Tag Archives: Economy

Requirements for Economic Recovery

Requirements for Economic Recovery

To get a handle on where the economy currently stands, take a look at the graph below. It is one of the nicest comparison graphs I’ve run across that compares our current economic (European AEX) picture with the 1929 DJIA economy and the Japanese Nikkei meltdown of the 1990s.

See http://www.vanenschot.com/finance/stockmarketcrash.html. The image is linked below:

Comparison of three stock markets

Comparison of three stock markets

Compare the chart above with the DJIA chart below. Line up the two charts at 2003, and one can see that the AEX and the DJIA are very close in performance.

DJIA Since 2003

DJIA chart courtesy of MSN at http://moneycentral.msn.com/investor/charts/chartdl.aspx?D5=0&D4=1&ViewType=0&ShowChtBt=Refresh+Chart&DateRangeForm=1&ComparisonsForm=1&D3=0&CE=0&Symbol=%24INDU&C9=2&DisplayForm=1&CP=0&PT=10

What Does This Mean?

The translation is this: Expect the stock market’s bottom to hit within the next 45 days (by April 30, 2009), followed by a protracted 5-7 year recovery.

Comments on Presidential Economic Stimulus Package

While I appreciate President Obama’s focus on improving the education system and access to the Internet, those incentives do not create new jobs. One must have a Return on Investment (ROI) that will remain after the money is spent. Education, unfortunately, is an ongoing expense. The ROI time line of education is typically a decade or longer, and this country cannot afford to wait ten years for an economic turn-around.

Obama indicated heavy investment in science and technology, but there needs to be clearly defined areas of investment. Exact areas were not outlined, and in business, identifying exact areas is the first step towards improvement.

For this country’s economy to recover between 2009 and 2015, it will require the federal government to invest in rebuilding the transportation infrastructure that serves as the primary conduit in a healthy, thriving economy.

Simultaneously, the country’s dependence on foreign oil holds this country hostage to foreign governments. Many of those countries would rather squeeze the American economy out of every cent they can. Do we really want to wait until petroleum is selling at $150 per barrel to say the words, “I told you so”?

Recommendations for Economic Recovery

Here are the recommendations I have for economic recovery. Compare what I believe is needed to what President Obama stated is in the stimulus package. See http://www.whitehouse.gov/agenda/economy/ for stimulus details.

1. Fund Alternative green energy for electrical power generation (Wind, Solar, WTE)

Yes. Obama wants “doubling the production of alternative energy in the next three years.” I have no idea how he he plans to replace all the electrical power that will be lost as nuclear plants close, but at least he wants to do it cleanly, right? Hmm, then why did he mention “clean” coal power plants? Does he really think coal is renewable energy?

2.Enact minimum of 40 mpg for passenger vehicles. Stop rewarding automakers for producing gas guzzlers like the Hummer that get single digit mileage. Penalize automakers for anything less than 40 mpg. Make it a federal mandate for all cars sold in the USA. There is no excuse with today’s technology not to get a minimum of 40 mpg for automobiles. Trucks are a different class.

No. Obama has not established anything for setting car mileage requirements or in generating incentives to car companies like Tesla Motors who produce cars with zero emissions and over 200 miles per battery charge.

3. Build twenty new Nuclear power plants to replace aging ones.

No. Obama is against nuclear power. As many as a dozen of the aging nuclear plants will go out of production in the next ten years, with several currently operating beyond the intended life expectancy. The average nuclear power plant generates 1 to 2 gigawatts of electrical power per year. How are we going to replace the power produced by these plants? Through Wind and Solar? No, both of those technologies are too inefficient. A large wind generator can produce 1.5 megawatts. We would need 1000 wind generators to equal the output of a single nuclear power plant! WTE (waste-to-energy) power plant? We would need 4 to 5 WTE plants to equal a single nuclear plant.

4. Enact infrastructure replacement for highway bridges.

No. Obama has not indicated a federal program for this. Yet tens of thousands of highway bridges are in need of serious repair or total replacement. Waiting until the economy starts to recovery is not the time to slow down the highway traffic to perform repairs. Do the repairs and replacements now. Be proactive, damn it!

5. Fund and build a federally subsidized High Speed Rail between all major cities ASAP.

No. Obama has not indicated a federal program for this. Why are high-speed rails not being built along the same corridors as Interstate highways?

Why are we wasting so much time and energy getting on airplanes to take trips of less than 300 miles? While are we spending hundreds of dollars on gasoline for a round trip of 600 miles (10 hours) if we could spend half that amount and spend only 6 hours travelling?

The average traveler spends 2 hours coming and going to the airport, another 2 hours to meet security requirements, and another 2 hours to fly 300 miles by the time we deal with airplane take offs and landings. A total of 6 hours to travel 300 miles.

