The Monster Deficit Is About To Eat Your Lunch

What matters with deficits is not so much the actual size of the deficit, but how much of the GDP (Gross National Product) it takes. With deficits, it is the PERCENTAGE of GCP that matters. Our present deficit is a country-eating monster.

This deficit is 13% of the GDP. The biggest previous deficits never reached more than 6%, not even during major wars or the Great Depression.

Would closing down all our wars help with the deficit? No. When deficits were used to finance previous wars, they were paid off soon after the war stopped. Actually, the cost of the current wars in Iraq and Afganistan are so small in comparison to the size of the national budget that stopping them completely would still leave our current deficit the biggest ever.

That's not all. Future (annual) deficits will be worse, because of the cost of our national debt (cumulative, or total.) Presently our national, accumulated debt, is $95 trillion, and slated to grow drastically and rapidly. Why? Because of promises already made to Social Security and Medicare/Medicaid, future deficits can only grow.

We're looking at soaring inflation, higher taxes and lower incomes for the forseeable future.

What to do? Save. Stop spending. Get out of the stock market. Do all you can to earn extra income. Grow some of your food. Make do with what you already own.

And stop voting for politicians who are not willing to cut spending, cut taxes, stop funding new programs, and cut funding for old programs. Stop voting for politicians who want the government to support so many people.

We're broke, folks.

Jealousy, Taxes and The Stock Market

What is "fairness" where taxes are concerned? Equal tax rates for all? Or a "progressive" tax rate, where the rich are taxed at a higher rate than the poor? Americans have come to accept that progressive tax rates are "fairer." But - how much more do the rich need to be taxed for "fairness?" That may have become "how much more do the rich need to be punished for being rich." For many, "fairness" has come down to punishing the more successful. To simple jealousy, in fact. How it that?

Americans have always been ambivalent about their rich. On one hand, they hate them. On the other hand, they love them and imitate them. On one hand, they need them to create jobs. On the other hand, they want to take away the "unfair" wealth that makes large-scale jobs-creating investment possible.

It's all about "fairness" for many. But what does "fairness" mean? For children, it is always getting what everyone else has. That is, they want equality of outcomes. But children eventually learn that life is not "fair." Yet they also learn that there are compensations. They may do worse than otners in some ways, but better in others. They see that we all are different. So most accept that while our outcomes may not be "fair" (equal) that so long as our opportunities are more or less equal, we still have a "fair" shot at a good life. For most, when they become adult, they accept that.

Still, when it comes time to vote, we somehow can be led around by those who want us to punish the rich. All we have learned about "fairness" of outcomes vs. "fairness" of opportunities goes right out the window.

But is there any economic reason not to keep raising the tax rates for the rich? There is! Simply, the more we raise the tax rates for the rich, the less total taxes they pay. And the more we lower the tax rates for the rich, the more total taxes they pay! Paradoxical, isn't it? If we want the rich to pay more of the total tax bill, we must lower their tax rates. And that is in order to make taxes "fairer!"

How does this work out in practice? We hate the very idea. Politicians especially hate it. Most especially of all, the Democrat Party hates it. They won't even acknowledge it. They have gone so far as to prohibit the CBO (Congressional Budget Office) from acknowledging it.*

What does all this have to do with the continuing free-fall of the stock market? Just this. Some observers point out that the post-election fall in stock prices is due to Obama's promise to raise capital gains taxes. That would fall on any profits from the sale of stocks. If stock investors sell now, they pay current tax rates. If they wait, they will pay Obama's increased tax rates. So they are selling now, in this tax year.

Some predicted accurately that this would happen. One was Dick Morris, Clinton's genius political advisor and current political commentator. He warned Obama to renounce his proposed capital-gains tax increase to stop the market from falling more. But traditional Democrat attitudes toward "fairness" get in the way, as they have before. Dick and Eileen McGann wrote yesterday:

Dick recalls vividly his meeting with Bob Rubin when he was Treasury Secretary under Clinton. Rubin opposed any cut in the capital gains tax even though he admitted that a cut in the tax would not cut, but might even augment, government revenues. Obama, himself, defended an increase as a matter of social fairness in the campaign debates when he was asked whether he favored increasing the tax even though history showed that a higher tax did not generate increased revenues.**

"Fairness?" How are higher tax rates on the rich more "fair" if they bring lower tax revenues for the benefit of all? It hurts the punishers more than the punished. The rich will remain rich, even with higher taxes. But there will be fewer jobs, and less prosperity, for the rest.*** And the stock market could continue its free-fall, punishing anyone with a pension plan. What's fair about that? Isn't it actually more a case of jealousy and resentment rather than fairness?

