Americanly Yours

I recently read Peter and Andrew Schiff’s new book, .”  I am a big fan of Peter Schiff and was excited about reading this book.  Peter Schiff is an economist who is famous for predicting the financial meltdown in advance.  Here is a great video of him making predictions in advance of the meltdown.  He is even laughed at by the other commentators on CNBC and FOX for implying that there was a housing bubble only months before the market crashed.  Well known economists including Ben Stein and Arthur Laffer were among those mocking Schiff.  Interestingly enough, the people laughing at him selected Washington Mutual, Bear Stearns, and Merrill Lynch as great stock picks (all of those companies are now out of business).

This book is a simply written, illustrated allegory which details how economies grow and what can cause economic collapse.  The book begins with three men who are stranded on an isolated island.  The men spend all day fishing just to catch enough fish to barely survive.  After a time, one of the men underconsumes and is able to use his savings to increase the number of fish that he catches.  From this action, an island economy is born.

The story continues for generations and generations (immigrants eventually come to the island) as the island’s economy continues to develop.  I will refrain from giving specific details about the economic expansion so as not to ruin this book.

The chapters contain “Reality Checks” which simply relate the material in the chapter to real life by defining the concepts which are outlined.  In these short sections, the Schiffs explain things like underconsumption, productivity, savings, risk, and so on.  The “Reality Checks” help readers who may have little or no understanding of economics understand basic economics principles.

At the end of each section is a much more detailed (but still simple and easy to understand) section called “Takeaway.”  These sections elaborate on the lessons from the chapter and give further explanation of the underlying economic principles.  They greatly enhance the book by providing the reader with a nice overview as well as a great segue to the next chapter.  The “Reality Check” and “Takeaway” sections both help move the story along and are features which would be great in other books on economics.

The first 5 chapters of this book are absolutely amazing.  The Schiffs do an excellent job of using humor to make reading about economics fun and easy to follow.  They explain the causes of a growing economy (and the effects of a growing economy on society) in a manner that is easy for anyone to understand, regardless of their economic background.

In chapter 6, however, things took a slight turn for the worst.  In this chapter, the Schiffs explain the foundation of a banking system.  I have heard Peter Schiff give speeches on this in the past–his speeches are great and include detailed information on the historical evolution of banking.  It is always interesting to hear Schiff speak about this and I wish that he had included more of this information in his book.  For some reason or another, the Schiffs do not tell the full story of the evolution of the banking system.  This is somewhat perplexing, as he wrote about this quite nicely in his bestselling (and highly recommended by me) book, Crash Proof.  I have also seen him give numerous speeches on this subject, all of which were great speeches which gave this full history.  The failure to include this can certainly be excused, as the Schiffs’ book was surely intended to be a brief, simple overview of how an economy works.

The “Takeaway” section of chapter 6 was also somewhat perplexing.  There was a disconnect between the material in the chapter and the “Takeaway” section which is likely to confuse some readers.  In this section, the Schiffs launch an attack on the Federal Reserve system without explaining to the reader exactly how this ties in with the information in the early part of the chapter.  While I fully agree with the Schiffs on the Federal Reserve, an uninformed reader might have a little trouble understanding the Schiffs’ early critiques of the Federal Reserve System.  To their credit, however, the Schiffs do properly explain this later.

I do want to point out to my reader that this chapter is my only real criticism of the book and that while it is worth pointing out, it does not take much away from what is truly an excellent book.

Following this section, the Schiffs continue to brilliantly explain the evolution of a developing economy into a major economic player.  While the time line is a little off (something that the Schiffs warn the readers of in the introduction), the Schiffs paint a largely accurate picture of the history of the American economy and the growth of the American government (especially with regards to its intervention in the economy).

I wont give away the ending, but the economy in the book suffers a fate similar to that of the American economy during the current economic crisis–the title promises to explain how an economy crashes, so I dont think that Im giving anything away.  However, the Schiffs looks into the future and offers a glimpse of what the future of the American economy might look like if we do not quickly enact sound monetary policies.  Given Peter Schiff’s history of correctly predicting the course of the economy, his prediction is certainly worth taking into account.

