Posts Tagged ‘depression’

Obama’s Hockey Stick

“I say after eight years of this Administration we have just as much unemployment as when we started. … and an enormous debt to boot.”

These were the words of Treasury Secretary Henry Morgenthau spoken to Congress in May, 1939. Exasperated after experiencing massive unemployment for 10 years and spending heavily year after year to try to end it, Morgenthau was a beaten man. He was admitting that massive government spending and make-work projects had failed to revive the American economy. Over that period, unemployment had peaked at 25%, never went below 14%, and was 20% again when those words were spoken.

Now we have an administration in office that is mimicking the acts of the Roosevelt years with unprecedented borrowing and spending in their attempt to revive the economy. No less than Vice President Joe Biden recently stated: “We have to go spend money to keep from going bankrupt.” These people refuse to acknowledge history.

Below is a graph which I call “Obama’s Hockey Stick”. The environmental “hockey stick graph” has been discredited, but this one is frighteningly real. It shows that the US Budget Deficit has gone over a cliff; the deficit quadrupling between 2008 & 2009.

The next graph is projected future deficits based on present government budget plans. One estimate is from the Obama Administration, the other from the Congressional Budget Office (CBO):

The plunge in 2009 (which added $6,065 of debt for every living American) appears to begin to recede in 2010 and after until retracing back deeper starting in 2013. Note that the White House projections are far more optimistic than CBO. Who are we to believe; an administration attempting to cling to power, or a non-partisan budget watchdog? No matter which is right, the scenario is dire.

Based on 1933-41 experience, the above projected deficits appear a recipe for disaster. Government borrowing sucks available capital out of the system starving business of loans to expand and hire. Interest rates will rise choking off recovery of the housing market. Taxes will be raised to pay both the debt and interest; draining vital earnings of firms and individuals for decades to come.

Deficit spending does not create recovery; it only buys votes today with the fruits of future labor. Our government is selling our children’s future down a rat hole. Next time you see a baby, think seriously about apologizing in advance.

Here is a cute one that has been around a while about the TARP bailout:

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Generation Zero

“The current economic crisis is not a failure of capitalism, but a failure of culture.”

This is an apt description of this documentary that every American adult should see – perhaps twice. It moves fast, with many vivid images interspersed with narration from a number of individual experts in finance, government, culture, and history.

It basically demonstrates the truth about how the Boomer Generation was raised, matured, and eventually became leaders in government, finance and academia. Not discussed is the fact that this generation split along cultural lines in the 1960s. Here is a trailer from the movie. The generational split is discussed below:

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A vivid cultural division occurred in the ‘60s between those who were raised with almost anything they wanted by doting parents and others who grew up having to work hard for nearly everything they got. Millions of young people were sent away to college fully financed by family money, safe from the draft on student deferments. Once away from home, they rebelled, rejecting the values on which they had been raised and embracing the counter- culture of pleasure, drugs, free love, protest demonstrations, and contented living in filth.

These individuals eventually outgrew the hippie lifestyle, cleaned up their acts, embraced materialism, and matured into yuppie types. With their education credentials, they moved up in the ranks of academia, law, finance, and government, eventually attaining leadership positions as the old guard who had experienced the great Depression and WW II retired. Their main flaw was a lack of experiencing any hardship, and a narcissistic expectation of good times and easy money forever. They became prone to taking huge risks with other peoples’ money; blindly ignoring the potential devastating consequences.

The other half of the Boomer Generation entered young adulthood without the advantages of family money, could not afford college, and millions ended up serving in Viet Nam. Their work ethic enhanced by military discipline, they returned home despised by those with whom they had grown up who had avoided service. They tended to drink heavily for years; self medicating against what is now called PTSD. Most eventually settled into blue collar jobs, raised families, and maintained the value system of the middle class.

Generation Zero aptly lays out the journey of the privileged from childhood to DC and Wall Street; focusing on the root causes of the present financial crises. It is a very compelling examination of how America went from the prosperous ‘50s to the present economic contagion.

Please order and watch this movie. Share it with those you know. This is a story that every responsible American must understand. It will be the most informative $25 you ever spent. Understanding how the economy got to this point will arm you with the knowledge of how to safeguard your future. The link to the site is below:

http://www.generationzeromovie.com/

Curing Recession

There have been 16 recessions and 2 depressions since WW I.  The most interesting things about six of them are how they were cured and how long the expansion period lasted afterword.

1920-21 Depression: Response – Harding Administration cut taxes and drastically reduced the size of government. The recovery became known as “The Roaring ‘20s”, continuing with only minor pullbacks until 1929.

1929-33 – The Great Depression: Response – The Hoover Administration raised taxes, reduced money supply, and signed the Smoot- Hawley Tariff Act. FDR raised taxes, borrowed heavily, and created millions of government jobs. This failed by 1937 creating the dreaded “double dip” depression. Unemployment peaked at 25% and never got below 14% for ten years. Mobilizing for WW II finally ended this unprecedented period of despair.

If you have any doubt about the true underlying strength and spirit of the American people; listen to this cut made in 1933 – the absolute depths of the great depression:

1945 Recession: War production ended and 12 million service members returned to the workforce. Ignoring “new New Deal” dreams of the late FDR and President Truman, Congress lowered taxes and refused to raise government benefits. The peacetime recovery lasted only about 3 years. Truman’s “Fair Deal” inserted government into housing, tightened the money supply and raised the minimum wage – choking off the recovery in 1949.

1960-61 Recession: Response – JFK lowered taxes which spurred recovery. This wonderful expansion lasted until 1969 – over 8 years.

