Praise for Obama

Yesterday, the Wall Street Journal had an article about how President Obama had met with business leaders and had since issued a mandate to his staff that they develop a bill that would in effect reduce government regulations on businesses.

Finally someone is talking about something that will actually help this economy.  America has been reducing its manufacturing base since the mid 90s when Wal-Mart was first allowed to use Chinese manufacturers for their products.  As a result of Wal-Mart's cheaper prices, the rest of America followed suit and we have since exported most of our manufacturing jobs to Asia.  In 2000, manufacturing represented 28% of our Gross Domestic Product.  In 2010, it only represented 12%.  While we are still the largest manufacturing country in the world, you can see that we have reduced our manufacturing considerably.

And manufacturing is the primary job creation tool we have.  Even our past unemployment reports that have been coming in somewhat positive, are not showing an increase in manufacturing jobs.  Instead most of the jobs created were in the food service industry.  These aren't the high quality jobs we are looking for and mostly represents a very large underemployment sector.  People who can't find the jobs they need end up waiting on tables instead.  Yes, they are employed but not in the right place.

If we were to include underemployment in our statistics, the unemployment rate would be more like 17% (according to John Williams, the economist at Shadowstats.com).

America can no longer be the world's consumer.  We've run out of money and are quickly running out of credit.  Plus America is getting older.  The next wave of baby boomers has reached retirement age and will be retiring soon.  Retirees very simply spend less money.  While our kids are getting older, there aren't as many of them as there are of baby boomers that will retire.  America simply does not have the money to spend.

That means for America to get back on its feet, it must sell its goods to someone else besides Americans.  Unfortunately, we don't manufacture as much anymore, as it has mostly been sent overseas.  If we can bring manufacturing back to America, we can make products here, and then sell them overseas to those countries that have the money (China, Asia, etc.).  This will create actual jobs.

Nothing else we can do will create jobs.  The government can print money all they want (and call it stimulating the economy) and distribute it to people to spend, but all that will do is cause prices to be higher.  It won't create jobs in spite of what they think.

It appears they may have figured this out.  President Obama wanted to know why businesses weren't hiring in spite of good earnings.  So he invited some business leaders to the White House.  They explained it to him.  Low wages aren't the only advantage China and Asia have on us.  They also have low taxes and low regulations.  The regulations in America are what is killing American industry.  Back in September the Intel CEO, made a public comment about how he could build their new plant in Asia for $1 billion less than he could in the United States.  And he blamed it all on regulations.

So President Obama appears to have finally listened.  We'll see if he actually follows through.  His mandate was to find a balance between safety and environment regulations without cutting off business development.  That is much easier said than done.  There will have to be sacrifices in both safety and the environment for
this to succeed.  I'm doubtful, but I'm at least happy that they are talking about the right solution to our unemployment problem.

I have been very critical of President Obama in the past (he isn't alone and I certainly haven't limited my criticism to Democrats) so when he does actually do something right, I want to praise him for it.
This is the first step in the right direction. It may be too little too late, but at least we now have some hope.  Let's see if they can actually take the second step, which requires action, or is this just going to be another political talkspeak?

No Inflation

The Consumer Price Index (CPI) was released this morning showing that America is not experiencing much inflation.  Ben Bernanke, the Federal Reserve Chairman, was on 60 Minutes a couple of weeks ago, touting why it was okay for the Federal Reserve to print more money.  He said America was not increasing the money supply and therefore was not creating inflation by doing so.

He is only partially right in that statement.

He isn’t creating inflation in America because we are going through a deflationary time as we watch house prices fall and credit reduced.  However, not all countries are in the same boat.  By printing money, he is increasing the supply of dollars available in the world.  And remember, the U.S. Dollar is the world’s reserve currency.

What does that mean?  It means that all international trade is done in terms of dollars.  If Mexico wants to buy oil from Iran, that oil is priced in dollar terms, not pesos, and Mexico must give Iran dollars for the transaction.  This means Mexico must have dollars on hand in order to do this.  And it means that Iran will be taking in dollars from Mexico.

So increasing the number of dollars in play by printing up new ones, the rest of the world is going to start experiencing inflation.  And already we are seeing evidence of this occurring.  China raised interest rates on Christmas day in order to fight inflation in their country.  Other countries in Europe and South America have followed suit.  The entire world has inflation, except for the United States.

(Of course the United States has inflation too, we just don’t measure it the way we used to in order to keep the inflation rate low and give the Fed the flexibility it needs to keep printing money.  But that is an entirely different subject which I will discuss at another time.)

Inflation is also evidenced in commodity prices.  Food commodities were among the highest hit.  Items like sugar, soybeans, coffee, wheat, etc. all went up considerably (anywhere from 40% to 80% price increases) in 2010.  Higher food prices (while eliminated from the CPI measurement) are substantially higher, but particularly higher in emerging market countries.  And when people can’t afford to eat, they start fighting back.

