For Those on Fixed Incomes, Government Bailout a Scam

Those people who get by month by month on a fixed income should know that the way that the economy is being restored will, in fact, help corporations and banks and get things back in order. However, the way the bailout is structured simply leaves no doubt behind that your dollars will be worth less in a short amount of time.

Think about it like this, banks are going under because of speculation on the prices of real estate, and the easy ways people had of acquiring loans and mortgages, all the while not being able to actually pay them back thanks to a variety of reasons. Money, which traditionally held value thanks to actually backing in gold and silver, can now be easily created using a press of a mouse button. The Internet has also created an easy way to shop, where consumers can spend money they don’t have easily and conveniently from the comfort of their own home. The average savings was abhorrently low, and most people were barely getting by on each pay check.

The result was what we now call the credit crunch, as money had vanished as speculative wealth was evaporated as prices readjusted after the bubble had popped. Some banks went under, but most major banks were given bailouts, large sums of money (in the billions), and the government decided to buy out bad assets. The burden of this bailout was placed on the taxpayer and an increase in the money supply to help alleviate the credit crunch. Interest rates were lowered to about zero, and wild programs such as ‘cash for clunkers’ were hurriedly enacted.

The problem with all this spending and the bailout plan is that the exit strategy is flawed. They plan to simply remove capital (cash) from the system after it recovers. How exactly are they going to do that? Instead, we will see a great increase in prices of oil, food, and other commodities as what more any more seems like ‘play money’ is injected into the system.

How do you protect yourself from this? As the old saying goes, if you can’t beat them, join them. Most of the people making these policy decisions have more than average savings and investments. Investments in the stock market especially in banks would be particularly lucrative as they are the ones that are being handed literally tons of cash, other investments include oil futures and commodities. It causes those who earn mediocre salaries that do not allow for savings to be at a disadvantage, as they are being left out on the beneficial side of inflation and government hand outs and instead on the disadvantageous position of slowly learning less real value per month.

As John Maynard Keynes puts it,

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens…. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

New New Deal Imminent

Firstly, the title is not a typo. The New Deal, which was implemented under Franklin Delano Roosevelt during the time period of 1933 to 1939. During this time national unemployment was 25% and even higher in certain industrial and mining towns. The result of the New Deals (there were two) were mediocre at best, but did include the repeal of prohibition (a time when making or drinking alcohol recreationally was illegal). A number of economists believed that the New Deal (also used to represent both New Deal 1 and 2) actually prolonged the Depression. This Depression did not end until WWII thanks to British buying of war materials from the US and increased production of war gear.

The second New Deal, popularly known as the “Stimulus Package”, is making it’s way through. It is in fact a spending package by the Government to spur new jobs and more demand in various sectors of our economy. Although it is currently around 850 billion dollars, it is bound to increase as time goes on if the economy does not recover quickly enough. Much of this goes into infrastructure development, and about half of it is going towards tax breaks. A few restrictions on the plan are that any buildings built from it must be built from American materials, putting caps on executive pay. A few of the companies receiving aid (not just from the stimulus, but also from the bank bailout) are Citigroup, Bank of America, and American International Group (AIG), were notorious for their exectutives pay being far over the $500,000 level. For example the CEO of Citigroup in 2007 made a $3.1 million dollar salary.

My concern over this new new deal is that it will be similar in effect to the 1933 New Deal. Putting caps on salary can be considered noble but also is anti-capitalistic. It reminds me of an old story heard years ago called “The Little Red Hen” as revised by Ronald Reagan:

A modern day little red hen may not sound like or appear to be a quotable authority on economics but then some authorities aren’t worth quoting. I’ll be right back.

About a year ago I imposed a little poetry on you. It was called “The Incredible Bread Machine” and made a lot of sense with reference to matters economic. You didn’t object too much so having gotten away with it once I’m going to try again. This is a little treatise on basic economics called “The Modern little Red Hen.”

Once upon a time there was a little red hen who scratched about the barnyard until she uncovered some grains of wheat. She called her neighbors and said ‘If we plant this wheat, we shall have bread to eat. Who will help me plant it?’

“Not I, ” said the cow.

“Not I,” said the duck.

“Not I,” said the pig.

“Not I,” said the goose.

“Then I will,” said the little red hen. And she did. The wheat grew tall and ripened into golden grain. “Who will help me reap my wheat?” asked the little red hen.

“Not I,” said the duck.

“Out of my classification,” said the pig.

“I’d lose my seniority,” said the cow.

“I’d lose my unemployment compensation,” said the goose.

“Then I will,” said the little red hen, and she did.

At last the time came to bake the bread. “Who will help me bake bread?” asked the little red hen.

“That would be overtime for me,” said the cow.

“I’d lose my welfare benefits,” said the duck.

“I’m a dropout and never learned how,” said the pig.

“If I’m to be the only helper, that’s discrimination,” said the goose.

“Then I will,” said the little red hen.

She baked five loaves and held them up for the neighbors to see.

