enough... The bank then forecloses...
If one bank says no anywhere along the chain, the whole system shuts down and none of the entities within that chain can pay back their loan... Now if it was your money and you had six times the possibility of never getting it back.... would you lend it out? Like me, you're saying "hell no." So you see... you can't blame the banks for not lending in such times of crises....
You can also see that easy credit is a necessity, not a luxury that must be maintained if we are not to break down completely.
Why do we operate on credit and not on a cash base economic structure?
That is a valid question.. For as a consumer, we are a cash base society.. We get a pay check, deposit it, and then spend down to zero. We then put another one in and do the same.. and repeat... Why can't our economic system function in the same fashion, ... get the money first, pay in real time with cash, and wait to receive your payment in cash upon selling?
The answer is that it can and does on a small scale... Your yard sale for instance.... Farmer's and flea markets are another example... But running an economy on a cash-only basis requires just one thing: lots of cash up front... Very few of us have it... Economies cannot grow on a cash basis, because the process is closed ended.. That is a fancy way of saying that an God given opportunity cannot be exploited in a timely fashion, Imagine if you as a dairy farmer lucked into having all your cows produce twins.. Your cash was tapped out so you could not buy a milker to take on the extra load. Upon seeing the milk go to waste, you capitalize on your good fortune by selling the cows cheaply for beef... If only you could have had another milker, you sighed..
In a static cash-based economy, growth can only be done by those with cash on hand... Take the top 10% for instance that owns 60% of the wealth for example... The top 10% that owns the plurality of this nations wealth, would have to make all of this nation's economic transactions. If they don't have a hand in the transaction, it doesn't get done. As in the Middle Ages, our bottom 60% would live a limited existence and could only move out of the legions of the "have-nots" and into the realm of the "haves" through crime and highwaymanship. Responsible lending is the reason our economy is so prosperous and egalitarian. Without easy credit there would be no Jobs, no Gates, no Turners, no Hagels,no Markells, and no Hiltons... Easy credit is responsible for almost all the risers on our current list's of industrial tycoons, just as it was during the Golden Ages of the latter 1800s....
But with credit, which is basically a guaranteed form of trust, we can raise jalapenos, we can buy and distribute them, and we can get our pay later. The fluidity of our market which we take for granted, would not be there without credit...
65% of our banks say they are tightening credit. What does that do to our economy? The answer as we saw above, is obvious. Our economy grinds down to a halt.
So what options can be used to grease the wheels, to get more "yes"s to come from banks than "no"s....
Obviously instilling confidence in everyone that we are indeed "out-of-the-woods" is the key... As long as we truly believe the system is intact and that when we lend out our money we are confident that we will get it back plus interest, then nothing else needs to take place.. All the other stuff we hear, such as buying up commercial paper, toxic mortgages, bank stocks, are all just tools to get us back to that psychological point of losing fear...
We must realize at some point, as did Roosevelt, that we have nothing to fear but fear itself.. He then put the banks on holiday...
Forcing someone to part with their money is close to impossible... It is called robbery and usually involves holding a gun to someone's head... That is what a lot of those tax breaks in the stimulus package do and is why they will fail... A tax incentive for me to build and hire? What's the point if doing so causes me to go under because no one has money to buy whatever it is that I spent all of this investment to make? No! Something out there needs to happen so lenders holding on to their money see they have a better chance to survive by lending it out than they do keeping it tightly fisted....
Again, the opposite of tax cuts can have a great effect here.. The effect is temporal and must be rescinded as soon as we reach two quarters of continuous GDP growth... And that is to tax the money that is being held in a bank's reserves and not being lent, at a relatively high rate of 50%... Doing so would provide sufficient shock to the system which might then push recalcitrant bankers to prefer to lend at a "no tax rate" and take that minuscule chance on the economy tubing... instead of keeping their money close by and guaranteeing they will lose 50%... If they chose the latter, the Fed can certainly use that tax money amounting to 50% of that banks assets, to turn around and buy the controlling share of that bank, and then, make good quality loans and slowly ease the system of credit back into fluidity.... Taxing reserves at 50% sends the appropriate signal to banks: "Start lending, sorry, you have no choice."
Again, contrary to what we have often heard, taxes are good... And the secret to good taxes is that they must be applied in moderation... Yes, there is such a thing as a too high level of taxation... We have plenty of evidence where high taxes stifle growth... But we now have at our disposal an arsenal of evidence illustrating the poor effects of following policies of "no" or "extremely low" taxation.... The obvious answer to both points, is that we need to find a level of equilibrium and hold at that mark where our tax needs and economic growth needs balance and compliment each other... We were at that level once.... As mentioned in another chapter, and as evidenced during the last decade, the ideal marginal rate level appears to be holding at 30%.... Our goal then is not to lower taxes... Our goal is to achieve an equilibrium that balances the needs of our government, economy, and our people. All three need to be growing for our nation to be successful.... not just one...
I've often thought about pulling this stunt at one of my public speaking engagements but so far have chickened out... It involves pulling out on stage a three legged stool with two legs sawed shorter so it fiercely wobbles and then nonchalantly back up and sit down on it while speaking and topple over to the floor... As I pick myself back up in front of the audience, I pick up the stool and announce (the audience realizing by now they have been rather cleverly set up). "This is what happens when you elevate one leg of our system past the others... The welfare of "Our Wealthy Corporations" over the past eight years has been force fed and elevated to where it is now sapping away the wealth away from "We The People". as well as the wealth of our Federal and state Governments through excessive borrowing and deficit spending... For eight years we have focused on the economy, by cutting taxes, dropping our oversight abilities, merging while deregulating, allowing our multinational businesses to do whatever they want with no one looking over their shoulders... We created this situation, one piece of legislation at a time... Overall, what is urgently needed is to bring the economic model back into balance... Cutting it back too far does just as much damage as well. Remember the stool metaphor; it simply needs to be in balance!"
To achieve this balance we need to re-evaluate the rate of taxes levied on our investment community, tweaking them upward to a point where the government can again receive sufficient money back into its treasury to re-begin its trip back to solvency. Likewise raising the tax burden slightly higher makes reinvestment into research and development (R & D) the optimal choice for every business seeking an avenue to avoid returning that increased taxation back to the government coffers. That investment into R & D creates jobs, jobs, and more jobs....
Now here is the irony. As irony it is delicious and historically has been proven to be a correct hypothesis based on the results of its implementation during the Golden Years of the 1990's... It also was a driving force behind our economy during the Eisenhower years, although at that time we did not yet fully understand the intricacies of how it worked... The higher rates of taxes directed more money to head towards R & D's within all corporations, so it could not hit the books as "profit" and therefore not be "taxed". New jobs were hired to fill those positions in R & D, and new buildings were built, new products developed, and new investment was spurred. The effect of putting money into all those people, buildings, new products, and additional investment, is that their increased money was now entering the community, and creating demand for such common use items as more orange juice, potato chips, coca cola, houses, cars, restaurants, and you name it... etc.. As each of those industries found themselves forced to expand just to keep up with the growing demand of their products, they too created new jobs, which in turn created even more demand for those common everyday products. The following year, because of the past year's growth, even more investment was internalized in order to keep it out of the government's hands... Which, as you can well guess.....spurred the cycle forward even faster... Now with all those new businesses (along with all the old businesses) investing a higher percentage of leftover money back into themselves, they, as well as the entire economy, grew larger, served more people, and expanded.
Now here is the rub. The taxes coming off all that increased growth, even though a large potential was recycled back into the businesses to avoid the higher rate of taxation, increased the amount of money pouring into the Treasury's coffers, and coupled with decreased spending, were what enabled this nation to finally balance its budget... so far the only time in our lifetimes.....
