Category Archives: inflation

“Lord, What Fools These Mortals Be!” When Discussing Fed Actions And The US Economy

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Many investors spend hours each week watching programs on CNBC that endlessly discuss the state of the US economy and the actions of the Fed. Most of what they say is repetitive foolish banter “signifying nothing”. They talk incessantly about actions the Fed has taken and should take, every tweet of President Trump criticizing the Fed, developments in the trade war with China, negative interest rates in Europe and Japan and recently, the inverted yield curve in the US. They then discuss and ask their guests for an opinion as to what action the Fed should take and whether stocks will go up or down or a recession is coming. Except for the opinion of an occasional guest or reference to a tweet of President Trump which they often mock as inappropriate they make almost no reference to the egregious errors of the Fed which inappropriately raised interest rates and reduced its balance sheet during 2018 and had foolishly projected further interest rate increases and balance sheet reductions in 2019. Such actions by the Fed slowed the forward momentum of the economy resulting from the once in a generation Trump tax cuts and his regulatory changes. Rather than praising President Trump for exposing the Feds errors they foolishly criticize him for interfering with the independence of the Fed and speculate on whether he is seeking political cover for the adverse effects of his trade war with China.

The Fed regulates both government interest rates and banks. Its Congressional mandates are to maximize employment, promote stable prices and moderate long term interest rates. They have become known as the dual mandates because it is assumed that if the first two mandates are met, interest rates will remain moderate. The mandates seem simple, but they are not. The Fed claims it is data dependent when taking actions. It gathers and reviews a broad range of data before making a decision to raise or lower interest rates or to increase or decrease the size of its balance sheet by purchasing or selling bonds. Then it acts in a way to best fulfill its mandate. To act wisely the Fed has to fully understand the data and anticipate future changes in the data including changes that may result from its own actions. Should it be looking at short term or long term unemployment or both? Should it assume that if the rate of expansion of the economy grows, that inflation will inevitably follow? Should it anticipate the risk of recession or stagflation?

During the Great Recession the Fed concluded that its mandates required greatly reduced interest rates and repeated doses of QE to an extent never before tried. Its actions worked spectacularly. But when the economy turned upward it lost its way. Rather than being patient (a word it later discovered) and observing the growth of the economy and its effects on inflation, it mindlessly decided to raise interest rates and rapidly reduce its balance sheet. It failed to recognize that if it could get the US economy out of the Great Recession without going through a depression, it could honor its Congressional mandate by taking actions to promote economic growth and avoid future recessions. It ignored most of the available data. It should have considered the size and rate of change of the National Debt and the GDP. It should have observed the status of and the potential effect on the GDP of the trade negotiations with China, interest rates in other countries, the affect of falling stock prices on consumer confidence and spending, the Amazon effect on the stability of the CPI, government spending, tax revenues and other data that affects the US economy. The Fed has indicated that it considers a rate of inflation of approximately 2% as being consistent with stable prices, but that it will permit rates in excess of 2%. It has recently indicated a major policy change by taking actions to extend the current expansion and avoid a recession instead of letting the expansion run its course and dealing with a recession when it occurs. Yet it has virtually ignored the aggregate interest which will be paid in future years on the swollen National Debt and the impact that its own actions in raising interest rates will have on the interest payments on the National Debt. It also ignored the effect such interest payments will have on future infrastructure spending and on the economy and employment. It acted incompetently by raising interest rates in December 2018  and announcing further expected rate increases and balance sheet sales while the major stock market averages were collapsing. Except for a limited and mostly muted criticism, comments on CNBC have ignored the errors of the Fed.

The Fed does not act in a vacuum. Its actions interact with the actions taken by Congress and the the Executive Branch. It should not be free of criticism. Its independence results from the fact that its actions do not require the prior approval of either Congress or the President. Some people argue that the President should not comment on the actions of the Fed because that interferes with its independence. That is nonsense. What the Fed does affects what the President is elected to accomplish. If it makes mistakes he should let them and the public know it. His criticism is even more important if the leftist press fails to do so. The Feds actions have a profound affect on business and investment decisions and must be considered an important part of the data it is reviewing. The Fed should be in constant contact with the Executive branch and Congress to best gage future changes in fiscal policy.

Although few people realize it, the Fed has done a terrible job of raising and lowering interest rates and justifying its actions during the last couple of years. Interest rates are currently too high and the Fed has reduced its balance sheet much too quickly. The Fed claims it is data dependent, but it pays scant attention to some of the most important available data. It focuses on a limited number of data points and is only beginning to realize that It virtually ignored much of the important data including stock market declines, the China trade negotiations and the spread between US and foreign interest rates. It seems to have totally ignored the affect that raising interest rates will have on future Federal spending if the US debt is rolled over at higher interest rates. It also ignored the adverse affect on the Federal deficit from the slowdown in GDP growth resulting from rising interest rates and the reduction of the Fed balance sheet. As noted above  in December 2018, the Fed committed a major blunder by raising interest rates and predicting three more raises in 2019 while the securities markets were collapsing. It should have looked at the data from the 1920’s when a collapsing stock market caused in large part by margin loan liquidations led to the Great Depression.  It raised interest rates when it should have lowered them. How foolish the mortals at the Fed were. Fortunately the Fed found a reason (called a “mid cycle adjustment” by Chairman Powell”) to reverse the December interest rate increase in July 2019 and stopped reducing its balance sheet, but it never admitted its December errors. It seems to strive for a 2% rate of growth in the GDP when it should not find anything less than 4% acceptable while striving for 5% or 6%. We certainly would have less fear of a coming recession if the economy was growing at a 3% rate or higher. Yet, we hear fool after fool arguing that there was no need for a rate cut. The emerging Democrat socialist left is even more dangerous. It proposes taking from the rich and the upper middle class to further enhance the already substantial welfare benefits for the lower income workers and the unemployed. It ignores the historical record of Socialism. It never works. Despite the failures of local governments, the collapse of the family and an educational system gravely in need of improvement, the rising tide in our economy produced by free market capitalism has lifted the economic well being of almost all Americans. It has offered unprecedented educational and business opportunities for poor children who take advantage of them through their individual efforts. But, we can and must grow or economy at a higher rate.

