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Wednesday, October 6, 2010

America Needs Virture NOT Mr. Soros....

Recently in the Financial Times Mr. George Soros, penned and article whose title is, “America needs stimulus not virtue”. Mr. Soros takes the position that the Obama Administration is not doing enough deficit spending for his taste, of course, he is not obligated to pay the debt back as he is not a US taxpayer; but he is perfectly content spending or recommending how others should spend and borrow.

“The Obama Adminstration’s insistence on fiscal rectitude is dictated not by financial necessity but by political considerations”. Mr. Soros shows that he is further out of touch with reality in his statement about rectitude, as I believe that the administration has chosen a path of fiscal irresponsibility because of political considerations. The stimulus bill has been a dismal failure and a horrible misallocation of future generation’s wealth. The Stimulus’s $814 billion supposedly saved or created 1.4 million to 3.3 million jobs , which roughly equates to $584K or $247K per job depending on how many jobs were actually created. I am sure you can see that it was a good and efficient use of those stimulus funds. Moreover, the bondholders of GM were thrown to the wolves for the political reason of rewarding the UAW(leadership) that greatly contributed to the company’s downfall. The healthcare bill that had to be passed so we could find out what is in it is projected by the CBO to cost far in excess of what could be saved and this is just what is coming to light recently. These are just a small sampling of rectitude policies of the administration.


Mr. Soros then claims that the Republicans cashed in on the market decline of 2008 and the recession following blaming the administration. I am not sure where Mr. Soros gets his delusions, but the decline in 2008 has been squarely laid at the feet of George W. Bush and the Republicans by both Obama himself and the sycophant media. For many months in to the Obama administration he was given a pass on the economy and the continuing recession. I am not sure where Mr. Soros gets his information, but his source must live in an alternate universe. While it is true that it is now Obama’s recession, enough time has passed that he can no longer blame the moribund economy on GWB at least not without being called to task. Only recently have the Republicans have been able to get traction on the economy especially since they were the party of “No” until a couple months ago. He is right about the Republicans being able to point out that the ongoing recession is a result of government ineptitude whose blame lies squarely at the feet of the administration and congress who devised the plans that have not repaired anything structural. We have had “cash for clunkers”, “dollars for dishwashers”(appliance rebates) and the first time home buyer $8,000 credit all of which provided a temporary boosts but did not address any problems.


“I believe there is a strong case for further stimulus. Admittedly, consumption cannot be sustained indefinitely by running up the national debt”. The problem here is that while Mr. Soros calls for more stimulus and says it can’t go on forever, he fails to recognize that we have blown the initial stimulus and further stimuli will have limited short term affects. This is a situation very similar to what happened in France from 1789-1796 when the government stimulated their economy by injecting liquidity in the form of printing Assignats. Each time they printed new Assignats the economy would improve, however, each subsequent injection had to be larger than the previous. Eventually the printing more Assignats had no impact and on May 21, 1797 all Assignats were declared void, as another FIAT currency bites the dust. The French never made the hard choices to fix their underlying economy therefore the result was a hyperinflation. Then as now, we are not fixing the structure of our economy and Mr. Soros’s calls to throw rectitude out the window may give a temporary boost but at huge future cost.


“But to cut government spending at a time of large scale unemployment would be to ignore the lessons of history”. Mr. Soros must have a warm and fuzzy recollection of the Great Depression although he did not learn from it. Government may be able to spend their way out of a crisis if they have a surplus but one cannot stimulate their way out by borrowing further especially when the structural imbalances are so large. You can not cure a debt problem with more debt, just like you cannot sober a drunk with more alcohol. The long term consequences of further borrowing without addressing the real problems just to give a boost in consumer spending in hopes that it may spark some growth is both foolish and reckless.