The Nineties got it right. Truly it was a Golden Age if there ever was one.....
And what cracks me up every time I think about it.... is that we actually get the Republican dream of a growing economy, one that works exactly the way they say it would, growing treasury revenues through growing the economy, while still sending profits out the gazoo... and we don't do it by cutting taxes! We accomplish it by raising them! It's wonderful. The Clinton years are the clinical proof that it works.. One may add the opposite, that the Bush years are the clinical proof that cutting taxes doesn't work... It really doesn't... Cutting taxes actually robs the economy of money that it needs to grow... Yes... it does... Need proof? We're living it.
Lets use the same model....
Taxes are cut.... no longer do we need to hide money into R & D... That was long term investment, kind of hard to explain that one to the shareholders, now isn't it... Instead, we opt to maximize our profits, which makes sense now that we will not be taxed too harshly on them...We scan the globe for options on how we can push profits...
There are two types of investments... One is real, and the other is virtual... One improves efficiency... The other just climbs in value... or more appropriately, perceived value... As more money pours in, some type of economic bubble inevitably develops... We get too much money chasing too few high yield returns... The bidding goes up, and up, and up, and on paper business appears to be doing well.. But really you are buying just paper certificates... You impose your value on those pieces of paper, and others may view them with the same worth as do you... but if that value is ever diminished... what do you have? Pieces of paper.
When that money is spent on a factory, and it fails, at least some of that money can be recouped from scrap iron. That is the difference between a real expansion and a virtual expansion. Due to 21st Century deregulation and the fact that no one really knew what was going on with unsecured derivatives.... we thought tax cuts were causing our economy to boom... We ignored the tell tale signs of manufacturing loss, increased household indebtedness, increased loan defaults, which were buried under a mountain of data showing tremendous profits from the financial, insurance, and medical sectors. We were told that our coffers were filling because of our tax cuts.. No,
As an economy all our profit was being bet on horses who for a while were paying off... Then one horse, a favorite, on whom everyone's bets were riding.... stumbled and fell...
And when that one horse went down... so did our entire economy... And as it started collapsing, we glance around and to our surprise, we had nothing at all to show for it... To whom could we turn to bring us out? No one but the American people represented by the Federal Government.
And we faced the same problem after 1920's when we had the same cavalier approach to investment... We faced the same problem after the Reagan-Bush 1 extravagance finally caught up to us in the early nineties. And we have it now...
Cutting taxes too low is very bad for long term growth.. Of course, raising taxes too high is equally damaging, but as every little child knows: if something is too hot.. or too cold, you go to the one that is just right... If something is too hard... or too soft..... you go to the one that is just right... It is a shame that what every little kid knows was lost on those making our national financial decision over the past eight years...
Balance between the three legs holding us up: The People, Our Government, and Our Businesses.
The idea is not new except perhaps in the economic world... In fact it is simply a transference of Henry Kissinger's world diplomatic outlook, where stability is achieved by balancing Red China, the Soviet Union, and the United States against each other.. If one country got too feisty, the other two were strong enough to stop it... As a result, balance was created by moving beyond the two-way, unstable, bi-polar arrangement between the US and USSR... With just two players, every gain was the opponent's loss.. Stability was never achieved.... With three major players, one had always to remain cordial with both adversaries since one had to ensure they would never become the odd man out, and stability eventually followed...
That was in the seventies... It is about time the same principals came to roost in the economic spectrum....
Now an increase in taxes will boost the economy. But.... it is hard when things are going so bad to persuade people in a panic that something that looks like it should have the opposite effect is really one's savior.. I understand. It is equally hard to tell someone violently vomiting from a bacterial infection, that a moldy piece of orange peel, covered in grey fur, holds the key to their salvation...
So we disguise it... With the orange peel, we make it into a nice little pill, and call it penicillin....
With the tax code, we make it into a nice little pill and call it an "economic incentive".... Is it a tax? Of course not! Who would dare think of taxing someone during a Depression... It is more of a ............shall I say....... "economic incentive"..... sort of something to get the economy rolling a little faster.... "By using an incentive to get business to spend more in their R & D departments, which we think will eventually drive our economy into high gear, we are going to charge those companies a little more who choose not to invest money into R & D.... I mean that's a fair as America gets.. Should those helping pull us out of our recession be penalized for spending their money on their business, to grow us new jobs? Or should they be rewarded?
"Most think they should be rewarded...Right? So since our current economy has made it absolutely impossible to cut taxes further and still stay viable (I'm sorry but it's just a fact of life), it makes sense to raise the tax rate on every other business who does nothing to alleviate our pain and suffering, thereby giving a huge reward to those who are putting their money to work for us... the American people..."
Something like that... you get the drift....
Remember a ways back when I said we needed to force the hands of institutions that controlled capital, and find an incentive they could not refuse to enlist them to begin lending?
Well, raising their tax rates while giving them a discount from it equal to the amount they lend out, is exactly the incentive that is needed.. If one is going to lose "X amount" to the government anyway, might as well lend it out and take a chance that the money will return... That's an offer no bank can refuse...
There is one important note that occasionally gets mentioned but probably does not get mentioned enough... That is that we have already tried all of our money supply tricks and they do not work... The Fed rate today is 0.25%... Go figure... Borrow a $100 dollars and pay back a $100.25..... over a year?... During the height of the boom the spreads between what lenders got and what they charged to lend, were between 1% and 2 %... Today most loans are between 5% and 6 %, meaning the bank is collecting between 5% and 6% percent off each business transaction. One might expect that since the same rate of return (1%) was acceptable before, that it might be as acceptable today? If banks were happy during boon times making 1%, why can't we have loans today at 1.25%? And the answer, to be frank, is that they are overcharging all of us to counteract the bad assets they themselves placed on their own books....
Which brings up three questions: Should a bad asset bank be formed? Should banks be allowed to fail? And should shareholders or taxpayers be the ones to bare the brunt of the costs of our recovery?
The principle of the bad asset bank is for the Government (Federal Reserve) to buy bad loans from banks, so the banks can forget about what happened and move on... In principal, the bank owes its investors the money which those loans were supposed to generate... It is duty bound to funnel much as possible of its income back into paying those notes that went bad... Since the amounts are so extravagant (1-2 Trillion) and the money required so great, there is little left over to do what banks are supposed to do.... which is lend it out so it can earn more interest for the bank and its stockholders... If the Fed (federal taxpayers) buys up these assets, the bank no longer has to owe these huge vacuums sucking up their revenues, and can instead use that money towards lending to businesses which are carrying out the commerce of our nation.
There are several reasons that make a toxic bank a bad idea... First is that it was tried during the first bailout... That was the reason the first piece of bailout legislation was passed and very quickly that plan was deemed to be insufficient and the money was switched over to directly infusing capital into the banking system... If the toxic program was not a good idea then; what makes it so great now?
Another downside. Banks are able to lend up to 10% of their capital. By injecting new capital instead of buying toxic assets, the American taxpayers get a $10 dollar bang of money lent, for every $1 dollar of new capital they invest.... Buying up $1 dollar of toxic debt just frees up $1 dollar which can be lent...
Likewise, a bad bank will have to choose which banks to support.. and which to let fail... Most of the toxic wastes are held at the top echelons of bankdom, ie. in the large nationwide corporations... However most of the loans done which allow business transactions to continue on a daily basis, are made at small, community oriented, local banks... The asset plan will do little to get money where it is needed, to those local banks. But direct capital injection, can and should be done on the level of local banks in their communities....