The Fed is also responsible for regulating the banking industry, a major role because loan defaults often cause a recession. Both Shakespeare and Benjamin Franklin knew about the economies of their day and the risks of debt. Shakespeare wrote “Neither a borrower nor a lender be, For loan oft loses both itself and friend, And borrowing dulls the edge of husbandry.” In those days you went to jail for debt default. Franklin said similarly “He that goes a borrowing goes a sorrowing.” Although neither of them foresaw the great benefits of debt, they warned of its risk because they worried about the affects of default. Today, Fed officials and most economists recognize both the benefits of debt  and the detriments of default on our economic prosperity. The Fed attempts to regulate bank leverage, to insure solvency against loan defaults, but does not prevent banks from making improvident amounts of high risk loans. It did not learn from the defaults that followed excessive mortgage lending on overvalued homes. Excessive margin lending to investors and loans to wildcat oil and gas drillers pose a danger to the stability of banks. The Fed should be taking action to reduce the risks associated therewith, but it is not paying adequate attention to the risks of default highlighted by Shakespeare and Franklin. The Fed should be limiting margin borrowing by reducing the 50% initial margin requirement in rising markets to protect against defaults in falling markets. It should be limiting loans by banks to high risk borrowers who use the loan proceeds in highly speculative endeavors.

We rightfully worry about climate change and the environment . The new socialist left seeks to combat it by mindlessly banning vital energy and food sources that are fundamental to the betterment of mankind. There are better ways. We are reducing detrimental emissions over time. Suppose we used our great industrial complex to build an interstate fresh water pipeline. It would enhance our water supply, let us fill our lakes and aquifers, and help us deal with the wind induced fires and the rise in ocean levels. It could be part of a national program to accelerate economic growth, improve our failing infrastructure,  create new employment opportunities, avoid recessions and reduce reliance on Fed actions.

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The Fed Funds Rate Should Be Reduced To 1% Or Less For An Indefinite Period

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We are foolishly paying hundreds of billions of dollars of interest on the National Debt. Many European nations pay negative interest rates. We should reduce our interest rates and save the interest costs. It will reduce inflationary pressure and the interest saving can be used to fund infrastructure spending.

 

Eliminating Recessions, Minimizing Interest Payments On The National Debt And Maximizing Economic Growth Should Be Added To Fed Mandates

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Brilliant action by the Fed, which kept interest rates low for more than 8 years, was instrumental in preventing the Great Recession from becoming a depression.  It was an exceptional achievement considering the mess our bankers has created. Low interest rates and QE debt purchases ended the downturn and worked together with technology improvements, the Amazon effect and other factors to fuel a low-inflation recovery. Eliminating many Obama administration regulations and the once in a generation business tax cut spearheaded by President Trump have greatly stimulated the GDP.  But a large number of fools including those currently leading the Fed seem bent on ending the upturn and causing a recession. Chairman Jerome Powell apparently learned nothing from the Fed’s efforts of recent years. Maybe it’s his banking background. Banks make higher profits in periods of rising interest rates. It is no surprise that most bankers think that rising interest rates are desirable, even necessary, in a growing economy to prevent excessive inflation.

Since wealth begets wealth perpetual economic growth in the range of 5 to 10% should be attainable. China has grown at that rate for many years. It’s clear that it will not happen under Chairman Powell if he follows the advice of incompetent economists who want three or four rate increases this year and at least two more next year accompanied by a faster reduction in the Fed’s balance sheet. Such actions will choke off the growth and are likely to cause short term interest rates to exceed long term rates. Economists debate whether an interest rate inversion will cause a recession. Why foolishly create the risk?

Interest is the cost of money. The higher the rate, the greater the cost of funding business operations,  including the cost of capital investments and carrying inventory and receivables. It will also over a few years have a devastating impact the cost of carrying our $20 trillion National Debt as the debt rolls over at higher rates. Rising interest rates will as usual CAUSE, not PREVENT, inflation by pushing up costs and lead our economy into the much-anticipated recession. Interest rates should at all times be kept at or below the desired rate of inflation. By doing so and controlling its balance sheet the Fed can (assuming sound fiscal policy and adequate regulation of banks and excessive risk) avoid future recessions.  Eliminating recessions, minimizing interest payments on the National Debt and maximizing economic growth should be added by Congress to the Fed mandates. Each is consistent with maintaining full employment. The Fed should be given the responsibility to react to events such as natural disasters or significant stock market declines or even a slowing of economic growth to keep the economy on a steady course.

The nonsensical talk about Fed independence is back in vogue. Of course the Fed should be independent to make its decisions. But, it does not act in a vacuum. It should invite criticism of its actions and be in constant contact with and coordinate its actions with Congress and Executive Branch.