It would be better to try using some common sense.

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*The CBO, due to Democrat insistance, has not been allowed to reflect this in "Pay-Go" - the idea that new spending must be covered by new taxes. Since lower taxes for the rich will bring in more tax revenue, that needs to be considered in such calculations. That would be a "dynamic" estimate. But the Democrats force a "static" estimate instead, based on the idea that only higher taxes on the rich will bring in more tax revenue.

**From "Obama Must Forsake Cap Gains Hike To Stabilize Markets", Dick Morris and Eileen McGann, 11-10-08, at http://www.dickmorris.com/blog/2008/11/10/obama-must-forsake-cap-gains-tax-hike-to-stabilize-markets/#more-486.

*** How do tax cuts make the rich pay more taxes? Basically, because the rich include more of the people most gifted at making money. Tax cuts might make some of them work harder, true. But mostly, tax cuts open up new money-making opportunities "at the margin." Suddenly, some deals and investments that were not profitable before become promising. So new deals and investments increase, more profits result, more businesses are opened or expanded, more old jobs can pay more, and new jobs are opened up. The result? Everyone in the whole economy benefits. The rich get enough richer that, although they are now taxed at lower rates, they pay taxes on so much more income that their total tax bill actually goes up.

Dems Will Turn Meltdown Into Catastrophe

With scant elegance, nuance or tact, this "bird's-eye view" is a rough picture of what will happen if we go over this particular cliff at this, "our moment" in history, and why we may never regain what will be lost if we do.

The problem is not only with the presidency. Increasingly, Congress is the problem. Congress has much more power than the President now. If the Democrat majority grows, it will have still more power over the new President, whether Obama or McCain. What will that mean for the future, and especially for this meltdown?

Remember how this meltdown started. It was from the Democrat party, and from their mis-handled compassionate desire to help minorities and poor people own their own homes. The motive was laudable. The result was ruinous. We need to assess blame in order to know what not to do, and who not to put in charge next time.

To recap: President Carter started the CRA, which pushed banks to make sub-prime mortgages to people who could not afford them. ACORN pushed banks into making sub-prime mortgages that they were forbidden to make, by law and by prudent practice. ACORN pushed Congress into forcing Fannie Mae and Freddie Mac into accepting more of such mortgages than they wanted. Then Congress forced Fannie/Freddie to make 50% of all its mortgages be sub-prime mortgages. Then President Clinton's Justice Department under Janet Reno actively threatened any banks who did not comply. (Clinton has recently acknowledged his mistake.)*

Madness! The house of cards started its free-fall when the price of housing started down, and the "housing bubble" burst. But that house of cards was built, first to last, by the Democrats. To understand our future, that fact must be remembered at every turn. Because we must move from Left to Right to have any semblance of a good future.

Why? Because this meltdown will take years to work out, even if we do everything right. (Much worse, if we do not do everything right.) That is because this meltdown is a "perfect storm." More than one crisis is going on, and more will come. They will be worse than this one, because this one, at least, has some underlying equity behind the bad debt in the form of property. The oncoming crises do not. And these crises will all feed on each other.

The housing crisis will be followed quickly by the Social Security crisis and the Medicare crisis. It Democrats are elected this time, there will also be the nationalized health care crisis.

Why will they be crises? Because they are all Ponzi Schemes. None of them are sustainable. Each one is a bubble, waiting to burst. Each one is built on debt. Sooner or later, debts have to be paid. If not, there is default on the debts. Then the bubble bursts. Then there is a meltdown, like this one - or worse.

Each of these future meltdowns will rapidly become international, world-wide. Why? Because the U.S. has become the lynchpin, the cornerstone, that keeps the world economy functioning. Why? It is the major market in the world. Everyone wants to sell to the U.S. It is also the major "safe haven" for investment money. Why? Because money is less likely to be stolen or lost here than anywhere else. And because it is the U.S. military - supported by U.S. prosperity - that is the primary guarantor of however much safety and stability there is in the world.

Another more long-term, underlying trend must be factored in. It is demography (population studies.) All countries have had declining birth rates for several decades now. At the same time, life-expectancy and life-spans have also been increasing in all countries. This has caused a "gray overhang." That is, the older population percentage has been growing while the younger population percentage has been shrinking. This means there are fewer and fewer young workers to support more and more older non-workers. This will ruin retirement schemes all over the world. Not to mention universal health-plans, which are heavily impacted by the old. This trend also invisibly underlies many other economic/political problems and will help drive them into crises. Now that the retirement of the huge Boomer generation has arrived, these crises will not delay long.