The bad banks are argued to be necessary because the bundled securities markets have dried up... No one is buying bundled loans, and no capital from sales of those is entering the banks financial stream... If the Fed buys the notes, they will most likely be at a premium and if sold, will be devalued almost entirely.. The American taxpayers pick up the cost of the entire security. But instead of using these scarce dollars to pick up bad assets we know we will lose money on, why not simply guarantee for a fee, (sort of what AIG did) that the government would guarantee their value? Then let the market buy the securities as they used to?
Remember we collect the fee, and pay out only if the security goes bad... Similarly to what we did with the originally FDIC insurance of $35,000, now up to $100,000 depository insurance... We guarantee the deposit... Doesn't mean we own the bank.... It worked for banks.. It is still working for banks... Thank heavens it works for banks...
That option would move assets out to investors, remove the debts off that banks books, infuse capital into the bank which could then be lent out at levels 10 to 1....
Over all a toxic bank is not the best use of Federal money at this time...
The next question is whether banks should be allowed to fail?
A lot of effort was spent in investigating this question... Even one Nobel Laurette was promoting the idea of letting banks fail....Our investigation after looking at the broad realm of evidence, found considerable disparities in the results and found instead that there were two groups of people who were each supporting their own camp... We classified one as being a group that makes it's decisions rationally; the other group tended to base their decisions emotionally...
The argument for propping up banks has now become a cliche: they are too big to fail; and that their collapse will impact us far greater than any cost of propping them up. The other side, points to morality and says that propping up bad people has bad implications; letting them fail punishes those who did wrong and were irresponsible.
The problem with these arguments is that neither of these jousts confront and interact with the other, thereby making them both right in their perspective frames.. One stems from the brain... the other from the emotions. The two themes we discovered across the spectrum of literature on this issue are either those appealing intellectually for assistance, or those ratcheting divisive emotions to make their case.
We believe that the best bet to settle the argument is to fast forward fifteen years and look back at how our grandchildren will come to learn about it... Will their lives be better or worse if we let all banks fail....
The argument for letting banks fail is: that is how it works... Banks fail, those holding financial interest in that bank go broke... lose everything.... the pieces are then bought up cheap, and others profit from that bank's demise... The idea is that fear of collapse will keep banks from ever straying into a stratospheric lending spree that will ultimately cost them everything... The motivation for this method usually can be found in the final lines of its arguments. Statements like "can we continue to reward those who made mistakes", or "they failed, and they should bear the burden" were pasted at the end of all argument for letting banks go... I have read those arguments and if one wants to take my word for it, they make good sense.... on a small scale... ie. One bank failing out of a 100, should be let go to fail... The system will compensate and the total economic health will improve... Darwinism in the banking world is a good thing. The next question is whether the extinction of a whole species is a good thing.
That is the problem underlying all talk of having banks fail. The discussion and all the evidence takes place in a closed arena. Assumptions are made that do not take into account the wider notion of human nature... Let banks fail they argue? That is just what the former Secretary of the Treasure Henry Paulsen did with Lehman Brothers... Clear the boards... But, that action spread off a widespread panic that spread to the ultra safe money market funds, drying up cash flow to all businesses, large and small. In other words, the free market could not solve the problem without government help. Even the bank the government had hoped would be able to bail out the other banks, Citigroup, required a government handout to stay afloat.
The question brought up is one of degree.. Do we compare our current crises to that of the Great Depression of the 1930s, or is it more like the collapse of he Japanese banking system in the 1990s. The Japanese did what we are in the process of doing, and propped up their banks... Similar to a dilapidated house, they chose to pour money into it, instead of to raze the building and rebuild over-top of its location....The benefit to razing the house and rebuilding, is that costs are fixed... And with the end product, we know exactly what we got.... To pursue the alternative tack, is worry that no one knows whether the house will collapse even long after considerable effort has been made to "restructure" it... The Japanese chose to restructure their financial house giving them a weak system... The Great Depression razed ours and WWII rebuilt it....
Again, notice how the argument takes place in a little bubble... Does anyone consider the experience of the Japanese who lived on the island during this time? To be honest, they lived very well.. Now compare that to how Americans lived through out the Great Depression... not so very well.. Or even better, compare that to how we will be living in two months!.. If one wants to judge the world through bank stock values.... then letting banks fail might make some sense... Like the house metaphor, at some future point they may be stronger if razed and rebuilt. However propping up the system, has done rather well for the Japanese population .. It's done well for Toyota, Nissan, and Honda..Those car makers are outperforming our own domestic Big Three... And let's not forget that one of the global consequence of "letting banks fail" before we knew we could fix them, was the fascism that sprang up in Germany, Italy, and Japan... which cost the global economy considerable strife for 5 or 6 years there during the forties... Basically a lot of men died for the principal of "letting banks fail"...
Japan is an island. What is at stake today is the total catastrophic failure across every financial market spanning the entire globe..
When we are talking about entire systems failing, and the collapse of the Bretton Woods world order, and an onset of the post Roman Dark Ages again.... I find fault with some of the Nobel Prize economist's reasoning... And I have only to look at the last Great Depression to find evidence that makes us wonder what it is that those recommending total collapse and failure are smoking....
It must be good.
To grasp all of the implications of total collapse, where everyone's money dissipated into thin air, I thought a great model would be to find a microcosm where that actually happened... My reasoning was simply that if all the money evaporated from the global economy, the effects would be similar if not on a greater scale, to what they would be on a small rural community centered around one bank, which collapsed completely. Because of the Great Depression, there is some factual historical evidence of what happens when a one-bank-county loses it's bank and everyone from top to bottom, is suddenly bankrupt....
Here is a collection of stories (with interviews) that describe that atmosphere around the rural Nebraska town of York during the Great Depression.. It gives us a sense of what to expect... No jobs, no ability to make payments, multiple foreclosures, no buyers for the foreclosed properties, bank failure, and absence of cash based economic transfers.... the use of barter... What eventually pulled rural America out, was the gradual effect of the New Deal legislation... People on "relief" or working on government jobs, began to use money again.
The problem with letting all banks fail and flirting with total collapse... is evident in the scenarios mentioned at the beginning of this chapter... Remember those tracings of lines of credit following jalapeno's? Everyone depends on credit... If the global economy fails, we do not get our jalapeno's, our gas, our food... We do not have jobs... we lose our livelihood and house.
The "effect" that bank failures cause upon society is surprisingly absent in each of those epistles that promote total collapse. They always only focus on the banking industry. There appears to be a better way to go than letting everything collapse... What is eminent from our studies of the Great Depression, is that depression lasted far longer than it should have, because less stringent Keynesian methods were applied than were actually needed... We credit the war with bringing us out... What the war did was drop all pretension that the government had no place in its economy, and caused the government to place orders and pay for them with borrowed money. Those orders for ships, steel, and fighting materials are what pulled our nation out of its hole... Today's stimulus package should be considered as the same response to the same economic troubles that we tried at the outset of WWII, just without the war.
Instead of "letting banks fail" we pump up the economy. The economy will allow banks to write down their bad debts..
The third question is whether it should be the stockholders or the taxpayers who should bear the brunt of rebuilding our Bushwacked economy....
Again the answer should be framed not against who is the more culpable, but which method will get us to where we need to be..... faster...
Which benefits America more? Growing the economy and then selling off the preferred assets bought by the government and pay down its debt? Or, allow wealth to dry up entirely by making all those investors, pension plans, mutual funds worthless by doing nothing and allowing the free market to devalue everyones portfolio....
We saw in the great Midwest... what happens when wealth dries up... Life turns bleak... Making investors pay has some moral benefits such as teaching them that "they who erred shall be punished", but considering that we are all gamblers of some sort, hurting ourselves severely to teach those who lost, a lesson already learned, seems kind of pointless, really...