 

 

President Obama’s Deceitful And Relentless Sisyphean Type Punishment Of The Middle Class

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In Greek mythology Sisyphus was a deceitful king who was punished after death by being compelled to roll an immense boulder up a hill only to watch it roll back down, and to repeat this action forever. He deserved the graphic punishment. Middle class Americans are being subjected to a different type of Sisyphean punishment as a result of our government’s failed policies which prevents them, despite a lifetime of hard work and achievement, from being able to earn and save enough to pay for their children’s education, purchase a home, or build a fund for retirement. The middle class is the back bone of American capitalism. They produce our products and services and their spending is vital to GDP growth. It is no wonder that the US economy is sputtering. This article will examine how from the start of his presidency, President Obama’s fiscal, healthcare and immigration policies have exacerbated the undeserved and increasingly severe Sisyphean punishment of the middle class. It will also explore the various actions our federal government can take to improve our economy and our safety and at the same time alleviate the punishment of the middle class.

President Obama calls the socialist economic system developed by liberal Democrat entitlementists, his “Middle Class Economics”. His intent is to deceive voters into believing he cares about the middle class. He talks about creating middle class jobs, but, except for favoritism toward destructive unions that support him and other Democrats, has shown a total disregard of the middle class. We know that the compensation problems of the middle class began before the election of President Obama who inherited a deep recession, but despite a continuing series of stimulus programs from the Fed that reversed the decline, his fiscal policies, or “Obamanomics”, have failed to grow the US economy sufficiently to generate middle class wage increases. In fact, his policies have extended the decline in middle class wages during his presidency. Unemployment is down as a result of the growth of low-paying jobs and people leaving the work force. But, under Obamanomics we have too many middle class or former middle class Americans who are underpaid, unemployed, under-employed or have given up looking for work.

President Obama has raised federal income taxes on many of the middle class by eliminating their Bush tax cuts and imposing a Obamacare income tax on their capital gains income. He talks of spending on transportation infrastructure to grow the economy and create middle class jobs but he failed to do so when Democrats controlled both houses of Congress and he had the opportunity. Nor did he promote adequate spending on defense to maintain our military superiority that also would have created middle class tax-paying jobs. Instead he squandered trillions of dollars on predictably ineffective fiscal stimulus programs that included unsound loans to green energy companies and supported expansion of unproductive welfare programs, including Obamacare which is harming the economy. His claimed Keynesian stimulus programs failed because they were not aimed at creating tax-paying jobs that would have stimulated further economic growth and generated substantial tax revenues. Increased spending on food stamps increases the GDP and provides a short-term benefit to the recipients, but has a low multiplier effect because it leads to the creation of mostly part-time minimum-wage jobs. It increases the National Debt because it fails to generate increased tax revenues.

For decades members of the middle class enjoyed more financial success than their parents. With the decimation of the middle class that is no longer true. The most significant economic problem in the US today is not the growing income of the wealthy who are living the American dream, but the elimination of the gap in discretionary after-tax income after spending on food shelter, transportation, education and healthcare, between the unproductive poor and the productive middle class. The Obamacare subsidies, whether they are intended to do so or not, have narrowed or eliminated the gap. They have even made it possible for families who become skilled at maximizing welfare benefits, legally or illegally, to have higher discretionary income than the hard-working middle class achievers whose wages are declining. A family living of four in New York City can qualify for welfare benefits exceeding $70,000 per annum. Why haven’t more voters recognized that liberal Democrat entitlementists have created a welfare state that makes it financially desirable for many Americans to have children out-of-wedlock to be able to maximize benefits from the wide variety of available welfare programs than to get married, form a family unit and work hard to support it? That situation is unlikely to change as long as a Democrat occupies the White House.

Defining the middle class and the upper-middle class is difficult. Reasonable people can disagree as to what constitutes middle class and upper-middle class income. It varies greatly from city to city. In many cities pre-tax incomes of $70,000 to $100,000 before deducting healthcare, housing and transportation costs might be considered as middle class and $125,000 to $150,000 as upper-middle class. Others like New York, LA and Dallas require much higher income levels like $150,000 or $250,000 for an individual to be considered middle-class or upper middle class and an additional $30,000 to $50,000 for a family of four. Since the cost of living is higher in cities where middle class and upper-middle class incomes are higher, the Sisyphean type punishment applies to virtually all middle class and upper-middle class families. It also applies to many upper income families living in high cost areas.

Middle class and upper-middle class families generally encourage their children to work hard in school to get into the colleges of their choice. Unlike children from poor families who generally get full tuition scholarships if they get accepted at a college, middle class children generally do not qualify for need scholarships and have to bear a large part of the cost of college. Accumulating savings to pay for college has become more difficult during the past decade as the cost of tuition has soared due to government guaranteed loans and middle class incomes have declined. The problem became exacerbated because the savings of many middle class families was decimated when their home and other investments declined in value during the Great Recession. Students and their families have been relegated to taking out college loans in ever-increasing amounts at excessive rates of non-deductible interest. Upon graduation most of the students, except for those graduating college with the most desired skills or who are athletes or entertainers, even if they are hired in good tax-paying jobs that qualify them to be immediately counted in the middle class or upper-middle class, find themselves living with their parents, unable to repay their college loans or form a family unit. Many college graduates are unemployed or under-employed and unless substantially modified many of the current student loans are likely to be defaulted.

