Thursday, June 04, 2009

Depression 2.0

I hate to say it, but I think we are well into our second depression in the United States.  A depression seemed so unlikely based on the lessons learned from the last one, but we are facing a very unique set of circumstances here that make depression 2.0 just about unavoidable.  The ingredients we have in place are pretty rare, but perfect for causing the second major U.S. depression.  We have a systemic shock to the world banking system as a result of the U.S. government allowing loose credit for way too long (republicans and democrats share the blame here).  We have an inexperienced, charismatic, president, who does not have a clue on economics, and has surrounded himself with a ton of liberal yes men advisors.  We have a democratically controlled congress that is sleeping at the wheel and rubber stamping anything the anointed one want’s to do.  We have a corrupt and biased press that refuses to honestly evaluate anything the president does.  The only voice of reason here (fiscal conservatives), are completely drowned out by the biased media coverage.  This rare stack-up of events puts us on course for a lengthy downturn that will feel much more like a depression than a recession by the time it ends if ever.

The economy is in horrible shape right now.  Forget about reports from the biased media that consumer confidence is up, and that housing is improving.  The media is talking the economy up as much as they can, because that is what Obama would want them to do.  He is paying for good media coverage through kickbacks to GE (parent company of NBC) including Cap and Trade preferences, Universal Health Care preferences, and unrestricted access to the White House.  I was flipping channels the other day and found a special on the interworkings of the Obama White House. This was not a Fox News report, because they would never get access like that.  It was obviously NBC the most biased and corrupt news organization out there, getting repaid for there biased reporting of the anointed ones election.  The media is cherry picking good news about the economy.  The economy is not improving, unless your definition of improvement is getting worse less fast.  The economy may be getting worse less fast, but it is still getting worse day by day, month by month.  Q1 home prices were down by the largest amount Y/Y on record.  Home price declines are actually accelerating right now.  Tough to find that in the media “housing market is improving” reports.  Consumer confidence may be ticking up, but same stores in May (a measure of actual consumer sentiment) were lower across the board.  In other words consumer spending continues to drop.  The problem with talking the economy up is that it rarely works.  Eventually people will figure out that the talk is just talk, and the economy is in truly bad shape.  It’s not that hard, go to a shopping mall and see for yourself.

A shock to the banking system is not enough to take the strong American economy down for good.  Normally easing interest rates and waiting the nine or so months for the changes to filter through the economy is enough to fix the problems.  Rates were lowered early on in this depression. The initial TARP capital injections into the banks were probably also required to stabilize the banking sector.  I would say about 300 Billion between AIG and the troubled banks would have been enough.  After that, you need to wait things out.  Unfortunately, along comes a new president with a wealth redistribution, socialist agenda.  Being opportunistic, he sees the crisis as a means to push his agenda.  His agenda though is pure anti-growth, pure punish the hard-working, and pure spoil the lazy.  Basically a pure anti-American agenda that would have the founding fathers spinning in their graves.  I could never really figure out the reason for the second amendment, but those genius founding fathers were looking 100s of years ahead to how our system could be corrupted by the executive branch.  The 2nd amendment is a check against unlimited executive power, and it may be time to use it.

So at a time when only sound economic policy can get us out of this depression, we have a president who could care less about sound economic policy, and cares only about social engineering.  We have a president that is spending about $18,000 per tax payer this year to “fix the economy”, with policies that will never work.  I think if you asked the average American they would want there 18k back.  The problem with spending 1.8 trillion dollars that you don’t have is that you have to pay it back some day.  You better get a massive bang for your buck if you are going to put all taxpayers on the hook for that kind of money.  When it does not work, it is not free.  The repayment of that debt will be a headwind against the economy for the next 50 years at least.

Lets just look at a few of the ways that Obama is damaging the economy with his policies and steering us right into a depression.


