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Monday, September 20, 2010

Honey, I Blew Up The Middle Class.. Incredible Shrinking Middle Class PT 2.

I have to begin by stating how much it bothers me that so many of my fellow Americans are in such dire straits. It is unfortunate that we are living in a time where the American dream is so threatened for so many under the guise of change and cloak of politics. There are so many reasons and causes that have pushed America to the current situation, that one could write thousands of pages on the subject.

Additionally, after giving it much thought I do not want to write this piece specifically on how to profit off of others misfortune, but instead to point out some of the drivers that are prolonging and deepening the recession(which I believe history will look back and qualify as a depression) as well as forestalling any chance of real recovery.

So to the matter at hand let’s identify some of the predominant trends. The biggest underlying trend that is going to be driving the American economy for years to come is Government. Dear reader, don’t take the prior statement the wrong way; I am not anti-government, but instead I am in favor of the founding father’s view of small responsible government. Today the sheer size of the government and the amount of resources needed to make it function is massive and getting larger every time anyone in government opens their mouth. Even if we cut the size of government in the near future the debt that has been issued to fuel government largess is still remains. Moreover, it seems apparent that the government will not cut itself unless there is a crisis that forces the issue.

The leaders at all levels of our government do not understand economics and how an economy functions.  Our leaders seem to feel that it is both the government’s job and responsibility to create jobs since the private sector is unable or unwilling to do so. However, government has never been able to create wealth and jobs here or anywhere else; for if it had the USSR and the Eastern bloc would have never fallen and China would not be reforming its government toward a capitalist style model.

As it currently stands there at about 107 Million Americans employed in the private sector where as there are 22 Million workers at the Federal and State levels of government*. So the ratio of government workers to private sector employees who support them is approximately 5 to 1. Additionally, the average job at the Federal level has a cost including benefits of $123,000($40,000 of which are benefits), the State level is better weighing in at $70,000 including benefits and of course the private sector bringing up the rear at $62,000 with $10,000 in benefits.  This trend is unsustainable it will not stop the government from trying to keep this train on the tracks. The cost to private workers and the general economy through taxation and government borrowing to maintain this job illusion is dragging down the whole system. Should you expect Dear Reader that leadership of the US would comprehend this fact when individuals like Nancy Pelosi are quoted as stating and I am paraphrasing here, “The fastest way to reduce unemployment is to give more unemployment checks”. Today this is what passes for economic logic and one wonders why we have such a mess on our hands.

A second trend that goes hand in hand with the aforementioned one is the tendency of government to believe that it has to create regulation and provide big business in particular with a safety net in the name of public good. All the regulation and harebrained schemes that are jammed in to every law passed are both creating uncertainty that is freezing up business and adding the burden of cost on to the productive sectors of the economy. For example buried deep within the Obamacare healthcare bill is a clause requiring all businesses to file a 1099 with the IRS for purchases of $600(cumulative) or more per year. On the face of it this regulation seems pretty straight forward and easy until you inspect the draconian nature of it.  Whether you own a business or work in one I am certain that in the course of your regular business you either sell or buy more than $600 worth of goods and services from multiple vendors, all of which will now necessitate filing a 1099 form with the IRS. This regulation will be a burden of sorts for large companies because they will have to hire additional staff to handle the paper work; but for small business there is no benefit only cost and could force many who are currently teetering on the edge to shutter. The intent of the regulation is to capture more revenue by the IRS for the government, however, the reality is that it will burden the small business sector who drives 80% of the job growth in the country and both increase unemployment and slow any recovery as well as reduce the very revenue it was intended to capture. In fact it appears that the only job growth as a result of this regulation will be at the IRS who intends to add 16,000 employees to its rolls as a result.

A third trend is the Federal Reserve’s policies to punish savers and reward the reckless. The FED continues with its cheap money and bailout policies all the while facilitating congress’ drunken sailor spending (Yes I know that is an insult to drunken sailors since they are spending their own money unlike the FED\congress who is spending yours and your kids\grandkids) it continues to put the US in jeopardy by debasing the currency. In fact the problem is so huge that it is almost never talked about in the media because the numbers are so staggering that most people cannot even comprehend the issue. In a recent article featuring Lawerence Kotlikoff , a well know Boston University Economics Professor (who is no  slouch receiving a BA in Economics from Univ of Penn and a PHd in Economics from Harvard) ,  points out that the “off balance sheet” deficits from the FED\Congress spending orgy is now in the range of $202 Trillion…yes that is Trillion with a “T”.  Kotlikoff states that the unofficial deficit is about 15 times the official deficit; and one should also note that the official deficit is roughly equal to the current GDP of the US.   The problem here is that the Congress and the FED are now “boxed in” as there is no way out of this mess. Given the current political and regulatory climate and the lack of will to endure any kind of cuts or taxes at some point the market is going to force the issue. The US is in the untenable situation that we cannot tax our way out nor can we grow our way out.  Of course as you know the US is not the only country with large deficits much of the world is facing this conundrum so there is no one out there to save US like the EU at least temporarily saved Greece. The difference is that the US Dollar is the world’s reserve currency and that has afforded the US the ability to rack up all this debt while abusing the privilege of its currency stature. Given or deficits and slow growth the only way out that the government will find acceptable is ultimately what veteran newsletter writer Richard Russell coined “inflate or die”, since debt default is not in the US government lexicon unlike let’s say Russia circa 1997. Currently, the FED and many deflationists out there fear deflation; however, just as in the great depression a debasement of all currencies will instantly put a stop to any deflation.  It appears to me that as time moves on the FED is ever closer to having to make Havenstein’s choice. Havenstein was essentially the FED reserve chairman of Weimar Germany after WWI, who printed and debased the currency at each slower juncture in the economy ultimately resulting in a hyperinflation.

To sum up I fear for the middle class, or what is left of it as the trends are for more government, more regulation, slow or declining job market and the potential for currency debasement resulting in large inflation.  You won’t hear these thought in the mainstream media, but looking at what is happening and historical parallels can allow you to think outside the box. The results of the policies in place will lead to opportunities for people who can deploy cash in to the right areas; such as being short housing, mortgage brokers, banks, title companies and other areas of finance that help the middle class afford items that would normally be out of reach like high end autos etc… as well as being long things people need and tangible items.

*All these figures are derived from reports on the Bureau of Labor Statistics site www.bls.gov

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