My rating:

Strongly recommend:  9/10

Americanly Yours,

Phred Barnet

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The phrase “you never get a second chance to make a first impression” works for Presidents too.  President Obama’s first year in office has been marked by failure after failure.  His only remarkable legislative success, last year’s “stimulus” bill is itself a failure.  But just how has the  first year of Mr. Obama’s Presidency been a failure?  Lets take a brief look:

Economy:

The economy continues to deteriorate under President Obama’s leadership. When President Obama pitched the “stimulus” bill to the skeptical American public, we were told that if this “crucial” bill was not passed soon (ie, before Congress had ample time to read the bill) then the economy would face devastating consequences.  This was of course a well calculated and bold faced LIE.  The fact of the matter is that the majority of the spending in the “urgent stimulus” bill were not going to be spent for over a year.  We were warned by the Administration that failure to pass the bill would cause unemployment to skyrocket and could cause it to reach as high as 9%, but passing the bill would keep unemployment from raising above 8% (see this chart put out by the Obama Administration to urge support for the “stimulus”).  So, we passed the bill and despite (or because of) this, the official unemployment rate surged past 9% and currently sits at 10%.  Of course, the 10% figure is a lie as well.  Previous administrations changed the way that the unemployment rate was measured in order to disguise how bad things really were.  This U-6 unemployment figure is still reported by the government, however, the government now uses U-3 as the official unemployment number.  While U-3 unemployment is 10%, U-6 unemployment is 17.3%.  This figure was 13.5% one year ago.  Simply put, things are bad.  But, government data collection is shady and should not be trusted as definitive.  Shadow Government Statistics, a private data collection/analysis website places unemployment at over 22%!

Ben Bernanke failed to see the impending collapse even shortly before the economy tanked.  While a candidate for President, Mr. Obama repeatedly criticized the economic policies of the Bush Administration.  By choosing to reappoint Ben Bernanke as Chairman of the Federal Reserve, President Obama was giving his tacit approval to the policies of the Bush Administration.

The administration has also increased the national debt to dangerous levels.  The US is now in serious risk of having its credit rating downgraded.  Any hopes of an economic recovery would be shattered if this were to happen.

Foreign Policy:

Candidate Obama repeatedly attacked the Bush Administration on three fronts: the economy, the wars, and foreign relations.  President Obama has failed to correct the errors of the Bush Administration on any of these areas.  As mentioned above, President Obama has continued the “stimulus” and bailout policies initiated by President Bush.  His reappointment of President Bush’s Federal Reserve Chairman Ben Bernanke confirms the fact that President Obama’s economic policies are not notably different than those of President Bush.

The second area where candidate Obama frequently attacked the Bush Administration was his handling of the wars in Iraq and Afghanistan.  Mr. Obama criticized President Bush’s Iraqi surge, falsely claiming that it was not a success.  If I were a candidate who ran on a platform of change and who repeatedly criticized the previous administration’s military policies, I surely would not have allowed the previous President’s Defense Secretary to continue serving.  Furthermore, if I had attacked the former President’s Iraqi surge strategy, I would not have employed a similar strategy in Afghanistan.  However, President Obama has done both of these things.  He kept Defense Secretary Robert Gates in his position, and he has sent an additional 68,000 troops to Afghanistan since taking office (many of those troops were sent in the weeks following the President’s claiming of the Nobel Peace Prize).

Candidate Obama promised to have all of the combat troops out of Iraq within 18 months after taking office.  That leaves him less than six months to remove over 100 thousand troops from Iraq.  Id put the chances of this happening right at zero.  More likely, President Obama will declare that the troops in Iraq are no longer combat troops (despite the fact that they will almost surely be engaging in combat).

President Obama missed a historic opportunity to improve relations with Cuba.  Since taking over, Raul Castro has introduced many positive reforms, introducing notions of private property, increasing wages for productive workers, and allowing Cubans to take advantage of certain technologies.  Raul Castro’s Cuba still has a very long way to go, but any movement in the right direction should be seen as positive.  Candidate Obama pledged to improve relations with Cuba.  Instead, President Obama has continued to support the same policies towards Cuba which have failed for the past 48 years.  Of course, this si just one example of this administration’s failed foreign policy.

Candidate Obama pledged to repair our strained relations with foreign nations.  President Obama has failed at this as well.  He has been publicly scolded by Russia’s Putin, Israel’s Netanyahu, France’s Sarkozy, and other allies.  In fact, I would argue that our foreign relations have not noticably improved with a single foreign nation since President Obama’s inauguration.

Agenda:

President Obama has almost completely failed in his efforts to push his agenda during his first year.

Remember, this President was the candidate who vigorously campaigned on a platform of “change.”  There have been few noticeable changes in the previous year.

With sizable majorities in Congress and a public eager for change, President Obama should have had a relatively easy time pushing through at least some major parts of his agenda.  The only major bill that President Obama was able to push through Congress during his first year in office was the “stimulus bill.”  This was a bill which was passed by using intimidation, threats, fuzzy math, erroneous estimates, and down right lies.  The “stimulus” bill was a costly mistake that did little if anything to stimulate the economy but will cost taxpayers around $1 trillion when the time comes to repay the costs of financing this bill.

Congressional Democrats pushed various health care reform bills for well over 6 months.  During this time, President Obama showed almost zero leadership on this issue, basically promising to sign any bill that came out of Congress.