But what of the prosperity we have had since WWII? It cannot last, without drastic changes - toward the Right. Our prosperity has mostly been based on debt - the promise to pay in the future what we borrow and spend today. Such promises eventually must be paid, or see the whole system collapse. The Asian countries save money. The West saves little. The U.S., nationally, does not save at all. Everything, all our prosperity, is based on debt. (For instance, our Social Security has no "lockbox". There are no funds, no actual savings there. Congress spends every dime, in "off-budget" spending. This "Ponzi Scheme" has assumed that taxes from younger workers would always pay retirement for the older non-workers. Our declining birth rates and growing survival rates have destroyed that possibility.)

All over the world, savings from retirement plans have been invested in the U.S. for security and safe returns. So when we crash, they crash too. And we will crash, because we are built on debt.

What can we do? First, when we are in a hole, we have to stop digging. So for a long time, we have to stop electing Democrats. Why?

Democrats want to help people. At least, some of the people. And they want to do it on a new, much larger scale To do that, they want to use force. That is, they want to force part of the population to support the other part. With what force? Government. Government is defined primarily as the ultimate coercive power - the highest power that can force people to do things. And Democrate, bless them, want to help people in the only way they know - through government.

To spend what they must in order to do what they plan, they must build government debt to great new levels- because there is no way they can spend that much out of current U.S. income.

What can we do? Don't let them spend what they plan. How can we stop them? Don't elect them. Don't vote for them.

Whatever other preferences we may have doesn't change the equation. We cannot afford the Democrat way. We cannot survive this, and the other coming crises, by making it worse.

I'm truly sorry. And I do realize and acknowledge that the Republicans have many, many problems of their own. But voting Democrat, at this time and probably for a long time, is to say "Bring it on!" to catastrophe. I'm sorry. But I can't argue with facts anymore than you can.**

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* Congress is pushing mightily to shift blame from itself to Wall Street fat cats - who are not without fault here. But the truth is that it was Democrats in office who pushed Wall Street (through the banks who were forced into making bad mortgages) into accepting toxic debt. This meltdown belongs to Democrats in office.

**Helping the poor and disadvantaged must not be abandoned. But we must find ways to help them apart from government. Fortunately, there are many other ways, with good, less-ruinous track records.

Stop! Don't Pass That Bail-Out!

"A trillion here, a trillion there and next thing you know, you're talking real money."

Time is short. Congress is getting set to act, possibly this week. We need to stop them.

First, do we want to have this crash now or later? One way or another, we will have it.

Our choice is to have this financial crash now, or to postpone the very same crash until later. Having it later will be even more painful. That is because the pain will be extended over a long time. Either way, the system must work its way through taking the losses it must take, now or later. A bail-out just moves part of the business losses to us, the taxpayers. The down-turn will continue until until the transferred losses are hammered out of tax-payers. Then the economy can move into recovery.

Which is better, now or later? Having it now would make a sharp "V-shaped" downturn. Having it later would lengthen it into an "L-shaped" downturn. A "V" goes sharply down, then sharply up afterward. An "L" goes sharply down, then stays near the bottom a long time, until all the losses are finally taken and out of the system, than goes into recovery. Whether it is V or L depends on how fast we take our losses. We need to "bottom out" as fast as possible, to recover as fast as possible.

Banking-system crashes have come to both Japan and to West Asia. In the West Asian case, they took their losses on the chin, fast, not trying to save anybody. Recovery was swift - a "V."

Japan, on the other hand, bailed out every financial company at risk. It's downturn lasted at least 10 years before recovery began. It was a long, long recession.

It's our choice. Same pain. Fast? Or Extended?

We also have not grasped how big this is. In the last few weeks, the federal government has already bailed out one outfit after another. Even before Congress acts on the current bail-out, we have already spent something over $2 trillion in a few weeks. (Yes, trillion. Are we talking real money yet??) Now Congress has a $700 billion bill on its plate. If it is its old self, it could raise that $700 billion to another $1 trillion before they pass it.

Probably no taxpayers, anywhere, realize how much that will mean in new taxes.

Probably we are already on the hook for the $2 trillion already handed out. Do we want to add another $1 trillion to that, for a total of $3 trillion? Over and above our regular budget?

Second: There's more. Even worse downturns are ahead. Postponing this one could make it overlap with the next one. Even the next two.

In this downturn, there are at least some physical assets underneath the bad loans: buildings. They are worth something more than zero. That money can be re-couped sometime, somehow, at least in part. There are no such assets behind the next two downturns.

One downturn will come from Social Security/pension plans. There are no physical assets there. Still, there is at least a very inadequate income stream from payroll taxes.