The severity of the situation has moved us to a point where practical solutions are needed. Moral ambiguity and waffling philosophies are simply extra baggage getting in our way... When a risk is big, we insure ourselves against it.. What that means is that each of us takes some responsibility for assuming a small burden of the risk, knowing that we can plan against a steady cost, and not be devastated by capriciousness of misfortune...
This bailout plan and our tax system fulfills the role of an insurance company in a time of crises. Our government bails out the banks, the stockholders get some return on their dollar, and the taxpayers pay a little premium over many years to keep our society afloat.... Why? Because we like it that way... Letting anger get the best of us and force us into a cataclysmic decision that destroys our future altogether, .... well... you decide...
Quick access to easy credit is needed to advance ourselves out of this slump... It does not come naturally during times of economic crises... To open avenues towards achieving easy credit, the predominant factor is to return that confidence back to our lending institutions insuring that their lent money will be paid back with interest.... We have determined that the outside forces have the most say in the matter..As the economy shows signs of picking up, the money will be lent.. However history shows that it is slow to return to the levels of exuberance. Human nature being what it is, a "stick" in the form of lost revenues from taxes designed to penalize the hoarding of capital, would be the shortest route to chase the money out of bank vaults and into the world of business. Likewise, guaranteeing repacked toxic assets for a fee attached, and allowing that product to be picked up by private investors, not the Fed, would help move the assets off of banks books at a smaller cost to taxpayers, thereby allowing a bank's profits to return to the business of lending out some loans......
If the rate of return is higher than the rate of the cost... you make money!. -- kavips
Controversial as it is, we MUST use government funds to reinvest in infrastructure, especially where there is too little a return to interest private investment....
As was previously mentioned, there is no such thing as spending pork in a "bailout bill"... The idea behind this package, must not be lost. ... This bill's sole purpose is to put money directly into the economy.... Whether that money goes to the arts, to schools, to refrigerators, or to Quakers and Presbyterians, it really doesn't matter... We all benefit from it's infusion. Anyone receiving some of this stimulus package's income will use it to buy among other things: Soda, potato chips and gasoline... That is the key... As the economy picks up from all this spending, confidence returns, and we are on our way. This package is about S P E N D I N G....
In the previous chapter we made an allusion that this stimulus package was like WWII pulling us out of the Great Depression, just this time without a war... Whereas then we geared up to make guns by borrowing massive amounts and investing it in ships and steel, this time we are doing exactly the same thing, but buying butter... It worked quite well then. Heaven help us... It had better work again now...
Like all pieces of legislation, this bill includes a few bad parts that were required for the insurance of a smooth passage, making it palatable among several Republicans... Those "bad apples" of which I speak are the 30% of the portion of the bill dedicated to tax cuts... Most of us intuitively understand how increased spending will help our economy.. That does not need much discussion since even a tiny child can grasp the fact that if someone has money, and wants what you have, they will spend it... Today only a few of those in an ever shrinking pool, dare argue that government spending is bad... Us with common sense know better....
For the sake of argument when I imply that massive governmental spending is good, I am speaking only about the present, right now in 2009,... and not another 30 years down the road when we again will have to trim off government excesses... At some future point to be determined, the argument of pulling government spending out of the marketplace and thereby allowing more efficient private operations to occur, will again have some merit.... And if we can all cross our fingers, hopefully with the large infusion caused by today's stimulus plan, we may reach to that point much sooner than the thirty years it took us the last time (1933-1963).
Right now, strictly because of our crises....spending is good... Tax cuts are not...
Since we all know that massive government spending is good during times when credit has dried up, we will instead focus first on why tax cuts are bad, and why tax cuts drag down the growing of our economy out from beneath its crises. For those who have read each of the chapters up to this one, this may be a little bit of a review.....
First, let's begin with just what exactly is a tax cut... For starters, is it a mechanism that opens market activity by driving down prices for all? Or.... is it a shill being used to suck up more wealth from the bottom four/fifths of the population and placing it into the hands of the top percent? And if it does, is that good for our economy?
Let's begin with the words by South Carolina's Senator DeMint on This Week February 1:
"And all of us believe that the way to move our economy forward and protect jobs is to infuse more money so that consumers have more to spend, businesses have more to invest, buy capital equipment. But there are two ways to do that.... One is for the government to take it out of the private sector through taxes and then decide where it's going to go through political manipulation, as they've done in the House. The other is just to leave more money in the private sector for consumers to spend"
That last line could sound convincing if only it were true....
The obvious reason for being cynical about that remark, is that it is the same argument that has been proffered since the year 2000 and for the past eight years worked rather poorly. Look at us today. How "booming" is our economy?
If that philosophy couldn't work over the previous 8 years when we had a budget surplus, money to spend, and a capital rich economy,.... why would anyone think it would work today when we lack each and all of those necessary tools?
They added tax cuts, huh?
Ever wonder how many people pay taxes and how many don't? Ever wonder how those totals correspond to income?
The answer to the first question: from the Tax Foundation
In 2004, a record 42.5 million tax returns - one-third of all returns filed - had no income tax liability because of the available credits and deductions in the tax code. This is a 42 percent increase in the number of zero-tax filers in just four years. In addition to these zero-tax filers are the 15 million individuals or households who do not earn enough to file a tax return. Overall, nearly 58 million taxable households are outside of the income tax system. These findings raise serious questions about the future of the U.S. income tax system. Are any future tax cuts, or even tax reforms, possible when the lion's share of the tax burden is increasingly borne by a shrinking pool of taxpayers who - at least on paper - appear to be "upper-income"? And will the expanding pool of non-payers demand even higher income taxes?
Back in 2004, one person in three did not pay income taxes...
Let's jump back one second to remember tax cuts. Here is a refresher on how tax cuts work. You work. Your employer withholds your taxes from your pay....You file your return. Through tax cuts you have enough deductions to get all of your withholding returned to you... You get a check. You go out and spend it .....
Now if you are in the one third that does not pay a penny of income tax.... and this year you bought a house, a car, got a $1000 middle class tax credit, from whose pocket will those stimulus tax cuts come? Can you file a negative total for your tax amount and get all your credits to come your way at Uncle Sam's cost? If your tax owed is $4200 and all your credits add up to $8400, can you get all of your withholding and an additional $4200 back, on top of what you paid in?
No?
So who on earth will benefit from the stimulus package's tax cuts?
The upper two thirds who are paying taxes: that's who... And here is the problem that tax cuts cause... Since one third of Americans do not pay taxes, our budget is funded by those two third who are... America's tax burden has been shifted to the wealthy who pay almost all of our taxes. Cutting their taxes, drastically brings less money into the treasury; less money that will be required to pay for the spending that this stimulus bill requires...
If we give the upper group additional tax breaks, what will those upper two thirds do with their extra money? The problem with receiving large amounts of money is that one can only spend so much... and then what... There is no other choice but to invest it... And as we can rightly see, investing in a domestic factory barely giving a margin of 3% is pointless when one can invest overseas and get a return over 25%, because over there, one does not bother with labor laws, environmental laws, and purchasing raw material is cheap.... As we saw by what happened these past 8 years, our wealth went off shore.
Those proposing tax cuts will bemoan the argument that "tax cuts benefit only the wealthy" , and argue instead that it should be those who bear the brunt of paying taxes, who ought to be the first in line to get the tax relief.... But when they bring up that point, the follow-up question to ask them is this: ok, then, ...so which income levels do most of the buying that drives the economy?
Evidence shows that most of our economy is driven by the bottom three fifths.. The very ones who will NOT get much of a tax cut, for they are already paying little or no taxes.