Without boring you to tears, dear reader, Mr. Soros goes on to talk about how Americans are convinced that the Government is lousy at managing investments that would help improve the country or its people. “A quarter century of calling the government bad has resulted in bad government. But to argue that stimulus spending is inevitably wasted patently false” the new deal produced the TVA, Triboro Bridge and other public projects still in use.” Mr. Soros has not been paying attention to reality here, in fact he had to reach all the way back around 70 years ago to site projects in the public domain that were not a boondoggle. He could have just looked at the last stimulus to see the waste like the rest of us, but maybe that is just not visible through his rose colored glasses.


The problem is today that the moral character of the country is not the same as it was in the 1930’s. The special interests, lobbyists, big business and politicians of questionable character could not produce projects of the same caliber at a reasonable cost, take the “Big Dig” in Boston for example. I am sure you could name hundreds of projects like the previous one that ran over budget or was not completed with proper workmanship. Responsibility and ethics within government has been on the decline for many decades and we have reached the level of bloated bureaucracy that breeds incompetence in all aspects including projects like Mr. Soros suggests. To counter Mr. Soros I do not think the average American thinks government is bad just mismanaged and inept, since we have seen it demonstrated first hand over and over at all levels, Federal, State and municipal.



For a guy who made his bones in the private sector he makes no bones about the fact that he does not believe that private business employs available resources. I have to take issue with Mr. Soros on this point. The private sector is the most efficient at allocating capital and competing, especially when the risk is not socialized rewarding the screw ups as we have today. The private sector also should be the largest employer and small business in particular accounts for something on the order of 80% of jobs. He goes on to state that corporations are operating profitably but are not investing instead they are building liquidity. Well Mr. Soros we are in the post credit crunch era and corporations are concerned that if there is another bout of credit contraction they need to be able to self finance since they could be frozen out of the markets. Additionally, given the current environment, business does not see a reason to expand and invest since they cannot get a lay of the land, there are tax increases, healthcare, and regulations to deal with. All the aforementioned items are coming and no one knows which rule will be changed next or tax increased; so business remains hunkered down and one cannot blame them. If they saw the light at the end of the tunnel or at least knew where they stood, business could and would plan. Instead the administration seems hell bent on punishing the very individuals that could lead us out of this mess; the entrepreneur, the saver and the investor.


Mr. Soros goes on to question how much debt is too much and that the debt level allowed is dependent on public perception, since they will reassess the risk by raising rates. He then makes a comparison stating that the US is nowhere near the 200% Debt to GDP that Japan is approaching, on the surface that is true until you factor in the unfunded liabilities, which Lawerence Kotlikoff pegs somewhere around $200 Trillion currently. Most Americans feel that we have reached the debt limit and must rein the debt in while Mr. Soros obviously disagrees with that philosophy. My take is that MR. Soros may think he is helping by putting this nonsense out in the public domain and people will listen to him because he is famous for shorting the British Pound and making $1 billion, but that does not mean that he is correct about the debt, macro economy and what to do about it. Mr. Soros’s suggestion I believe is wrong headed, reckless and dangerous.


We as a nation need to face our problems and cut government and entitlements, before it is forced upon us by either default or hyperinflation. We need to simplify our system of government and remove the barriers to business that are a hindrance and produce no good for the general public only the government. We need to avoid protectionism but level the playing field so US business is playing with the same rules. We need to simplify the tax code and make it fair for all, which means that everyone needs to have skin in the game and pay taxes; currently 47% of workers do not pay income tax only payroll taxes like FICA. We need to regulate business in a manner that actually protects but uses commonsense. We need to change laws that encourage outsourcing and move plants to foreign countries. We need to develop a real energy policy instead of relying on alternative energy pipe dreams that won’t materialize in time. We need to look carefully at fixing our education system as our future is dependent on it. We need to realize that the US is no longer the center of the economic universe and we now have real competition from countries around the world; whose policies and demands can drive markets and have an impact on us.The list goes on and the challenges are great and the crisis is now. Americans always have stepped up in a crisis and come out stronger and we need to do it now. Mr. Soros’s answer is a limp wristed solution to the real problem but it won’t solve it only will make things worse. We can solve it and we start on Nov. 2nd. Remember to vote!

And people wonder why gold, silver and commodities are rising...
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