Where is this fight going?  As they complain to their political leaders the leaders are realizing the inflation problem they have is a direct result of the Federal Reserve increasing the dollars in existent by printing up more.  This had led to discussions that perhaps the U.S. Dollar should not be the world’s reserve currency.  China and Russia recently completed an agreement to trade with each other using their currencies and avoiding the U.S. Dollar.  This is probably just the beginning of a trend.

What happens if the world decides to quit using the dollar as the world’s reserve currency?  These other countries would then have a bunch of dollars on hand that they won’t need anymore.  They would come back to the United States which at that time would create severe inflation in the United States as we would have way too many dollars available in this country.  The result would probably be hyperinflation.

So in conclusion, the Federal Reserve needs to be helping fight inflation on the European, Asian, and South American fronts.  They can’t simply ignore this or use different calculations to try and fool the foreign public into thinking there is no inflation.  In short, the Federal Reserve should just quit printing money.

Will this happen?  Ben Bernanke, on 60 Minutes, was trying to sell the second quantitative easing (printing of $600 billion dollars) to the American public.  At that time, he admitted that a third and perhaps even a fourth quantitative easing may be needed.  (The first quantitative easing was the bailout of the banks in 2008 to the tune of over $1.5 trillion dollars.)  He did not sound like a man who understands the repercussions of continuing to print money.

He got his nickname, “Helicopter Ben” because he once made a speech that the way the U.S. could solve deflationary issues was to simply dump dollars on the American public by throwing them from a helicopter.  Hopefully the tea party movement can get him to change his attitude on this.

It's All About The Debt

It’s all about the debt.

I keep hearing that the road we are on is unsustainable.  Yet this word does not seem to resonate with most people.  What unsustainable means is that we can’t keep doing what we are doing without it eventually breaking or going bankrupt.  And yet the majority of Americans appear to continue to think that we can.

I just saw a poll in the Austin American Statesman where they were asking voters where in the budget the state should cut.  The two biggest areas of the state’s spending were in education and health care.  And yet, that is the area the vast majority of those polled indicated cuts should not be made.

It isn’t that these programs aren’t important.  They are.  It isn’t that these programs aren’t good.  They are.  Whether they are effective are not is debatable but that isn’t the issue either.  The issue is that we can’t afford them.

Who doesn’t want small classroom size?  Currently Texas mandates an elementary class of only 22 students per every teacher.  I think that is great.  But at what expense?  When I went to school, I never had a class size that small.  And I think that I turned out pretty well educated.

At what point do you stop?  If 22 students per class size is good, then 20 is even better.  Better still is 18.  But does it really help?  And is it worth the expense?  I don’t think so but that isn’t really the point.  The point is that unless we want to have our taxes raised again, then a larger class size is just going to have to occur.

And if we allow our taxes to go up, I again ask, at what point do we stop?  You just can’t tax people forever before they decide to move to a state (or a country) that allows them to keep more of what they make or have made.

I think people, in general, are pretty much fed up with the amount of taxes we pay.  They don’t think they are getting their money’s worth and they pretty much don’t want to pay more, regardless of the services they may have to give up.  That’s why Texas keeps electing Republicans in office.  The Republicans continue to pledge not to raise taxes (although they did it anyway when they passed the Franchise Margins tax on businesses).    However, they aren’t doing much to cut spending.  And that is where our politicians really need to step it up.

However, I don’t see our politicians really stepping up, until we, as a people, actually tell them to.  If this Statesman poll was any indication, we simply aren’t ready to do that yet.  I guess we still need a little more economic pain before we are.

I got a kick out of Greece when the government reached the point of not being able to pay its bills.  The Greek government decided to cut spending, which was quickly followed by riots and protests from the public citizens.  So then the Greek government decided to raise taxes.  This too, was followed by more riots and protests.  The public simply doesn’t understand the reality of finance.  You can’t spend more than you make forever, because eventually no one will loan you any more money.

The United States is in the same boat.  Yes it is a larger boat.  Our solution is to counterfeit our currency by printing more money.  Greece couldn’t do that since they don’t control the Euro printing press.  Eventually the Eurozone bailed out Greece by printing them some Euros they could use to pay their bills.  However, it came with stipulations that Greece would get its spending under control.

But the United States can’t counterfeit its money forever.  Because sooner or later, other countries will refuse to accept our counterfeit money if we do.  So we still have some time to get our spending under control, but I’m simply not seeing the U.S. citizen accepting that as the reality.  This poll was simply another indication of America not wanting to spend within our limits.  And until that attitude changes, we are headed on the path to bankruptcy.