Another problem with tax cuts: they cannot be targeted to a certain area to achieve a certain goal. Giving out tax cuts? So what can you do? Can you legislate how everyone will spend their tax check? All 117 million households?
Official Government Announcement: "This year we want all recipients of a tax rebate to invest in Ohio."
Really?...... I mean...... really?
I hope that you are beginning to see the myriads of long-term problems that tax cuts create... I know tax cuts sound good... "Wow"... "money to spend"..." great".... But a closer look at who does the spending and what happens to wealth as it accumulates upwards towards the top echelons, makes one understand exactly what went economically wrong over the past 8 years... Tax cuts simply transfer more wealth into the hands of the wealthy which continues a very unhealthy trend.
It is unhealthy because of this one facet: the wealth that lies increasing in the coffers of those who are well endowed, is being stolen away from the echelons of workers who are not. Over the past 8 years, the average income of the bottom fifth, second fifth, and third fifth, all declined... The fourth fifth's income was steady, and the top fifth's level soared... This is opposite from the Clinton years, where income level increased in each economic strata, all at the same time. Based on actual growth of income, most would argue the Clinton Plan is the better plan and should be included somewhere in our national goals. We must restructure the tax code so EVERY income level improves.... including the wealthy.
What? Have the rich get richer? That is no problem, as long as the poor get richer too..... which if I may remind you one more time... is exactly what happened during the last decade of the twentieth century.....
So who spends the government's money? The first question to ask is this: what do we mean when we say someone has “received” government spending? In this report, any time you use a government service, the amount of money it costs the government to provide that service to you, is counted as part of the government spending you receive. For example, if you use Medicare to pay for a hospital trip, you “receive” the amount that trip cost the federal government. Similarly, if you enroll your children in public schools, you “receive” the amount it cost the government to educate your child. If you have two children enrolled, you receive twice that amount. And so on.
So when we shake out all costs, the bottom 3 quintilles or bottom 60% receive more spending than they pay out in taxes... The top 40% pay out more in taxes than they receive in benefits from any spending.
When all government spending is included, households in the lowest quintile received about $8.21 in spending for every dollar of taxes paid. Households in the middle quintile received $1.30, and households in the top quintile received $0.41 for every dollar of taxes paid.
This chart shows us how Americans spend their money... Through this chart one can see that the top percentile spends more than does the lowest or the middle in each category. But, the percentages spent are a much lower portion of their income....The bottom percentile spent $3193 dollars on food for a year... The top spent $10,243 dollars on food across the same time period... The food percentage of the lower groups income was 32%... The percentage of income devoted to food by the top echelon, was 6.8%..... In housing, 54% is spent by the lower quintile; 14.4% is spent by the top group.....
If you want to flood the chambers of the economy with a mixture of fuel and air, in order to jump start the economy as fast as possible, you have to get the money down to the bottom level as fast as possible... They are the ones who spend it.
Or put another way.... If you wanted $9 billion dollars to go towards helping jump start the food industry, giving out a $9 billion tax cut, which would go to those still paying taxes, would only jump it by 6.8% of that $9 billion: $612 million..... But if you target that same $9 billion as spending (EIC payments) and distributed it to the lowest fifth of income, then 32% of that amount, or almost 2.9 billion dollars hits the target that you wanted... Our food industry gets a $2.9 billion dollar boost graciously paid for by those in top group who are still paying taxes.
Let's try housing..... The same amount, $9 billion dollars spending spent at 54% puts 4.9 billion into that market... As a tax cut, less than $1.3 billion dollars would reach the target....
It's human nature... if one does not have enough money to survive, if one receives even a little, it gets spent almost immediately... But if one has plenty, and one is not pressed to buy something right away, one would wisely spend less now, pocket that money into some form of savings, and little or not "stimulus" would occur...
That is why "tax cuts" do not drive the economy... They drive investment, but that virtual world has its own set of rules, which does not create new growth nor improve efficiency among the growth we already have.... Tax cuts create large amounts of money with nowhere to go... In principal tax cuts could work to salvage the economy if those who received them just spent wildly as did their lower income neighbors... To do so, the top quintile would need to spend 34% of their average income or $50,987 dollars worth of food..... At an average household of 3.1 persons, each person would need to eat $16,447 dollars worth of food... Now how is that going to happen?
Another trivial fact that was rather surprising was listed under charitable contributions. The bottom quintile gives away 10.56% of their income to charity and the top quintile donates 4.6%. (It IS harder to go through the eye of a needle).....
Bottom line is that IF the goal of a stimulus bill IS to stimulate the economy, it is better to spend the money on the lower three fifths, than it is to grant tax cuts to either of the upper two fifths. In the top echelon at least 31.4% of that amount is guaranteed to flow away from the areas needing a stimulus and get locked down into private pension payments or paying down one's mortgage principal... neither of which generates further spending, unlike buying a pack of doughnuts.... This lack of continued investment into our economy means that 31.4% of the money given out through tax breaks has now met a dead end... It has been sucked out of the economy.....
However the lower quintile person who spends their entire check in one store, causes that store to buy, the factories to sell, the assembly lines to roll, the employees to get paid, who then spend their entire check all over again and the economic process begins to gear up steam....
Tax rebates cause money to get sucked out of the economy... If one seriously wants to get the economy moving again, it is better to continue taxing the top group and just hand that money to the lower group with no strings attached. The economy will be fixed in no time...
Today's tax rebates are the largest amount of pork this nation has ever seen. They simply do not work to stimulate the economy, unless provisions are also instituted along with that tax break on how it must be spent... Since that is a political impossibility, it just makes more sense to collect the money, and then decided how to dispense the money to those who can be counted on to patriotically spend everything they get....
Even as one closely reads DeMint's comment, one grasps that he knows this fact all to well and is just mouthing policy that has come to represent his party... "To leave more money in the private sector for consumers to spend.." We see from the chart, that the money is already there... The top echelon is simply choosing NOT to spend that amount on goods and services... Giving them more money will only make things worse....
The chart shows the impact of Federal spending on our lower quintile... The household consumption in the bottom fifth, is almost double what the household income turns out to be.... How can it be double? Their consumption is twice as much as they make... That is due to our federal infusion of money collected from the wealthy, and laid at the feet of the poor....
Spending or tax cuts? Which has the bigger bang?
We discovered some literature about the Great Depression that sought to explain its exceptionally long length as proof that governmental spending projects did not work.. Our research showed the opposite.
The data that is available today, if I can put it briefly, shows that Roosevelt was hesitant towards going full steam towards the Keynesian plan until WWII forced his hand.... In local areas such as the Tennessee River Valley which did have an abundance of projects all close by in the same geographical area, the economy fared better than it did across the nation as a whole... The argument that tax cuts should have been instituted as soon as the market crashed, falls short as soon as one sees the highest marginal tax rate of the thirties was equally low as it is today though out the entire administration of Herbert Hoover during the three years after the crash of '29 up to Roosevelt's inauguration. After three years when it was obvious that tax cuts did not work, America threw out the Republicans in Congress, and the rate was jumped up from 25% to 68%. Some stalwarts still contend that not keeping that tax rate ridiculously low prolonged the Depression. Compared to us, they had a tax cut.... It did not work... Massive borrowing to have massive spending on the war.... did...
Those crying for more tax cuts are speechless when presented with this data. The highest punitive American tax rates ever (94%).... occurred when the country's economy was booming (1944-45) from massive spending for the war.... The second highest tax run, from 1950 - 1963, ran alongside some great economic years; their highest marginal tax rate was 91%!