TARP was never intended to be used to bail out the car companies.  GM and Chrysler both have broken business models and are not savable. Every dollar that we give them is flushed down the toilet.  Unless we offer to provide them unlimited funds to stay in operation they will be both be bankrupt for good in short order.  Worst of all, Obama corrupted to bankrupcy process to payback the UAW for helping elect him.  Unless the Chrysler bankruptcy is tossed out on appeal, our bankruptcy laws will be broken in the United States, and that will dry up investment in U.S. companies.  Why be a secured investor in a company, if bankruptcy rules can be changed for political reasons?  I also do not understand how TARP can be used to buy 60% ownership of a car company out of bankruptcy.  I guess since the bill is 1000 pages long, and nobody read it so Obama can do what he likes no matter how unconstitutional.  The initial TARP funds were distributed by Bush as preferred stock would have likely been repaid with the exception of AIG.  AIG should have been cut-off after the initial stabilization effort and been allowed to fail.  Conversions of preferred stock to common stock (Citigroup) is the same as flushing that money down the toilet.  So under Bush they were careful to make sure that TARP would be repaid, and tax payers would not be damaged.  Under Obama TARP has been turned into a slush fund of bail out money that will probably never be repaid.  If transparency is ever brought to TARP it will be clear that the money distributed under Bush was mostly repaid, and under Obama was not repaid at all for a huge taxpayer loss.

Stimulus Bill

Let’s face facts here; the stimulus bill has not stimulated the economy in any way.  It was a welfare bill disguised as a stimulus package.  If you gave me 770 billion dollars to stimulate the economy, the recession would already be over.  I would have suspended income tax collection, and reduced corporate tax rates until the 770 billion was “not collected”.  The key difference here is that not collecting the money is not an expansion of government, and is very easy to unwind.  Every working individual and corporation would be immediately stimulated.  They may not spend the extra money, but if they don’t it will get saved which is good for the banks.  It also gives people an incentive to work, and businesses an incentive to hire.  The stimulus package was simply a welfare package, and gives no incentive to work or for businesses to hire.  Let’s break it apart a bit here.  A massive portion of the stimulus was for the “Make Work Pay” tax credit.  A tax credit is not a tax cut, and that is a huge difference.  There were no actual tax cuts in the stimulus package despite media and Obama reports to the contrary.  The tax credit is phased out for 100k+ earners, and is paid out even if you did not pay taxes. (Refund of your Social Security and Medicare withholdings).  So there is no stimulus here for high income earners, and he has raised the marginal tax rate for low income earners disincentivizing hard work.  Basically, a low wage earner who qualifies for the tax credit faces a phase out if they earn any more money as well as increased tax rates.  The double whammy makes it not worth it to work harder and earn more money because the government will take most of it.  100s of billions of stimulus is welfare for states so they can temporarily avoid tough budget decisions.  100s of billions are to extend and raise unemployment benefits which has been shown over and over again to discourage people from seeking work, and expanded Medicare payments which don’t stimulate the economy at all.  The rest is for shovel ready projects of which less than a billion has been spent so far, and for research grants to study liberal pseudo science like Global Warming.  The quality of science is deteriorated by government assistance, as it politicizes science.  The government will siphon off 75% of the R&D grant funds by administering them.  It would have been a much better idea to expand the corporate R&D tax credit.  At least corporations would research stuff that could help the economy as opposed the government standard pig flatulence studies.

Cap and Trade

The most scientifically dishonest policy from the president that said he would use sound science to make public policy.  Obama’s energy policy will cost the average family $4600 a year in extra energy and related costs in a time of depression, and ship millions of manufacturing jobs overseas where energy will be much cheaper.  The policy will also have no measurable effect on Global Temperatures that have been dropping for the last 7 years and are expected to continue to drop in their normal 30 year up and down cycle as determined by the Pacific Decadal Oscillation (PDO).  There is no current substitution for oil, and CO2 is a harmless gas that is essential for life as we know it.  If this policy is enacted, not only will a depression be guaranteed, but our national security and quality off life will take a huge hit.  Keep in mind that the science of global warming per the IPCC was determined by a show of hands, and not by reproducible experiments.  I was not aware that a show of hands trumps an actual scientific experiment, but this is how Obama science policy works.  I would really appreciate a public debate on this matter before we head back to the energy use levels of 1905, but it is not going to happen because the liberals would not win, and they are the ones in control now.