President Obama chose Obamacare as his most important Obamanomics initiative. He knew when he proposed Obamacare that it would place a yoke on the shoulders of the middle class and make them pay excessive premiums and deductibles. Although he knew the truth about Obamacare when it was first proposed, he disgracefully lied repeatedly for political gain about the cost reduction of $2500 per year for Obamacare plans and about keeping your doctor and your plan. He also claimed Obamacare would reduce the use of ERs as doctors for the poor. However, many poor people are expanding their demand for free treatment at hospital ERs. Where else can they find a doctor who will immediately treat them or their children 24 hours a day? He lied because he knew that if he told the truth about Obamacare, it would not have passed in Congress. President Obama’s long-term objective is clear. He is an entitlementist who wants to secure votes for Democrats from the people who benefit from Obamacare’s expansion of Medicaid and who receive premium subsidies, the new entitlements. As a socialist he wants the federal government to control healthcare which represents more than 15% of the GDP. Socialists believe that government can provide healthcare better and more efficiently than the private sector. We are already seeing strong evidence to the contrary.

President Obama’s lies also succeeded in preventing most voters from learning prior to his re-election and even to this day that Obamacare requires the middle class to pay grossly excessive premiums and deductibles to help pay for the enhanced mandated benefits given to the poor, the sick and the low-income workers whose coverage is free or highly subsidized. He also failed to disclose that young taxpayers are required to pay even higher premiums to help keep down the rise in costs for the older middle class individuals whose healthcare costs are predictably higher. He deliberately concealed the future rise in premiums and deductibles for the middle class, who are not eligible for subsidies. Such a rise is inevitable as a result of the increase in Obamacare insurers’ outlays as their statutory protection is phased out over a three-year period and as the sick learn how to make greater use of their Obamacare policies that can be purchased without regard to pre-existing conditions, but offer up to $2 Million in benefits. Helping people with pre-existing conditions to obtain improved healthcare is a desirable goal that was being pursued prior to Obamacare. Offering them a Rolls Royce healthcare plan at substantially below cost and requiring the middle class to pay for it, is outrageously unfair. Prior to Obamacare many middle-income families, unless their children qualified for large scholarships, used most or all of their life savings to pay for their children’s college tuition and related costs. After Obamacare they are likely to have little or no savings to pay for education.

Employers, many of whom offer healthcare benefits, are also subjected to the horrors of Obamacare mandates and rising premiums. To avoid Obamacare burdens, many employers are converting full-time to part-time jobs and will pay penalties rather than Obamacare premiums, while encouraging their low-income employees to seek subsidies under Obamacare. Corporate executives facing a long-time stagnant economy and obsessed with increasing profits to please shareholders and to justify their excessive compensation will continue using increasing healthcare costs as an excuse for limiting wage increases.

President Obama is now claiming Obamacare is a success because an increased percentage of Americans have healthcare coverage. The increase results from people taking advantage of Obamacare’s new welfare entitlements that give coverage for free or at below cost to (i) poor people signing up for expanded free Medicaid, (ii) sick people, who couldn’t previously obtain coverage, taking advantage of the opportunity to purchase insurance at standard rates which pay for only a small fraction of their high-cost care and (iii) low-income people buying expensive Obamacare policies because they are offered discounts in the form of subsidized premiums and deductibles. President Obama ignores the evils of Obamacare, which include the hundreds of billions of dollars of costs to offer these new entitlements or the harm to doctors and other healthcare providers and the reduction in the quality of care resulting from attempts to limit cost increases for those who pay. Some healthy middle class people have been tricked by Obamacare ads into signing up for insurance to avoid paying a penalty. They are not told that the penalty is less than the over-priced premium for a Obamacare policy that may be worthless to them because of the exorbitant deductibles. He considers it a success because more people have coverage and once you give an entitlement it is difficult to take it away. He obviously doesn’t care about the spiraling cost of Obamacare premiums for the unsubsidized middle class, the damage to the healthcare system, or the size of the National Debt. That’s for the next president to worry about.

President Obama believes that even if the Supreme Court rules that a major portion of the subsidies are being paid illegally, Republicans will be afraid to enforce the law and will grant a waiver to those receiving subsidies. Republicans in Congress should go to the aid of the middle class by voting to eliminate all the Obamacare subsidies and mandates regardless of the Supreme Court’s decision and  immediately propose a replacement for Obamacare even though they know it will be vetoed by President Obama. Republicans should make the repeal of Obamacare a major 2016 campaign issue. Republican control of the White House may be required to appeal Obamacare.

Obamacare and the skyrocketing costs of other welfare entitlements are likely to prevent most of the middle class from ever again accumulating meaningful wealth despite a lifetime of hard-earned achievements. They virtually guaranty that the Sisyphean punishment of the middle class will persist from generation to generation unless we find a way to grow the GDP at more than 5% per annum and Congress (i) reins in welfare spending as a percent of the GDP, (ii) modifies welfare benefit rules to discourage bearing children out-of-wedlock and encourage family formations or at least identification of fathers, (iii) creates incentives to work, (iv) repeals Obamacare, or at least its subsidies and mandates, (v) deals with future unfunded Medicare obligations and (vi) modifies and enforces our immigration laws. The horrendous growth of the National Debt resulting from welfare costs, including Obamacare subsidies, has to date gone almost unnoticed because, due to Fed low-interest rate policies, it has not yet significantly impacted taxpayers. The people who qualify for the Obamacare subsidies pay little or no federal income tax and many receive negative income tax payments, another form of welfare for the poor paid for by tax-payers.