I don't know why this evidence is only coming to light now... The historical record sufficiently provides enough historical data to imply that in the real world, cutting tax rates is bad for the economy, and raising them as high as possible, causes the economy to rapidly expand....
The reason is simple.. If you as a business, had high tax rates (91%), you'd take back some money you had earmarked for profit and reinvest that back into your company... Doing so makes economic sense to you and your board of directors. For if you don't, you lose 91% of what you made. Instead, you reinvest it... building up your net worth. That investment into oneself is what creates economic activity. Additional personnel must be hired, additional buildings must be built, and additional projects must be funded... The economy grows best ..... not when you reward people for taking money out of it... but when you provide them with a reward for putting their money back into it...
Taxes reward responsible behavior. They do it the "free market" way. Expanding one's business under higher taxes is cheaper than reporting excessive profits.
So what is the net fallout in a Depression of increasing taxes?
Money does not get reported as income. Which would you rather have: an economy that was broke and not working, or one thriving in all aspects other than the amount of profit being reported to the IRS....
Raising corporate taxes in this case is being done in order to NOT suck money from out of businesses and NOT whisk it away somewhere into the government's vacuum... No, just the opposite!.... Raising corporate taxes needs to be done so that business can keep its money inside that business, and NOT. send if off to the IRS!
The IRS loses nothing the first year... If the business went belly up, the IRS gets nothing... If the business invests all its profit back into itself, the IRS still gets nothing... The difference is that in the second scenario, we all have jobs and we are paying our taxes...
So if one wants to have fun, what I am actually saying to all of you, is that those economic benefits which we have always heard as one day coming to us from tax cuts... are actually achieved because the amount of taxes that are being collected, is now less.....and it was made so by imposing a rather prohibitive, punitive cost to the reporting of high income and excessive profits ... So you see, I am for tax breaks!... Yes?... But they must be achieved in a manner that forces a company to reinvest what would have been profit, back into itself... The most effective method that we have found for accomplishing that, is to raise a corporations tax rate high enough so it makes sense to do just that....
The Stimulus package is about S P E N D I N G..... Due to the cyclic nature of our economy, there is no right or wrong area in which to have it spent.... All money enters the economy and quickly gets spread around where it needs to go...... It makes sense that if we are injecting money into our economy, that we inject it wisely in areas that continue to have improvement and contribute value to us and our progeny.... One can spend money digging holes and filling them up again... Yes, all those jobs will be done by real people who will spend their money.... and our economy will still get a big bang from it...
Or, .............. we could spend that money on something worthwhile and long lasting, perhaps something like building cheap wind energy, and instead of having a series of refilled holes in the ground, we could have something that continues to save us tons of money every day that it runs....
Either path will lead us to what we need: having borrowed money jump start our economy... Far better to have something lasting to look at when it comes time to begin paying back our loans.......
America could always declare bankruptcy... That would put our creditors on hold, while we sorted out our priorities and assets.... Since bankruptcy has a bad connotation, we could call it by it's euphemism: restructuring.
Restructuring..
Now that happens all the time... Especially among those with "big" money.. I can remember even Donald Trump had some "restructuring" issues during the eighties... A meeting was held among his prime investors (it was during the planning for the Taj Majal) and he said: "look, I can't pay you on time... Fold me down and you lose everything... Give me a "by", let me get through this logjam, and I'll get ourselves back on track.. You got a choice: no money now and forever, or a full return later... It hinges on the word: "later".... So what are you going to do?"
"Uhh...... given that choice...... we'll settle for giving you the "by", Mr. Trump, and we'll take our payment a little later...."
Twenty years later Donald Trump is still around.
The key to this depression really hinges on us, the investors... Will we settle for a later version of "getting our money" or will we insist on our entire amount up front right now.... Will we demand all our "two hundred forty two dollars worth"? or will we be reasonable and settle instead for :seventeen dollars and 50 cents" and a kiss from the American people?
It is us who hold the key...
It is hard when one has saved up a lifetime, to have it drop to nothing.... Yes, it is hard. But to insist on a guaranteed life of paucity by demanding payment now and settling for 2 cents on the dollar, does not serve our best long term interests. In the broad scope of things, what does serve our best interest is to be able to keep one's home;... to have some type of income trickling in;.... to be able to get through next week, and the week after that, and possibly continue surviving until we one day pull ourselves from out of this crises by our own bootstraps... Those goals are the ones that serve our best interests!
And here is where one has to develop the wisdom, perspective and ability to see that money and people are distinctly separate and not intertwined... Here, those worried about something as abstract as assets, debts, payment plans, must realize that out there, real people don't have food; real people don't have a warm place to stay; real people can't work because they have no money to get a job, and even if an employment opportunity presented itself, they have no money to even get to work....
Our assets are entirely paper... We constantly have to remind ourselves of that. Pieces of paper that represent a certain value that rises and falls; a value that has dissipated rapidly since the Lehman collapse shocked the foundation of the financial world September 15th... just 150 days ago... One day, at some future time, they will regain their value and that money will be recouped.. (If we sell, it gets recouped by someone else.) Once it returns to its value, we are financially where we were before the crises came... We, despite the fall and subsequent rise, did not lose a penny of value once that amount again reaches that point before it fell... But with people it's different... They suffer and it leaves scars.. They too can bounce back, but they are never the same as they could have been otherwise...
That is why when making policy, we need to put people first... We are after all, people ourselves; not dollar bills.
Bankruptcy is one of our great American traditions... It is deeply rooted in the American notion that forgiveness is a better policy than harsh punishment... It is a mechanism based on practicality instead of a philosophical morality...
Perhaps our ancestors being more familiar with debtor's prisons, understood the concept that allowing someone to continue to contribute to society was far better for everyone as a whole, than locking them away to rot at state expense... Punishing someone for not paying their debts, certainly did not make sense for the large numbers of patriots living the American dream, who had only been brought over here to empty out those very prisons...
So the concept of having one's assets divided among one's creditors, and then being free to go on forward, is truly an American one.. Old World mentalities could never have grasped that vision as a benefit... That idea could only have been formulated in a land "of true opportunity".
When one considers bankruptcy, one should remember the adage: " it's just about money".... For in truth, that is what it is... really... If one loses money in the stock market, (oh well)... the same principal applies as if one bets on a race horse.... (rats)... or a basket ball team... (better luck next time)... or a Philadelphia sports team......(should have known better).... or a person with a good credit score who then gets a string of bad luck... In the end what is lost is "just money"... they print more of it every day...
So wiping one's debt value off the books and starting fresh does a lot of good for society... It turns a liability into an asset... turning someone who is not productive, into someone who is...
If one simply accepts the reality that the money is lost anyway and can never be repaid, bankruptcy costs society nothing...
If I give you forty dollars and you don't pay me, and I understand that you CAN never pay me, and furthermore that if I pursue the matter that you WILL never pay me, then the fact that you DID "not pay me".... in reality costs me nothing.... That debt does not need to be on my books anymore...
Actually carrying a debt that will never be paid, is an insult to stockholders and misleading to investors... Bankruptcy does justice to those wondering where to invest their monies by forcing the eradication of false and unrealistic accounts off a corporation's books... Bankruptcy clears the air... With bankruptcy, all parties know where they stand...
We all know it... Every giant bank in America is bankrupt. They have debts they owe which are estimated to be 2 Trillion greater than any income they see arriving in the foreseeable future... So each of these statements we get in our mailboxes (the ones which show these banks still appearing solvent), have on their balance sheets backing them up, all these securities worth nothing, which in all honesty should not be listed in the asset column at all,
But...