1981-82 Recession: Response – Fed Chair Volker choked inflation and Reagan Administration cut taxes. It was 8 years of expansion until a mild pullback occurred.

1990-91 Recession: Response – Mild tax policies and the “peace dividend” at the end of the cold war energized this recovery. Welfare reform and balancing the budget under Clinton inserted workers into a growing economy while more money was available to finance private industry growth. The expansion lasted ten great years.

2001 Recession: Brought on by the Dot Com crash and followed by the 9/11 attack, this one was cured with two rounds of tax cuts by the G. W. Bush Administration. The following expansion lasted 6 years.

2007 – ? Recession: The crumpling housing market set this one off, followed by the collapse of financial, insurance, and auto industries. The Obama Administration took office as it deepened. This one has now lasted 3 years and is only showing very weak signs of recovery.

The question is: “Why is this recession hanging on?” Look at the Great Depression and the Hoover and Roosevelt responses to it. Huge government spending to create government jobs not a “cure”, but a canard. Tax increases are economic poison to a recovery. Massive borrowing raises the national debt and leads to higher interest rates, inflation, and scarcity of private funds to finance growth. Expansion of entitlements drains present and future treasury assets, further weakening the nation’s fiscal stability.

The discredited New Deal playbook has been used and failed miserably before. Government spending cuts and tax relief have been used at least six times. Each application resulted in quickly rebounding expansions at least twice as long as the average business cycle.

Perhaps President Obama should ditch the Teleprompters and take a hint from Sarah Palin. He should write on his palm:

“CUT SPENDING”
“CUT TAXES”
“CUT ENTITLEMENTS”
“CUT REGULATION”

The Rerun of History

When FDR took office he faced a deepening depression that had begun a few years earlier. Prior administration acts raising taxes and tightening the money supply had contributed greatly to the misery. The Smoot Hawley tariff legislation had sparked a worldwide strangulation of international trade. Unemployment was around 25% and the lower Midwest was in the throes of a devastating drought. Roosevelt knew he had to do something and quickly.

Unfortunately the cabinet and advisor roles were filled up with eastern intellectual types with little practical business experience and political hacks with even less. The President and his team then embarked on a frenzied search for something – anything – that would renew growth and create jobs. In December, 1933 only months into his administration, Roosevelt received a letter from John Maynard Keynes who was just developing the theories we know today as Keynesian Economics. Below are two quotes from that letter:

Thus as the prime mover in the first stage of the technique of recovery I lay overwhelming emphasis on the increase of national purchasing power resulting from governmental expenditure which is financed by Loans and not by taxing present incomes.”

“In the field of domestic policy, I put in the forefront, for the reasons given above, a large volume of Loan-expenditures under Government auspices.”

During the next few years the most common theme among all the programs, bureaus, laws, and plans that came forth was spending heavily by government using borrowed money and higher taxes. The unemployment rate went from 25% to 15% by early 1937. However just when the nation was beginning to feel some improvement, the Depression returned in 1938 with unemployment again at 20%. The national debt had increased by 62% in four years and the economy was tanking into a double dip depression. The beginning of WW II in 1939 with its large defense orders under Lend Lease and sales to allied belligerents was the only thing that pulled the U.S out after over ten years of economic hardship.

Deficit spending and higher taxes – the top marginal rate had been raised to 79% – were only part of the problem. Uncertainty among investors and consumers was rampant. Federal price controls and policing gummed up business planning and profits. Ridiculous programs to kill pigs and burn crops to raise farm prices backfired by making agricultural products unaffordable to millions on limited incomes. Huge public works programs administered by party hacks and unions employed democrats but froze out republican workers. Banks were overwhelmed with repossessions of failed farms, businesses and homes. Fear and uncertainty over what the government might do, or who it would punish next choked off initiative. How and why would anyone even think about starting or expanding a business under conditions such as these?

To quote Yogi Berra, the present administration is “déjà vu all over again. ” Inexperienced intellectual types in charge, a grinding recession, high unemployment, and humongous borrowing and spending look familiar.  The bombastic threats to banks and insurance firms along with the near certainty of higher taxes have a severe chilling effect on business development and future planning. Ersatz nationalization of automobile manufacturers and stimulus cash to states and municipalities mainly benefit the UAW, SEIU, and NEA.  Raising discretionary spending by 20% and jacking the deficit to three times its former amount  with failed stimulus efforts mirror the actions of the ‘30s that obviously failed at that time.

Instead of burning crops and killing piglets, we are threatened with cap & trade, health care, tax increases, draconian regulation, and wasteful government projects.  Trillions will be flushed away on useless boondoggles from light rail to the study of cow manure.  The unholy bill for these expenses will fall upon those yet unborn.

Keynesian deficit spending has failed in the U.S in the ‘30s, the ‘70s, and in Japan yet today.  Such beliefs belong on the ash heap of history.  It is among the universe of ideas so aptly described by George Orwell: “There are some ideas so wrong that only a very intelligent person could believe in them.”  Our leaders are but a cabal of inexperienced, present time oriented elitists who; refusing to learn the lessons of history are doomed to repeat it.  We must slash the spending, lower taxes, roll back regulation, and stop threatening to punish success. 

The American people are beginning to reject this situation.  In their hearts they realize that American Exceptionalism built and sustained this nation for over 200 years.  Americans will bring this economy back if only left to harness their own ideas and entrepreneurship unbound from the leaden hand of huge government and incompetent leadership.  Virginia, New Jersey, and Massachusetts are encouraging signs.