Most Americans are oblivious to the dangers posed by the National Debt which exceeds $18 trillion. They know that we are a rich country. They observe our amazing technology, the continuous growth in stock market indexes and the financial success of many Americans and the top 1% in particular. The number of millionaires and billionaires is skyrocketing. They do not understand that if the National Debt continues to grow much faster than the GDP (as it has during the entire term of the Obama presidency) which is likely because our government faces tens of trillions of dollars of unfunded entitlement liabilities, and if interest rates return to prior levels, a time will come when our government has to raise taxes, confiscate wealth or print large amounts of dollars to pay the annual interest charges. Since the tax burden of middle class taxpayers is already excessive, socialist entitlementists are beginning to make demands to substantially increase the tax rates on the upper class and the wealthy and eventually will demand confiscation of wealth. Such tax increases or confiscation of wealth inevitably will likely lead to an economic decline further harming the middle class and jeopardizing the survival of American capitalism. Our country’s financial condition could change suddenly if the National Debt spirals upward and the US dollar is abandoned as the world’s exchange currency and collapses in value.

President Obama argues for a higher minimum wage, which is of questionable overall benefit. It will help some workers working for the minimum wage and hurt others and does not help the middle class. Walmart and others have recently increased wages of their mostly low-income employees, but middle class wages are unlikely to rise significantly unless we have much stronger economic growth that spurs demand for labor or corporations elect to treat their non-executive employees more favorably. Henry Ford believed that raising the wages of his employees would enable them to purchase cars. President Obama has made no meaningful effort to convince corporations to share a portion of their increasing cash flow with middle class employees rather than using it to pay grossly excessive executive compensation and giving it to shareholders in the form of increased dividends and stock buy-backs. He could have tried to encourage voluntary middle class wage increases or proposed changes in the federal corporate tax laws to give tax credits to entities giving salary increases to middle class and other non-executive employees. He might also have proposed legislation to give workers a voice in management by requiring the election of an employee representative to the board of directors.

Socialism has a long history of failure. Some might argue it is beneficial in countries with an educated and motivated work force and only a limited number of people in need of welfare benefits. However, it becomes destructive as the number of families relying on welfare grows to unsustainable levels.

The middle class is not the only group to suffer from excessive welfare entitlements. Although poor families (a large number of whom are single parent families) are singled out for preferential treatment by President Obama’s socialistic policies, quality of life for welfare dependent families has declined. Children from poor families often fail to achieve in school for any number of reasons despite trillions of dollars of government funding provided for food, housing, education and other benefits. Too few of them learn about personal responsibility and self-reliance from a parent, grand-parent or from religious training. Only a limited number of them achieve in school and become eligible for available fully paid college scholarships. Some, whether or not they finish high school, achieve the American dream by working part-time (or full-time) beginning at low pay and with effort advance up the jobs ladder to achieve middle class status or higher. However, under our failing system, a large number of people in our inner cities have turned to the welfare system as their principal means of support. Young girls often become un-wed mothers and live off the wide assortment of welfare benefits which they maximize by avoiding marriage and having additional children with the same or another unidentified father. Too many young men find a way to share the welfare benefits given to women who bear their children out-of-wedlock. Others, relieved of the obligation of supporting a family, are satisfied with part-time dead-end jobs. Many turn to joining gangs and selling drugs as their main source of income.

Recent developments have reminded us of the problems faced by many of our largest cities and how unsuccessful our efforts to improve the lives of the most needy Americans have been. Socialists do not understand that a poor person is better off being given a fishing pole than a handout of a few fish. We are learning from inner city unrest that people can’t live with dignity on welfare by choice or because there are no available tax-paying jobs. Our long list of well-intended housing programs, costing more than a trillion dollars over a more than 50 year period, have often temporarily improved housing conditions for the poor, but have over time destroyed more communities than they have helped. Instead of recognizing the negative effects of our socialistic welfare system on the lives of the poor, President Obama and other Democrat liberal entitlementists are now attempting to expand welfare benefits and shift the blame for their failed leadership on alleged police racism. They have promoted hatred of, and attempted to criminalize the efforts of, the men and women in blue who risk their lives daily to attempt to prevent crime in our inner cities. Almost every incident involving a killing of an unarmed person of color by the police becomes a sensationalized national news event prompting a large protest, whether or not justified. Too often the protests are provoked and get out of control leading to looting and arson because the police are told by local politicians and police chiefs to stand down. The inner city destruction that results leads to a demand for increased welfare to clean up the damage and rebuild. Most of the cost of rebuilding will fall on middle class taxpayers. Crime and murder rates are now on the rise in the areas inhabited by the poor in many cities where the police, prevented from performing their job and facing the risk of being personally attacked or unfairly charged with wrongdoing, become less confrontational to protect their own safety.

The middle class and the poor have also suffered from President Obama’s wanton failure to enforce US immigration laws which has enabled illegal immigrants to work at millions of jobs at below the minimum wage. Many of such jobs had previously been tax-paying middle class jobs available for legal residents. Liberals argue that these are jobs that Americans do no want. That is true in some cases, but is clearly not true for many desirable jobs involving manual labor where language and mechanical kills can be learned on the job. The long list of jobs includes building, improving, repairing and maintaining homes, apartments, sidewalks, driveways, landscaping and pools. Although employers benefit from the cheap source of labor, these are the types of potentially tax-paying jobs we need to rehabitate the middle class and lift the inner-city poor out of poverty and reduce the number of people needing welfare.