And this is a big but.... and here's the rub. One day, those values will return... One day those assets will amount to a whole lot (+2 Trillion Dollars) of money... Why? Simply because they are backed up by homes out there that will one day be lived in and will one day be paying money on a monthly basis... As soon as someone moves into an empty house and begins paying monthly payments, those deeds to those properties will again be worth something...
So can we just walk away?
Let's see..... Here is an interesting model.. Imagine you are playing a poker game in your friend's kitchen.... It's one of those times when everyone has a great hand and the bidding is slow and arduous and constantly keeps escalating... What started out as a dollar bet has now climbed to $150 dollars... Time is lost entirely and suddenly everyone's spouse is demanding they return home at once.... Since divorce is more expensive than $150 dollars, a chorus of "I'm outta here"s rounds the kitchen table... Everyone walks away and since no money ever hit the pot....( it was all verbal....) the game is done and everyone exits to choruses of "see you next week"....
I've seen it happen three times and being only one of 305 million Americans, I'm sure that across this country it happens much more than that....
We had a virtual value with no collateral backing it up... We walked away from our promises with no cost to ourselves nor any cost to whoever it would turn out was holding the winning hand....
We each drive home and nothing in our lives has changed......
So what if... and I stress if.... there was a way we could use this example of real life and apply it to our betting on a constantly rising housing market and figure out a way we could all walk away and have nothing in our lives change?
Perhaps a brief review of how we got here might be helpful to assist the average person's understanding of the "virtual nature" of what is going on... My apologies for not getting technical... The evidence is out there and a great source is this wonderful person... Essentially, what we are talking about is the new toy of our decade: "the credit default swap...."
Why talk about it? In just the 8 years of the Bush Presidency, this market went from conception ($0 dollars) to between a $54 - $62 Trillion dollar catastrophe..... That was trillion with a "T"..... Need a visual?
$54,000.000,000,000 = Credit Default Swap ......$700,000,000,000 = TARP funded amount
When one takes the $54 trillion mess and divides it by the $0.7 trillion relief effort passed by Congress last October.... we see that we have impacted the crises by ...... a whopping 1.3%.... Mathematically it is similar to dining out and coming up entirely short on a $54 dollar tab, then plunking just 70 cents down on the table and running out........
Need another "moment of truth"?
At today's $12 Trillion GDP, it would take every penny from every financial transaction in the United States over the next four and a half years, to resolve this overbalance of liabilities... That means every penny spent in the United States for 4 and a half years is the amount equal to how far overextended our banking system currently is...
I think that qualifies as a debt that will never be paid...
From zero to $54 Trillion in just the lifetime of a 3rd grader... Wow. How does that happen?
Betting...basically... Gambling....perhaps....
Here is how it works in plain language.
You buy a stock...Let's just for fun, say it is as stock in "Hooters"... Why a stock that "sticks out" like that would ever go under... is unfathomable.... but just in case some moralistic group decided to go after that company, you decided to pay a broker to insure that stock.. You give the insurance guy a fee, and if that stock has dropped when you pull out, he pays the difference of that drop to you....
Guaranteed, right? Well..... not.... quite...... bring on structured investment vehicles.....
Senator Phil Gramm removed these "bets" from being regulated when he sneaked a indecipherable rider to the American Commodities Exchange Act of 2001 in the dead of night and buried it into a 11,000 page Omnibus Bill which he had personally held up for a full 4 months in conference committee, 3 months of which had caused the social services of the Federal Government to operate in default.... and it passed buried inside that spending bill by voice acclimation, simply so Congressmen could go home for Christmas.... (If any single person deserves the finger-pointing-blame for the global economy's collapse, it is Phil Gramm.)
That rider made these insurance bets far less regulated than those bets being made by any crime syndicate's bookie... Even that fellow has to follow some rules to keep from getting caught..... But with the act of removing those "insured bets" from any oversight whatsoever, there was no way or no one to regulate those insurers to see whether or not they had enough assets to cover their bets,... if they lost money... Since no one was looking... that money wasn't there, being long ago gambled away in Vegas or spent on the Bunny ranch north of town...
So all these bets were sold....in a deregulated market... and everyone began investing in them, because they were guaranteed... Now if this market had been regulated.... money would have been set aside to pay for a reasonable percentage of future defaults... But,... because of Phil Gramm's sneakiness... it turns out when we finally looked, there was no money there... The insurance safety net was in default....
But how did the balloon swell up so fast? How did it get so big now that everyone and every thing is collapsing? The answer can be summed up in one word: "commissions". Even a 3% cut of $54 trillion dollars is still..... $ $1.6 trillion... That's a lot of money to put into one's pocket.... Big Banks, who were playing these games on the side, began to realize that if they added these previously hidden amounts to their balance sheets, listing it as part of the bank's assets, that they too could on paper show great profits, and they too, could pocket commissions unbelievable a year or two before... Human nature being what it is.... as soon as regulation disappeared, the market took off....
Everyone bet. Some bet the market would rise... Others bet the market would fall. Some bet both ways thinking they were covered whatever happened... But everyone who bet...... bet more than they had... sometimes betting $30 dollars more for every dollar in capital they held.... So when the housing market peaked and started declining, and it was quietly discovered that the insurance which was to prevent that from happening was currently in default, then all the bets came due at the same time....no one had enough money and instantly we were suddenly bankrupt... by a margin of 30 to 1.
So what happens if we just write all these toxic debts off... What happens if $54 trillion were to be written off the books and each bank were to approach its investors and say: "Look, we are short 3 Trillion this quarter because we wrote off all of these debts... Yes, we will keep these pieces of paper off to the side, and someday they may again rise and gain value, but they will never play a role in whether or not we pay out a dividend each quarter.
"Whatever".... the world sighs... "it's just on paper anyway"... The bank stock being held by investors, upon such an announcement, actually becomes something of value again... For the stock can only go up... it's on the bottom now... Without the giant liability looming over every future quarter, the outlook for big bank stocks actually looks bright...
The only actual loss that occurs from doing this: is the dividend that would not have been paid that quarter anyway...
How can there be no consequences to just writing off trillions of dollars? Surprisingly as it may sound, since it was all virtual anyway, writing off trillions doesn't really matter...
Let's use this example to illustrate this concept... Let's say you once had an decent medical insurance policy and over the years it covered most of what you required of regular doctor's visits... But there was a sticky provision when you signed those hospital bills that said you would be liable to pay for any thing not paid for by your insurance company... Now between the insurance company and the hospital, several extra sets of bandages weren't covered, and even though you were charged them, they were never used and the hospital used them for someone else... but the charge for them was $14.95 and all ten of them give you a bill of $149.50 cents...
Let's assume that your hospital puts you on their payment plan (which you can not afford), and issues you their own credit card with a starting balance of $149.50. Since you can't even make minimum payments, you never pay it down... It's financially impossible. You can't.. you simply don't have the money... Your hospital carries that balance year, after year, and over a decade at 1.5% a month, your balance on that amount after creeping up by a little each month, stands at $905.75 dollars and cents... Now from both of your points of view, all of that interest money is virtual... Which get's proven because after 10 years you choose to declare bankruptcy, and your lawyer sends to that credit card company a notice of your intent, and approximately 3 days before your court date, you get an offer saying they will be willing to wipe off $755.25 from your amount if you will only rush them a payment of $149.50, which will allow them to wipe the offer off the table... If they are happy with the original amount ten years later, why continue the charade of interest charges?
Instead of complying, you choose to default: What are the consequences? The hospital doesn't care... They really didn't lose any money... They charged you for bandages they actually gave to someone else... you just couldn't prove it. The $149.50 spread over ten years will not make a dent in their profits... In truth... it doesn't matter to anyone whether you pay your bill or not...
