By John Browne – Senior Market Strategist, Euro Pacific Capital.
Through its rhetoric and actions, the Obama Administration has made it clear that no matter the current or future costs, the federal government will not allow a collapse of the banking system. The resulting aura of certitude has, in turn, encouraged investors to roll the dice one more time. Some of these investors are likely trying to make good prior investment losses through speculative trading in U.S. equities. The surety of the government guarantee has sadly allowed them to overlook the fact that U.S. corporate earnings continue to fall.
So, as is the case with all government guarantees, the risks our economy faces are now disproportionate to the opportunities. Haven’t we been down this road before?
The operative question remains whether the government can reward the current round of investment by averting an economic depression. If not, what is the justification for investing in U.S. equities or high-yielding corporate bonds?
Given that the majority of government spending is on corporate bailouts and social programs, rather than infrastructure improvement, I would argue that the odds of recovery are long.
Economists broadly agree that greater economic bang for the buck is achieved through infrastructure spending. It is surmised that for every $10 billion spent on infrastructure, some 35,000 real, wealth-creating jobs are created. Therefore, a government spending $1 trillion should create some 3.5 million new jobs.
When President Eisenhower, the last big spender on infrastructure, left office in 1961, infrastructure amounted to some 12 percent of federal spending. The ensuing generations have neglected such spending in favor of wealth transfers and efforts to control social development. Today, only some 2.5 percent of the federal budget goes towards infrastructure.
I was perusing the Federal Budget recently, and I had sort of a knee jerk reaction to most of the items I saw. Keep in mind, what I propose below is only a starting point, and it is in no way meant to be a “final draft”. I’m extremely interested in your input!
1st draft tax plan:
GIVE AWAY AMTRAK. Privatizing CONRAIL worked, this will too. Savings: $1.4 Billion annually. Privatizing it also has the effect of generating tax revenues, as private ownership will make it profitable.
Sell (at a minimum) 1/2 of all land owned by the Federal Gvt. “We the people” currently own an estimated 999,390,920 acres, about 44% of ALL US landmass. By the way, the Bureau of Land Management has no idea how much land it (we) own(s) anymore. Sell for $500/acre, generating $499,695,460,000, yep, that’s almost $500Billion. Besides, why does the Federal Gvt need all that land? Why are they aquiring more every day?
Eliminate the Department of Education. Savings: $178 Billion annually.
Eliminate the Department of Agriculture. Savings: $124 Billion annually.
Bring ALL troops home, including closure of all foreign military bases (we don’t need troops in Europe and Japan. . .), estimated annual savings: $325 Billion (half the annual budget).
Cut the Deparment of Health and Human Services. Thanks so much for telling us to wash our hands to avoid the pig flu! Common sense costs us: $71 Billion annually. They administer Medicare and Medicaid also, both complete failures that are underfunded (and we want to Nationalize healthcare? – we’ve already proven we can’t manage it!), which constitutes $666 Billion annually. It, as should social security, be a voluntary, not mandatory, system.
Eliminate the Department of Homeland Security (this can be taken care of in our normal military budget). Savings: $44 BN
Cut Department of Housing and Urban Development in half at a minimum. There’s $300 MN in there for housing for persons with AIDS, enough to buy 1,500 homes for $200,000 each. Savings $105 BN
Cut Department of Labor in half at a minimum, savings: $27 BN
Cut Department of State in half at a minimum (we fund foreign military to the tune of $5 BN a year, and disburse loans to foreign governments in the amount of $15 BN – which we’ll never get back). Savings: $35 BN.
Eliminate, at a minimum, the entire IRS, as you’ll see reasoning for below, from the Treasury Dept, saving $11 BN
Total Savings / Earnings: $1.422 Trillion
12. Eliminate graduated scale federal income tax and replace with fair tax based on purchases – no tax on food, at all!! Set Federal fair tax rate @ 10% max (we could delve into this more and probably wriggle it to 8% or less). Total sales taxes (when including local) capped @ 20% (I don’t think any local ST is over 10%, is there?). Furthermore, you don’t need a complicated system to file returns, etc. You make your purchase, you’re done. Businesses file sales tax returns, this would just be one more line.