The illegal immigrants entering into the US across our borders or overstaying their visas are using their children born in the US and eligible for food stamps and other welfare benefits as their anchor to remain in the US and as their personal ATM to fund their family’s basic financial needs. Illegal immigrants are able to further improve their way of life by working at or even below the minimum wage without paying withholding taxes or receiving healthcare benefits. They get free healthcare for their families at the hospital ERs which causes crowding and adds tens of billions of dollars to the annual cost of operating the ERs. The costs, borne by tax-payers are a further burden on the middle class. We do not know the aggregate cost of providing welfare benefits to illegal immigrants and their US born children. We do know that there has been an enormous rise in the number of people receiving food stamps during the Obama presidency to approximately 50,000,000 at an aggregate cost of about $80 billion per year. A significant portion of that amount is paid to illegal immigrants families.

Unless President Obama’s current blatantly unconstitutional effort to change the immigration laws is stopped by the Supreme Court, it will result in the elimination of even more middle class jobs to the tens of millions of illegal immigrants who are already in our country. Why aren’t voters and the press demanding to know why President Obama is enabling illegal immigrants to take jobs from Americans workers? Although we are a land of immigrants and welcome more than a million people into the US as legal residents annually, as long as we recognize children born in the US to illegal immigrants as citizens eligible for welfare benefits, we will not be able to stem the flood of illegal immigrants. Nor will we prevent people overstaying their visas and going into hiding until we issue everyone an US identification card (“USID”) of a type as described in my book entitled Homeland Security and Economic Prosperity published in 2003. A USID would enable us to track illegal immigrants and serve the even more important purpose of identifying, preventing entry and limiting the movement of Islamist terrorists within our country.

Upper-income individuals and the wealthy are generally able to bear the costs of our welfare entitlements including Obamacare. However, we are already hearing almost daily from socialist entitlementists about the excessive income and assets of the top 1%. It is not the growth in the income of the top 1% that is the problem. The industrial revolution, that created wealthy industrialists, generated the middle class and made it possible for almost all Americans to have the opportunity to achieve a comfortable way of life. We should appreciate the important role now played by our most financially successful individuals who have amassed multi-billion dollar fortunes that are beyond the amounts their descendants will ever need. They currently pay a significant portion of all federal income taxes. Their capital investments are spawning new entities and their personal spending on homes, yachts, jets, cars and other luxury items propel economic growth. They and the entities they own are responsible for the creation of many millions of tax-paying jobs. Their charitable foundations are feeding the hungry, caring for the sick and finding cures for diseases worldwide. We should note that much of the income growth of the 1% results from the asset bubble caused in large part by the Fed stimulus programs that have lasted for over five years because of the failed Obama fiscal policies.

Socialists demands for confiscatory tax policies are not the answer, but changes in the tax laws to make them fair should always be under consideration. Without making income tax rates excessive, unfair and counterproductive we might consider higher, but not confiscatory, marginal rates for people earning in excess of $5,000,000, $10,000,000 or $20,000,000 per year averaged over a 3-5 year period. Investment bankers should pay ordinary income tax not capital gains taxes on disposing of their carried interest. We might also change our estate tax laws to take into account that many of the great fortunes accumulated in recent years came in the form of capital appreciation of assets that has for good reasons never been subject to income taxation until it is sold. That is why Warren Buffett pays a lower-income tax rate than his secretary. The Federal Estate Tax is designed to collect a death tax on such appreciated property. However, permitting the wealthy to donate all of their assets to charitable foundations prevents the US government from ever collecting taxes on such capital appreciation. Federal estate and gift tax laws can be changed to enable the US Treasury to recover such previously untaxed income with the remainder of the estate available to be given to a charity.

Economic growth in the US has been feeble. We need more than a trillion dollars to be spent on transportation infrastructure and increases in defense and homeland security expenditures to generate economic growth and create millions of tax-paying jobs. Many conservatives argue that only the private sector and not government creates jobs. How wrong they are. Adequate spending on infrastructure and defense by governments can lead to the creation of millions of tax-paying jobs and substantially increased tax revenues to enable the GDP to grow at a higher percentage rate than the National Debt. However, many Republican Congressman, who have for six years been unfairly abused by President Obama at every opportunity, are obsessed with the size of the National Debt and have good reasons to dislike the president. They have made no attempt to impeach him for his outrageous conduct, but we should not expect them to cooperate with him during the remainder of his term. However, the Sequester and other forms of austerity pushed by conservative Republicans are not the answer. Our goal should be to grow the GDP at 7 to 10 percent yearly while reducing welfare as a percent of the GDP. A decaying infrastructure coupled with defense and homeland security needs, available raw materials and technology and an underemployed work-force give us the opportunity to do so.

Many Republicans favor tax cuts for corporations which might help to stimulate investment. But, corporations have strong balance sheets and are not investing because they do not see a need to increase their productive capacity. They might just use the tax savings to increase dividends, stock buybacks and executive compensation. They have strong balance sheets and will begin to spend when they see the increased government spending. We should look to the wealthy and our cash rich multi-national corporations to partner with our federal and state governments and invest in and help jump-start our economy by financing transportation infrastructure construction. It can be accomplished by changes in the federal tax laws which permit corporations to bring home the trillions of dollars of cash deposited overseas if they invest it in expanding production capacity or to partner with states to finance transportation infrastructure. We could give a fair return, financial guarantees and naming rights to entities investing in America.

Republicans should take the lead in immediately promoting increased defense and homeland security spending. They should pass legislation to do so even if it is vetoed by President Obama. Although the US remains as the world’s leading military superpower, China is closing the gap and will soon equal the US militarily. China like Russia will continue to seize territory unless we take deterrent actions to prevent it or are prepared to confront them. However, they are unlikely to attack our homeland because of fear we will retaliate. A majority of Americans are war-weary and don’t want to fight to protect the citizens or territory of other nations. But, that is no excuse for decreasing and not materially increasing our military strength and preparedness. President Obama’s inept foreign policy has created a new urgent need to be prepared to defend our homeland from immediate and rapidly expanding security threats.