They all wanted some and, in fact, demanded a share. But the little red hen said, “No, I can eat the five loaves myself.”

“Excess profits,” cried the cow.

“Capitalist leech,” screamed the duck.

“I demand equal rights,” yelled the goose.

And the pig just grunted.

And they painted “unfair” picket signs and marched round and around the little red hen shouting obscenities.

When the government agent came, he said to the little red hen, “You must not be greedy.”

“But I earned the bread,” said the little red hen.

“Exactly,” said the agent. “That’s the wonderful free enterprise system. Anyone in the barnyard can earn as much as he wants. But under our modern government regulations productive workers must divide their products with the idle.”

And they lived happily ever after, including the little red hen, who smiled and clucked, “I am grateful, I am grateful.” But her neighbors wondered why she never again baked any more bread.

Let us hope that it doesn’t come to that point.

Unemployment Still Low By Depression Standards

According to the latest report by the Bureau of Labor Statistics [1], the November 2008 unemployment rate was 6.7%.

During the Great Depression’s second year (1930), unemployment rose from 3.2 to 8.7 percent. In 1931 unemployment rose to 15.9 percent. At its peak in 1933, unemployment got to around 25 percent, more than any other country besides Germany. The chart below gives a rough representation of the aggregate unemployment rates in the US from 1890 to 1999.

So, one can hardly say we are in a depression by looking at our current unemployment rate. If unemployment continues to rise, however, we cannot rule out the possibility of a depression happening. Below are charts taken from the Bureau of Labor Statistics that go up to 2008.

[1]http://www.bls.gov/

Lowering Prices Is Good Business These Days

Thanks to the economic situation, prices are starting to go down. Retailers, restaurants, and pubs are all lowering their prices to stay in business. From the pub in England offering a £1 food-menu to the Barnes and Noble here in the US putting some really nice weekly planners half price, sellers are saving their customers money and themselves in the process. In fact, from January 7th 2008 to January 2nd 2009 Walmart (WMT) went up over 25% while McDonalds (MCD) went up over 11%. [1]

Dow Jones Industrial Average 2008

Whether or not things will stay like this, I don’t know. One thing is for certain, if you are a retailer or sell goods to average consumers, lowering the price is the best way to attract more customers. Even though I have some money to spend, I feel like spending less when the economic situation is poor. I’m sure others feel the same. The worst thing to do now is raise prices.

I hope that the economy recovers in 2009, but if it doesn’t I think that the “sell cheap” motto should be adapted by sellers. If not, then let’s hope some revolutionary technology is discovered that will improve human life and the US and World economies.

[1] http://finance.google.com/finance?q=wmt%2C+mcd

Economic Summary of 2008

As the world begins the year 2009, everyone is probably wondering whether or not the economy will collapse further. Has the ripple effect reached the edge of the lake yet, or is this only the beginning of a economic fire that will burn down the entire forest?

In looking specifically at the United States economy, I would say that further readjustment is required specifically in the credit markets. Tightening credit on consumers, such as you and I, is understandable. But tightening credit on business, especially industries that have high upkeep costs, is essential. How is a factory that has suffered the economic storm of 2008 going to recover if it cannot borrow enough money to pay its workers, run its machines, or buy equipment?

The housing crisis, a crisis that could be avoided by being practical about home equity values and the absence of sub-prime lending, has cost banks so much that they are now withdrawing loans to those that need it the most such as small business owners with good credit scores. The very definition of sub-prime is “that which is less than standard”, or in our case lending to those with a less than safe record on borrowing. Lending to those who have defaulted in the past, lending to those that have no record of credit, etc.

Much of this lending was predatory, where the lenders had full knowledge of the loan recipient’s ignorance of the terms of the loan. This led to exorbitant fees and hidden terms and conditions for the recipients, and a fat paycheck for those who stooped so low as to engage in the sale of these loans. To make things worse, these predatory lenders, who traditionally preyed on the weak (those with very poor credit scores) were making a killing on those with good credit scores.

This, like all bad things, had to come to an end. Eventually, so many people were defaulting on these loans and many lenders went bankrupt, but don’t feel too sorry for them, their management managed to save a few golden parachutes. That was not the end of it, because these lenders happened to be on the stock market and up until the meltdown thier financial reports looked very good, attracting the attention and the investments of large hedge funds and individual investors alike.

Once the meltdown happened, a ripple effect occured and in the end trillions of dollars evaporated from the public. Those most banks most involved with the sub-prime loans or stakeholders of other banks that were received a major blow, and those small banks that involved themselves in over-zealous sub-prime mortgage lending went out of business.

All the coverage of this by the news industry caused a slowdown in spending, and that had a ripple effect on the car industry and others. This holdiday season was slow, and the only light at the end of the tunnel is lower gas prices, a light that is dimming down.