Universal Heath Care

Here are the facts.  Health care in the United States is the best in the world.  Countries that have universal health care ration it with long waits and by letting people die while waiting for treatment.  The problem is also greatly exaggerated.  I keep hearing 50 million are uninsured.  Well 10 million of those are illegal immigrants, and they should not get universal heath care.  8 million more are under 18, and can probably do without.  Another 10 million are 18-34, and probably choose to not have it to save money.  That leaves just 20 million who are probably too poor to pay for health insurance.  Mandating that these 20 million now pay for health care will not work, because they can’t afford it.  Once you realize all this, you can see it is just another Welfare policy.  Tax the rich and use it to pay for the poor’s heath care coverage.  Well there are many problems here.  First off, universal health care is a disincentive to work.  If you need a job to get good heath care then that is a reason to go out and get a job.  If you tax the rich to pay for it that will put a drag on the economy and make them less likely to work hard.  Increasing taxes in anyway will hurt the economy and that is a proven fact.  Tax the rich enough and they will simply leave the economy.  Lastly, the government does not run anything efficiently.  Getting them involved just means more waste and worse care.  If it ain’t broke don’t fix it is my vote.  If this somehow gets through, a depression is guaranteed because they will tax us to death to pay for it.  Think about a national sales tax.  Think about taxing your company health care benefits.  Think about sin taxes.  Obama is thinking about all of these, and every one of them will kill the economy.

Reckless Spending Plans

If you combine TARP, the stimulus package, the 2009 and proposed 2010 budgets, and the expanded balance sheet of the FED, we have more deficit spending (planned or spent) in the last 6 months, than the last 30 years combined.  This reckless spending is driving up interest rates, devaluing the Dollar, and causing domestic inflation.  Mortgage rates are up ¾ of a point in a week.  Oil is heading back up to $80.  This is all happening before the economy has started to recover.  In a normal recovery, the economy starts to move and that causes interest rates and inflation to start ticking up. When it is caused by the economy this is normal and good.  When it is caused by reckless government spending it is not good.  The economy is already facing stiff head winds as it tries to recover.  This is why I do not see the economy recovering anytime soon.  Forget about a Q3 or Q4 recovery that the media likes to hype.  A recovering economy has never felt headwinds like this before, and the economy is way too weak to overcome them anytime soon. Deficit spending needs to end ASAP so that the headwinds can be removed. Also, the government needs to stop intervening in the economy.  You can’t fight off the bottom, only delay it.  Obama may be successful in delaying the bottom for 4 years, but that means 4 years of economic decline.  If you let the economy find its bottom it will grow again given some time.  The only way out of this is to stop bailing out companies, and stop spending money that we do not have.  The deficit last year was a historically high $450 Billion.  Obama has no problem with trillion dollar deficits for the next 10 years.  We will not get fiscal responsibility until he is long gone.  I just wonder how much permanent damage will be caused by a 5+ year long depression.

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At 5:18 PM, Blogger Russ Fox said...

Other than this being the first depression of the century (the Great Depression was in the 20th Century), your post is dead-on accurate. Business leaders who supported Obama are starting to tell the press, obliquely for the moment, that they disagree with his policies. If they continue and/or accelerate, expect it to be anything but oblique in the future.

At 10:35 AM, Blogger Rice and Salt said...

The stupid is still burning with you isn't it?

At 11:22 PM, Blogger JD Schellnutt said...

Excellent post. How are you positioning your investments given what I agree to be the inevetability of a depression?


At 3:10 PM, Blogger Blinders said...


I fixed the reference. Too much of a hurry to be the first to call depression I guess.


Nice Ad hominem argument, but come on. Please point out your objections to the post or don't bother commenting here.


Its tough to sit on a ton of cash while the dollar devaluates, but that's where I am right now. I would say 10-20% in gold bars, large multinational stocks if you invest in the US market as well as inflation hedged stocks like oil producers. Emerging markets look promising right now as well. You could even borrow dollars at low rates, and convert to Euros and invest them at a low/safe return and make a killing with the dollar devaluating.

At 9:44 PM, Anonymous Anonymous said...

It is not true that the old men and women are more susceptible to depression than their younger counterparts and it must be mentioned that an individual is said to suffer from depression when he exhibits symptoms, namely, hopelessness, chronic tiredness, appetite loss, loneliness, sadness et al for one week or more. Therefore, it is important for you to get hold of right information on depression related details before starting to treat your depression.


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