Throughout his presidency he has failed to recognize the threat of Shiite Islamic terrorism supported by Iran. He falsely claimed that Al Qaeda’s Sunni Islamic terrorists were on the run and diddled when they re-appeared on the scene as ISIS, savagely killed tens of thousands of people and in record time established a rapidly expanding caliphate in Syria, Iraq and elsewhere. Although Iran and ISIS have each made it clear that their goal is to rule the world, our president has downplayed the danger to our allies and our homeland and failed to develop a military strategy to deal with the threat of either Iran or ISIS. He stubbornly refuses to use US troops on the ground, even special forces to stem the rise of ISIS. It is no longer a question of trying to build democracies in Iraq and Afghanistan. We must prevent ISIS from using its caliphate to train Islamic terrorists to attack our allies and our homeland. We must also prevent Iran from developing a nuclear bomb and from gaining control of most of the Middle East. Fortunately President Obama appears to be listening to Congress and public opinion relating to verification of Iran’s current capability and delay in removing sanctions prior to such verification in negotiating his Iran nuclear deal. Our president is placing unjustifiable reliance on ill-equipped countries to retake the territory seized by ISIS and paying lip service to the Iranian risk. Apparently he is prepared to allow Iran to assume control of defeating ISIS and, if it succeeds, become the major political force in the Middle East to the chagrin of Saudi Arabia and other Sunni dominated countries who are taking actions to prevent it and to confront the danger a nuclear Iran will cause.

Meanwhile ISIS is using social media to encourage a significant number of US residents to join its cause. There are potential domestic terrorists who might commit horrendous and financially devastating damage within our country. Our constitution guarantees freedom of speech, but that does not include the right to participate in an Islamic terrorist conspiracy of the type currently being orchestrated by ISIS. The necessary evidence to prosecute the conspirators is available from their Internet communications.

We greatly improved homeland security after the World Trade Center attack on 9/11 and occasionally prevent a terrorist act. But when we examine the terrorist attacks around the globe and listen to daily news reports, it is clear that our anti-terrorist preparedness is woefully inadequate. Incompetence is rife and ignored at most government agencies. Our borders have not been sealed because our President doesn’t want to stop the flow of illegal immigrants to gain votes for Democrats. We must not wait for events that disrupt our economy or cause the death of large numbers of Americans. We must immediately recognize the danger and greatly expand the effort needed to prevent any type of domestic terrorism anywhere in the US and to respond in the event of a catastrophic event caused by a weapon of mass destruction or an attack on the Internet, our power grid or our banks. That will include hiring, training and equipping a large number of additional anti-terrorist specialists to work with current anti-terrorism forces and within local police units. We should increase the number of our military personnel so that we are prepared to fight on three fronts if necessary. Hopefully it will serve as a deterrent so that we will never have to call upon them to do so. We should address our doctor shortage and strengthen homeland security by offering free medical school to military enlistees who agree to serve as military doctors for five years after graduation. Just as the extraordinary World War II military build-up strengthened our economy and enabled us to escape the Great Depression, the effort to upgrade our military strength and to protect our homeland against terrorism, if undertaken, will enable us to jump-start the American economy and re-establish a strong middle class and permit others to escape poverty.

Annual US GDP Growth Of Ten Percent Should Be The Goal

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Annual US GDP growth of ten percent should be the goal. Not the communist goal of eliminating income inequality that President Obama keeps talking about that has never succeeded.  Ironically, the failed socialistic economic policies of the Obama administration have created an immediate opportunity for much larger annual increases in the US GDP. Years of stagnant US economic growth, despite exceptional technology advances, have resulted in a highly under-utilized  and underpaid workforce. We should be seeking the preservation of American exceptionalism by encouraging competence and hard work, not laziness or poor conduct. We should be rewarding success, not encouraging failure. We can only imagine the growth that can be generated by bringing large numbers of people back into the workforce and converting part-time jobs to full-time jobs. Each time a job is lost due to improved technology or a job is lost because production moves offshore, we have an available worker for a new job which can accelerate our growth.

We have had five years of a tepid economic recovery during the period following the Great Recession, the most severe downturn since the end of World War II. President Obama has been very lucky. The recovery has taken place despite the failed fiscal stimulus programs adopted during his administration, his raising income taxes, cutting defense spending, adopting incompetently drafted banking and business regulations that are in large part counterproductive and excessively costly to comply with, and adopting Obamacare and its 18 new taxes and thousands of pages of regulations and then changing them at his whim for political purposes. The recovery has taken place because of developments that President Obama had little, if anything, to do with. TARP loans, which originated during the Bush administration, followed by the Fed’s monetary programs were instrumental in enabling the banking system and the auto and housing industries to avoid collapse, stabilize and return to profitability.