A May 2009 Wall Street Journal article details that many employees and newly unemployed are having issues with withdrawals and redemptions from their company-sponsored, government-tax-deferred 401k retirement plans. The only employer named in the article is the energy giant BP, but 401k providers listed include State Street Corporation, a major bank, Northern Trust, and Principal Financial Group.
Some investors have found their money either frozen and unable to be withdrawn, or redemption rates much slower than expected. One man was laid off from an undisclosed manufacturing job and was unable to access $40,000 in funds held by Principal Financial Group. “I hate to be whiny, but it is my money,” he said.
Typically in a 401k plan, one must be laid off or resign before having full access to withdrawal funds, but there are, of course, loopholes and rules that vary from plan to plan, and from fund to fund. Typically when funds are withdrawn, especially prior to age 59, they are taxed as income AND taxed a 10% additional penalty.
Even as Madoff is sentenced to 150 years, many have forgotten that there are likely many other Ponzi schemes still out there, whether it’s the FED, Social Security or other Madoff investment schemes. And no, the government itself has certainly not yet blocked withdrawals from 401k’s – any move by lawmakers to inhibit redemptions would likely cause a panic and populist uproar.
I am not a financial advisor, but I would suggest that it is merely a matter of prudence for any reader with an active 401k or IRA plan to educate themselves on withdrawal methods and confirm that withdrawal lines are still solvent, if you choose to invest in these vehicles and are not already 100% aware. Caveat emptor.
In the June 24, 2009, the Federal Open Market Committee (FOMC) led by FED Chairman Ben Bernanke announced that the FED will monetize another $1.75 Trillion in 2009. The announcement reads “the Federal Reserve will purchase a total of up to $1.25 trillion of agency mortgage-backed securities and up to $200 billion of agency debt by the end of the year. In addition, the Federal Reserve will buy up to $300 billion of Treasury securities by autumn.”
This is a last-ditch attempt to continue to prop the housing market from a further collapse due to option, Alt-A, ARM mortgages. As with most of the current interventions, instead of “softening the blow” this action will merely drag out this depression, and likely will make the end resolution that much more catastrophic. Monetization of debt increase the money supply of dollars, which inevitably causes debasement of the dollar by inflation.
Ron Paul was interviewed on the Jason Lewis Show by guest host Rod Grams this evening. They talked for about 16 minutes and covered several topics but in the end focused on auditing and potentially ending the Federal Reserve.
Paul specifically discusses why he doesn’t think the way to get HR1207 to a House vote is through a discharge petition. He suggests continuing to drum up grassroots support for HR1207 is the best method.
Grams allowed Ron Paul to speak until he was done on each topic. He even pointed out that his niece convinced him that Paul was a great candidate during the 2008 election.
Listen to the interview in it’s entirety below.
Audio clip: Adobe Flash Player (version 9 or above) is required to play this audio clip. Download the latest version here. You also need to have JavaScript enabled in your browser.
It’s Friday again. Here is this week’s installment of “quick hits”.
It has been quite a busy week. The news outlets have had a lot to talk about. At least 4 people died this week, one of them politically, the other 3, physically.
Ed McMahon died earlier this week. There are three things I think of when I hear his name, other than being Johnny Carson’s sidekick on the “Tonight Show”.
The first is the impression of Ed McMahon on the “Carsenio Hall Show“, an SNL skit with Dana Carvey playing Carsenio and the late great Phil Hartman playing McMahon. Next, I recall McMahon hosting the talent show “Star Search“, an 80’s version of “American Idol” with several other talent categories. Finally, and perhaps most of all I remember McMahon as being the guy in the “American Family Sweepstakes” commercials (see one here). RIP Ed.
The next “death” of the week was purely political. I’m talking, of course, about Mark Sanford. There’s not much to say that hasn’t already been said. I realize many people liked Sanford and thought he may be the guy in 2012, but I was never completely sold on the guy for some reason. Now, we all have a reason.
Author’s Note: Hello all. The editors of Liberty Maven have graciously agreed to include me as a contributor to this fine site. As they are always on the ball with breaking news, it may be a challenge to keep up with valuable content. So, for my first post, I’d like to start with a rhetorical, philosophical open letter that I wrote directed at all those who think that more government regulation will solve all of our nation’s ills. I hope you enjoy it!