Oil Supplies High, Demand Low

The Organization of Petroleum Exporting Countries recently decided to cut production of oil in an effort to raise prices, says Bloomberg. A funny thing about it is people are betting against the price of oil, in an ever worsening economy. The US Department of Energy predicts a .5% drop in demand next year, it seems the Recession of 08′ is finally doing some good (reducing fossil fuel consuption). The unfortunate thing about the oil drop is that it will probably cause a reduction in R&D on alternative energy.

Dollar, Constitution under Siege

We as Americans need to wake up to what we are doing, and understand how the economy works and what our part is in it. Can we really expect the world to put up with the United States deficit? “Every American has an implicit mortgage of over 175,000 dollars each, each household, 400,000, but unlike a typical mortgage, there is no house to back this.

Policy changes could prevent all of the previous predictions from occurring. Unfortunately, that will not occur, in due course, the Constitution will continue to be steadily undermined and the American Republic further weakened.

-Ron Paul, April 26th, 2002

We’ve already pumped in 700 billion dollars, we are going to pump in another 700 billion dollars, this is going to destroy the dollar. -Ron Paul after the Fannie Mae Freddie Mac, other bank buyouts and before the 700 billion bailout passage.

David Costello’s Nightmare

David Costello, an advocate and builder of free homes for the homeless, recently realized the nightmare that is the Des Moines city council. The man is retired, and although short on cash himself has embarked on a mission to single-handedly fight homelessness in the Des Moines area. City Council has ruled the structures against fire code, and has promptly destroyed the homes built for free for those that have nothing else.

They ruled that the huts that he had built, free of charge near the Des Moines River were to be torn down after an accident involving one of the homes burning and a man getting minor burns. The homes were torn down on Thursday of last week, in the middle of an Iowa Winter. I don’t know about the people reading this blog, but winters in Iowa are very cold. The huts, which were constructed from pallets and scrap lumber had windows, manufactured doors, and wood-burning stoves. Anyone who has camped knows that tents are really cold, and don’t offer much protection against the elements. Regardless, the City Council declared the shanties fire hazards and decided to bulldoze them.

David Costello stands among rubble

David Costello hugs Primary Health Care worker Deirdre Henriquez as homes are torn down. Photo courtesy of JOHN GAPS III/THE REGISTER

David, the man who freely built these homes was caught crying as the homes were turned to rubble. “There is so much need, and there is so much waste” said Costello as the homes were destroyed. Dwight Mericle, one of the homeless living along the river said “This really sucks, A whole lot of hard work went into this. We weren’t hurting anybody. It’s a lot harder living in a tent, but I was in a tent before I got my hooch ( the word described for the free homes ), so I guess I can do it again.”

John Menting crying after being told he will have to leave

Above: man weeps after being told by city authority he must leave JOHN GAPS III/THE REGISTER

My question is, why is the city council ruining everything that was done freely for the homeless? Must they waste money on bulldozers and putting these homeless up themselves when kindhearted people are doing it for free?

The Des Moines Register Article

The above video shows David Costello explaining the situation. JOHN GAPS III/THE REGISTER

Who is Responsible for our Financial Crisis?

Who I ask is responsible for the financial crisis of 2008? (If you don’t feel like reading this post but have your own notions of who is responsible then please feel free to comment without reading the below).

This is a very hard question to answer, and I for one certainly do not have a definitive answer. I can, however, provide some clues as to what put us in this situation. The average American consumer saved 10% of their annual income in the 1970s, now the average consumer saves 0%. The national debt is over $10,600,000,000,000!

Going back to personal savings if Americans were able to save 10% of their income and avoid going into debt we would not be experiencing depression today. But going back to the root problem, if rates weren’t so low then people wouldn’t be so enticed to borrow so much. However if rates weren’t raised (which they were before the mortgage crisis) most likely most homeowners would be able to make their house payments.

 

Clinton Wants Supporters To Pay Off Her Campaign Debt

Hilary Clinton’s presidential campaign is still active and running, accruing more expenses and using up more man hours of labor. Only now instead of working to win the campaign for president, it is
trying to get donors to pay back some of the 7.5 million dollars in debt. To add to the misery, the value of the dollar is appreciating, and credit is harder to come by. That means that the debt accrued is worth more now than when it was accrued, instead of the historically inflationary advantage that came with owing debt. My question is: what makes it legal or necessary to accrue debt in a presidential campaign?
Shouldn’t they simply spend what they have, instead of spending more than the donors give them? This is another living example of the nature of the US government, “spend first, find out how to pay for it later”. No wonder the state of the union is so unpleasantly confused and complicated.

We are Witnessing the Death of a Giant

General Motors has reached the lowest level in over 70 years, and earlier today touched $1.70 (that’s right, one dollar and seventy cents). After yesterday’s rejection of a large government aid package, GM will finally be allowed to die. There was a time when GM was the largest corporation in the US, and there was a time when GM was the single largest employer in the world. However shoddy products and expensive production costs, mixed with its union liabilities and benefits for generations of retirees has culminated into an unmanageable mess that cannot be fixed by any non-miraculous means.

GM STOCK PRICE