Spectacular developments have spurred the economic recovery, including: 

* Improved horizontal drilling and fracking techniques which, despite the unsubstantiated concerns of environmentalists and interference from the Obama administration, represent the single most important economic development of this century. They have (i) caused an explosion in US national gas and oil production, (ii) created an annual demand for tens of thousands of miles of stainless steel pipe for use in connection with the drilling and transportation of such oil and gas production, (iii) created a growing demand for rail transportation to move the pipe to states such as North Dakota and Texas and the oil and gas being produced to refiners and users across the nation, (iv) created  high-paying jobs leading to increased income tax revenues and a demand for cars and trucks for use by the oil and gas industry and its employees, (v) engendered the rapid growth of new communities to house and service the production employees, (vi) led to the return to the US of industries producing plastics and other natural gas by-products, and (vii) made the US energy independent and strengthened our position as the world leading military power; 

* Rapid expansion of our international businesses throughout the world and increased sales of our exports of products and services, including food, aircraft, machinery, equipment and raw materials to the BRIC and other developing countries;

* The spawning and rapid growth of sales of wireless communications devices, the Internet and social-networking businesses; 

* The wealth effect from rising stock market prices based on increased corporate profitability stimulated by the Fed’s bond purchases and promotion of low-interest rates that enabled corporations to reduce financing costs and inexpensively finance the purchase of cost saving technology. and 

*The exceptionally large sums (financed in large part by federal and state government funding and private insurance) spent for clean-up and rebuilding of roads, infrastructure, housing, and commercial real estate and vehicle replacement following  the many natural disasters that have occurred during the period. 

Even the modest recovery in the housing market (and the related housing improvement and rehabilitation market) caused in large part by investors buying up foreclosed properties for resale and rental and rising number of international millionaires seeking to own US-based assets, has contributed to the recovery. However, private home ownership that was the most important asset owned by the middle class for more than 50 years prior to the Great Recession, has been put on the back burner by the Obama administration which favors the poor at the expense of the middle class. Housing construction offers the potential to be a leading force if future US economic growth. 

President Obama claims credit for the recovery, but he had little to do with it. The manner in which he saved the auto industry was disgraceful. He favored his friends, the unions, over secured creditors. He hampered the oil and gas industry by impeding fracking, the leasing of federal lands and pipeline development. The Obama stimulus programs concentrated on increased welfare payments and ill-conceived, failed green energy programs that squandered large amounts that greatly expanded the National Debt, but generated almost no tax-paying jobs. The Fed has repeatedly stated that it has extended QE programs because of failed fiscal policies.

I will not in this writing discuss the harm to the US economy being caused by the adoption of Obamcare. I have and will continue to write about (i) the continuous stream of outrageous, lies and misinformation promoted almost daily by President Obama relating to Obamacare’s costs and benefits, (ii) President Obama’s failure to deal with Medicare spending problems,(iii) how Obamacare is gouging and damaging the lives of the middle class by requiring them to pay for free or highly subsidized healthcare for the sick and the poor and low-income folks and for a significant portion of the healthcare costs of the elderly and (iv) the inevitable economic disaster that awaits the middle class and the US economy when the employer mandate (that has been illegally delayed by President Obama for political purposes) is allowed to become effective. Suffice it to say that if and when the egregious provisions of Obamacare are repealed it will serve as an immediate stimulus to the US economy. 

Can we envision a time soon after President Obama is out of office (i)  when Congress regains control of spending and middle class income growth and not growth in welfare and ending income inequality is the goal, (ii) when Obamacare is no longer interfering with economic growth or destroying the healthcare industry, (iii) when our transportation infrastructure is being adequately repaired and improved, (iv) when employers are investing in expansion, offering raises to current employees and seeking employees for full-time, tax-paying jobs; (v) when young middle class families can pay off their college loans and buy and make improvements in homes which develop growing equity; (vi) when defense spending and homeland security spending is increased to levels needed to protect our country and our allies from aggression and terrorist acts (vii) when the National Debt is stable or declining, (viii) when Medicare costs and welfare abuses are brought under control;(ix) when the Fed permits interest rates to rise during a period with 2 to 3% inflation and (x) when savers can get a fair return on their capital? 

It can happen if we turn away from the path to socialism and focus on GDP growth and strengthening American capitalism.

 

However, the growth will not occur if Republican conservatives insist on policies of austerity or if a needed catalyst fails to occur to get the growth avalanche started. Our international corporations have more than 2 trillion dollars held overseas that can be repatriated if we change the tax laws. Previous changes led to repatriation of overseas funds, but did not result in significantly increased domestic investment. This writer published a book last year (that has not attracted attention) entitled “Perpetuating American Greatness After The Fiscal Cliff” which proposed changes in the US tax laws to finance transportation infrastructure construction projects through the sale of “Jump Start America Bonds”. The name of the bonds tells the story of their purpose. They would serve as the needed catalyst.

Thoughts on Inflation

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Inflation has many causes, including increases in demand for products and services, shortages of raw materials and wage increases.

Our federal and state governments would benefit from additional income tax revenues generated from inflation.

Weak demand for labor and an economic slowdown in China and Europe has led to a decline in the value of commodities and reduced inflation. Some people have benefitted. Others have been hurt.

Inflation generally harms people living on fixed income and helps borrowers. However, in recent years the lack of inflation and high rate of unemployment has promoted the Fed’s QE programs which have reduced interest rates payable on bonds and savings.

Many public pensions and welfare benefits have COLA clauses. Insolvent cities and states are looking to avoid paying COLA increases on pension benefits. Employees whose salaries are not keeping pace with inflation, are seeing their spending power reduced by inflation. Because of the high levels of unemployment employees have limited bargaining power or job mobility.

The value of homes generally benefit from inflation because income rises and the cost of building a new home increases. In this post housing bubble where home prices are depressed, it will take years of inflation and a reversal of many factors depressing demand for homes before housing prices recover to a satisfactory level. The middle class is being decimated by reduced home values.

State revenues have been substantially reduced by the collapse of the housing market. Increased state revenues are vital to increased highway construction spending and the creation of good tax-paying jobs. They will benefit if housing inflation returns.