Had President Obama taken a leadership role and urged Congress to pass a series of smaller health care reforms instead of trying to push a sweeping bill down the throats of an adamantly opposed American public, he could have signed several of these reforms months ago and moved onto other pressing issues.  Instead, Democrats wasted the better part of a year, alienated a large portion of American voters, and came up empty handed.  Democrats might now adopt the strategy of pushing through smaller, incremental reforms, although it could even be too late for that approach.

Opponents of government controlled health care can thank President Obama’s complete lack of management abilities for preventing the nationalization of health care that seemed to be a foregone conclusion several months ago.

The President’s inability to lead has also prevented the passing of cap and trade and several other government intrusions into the lives of individuals.  He has placed his coalition in danger time after time, and now seriously risks losing the House of Representatives in November.  Things also look increasingly likely that the Senate may be in play in November as well.  More ont his in a future article, but it is beginning to look very likely that Democrats will lose President Obama’s former Senate seat, Vice President Biden’s former Senate seat, Harry Reid’s Seat, and possibly Hillary Clinton’s seat.  This would have been unthinkable only one year ago, but then again so would a Republican winning Ted Kennedy’s former Senate seat.  President Obama has alienated Democratic voters to a degree that even the most optimistic Republican would have thought to be impossible a year ago.

President Obama should follow the lead of Domino’s Pizza: soak in and address the valid criticisms, revamp his “product,” and use his rhetorical skills to sell his new image to the public.  Failure to do so can only lead to a changing of the guard in the 2012 Presidential election.

Americanly Yours,

Phred Barnet

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For the first time in almost 35 years, there will be no cost of living increase in Social Security payments.  In the predictable “something must be done about this [so called] problem” mentality of this administration, President Obama has proposed sending $250 checks to over 50 million seniors to help them cope with their financial woes.

The problem here is that there is a very good and simple reason why there is not going to be an increase in Social Security payments: prices have dropped by 2.1% since the fall of 2008, meaning that the money that seniors already get from Social Security actually buys more goods and services than it did last year.  On top of this, the Social Security Administration has already given seniors a large increase in their payments this year: in January, seniors received a 5.8% boost in their payments, the largest increase since 1982.

Once again, President Obama is using misguided “logic” to support his own political goals.  Social Security payments are indexed to price inflation, however, they are not allowed to be decreased, meaning that a decrease in prices actually makes seniors much better off.

I understand that many seniors are suffering in this recession.  Many have lost a great deal of their savings due to the collapse in stock prices.  However, Congress decided over three decades ago that Social Security payments would be linked to the cost of living.  Besides the obvious reason of guaranteeing seniors a livable income, Congress likely had another reason for guaranteeing the benefits: they wanted to take the decision out of the hands of the political process.  Right or wrong, it will be very difficult for members of Congress to vote against the $250 payment for seniors.  For one, seniors are a vulnerable group, many of whom are living only on their fixed Social Security payments.  Seniors also vote–a lot.  As a group, they historically have the highest rates of voter turnout.

I firmly believe that this bill should be voted down.  For one, President Obama’s proposal to send checks to seniors  is addressing a problem that doesnt actually exist: seniors can buy more for their money than they could a year ago.  Additionally, these payments will cost roughly $13,000,000,000 [$13 billion] in money that the government does not have.  The money being spent on this non-existent problem will have to be expropriated from hard working citizens or printed out of thin air (devaluing the savings and earnings of anyone who does not receive a payment).

This “something must be done” mentality is flat out wrong.  Many supporters of the bailouts, stimulus, and other interventionist policies defend them not on moral or economic grounds, but rather defend them by saying that “at least they are trying something.”  This mentality has brought this once great Nation to the brink of bankruptcy and has brought government regulation into nearly every single aspect of daily life.  We can only hope that enough members of Congress will do the right thing and oppose these payments.

Americanly Yours,

Phred Barnet

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Please take a look at the following article and then read on:

http://seekingalpha.com/article/134820-the-worst-case-scenario-someone-has-to-say-it?ref=patrick.net

This article comes from what I believe is the best financial site on the internet. Its a list of predictions for what the worst case scenario will look like in 2012. I think that every prediction made in the article is accurate and will happen if the government continues to respond to this economic crisis in the manner that it has been for the past year and a half. His unemployment predictions for 2009-2012 are almost exactly in line with what happened during the Great Depression from 1930-1933. I think that the author’s timeline is probably off by a few years, but if we do not change our course, every single prediction in this article will come true within the next 10-15, and possibly sooner.