The other downturn will come if or when we decide to have socialized medicine, more or less. There are no physical assets there, and no significant income stream, so the impact will be even greater.

Boomers started to retire this year. They are a huge generation. They did not replace themselves with a generation at least their size. So there will not be enough workers to support them. (Had they lived, the 40 million aborted kids would have made the number of supporting workers come out a lot better for Boomers.) The retirement problem is also aggravated by our longer life spans. The worldwide problem of declining birthrates combined with longer life spans for elders.is generally worse than ours, and will further aggravate the U.S. retirement problem.

The cost to taxpayers will be huge, from increases in both taxes and inflation, just from Social Security. Adding the costs of more or less socialized medicine could cost even more than Social Security. Taxes to support both would be toxic for non-retirees and for the economy. (Inflation is one way to reduce the tax burden paid by workers to support elders. Elders will have mostly fixed incomes. Workers will not.)

Do we waht to add another huge tax increase from this present financial crash to those new taxes that are also coming? We need to get this present crisis one over with, now! Take our losses now, and hopefully have a breather before the next crises hit. This present crisis is the only one where we even have that choice.

(For more, see Spengler at http://www.atimes.com/atimes/Global_Economy/JI23Dj06.html)

Root of Financial Meltdown - Misguided Compassion

What a mess - the 2nd biggest financial meltdown ever! It is as if the accelerator in Switzerland started a black hole after all, and most of the globe was getting sucked into it. How did it begin?

It started with very good intentions. About 30 years ago in the most powerful economy in the world - the U.S - it started as a way to fight racism, and then poverty too.

Some banks would not lend for mortgages in very poor areas. This was called "red-lining." These areas had such poor credit ratings and high default rates on mortgages that banks had to avoid them. But many such areas were not only poor, but also largely African-American or Hispanic. So it also could have been racial discrimination. So activists attacked red-lining as disguised but real racial discrimination.

In many ways, they were right. There was racial discrimination and prejudice then on a much larger scale than now. There was a great need to end it. So it was a good cause, and compassionate people got on board to end red-lining.

The problem started when the government got involved, with good intentions and its power to enforce. Soon banks were forced to make housing loans in red-lined areas. Then a "quota" system evolved. Banks had to show that they had an "adequate" number of loans in red-lined areas.

Politics being what it is, the new government agencies began to grow enormously. In election after election, more goodies were promised to be added onto the mission of these agencies. More people were to be included. Then more next time. Then more the next election. Politicians also began to use these agencies to hire their favorites.

Meanwhile the banks, making more and more bad loans, needed help. So credit to banks was made easier to get. and apparently guaranteed by new government agencies. These new agencies grew so much that after awhile, almost every housing loan in the country was backed by them. The guaranty might not have been clearly spelled out, but it was believed that the "faith and credit" of the entire U.S. government stood behind these loans.

Interest rates were also made low, so that "everybody could be a home-owner."

The business community took advantage. So did most U.S. families. As usual, when investments seem low-risk, people risk more on them. Real estate, both residential and commercial, became more of a low-risk investment.

When interest rates were kept low, people borrowed more. They borrowed more than they needed for mortgages and got consumer loans too. They got bigger, more expensive houses than they would if they paid higher interest. They bought more cars, TVs, furniture, vacations and everything else. Since borrowing was so cheap and easy, they even saved less. This made a bubble. And bubbles always burst.

But that's only part. Since borrowing was so low-risk, business began to take higher and higher risks - especially in the financial sector. There, leveraging began to rule, at ever-growing rates. A huge boom was built on it.

Leveraging is necessary. The economy could not function without it. But financial institutions and investors began to develop new kinds of leveraging instruments, not only options and trading on margin, but newer kinds of derivatives, based on even more "borrowing." Fortunes were built, all over the world. Not only individuals, not only financial institutions benefited from them, but also pension funds, colleges, charities, and the 40% or so of Americans who invest. The fact is, we all benefited, one way or another.

Most of all, political parties and politicians benefited from them. But that is another story.

Sadly, it was a bubble. That was because, with the piled-on leveraging instruments, you could eventually buy $100 or sometimes $1000 of financial paper instruments with only $1 of actual investment. Apparent guarantees of almost any mortgage, plus very low interest rates, eventually made such "investing" inevitable. And we have known for a long time that such activity must cause a bubble. That booms built on such unwarranted risk-taking must collapse. If they are big enough, they can take out a whole economy. If such booms are international enough - as they are more and more - they can take out every economy in the world.

All from unwise, misguided and politically-abused good intentions in one country.