Why do they insist on it? Because some poor suckers do pay the extra $755.s5 and give the hospital the full $905.25 amount...
It's as if your parents gave you a down payment for your first house.... Proper papers were drawn up but hardships in the form of children interfered and well meaning parties on both side decided to just let the balance grow... As it time passed, one day you get the message not to worry about paying it back.. After all is said and done, and over the passage of time, that balance is quite inconsequential... It is no hardship to the parents... It benefits the family as a whole....
So, what if we took these models and applied it to our banking crises? And said, we will continue to honor all regular commitments previously made, but these excessive paper debts, are disappearing today?
Those, like the Chinese, worried they would not get back their money .... would be relieved. The rest of the world, worried that they too would not get back their money .... would be relieved... Understandably, what they would not get back would be the soaring expectations they had once envisioned, as they saw their investments rise up 100% in value... But their capital they once expended? That would be payed back with no problem when the maturity came due...
So what mechanism can be used to do that?
Another Bretton Woods convention would need to meet and from there, a decision would need to be made stating that all debts previously on the books between nations would be resolved at the stated amount of principal plus a nominal percentage... say 1.5%.... Not wealthy by any long shot, but.... stable... Much more stable than the scares we have all experienced since the Lehman collapsed..... Right now... stability looks good.
The banks can follow suit. Wipe off all balances, then recalculate the liabilities by taking the original principal, plus that party's accumulated interest over the time that investment transpired, recalculate the books and we all know where we stand......
If you put $13,000 into a bank.... and it crashes, you lost your money... It can never come back... If you put your $13,000 into a bank and it grew to $113,000 by virtual manipulation and then suddenly crashed down to $12,000, you are probably whining like Phil Gramm that you lost $101,000 dollars... Whether you did or didn't... is based solely on your method of accounting..... Your actual loss of what you put it, is $1000.... So if legislation and agreements are forthcoming that give you your principal of $13,000 plus interest of 1.5%..... you should be happy... It's not $100,000! But it's not a loss either....
Has this ever been done before?
On a global scale, Bretton Woods is the closest we have come... But considering the gravity of the alternative we face, that after total collapse we will no longer have any financial or political system whatsoever to protect us from anyone or anything...... it is about time we make plans to join together to have another one....
But as we saw in the examples above, on a smaller scale financial transactions like these are finessed all the time and extend no harmful consequences to anyone what so ever.....
Bankruptcy has two connotations... one is scandalous ... the other pragmatic... One envisions one's neighbor hiding his head in shame as his house goes up for sheriff's sale, or.... one see Chrysler coming back strong just a few years from throwing in the towel...
It is the latter course we need to steer our nation towards... Those beholden to the first concept, preventing the appearance of bankruptcy out of shame, have no real stake in this argument over our financial future... They apparently have given up on the future... But those of us who see a way out, still believe that by temporarily rearranging a few of the rules we play by, we can emerge from this catastrophe with our heads held high, and all parties unscathed.....
We just have to change the rules a little. Being thinking men and women... that should not be hard to do. Once done, we shift tack, and set course on a new heading ... towards prosperity.
Historically Democrats have always had trouble during the early fall months... The leads they aspired to, that once looked possible, have slowly closed as the Republican Convention wraps up and now their democratic presidental campaigns, just seem to run out of steam...
It happened to Carter; it happened to Mondale; it happened to Dukakas; it happened to Clinton; it happened to Clinton during his second term; it happened to Gore; it happened to Kerry; and we should certainly expect it to happen to Obama-Biden....
I will be blunt here. The Democrats peak at the cnnvention...where as Republicans who have always struggled since Iowa, finally just get it together at the convention... There is little you as a Democrat can do. You can visit a town, say the same things, smile and wave alot, try wearing sweaters, slamming beers, and the tiny little tricks the marketing advisers try to reccomend you follow, but against hard hitting Republicans, you just look stale...And your tricks look fake. Hell, we heard the same damn message for 19 whole months now... It's boring.
Looking back over the historical litany above, there is one exception that stands out.... That was Clinton in 92. His campaign was stuck in the doldrums until it got some unexpected help from Ross Perot.... Suddenly we were discussing the budget.... Other things were mentioned, like NAFTA and it's gian sucking sound...., but the budget captured the imagination of America... Clinton seized on that topic, and out performed Herbert Walker, winning the election while still giving up 20% of the vote to Perot....
I remember Clinton rolling into my town just days before the 92's General.. He said the right things, but it was the fact that we believed he would tackle the deficit, we really believed it then, that gave him stature...
This week's convention tipped the Republican's hand... They will drive a rural/ urban split... Pitting the Toby Keith crowd against those loving the Dixie Chicks... Those working with their hands, against those making their living with their ideas....
Face it, Democrats are vulnerable on that front... Those in charge of advising the candidates, know little of this broad segment of rural America... That vast segment is the Republican's target and now with Sarah Palin, they have a real shot at winning it.... a real shot...
So how do Barack and Joe combat this weakness they seems to posess all Democrats? (In truth, McCain has it also)? Please, don't go on a fake hunting trip, that opens you to ridicule...(like riding in a tank)....
Let's go back to Iowa.... What made candidates Barack and Joe Biden both successful in that rural community? You were both there... you know what you did right, and by now, you ceretainly know what you should have done better.... That is who you need to become again... Forget the pundits call to stay on message... everyone who takes the day off to come see you, already has seen your debates, already has read your news stories, they came to see you...
Here's a fake address of what I would recommend, say in Oklahoma.... "Ladies and Gentlemen, I'm not going to lie to you... I'm not much of a cowboy, a farmer, or an oilman... I live in a bubble... a bubble they call Washington....
Most of you will no doubt vote for my opponent... If that is what is in your heart, then its ok...I do understand and won't hold it against you... But there are those who have crunched the numbers and told me that I and Joe have a good chance of running this country. As soon as the election is over, I start that job...in fact without the pay until January 20th (smile).... I hope to become commander in chief of the United States.... Obviously, Oklahoma is a part ot that great country, the United States of America.....
I will need to represent you to the best of my ability... That means I need to understand you... What I propose is not giving you a great speech, one you will forget tomorrow because it says so little.... What I propose to you is giving you something more important... Time.. time to ask the next president of the United States (smile) I hope... those questions that are really on your mind...
I don't know. You may not like my answers, and that's ok... But at the end of our conversations, you will know where I stand... And the motivation behind as to why I stand for that....
So lets get started.... First of all, how is the economy going in this town... How are you surviving the housing bubble burst, How many of you are out of work... Are jobs hard to find... And what could I do, as the next president of the United States, to make your lives better....Yes you ...you go first.......
Having watched you, I know both of you listen very well.... As you get hooked back into rural America's values, just as you both did in Iowa, you automatically protect your flank form the gun toting, hip swinging, political version of Paris Hilton... (Joe is so lucky. I wish I was debating her....)
You don't win rural America by persuasive speeches... You win rural America by letting them know you are an ok guy after all. They've all heard the horror stories, they get 5 emails about you each day.....They need to leave reassured 1) that you really care about them, and 2) that their life will go on if you get elected... just as it was, if not perhaps a tiny bit better....
In todays world, what goes on in Oklahoma, instantly gets back to rural Pennsylvania, rural Virginia, rural Colorado, as well as the rural towns across all 50 states....
Forget the bubble..Forget the politicos,.. Forget the television bits....
Its all about people...Its all... about people....In the end, bubbles, politicos, and televisions sets won't step into a voting booth... People will....
I shudder to think of this country again choosing the wrong person to lead, a Republican,... simply because rural America was not comfortable enough with the "right" person to lead this nation.....