[[However, this might not be all bad: From the comments section of the article: “On the bright side, this means there will be no money to build machines that will wind up conquering us, so we won’t have to bring a terminator back from the future.“]]

We have more than doubled the amount of money we have in print in just the last year. We have “spent, lent, or committed $12.8 trillion” in less than 2 years–over 90% of our GDP–trying to stop this financial crisis from getting worse. This money has been printed, but most of it has only been pledged and has not yet been spent. When this money is spent, economic laws of the multiplier effect and the velocity of money, along with the realities of the current fractional reserve system will lead to a massive and unavoidable increase in the money supply. This will cause the value of the dollar (and any savings that you may have) to drop, while the cost of goods and services will rise.

If you have the means to do so, I suggest that you buy some gold… just in case.  This isnt just a solution for the rich.

On top of this, we are nearing a major crisis with Medicare and Social Security.  According to the Social Security Administration, the Medicare fund will be in a deficit starting this and will be completely exhausted by 2019.  Social Security will be in a deficit starting in 2011 and will be exhausted by 2041.

Future funds for these programs will have to come from general revenues, but the CBO is already forecasting trillion dollar deficits for quite some time.  Deficits in Medicare and Social Security will put an even greater strain on our budget.  This happening because of a collective failure which is the fault of all Presidents from President Franklin Roosevelt up to and including President Obama, as well as all Congressmen who refused to debate proposals to reform these programs for the past 60 plus years.

Here is an interesting article from the President of the Dallas branch of the Federal Reserve.  In the article, he explains that to fund these programs at current levels, spending will have to be cut by 97%!  I took a few quotes and posted them below:

“I would say the mathematics of the long-term outlook for entitlements, left unchanged, is nothing short of catastrophic.”

“And just to drive an important point home, these spending cuts or tax increases would need to be made immediately and maintained in perpetuity to solve the entitlement deficit problem. Discretionary spending would have to be reduced by 97 percent not only for our generation, but for our children and their children and every generation of children to come. And similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?”

To fund these programs, the government essentially has 3 options:  borrow, raise taxes, and print money.  At some point, other nations will stop lending us money.  It is only a matter of when.  Raising taxes is politically explosive.  The  economics of printing money is too boring for the vast majority of Americans to care about, making it the only political solution to this problem.

Of course, there is a 4th option:  cut spending drastically and reform these programs before our economy collapses.  But, does anyone think that Congress or the President will make any serious effort to do so?

Americanly Yours,

Phred Barnet

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A year ago, America was completely different than it is now.  In the last year, the government has nationalized the banking industry, taken over the worlds largest insurer (wasting well over $100 billion in the process), and taken control of two iconic car companies.  Last week, Congress agreed to a plan that will cost nearly $800 billion.  Between actions by Congress and the Obama administration, as much as $3 trillion was pledged to government bailouts last week! This amounts to 21.7% of American GDP (US GDP is 13.7 trillion).  This new spending is more than government’s entire 2008 budget of just under $3 trillion.  Every penny of this money is being financed with debt.  This will raise the size of the national debt substantially.  Our national debt currently stands at roughly $10.7 trillion.  If we add another $3 trillion to the debt, our debt will increase by 28% and will be roughly equal to our GDP!

Of course, even Mr. Obama has admitted that there is no guarantee that these plans will work.  Even more interesting, he has said that these plans will have little effect before 2010.  This is particularly interesting because the non-partisan CBO recently estimated that the recession will supposedly be over in mid 2009 even if these “stimulus” plans werent passed, meaning that Mr. Obama’s plans wouldnt even begin working until after the economy has already started to heal itself.

But, lets pretend that Mr. Obama’s boldest predictions are correct and that this plan will create 4 million new jobs (although he says it will create or save 3-4 million jobs).  Let us also assume that each of these jobs is a high paying job of $100,000 a year and that these jobs are permanent jobs that will never go away in the future, regardless of future circumstances.  According to both H&R Block’s tax calculator and the Heritage Foundation’s much simpler tax calculator, a single person earning $100,000 pays $19,472 in Federal taxes.  So, the 4 million jobs that we are pretending this plan will create will return $77.888 billion in taxes per year to the federal government.  Excluding any interest (which will likely be a hefty sum and will go countries like China), it will take the government about 35.5 years to recoup the money!

If, however, this plan still creates 4 million jobs but these jobs pay $50,000 per year instead of $100,000, the government will collect $6,606 in taxes per person totaling $26.424 billion in taxes per year.   Under these circumstances, it will take the government 113.5 years to recoup the money!

However, I made a little Excel spreadsheet assuming that the government would have to pay 3% interest on these new loans.  This is a generous assumption, considering that the average rate on treasury bills has been much higher.  I used both of the above jobs assumptions in my calculations and found that the government will actually never be able to recoup this money if interest is factored in! Check it out for yourself.

Americanly Yours,

Phred Barnet

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