Compare that with a high-speed rail service capable of 200 mph, and even with the 2 hours to travel to and from the rail terminal, we reduce the travel time from the 6 hours down to 4 hours. No cancellation of travel due to snow. No cancellation of travel due to thunderstorms at other airports.

Every economic recovery of the past one hundred years required investment in mass transportation, whether in providing it or in increasing the speed or improving efficiency. Why is the federal government ignoring this fact this time?



Filed under Economy, Government

Change of Government? Really?

Originally posted on another web site: November 05, 2008 2:14AM
(Small expansions/clarifications made in this posting)

Foreword: I am an Independent, neither Democrat nor Republican. I did not vote for either of those parties in this recent presidential election.

The Fear Factor
I know many Republicans who fear that our country will lean towards Socialism or Marxism because of a radical left wing of the Democratic party. Many fear that Obama’s “redistribution of wealth” is a disguise for Socialism. Many believe that Capitalism is the only way that works.

A response to cover all angles of fears is beyond my available time to devote. But I do wish to provide observations of what I perceive as erroneous by various groups who are fearful of the recent change in government.

Distribution of Wealth
First, some background:
No president has been able to pull back Federal spending. It is the nature of government to spend as much as they can. Alexander Hamilton and his group of supporters during the establishment of the US Constitution made sure that the Federal government has the ability to raise taxes as high as they wish.

Adam Smith, a supporter of the capitalist economic model, had serious concerns about the dehumanization of people. The long history of business in this country proved that unless laws were created to protect the workers, business owners would not provide the essential necessities to their employees. This negative aspect of apathy and corporate greed has been the bane of capitalism, and eventually led to laws governing work safety, minimum wage, and more.

Business owners screamed bloody murder, claiming that they were being robbed of their profits. In essence, they were right. It was a redistribution of wealth because of their lack of concern for their workers. Workers today have matching 401K programs and insurance because of this “redistribution of wealth”. Business Owners, for the most part, only provide these types of benefits because of competition, and not because of their generosity.

Note: The ability to compete against corporations that do not provide similar benefits has forced US manufacturers to either tighten up their efficiencies or to move operations overseas to countries where employers are faced with lower employee benefit costs. This means countries such as China, Thailand, Philippines, South Africa, and India may seem more lucrative in profit than US based operations with US workers. Much more can be said about this issue, but it is sufficient to state that many 2nd and 3rd tier companies that moved operations to China regretted the move once energy prices tripled shipping costs. There is always a price to pay when taking an apparent easy way out rather than working on improving US-based operational efficiencies.

Taxation exists in many forms. There are taxes on gasoline, non-food items, toll roads, and various sales tax at the federal, state, and local levels. Then there are all of the taxes on income, including Medicare and social security. These taxes are not limited to the government providing security and common well fare. It also provides for “redistribution of wealth“. How? If the wealthy are taxed more severely, then the majority of the cost of new highways and new infrastructure to support communities are paid by the wealthy. Therefore, everyone that uses those infrastructures should thank the wealthy for covering the lion’s share of the cost.

However, many who are non-wealthy erroneously believe that the wealthy do not pay income tax. Rest assured that the Alternative Minimum Tax insures that everyone who makes above a certain income will pay taxes. Unfortunately, this system never considered inflation, therefore the AMT is now striking more and more middle class incomes. Every year a temporary fix has had to be passed through Congress. See http://www.cbpp.org/2-14-07tax.htm

Note: The sad truth is that all of the tax loop holes that existed at the time the AMT was initially created no longer exist. Therefore, the purpose of the AMT no longer exists. The obvious question is why is AMT still around if its purpose for existence is no longer there? The answer is that the US Government does not wish to stop collecting the additional $600 Billion in AMT taxes gathered each year. What I fear is that Obama has indicated that he will remove all tax breaks instilled by Bush. This would mean that the impact of the AMT will hit more Americans because there will no longer be any manual adjustments made.

  • Thus, we see from a brief examination of history that the harsher side of capitalism created the need to force adjustments, which, in essence, created a form of wealth redistribution.
  • The AMT also attempted to do the same, attempting to insure that the wealthy did not walk away without playing taxes.
  • The future shows that tax increases will hit households making over $150K per year, and if the manual temporary fixes to AMT are eliminated, the increase will hit households with incomes below $100K per year.
  • Obama stated in his first debate with McCain that he would bring tax relief to those making under $250K per year. However, later in his campaign, he changed that limit to $200K per year.

The point is this: Unless Obama eliminates the AMT and restructures existing IRS guidelines, taxes will significantly rise for any household with an income of $100K or higher. This would mean an increase in taxes for a majority of middle class workers, not a tax break.