What about next time? Deal with it. Boom/bust is part of the capitalist system. Capitalism is, after all, a terrible system. But everything else is worse! Any kind of tampering with it makes it move toward socialism, facism or mercantilism. Mercantilism - trying to change the free market-decisions of capitalism to favor any producer or group or consumer - is the danger for democracies. It is what we are struggling against in the U.S.

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There is a fine line between mercantilism and needed regulation. The bursting of bubbles may require new regulation, but that should be temporary. The ordinary regulation needed for capitalism to work is to enforce contracts, protect property, penalize fraud and punish infractions. Good militaries, courts and police are needed to prevent looting, theft, intimidation and violence. Beyond that border, mercantilism begins and the benefits of capitalist begin to be lost.

But where does our compassion come in? Is the brutal working out of competition to rule instead? Absolutely not! Capitalism may be the biggest part of having true compassion, since does more for the poor and afflicted than any other system. But the government is a poor, deceptive, counter-productive way to help them, eventually causing the problem to become even worse.

Charities work better. We all can inform ourselves, give and volunteer. If we had tackled "red-lining" through charities 30 years ago instead of using the government, it would have worked better in the net.

Look what would not have happened. Our government and country would not have spent so enormously more than it should have. We would not have tempted so many politicians and so distorted our politics and government institutions. We would not have caused thie huge bubble. It would not have burst, with all the loss that will bring. And we would not have caused all this harm to the very people we were trying to help, who were likely among the first to lose their houses.

Whatever we would have achieved by charity would have been a net benefit to those we wanted so much to help. It would not have caused such great harm and loss as using the government. Long run, charities would have done more true good and less harm. Governments cannot do that in compassionate matters..
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Also see these sources:

Excellent - includes demographic and international issues. Lehman and the End of the Era of Leverage by Spengler, at http://www.atimes.com/atimes/Global_Economy/JI16Dj08.html and also http://www.atimes.com/atimes/Global_Economy/JG01Dj07.html

Excellent - Ticking Time Bomb Explodes: Public is Shocked, at http://www.independent.org/blog/?p=186

Whose Bailout Is It? at http://www.investors.com/editorial/editorialcontent.asp?secid=1501&status=article&id=306545173352598

The Real Culprits In This Meltdown, at http://www.ibdeditorials.com/IBDArticles.aspx?id=306370789279709

Mud-Flap Manor, at http://www.nypost.com/seven/09152008/news/nationalnews/mudd_flap_manor_129159.htm

About the best ways to help the poor, see Up and Out: A Guide to True Compassion for the Poor" at www.upandout.us.

Sorry - Financial Crisis Worse Than I First Thought

Going to dentist right now, but will try to get back to this later. Meanwhile, these urgent suggestions:

1. Pay off your debts
2. Cut back on spending
3. Save money like crazy, and hang on to it
4. Do not put your money at risk - invest extremely carefully
5. Finance your own retirement.
6. Tithe! (You should want the blessing, if nothing else.)

These two links will give a good running start on assessing this and future crises:
Spengler at http://www.atimes.com/atimes/others/spengler.html
Robert Higgs at http://www.independent.org/blog/?p=186

The Titanic Is Not Sinking

Is the stock market plummeting? Yes. Could it go lower - a lot lower? Yes. Will some businesses close? Yes. Will some jobs be lost? Yes.

Then - is this a real economic crisis? Not exactly. It is a financial crisis, limited so far to the financial sector of the economy. But not an "economic" crisis, not for the whole economy. For example, the transportation, energy, utility, manufacturing and other sectors are not in crisis. Will they be affected? Yes. But not in the same way or as much.

How do we know the rest of the economy is "sound?" Not by guessing or by wishful thinking (nor by making hasty electioneering points), but because the numbers tell us so. Unemployment may be up, but it is still low historically. Productivity - a prime indicator of economic soundness - is at a new peak. Are we in recession? No. Growth in the last quarter was 3.3% - very healthy.

Is this time like the Great Depression? Not even remotely! Rather, this is most like 1987, when another housing bubble burst and there was "Black Monday" when the stock market lost 25% of its value in one day. What were the results?

The financial sector was restructured. Some businesses survived, some didn't. Some government regulations were changed. Some parts of the country were strongly affected, other areas barely affected. The economy as a whole slowed some, but was in recovery within months.

Is that what will happen this time? Not exactly. But what will happen should be closer to 1987 than other scenarios out there right now.

In short, it's time for repairs and adjustments, probably some belt-tightening - but not panic. This ship is not going down. It would take much more than this financial crisis to do that. After we learn some needed lessons, better days will be back. This present crisis will be a fading memory.