—————————————
I’ve gotten some feedback on the subject of deregulation, and the effect of greed. Many are quick to demonize it, but I think we all need to slow down and take a look at what greed really is, before we admonish the “greedy”.
Interestingly, greed, is one of the 7 deadly sins, so we should strive to not be greedy, right? Well, greed is defined in several different ways, but the most unbiased true definition (not relating to material wealth – I’ll explain why this is important in a moment) of greed is: An eager desire or longing; greediness; as, a greed of gain. Is this not merely an extension of self interest? What is self interest? Self interest is defined as personal interest or advantage. Everyone acts in ways of self interest, some more than others. The reason is because life is a competition, like it or not. You cannot beat the self interest out of anyone, and that is the paradoxical nature of self interest, i.e., greed. To clarify my point, allow me to give several examples.
1. Early in life, we play games. The object of a game is to win. The desire to win is an act of self interest. Yes it is fun to play, but winning and losing is part of the game, and the desire to win is part of human nature. If the true object of the game is only to have fun, why do we keep score? Why do we play at all? Can we not find more fun and productive things to do if the object is “fun”?
2. When we go to school, we get graded on our performance. We strive to get good grades based on our performance, and to gauge how we are faring against our peers. Some learn faster, or in different ways, than others. It is in our self interest to get the best grades possible, so that we not only know we are learning, but to ensure that our future will be bright, by being accepted into higher educational facilities which boast better educational practices than others.
In case you missed it, Ron Paul participated in a Fed forum at the CATO institute yesterday. I enjoy these types of gatherings. The speakers all were quite knowledgeable.
During Ron Paul’s Presidential campaign of 2008 I was fortunate enough to attend a PBS debate in Baltimore, MD and witness some of that that magical Ron Paul truth in person. Following the debate all the other candidates sauntered off the stage. Ron Paul immediately headed toward the audience where he was mobbed by his supporters for autographs and handshakes. A girl near me was having trouble breathing because she was so excited to “meet” Dr. Paul. Ron Paul had acheived rock star status.
I’m thinking of this now because it seems every time I read something from Robert Higgs I approach that same feeling. Higgs is a liberty rock star. In a recent article he annihilates the pro-regulatory power-grabbing bottom-feeders of our government.
Even if systemic risk does exist, why should anyone believe that the fakers and time-servers employed by a government regulatory agency will have the ability to gauge its magnitude and to identify the specific firms that must be eased away from the precipice—always, of course, at the great expense of taxpayers and holders of dollar-denominated assets?
Let’s be frank: systemic risk is the greatest—and perhaps the phoniest—excuse for unwarranted bailouts ever devised by the mind of man.
It’s Friday and that means another installment of “Quick Hits”…
I read a quite sobering article by Chris Hedges earlier this week entitled, “The American Empire Is Bankrupt”. After reading the headline I said to myself, “well, duh!” But the first paragraph of the article shocked me out of my “duh-ness”. It reads:
This week marks the end of the dollar’s reign as the world’s reserve currency. It marks the start of a terrible period of economic and political decline in the United States. And it signals the last gasp of the American imperium. That’s over. It is not coming back. And what is to come will be very, very painful.
Hedges directs the ultimate economic horror movie, something I’ve tried to prepare my family for after watching Chris Martenson’s excellent “Crash Course” last year. I find myself asking the same question over and over again. Are the doomsayers like Peter Schiff, Ron Paul, Jim Rogers, Chris Martenson, Chris Hedges, and Gerald Celente right?
If they are, I know I’m at least partially prepared now and am trying to become more prepared every day. That is, of course, without going completely into the commando-survivalist realm. If I did that, I’d likely have to survive a divorce before I’d get to use any of my newly acquired skills.
A big deal was made this week over Obama murdering an innocent fly with his bare hands during a CNBC interview. As if all of the human Obamatons frozen in O-face since our long national Obamagasm began on January 20th wasn’t enough. He is now the lizard king. He fellates humans with his sharp tongue and strikes down insects with his bare hands. Is there anything this Superhuman-in-Chief cannot do? Removing his teleprompter seems to be his only kryptonite…. or is it?
Liberty Maven
“A government that robs Peter to pay Paul can always depend on the support of Paul.”
Follow LM on Twitter