What Does This Mean For The Future Obama Redistribution of Wealth?
If he is telling us the truth, he is wanting to balance the tax burden more fairly. However, the term “fairly” means different things to each income level.

The primary problem, however, has been out-of-control governmental taxation while simultaneously ignoring the severe impact on individuals making less income who are still required to pay taxes at a greater impact to their income that those who earn higher wages.

To provide an analogy: the price of gasoline has more than doubled in the past few years. For a person earning $30K per year and whose prior gasoline expenses were $1000 per year was, only recently before prices collapsed, suddenly facing $4000 per year in gas expenses. At the lower expense, fuel was 3.3% of yearly income. Suddenly, at the higher price, the fuel cost was 13.3% of yearly income — a jump of 10% in expenses. However, for someone earning $200K per year, the percentage would have moved from 0.5% to a mere 2.0% — a change of only 1.5% in expenses.

The same level of impact applies to fixed taxes (such as those hidden in gasoline and cigarettes). The smaller wage earner may pay a significantly smaller percentage, however, due to the many hidden taxes within our economy (gasoline, telephone, toll roads, purchases at stores, etc) the net impact of hidden, fixed taxes takes a higher percentage of the earner’s income. This is what Obama is suggesting will be changed by modifying tax scales, providing relief for lower and middle income workers while increasing the tax burden on the wealthy. We shall see if he truly understands the complexity of the tax system.

This action goes against the core of libertarian minds who do not view that government should manipulate taxation for any reason, and it does not suit hardcore capitalists who demand “a decent profit” for their hard work and risk taking. While I partially agree with the libertarian view and with the capitalist view, I belief there must be a balance as John Rawls indicated. However, it is imperative that a true balance exists. Rawls warned of over-burdening the higher earners to the point of punishing the wealthy for earning money. It would take far too much space to explain the details of Rawls’ philosophy, but it is a balance between capitalistic and socialistic economies.

If Obama does increase taxes, promising for redistribution, but turns around and spends heavily on federal programs creating more federal bureaucracy, then he will not have kept his promise of reducing government interference and creating redistribution of wealth. He will have merely increased the tax burden on the wealthy, potentially creating a situation of which Rawls warned.

Socialist Economics vs. Socialist Government
Socialist Economics has been in our system for almost a hundred years. It has helped to create a large middle class. Prior to the socialist economic mechanisms put into place gradually during the past 100 years, capitalism was creating the classic Marxist model of “class struggle”, just as Marx predicted. The wealthy controlled the poor, and there were very few middle class earners. Capitalists like John D. Rockefeller and Andrew Carnegie truly believed that their wealth was given to them by “God” and that they had no responsibility to share any profit to the workers. Since workers had no representation within corporations and the government traditionally sided with big business, the “class struggle” emerged, giving rise to unionization and the consequences.

Constitutional Objectives: It Includes General Well-Fare of the People
A part of our Constitution states that the government is responsible for the defense of this country against foreign powers. It also states that the government is responsible for the general well fare of its people. Government cannot ignore the economic blight of its people created by its economic model (capitalism) which does not possess a conscience.

Milton Friedman warned us that corporations do not possess ethics. It is the people who must possess them. He also warned us of the growing trend of companies selecting executives focused solely on the market without any consideration of social or societal responsibilities. When the leaders of businesses are without ethics, we see the aftermath, such as Enron, AIG, and more. The workers are the ones that suffer the most from unethical practices that are performed within capitalism.

Thus, no economic system is without problems, not even capitalism. An uncontrolled socialist economic model can lead to total government control. I fear that the recent bail-out to the financial industry is a step toward nationalization of the business sector — a heavy-handed symptom of socialist economics. Unless watched and controlled, this can lead us down the road to a Socialist Government and not merely a socialist economy.

John Doughtry

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US Economic Forecast Through July 2009

Housing slide has not bottomed out in all regions. The NE, SE, most of California (SW) and scattered portions everywhere else have NOT bottomed out on the declining market value of homes. Charts indicate that in those regions, the housing prices are still 200% higher than actual worth. Expect the Feds and the State of California to get really creative real soon. Also expect to see public backlash as many who do not “deserve” rescuing get it, and those “deserving” rescue do not get it. (Use whatever definition you wish for the two terms).

Other than for Chicago, the Midwest region is now stable, and has been relatively so for the past 60 days. The past two months of casualties has primarily been due to overloaded budget due to increased energy costs and food price increases. Those that had been squeezing by with less than 20% cushion in their finances were overloaded by the estimated 60% increase in budget needed for energy and food.

We should start seeing a MAJOR collapse in California and Florida beginning in mid-November. Not a good time for the two states responsible for 50% of our economic power.

There is both a critical tipping point caused by “too high a price” and another tipping point caused by “too low a price”. Back in 2004, I had calculated that a per gallon price of greater than $3.50 would create a significant economic slowdown. Once prices this year got over $4.00/gal., I had no doubt of what was coming down the tunnel.

The lower price end is $70 per barrel. We’re seeing current pricing at less than $65, and this will create another crisis as well. Without enough profit from oil, there is no incentive for:
a. Alternative Energy efforts. These efforts costs run in the Billions. Without an incentive of high energy costs, expect to see a lot of these Green projects lose funding or stock market support.
b. New Drilling efforts. Again, to establish a new well can cost in the hundreds of millions. Without adequate profit, there is no incentive to drill new holes. And if there are no new wells, when the NEXT energy crunch comes, we’ll be right back where we were this summer.

If pricing remains below $70, we’re going to be setting ourselves up for a VERY nasty economic recovery.

First a disclaimer: I am NOT a financial adviser. Take any action at YOUR OWN RISK. The following is based on my personal research and my own strategy for surviving the economic storm.

If you’re like millions of mutual fund owners, you’ve seen your portfolio lose value anywhere from 10%-50% percentage in the past six months. For those of you who didn’t move fast enough, it’s time to consider shifting your investments to the following:
a. BioMed Industry. It is still a hot market, and will weather the storm better than other areas. The reason is due to equity and forecast. The value of biomed does not easily change when other areas of the economy bounce. In addition, the forecast is that people will continue to need medical care — there is no decline in illness during bad times.
b. Treasury Bonds. DO IT QUICK! You’ll want to do this BEFORE the Federal Reserve lowers interest rates in order to obtain maximum gains from Treasury Bonds. Hang on to them unless interest rates show signs of rising. Remember the general rule: Treasury Bond yields go UP as interests rates go DOWN.
c. Find the best rates on six-month and 2-year CDs and shift investments into those as well. Again, do it before the Feds take action on lowering interest rates.
d. If you REALLY want to play stocks, it may already be too late to jump into the best bets. Generally, tight economic times means people change where they spend for entertainment. Businesses like NetFlix will see an increase as folk begin staying in and watching more rental movies. If you have a Timeshare in a Condo in Florida, you might not do well for the next 9-18 months, as an example. Places like Walmart and Target will increase business as shoppers move away from higher priced stores.

If you’re in realty, the automotive manufacturing sector, or housing sector, then times will be tough. If you’re in industries where there is a heavy reliance on discretionary spending, such as vacation resorts, then expect to see a significant squeeze in business unless your particular zone is family-oriented and on the conservative end of cost.

Expect to see an additional 30,000 jobs lost in the automotive industry, with an additional 250,000 unemployed in other sectors by Spring 2009. We’ve already crossed the magic tipping point of losing over 400,000 jobs this year. (That was the magic number I had estimated would be the clear evidence of economic peril).

As I predicted to my friends and family back in the Spring of this year, expect to see either GM or Chrysler go down the tubes. Don’t be surprised if the Japanese buy one of them. They will do so because of the rising difference between the Japanese yen and the US dollar. Japanese manufacturers NEED an immediately home base in the US. What better way than to take over an existing infrastructure that is poorly run? If the Japanese merely buy the ASSETS without the employees, then hiring will restart WITHOUT unions. Think about that.

Expect unemployment to hit 9% to 12% (depending on the US Region) by Spring 2009.

I’m pushing the envelope of my little crystal ball. I see a clear point of delineation at this time frame. If the cost of oil is stable and above $70 per barrel, and the pricing decline of housing has completed its worst in the remaining regions, then the economy will be ready for a gradual recovery.

On the other hand, we could see pricing continue to collapse in ALL sectors, creating what economists dread the most: DEFLATION. Also known as instant DEPRESSION. Here’s the bad news: a depression doesn’t merely reduce the costs of everything, it also reduces everyone’s income. It’s an ugly one-two punch that the Feds and the Treasury are trying to avoid. It’s very possible they will avoid the big D word, but it will require:
a. Stabilization in the housing sector.
b. Japanese buyout of either GM or Chrysler.
c. Chinese economy to maintain GDP growth above 6% or so (they are now at 9% which is the lowest in a number of years, indicating a rapid slow down of the economy).
d. A steady low level interest rate while avoiding inflation. This will be a neat trick to pull off, since any extended period of time where interest rates are lower than inflation will create an over-abundance of money. The Feds and the Treasury will need to continually rebalance their dealings with the banks and other institutions with great dexterity and flexibility.

The good news is that this is hitting the entire world, so it’s not merely an American phenomenon. The bad news is that this is hitting the entire world, because the US GDP is equal to the EU + Asia, combined. Thus, the collapse of the US economy has triggered a domino effect.

Watch for the signs as outlined above. We’ll all know by next summer which way things are going.

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