Intelligence, Please…

The economic potato. See below

All of you need to get your act together, stat. Many of you are still operating in a sort of “pissed at Obama” mode that clouds judgment. You sit there, eating the finest of crabcakes and lobster from the East Coast, unaware that the powers that be have every intention of ripping even the lobster from your mouth. Either you take things too seriously or not seriously enough, or both.

The grand exit from this recession, desired by many, is not going to come in the way that the politicos, economists and financial planners believe it will. They (and many of you) are watching things like housing numbers, consumer spending, etc. for clues to the end of this situation. At the same time, they are decrying Obama “job-killing policies” and saying that mess like “austerity” will somehow fix us.

Idiots. If anyone thinks that austerity is some sort of magic pill that’s going to pull us out of the recession at a rapid-fire pace, they are, in a word, wrong. Austerity has all the possibility of throwing us into Great Recession Round 2, if not approached with the appropriate style. I only endorse austerity as the current Administration (and its enemy Republicans) have no notion of how to use stimulus of any sort.

Clearly, everyone has forgotten what makes successful economies happen. Successful economies occur when gentlemen with large brains see some way of capitalizing on gaps in the market and exploit them. We enter epic economic booms when the world is revolutionized, as was witnessed in the technology bubble of the ’90s. Investors, economists, politicians, etc. are so concerned about bubbles that they have forgotten the benefits of the Internet investment cycle. You are reading this post as a result of those investors and innovators alike. You will see it tweeted later today. The Internet has become so commonplace today that investors have forgotten the risks needed to put it in place.

The 2000s was not an investment cycle like the Internet cycle. We, as a country, did not do anything new. We built and upgraded many houses using styles familiar to architects of the 1990s. We purchased many consumer goods from China. And we patted ourselves on the back as we transitioned to a “service” economy.

I have no issue with a service economy in principle. However, if the economy can be compared to a baked potato, we have forgotten to cook the actual potato out in favor of making amazing butter for it.

When I state that neither the Democrats nor the Republicans understand stimulus, I am talking about potatoes. Democrats have decided to pursue a course of adding salt to the uncooked potato with poorly directed stimulus funding – in essence, by randomly injecting liquidity into the system. Republicans, on the other hand, scream “tax cuts” or “bacon bits” for the potato. Tax cuts for whom? Bush-era tax cuts seem to indicate that unconditional tax cuts do not spur real economic growth in a risk-averse populace.

Before I draw the fire of the conservative types that accidentally read this blog because of George, bear in mind that I am not unilaterally opposed to stimulus or tax cuts. I’m merely saying that neither party seems to be able to do it right. Neither one is cooking the potato.

Thus, I condone the use of austerity, so long as spending reductions outpace any sort of tax cuts. I am not in favor of false austerity, where spending is cut only marginally. If we’re going to do it, we must go big – and here’s why.

1. There are reasonable long-term concerns about the deficit if we are expected to take charge of world growth again. Europe’s debt situation sucks, in a word. China’s looking like its growth may be a little long in the tooth. Latin America doesn’t seem to have the special sauce. So, if it is to be us to take up the economic torch, deficit-reduction plans should be in place.
2. It would be far easier to negotiate currency terms with China if we didn’t need them to buy so much of our debt. Asking China to keep buying our debt and loosen the peg on the yuan is a mutually exclusive request.
3. It would send the message to our corporate overlords that there are no more bailouts coming. Why should any company invest any more? If you wait long enough, Congressional Democrats will inevitably throw a bone out there. So far, they’ve covered the financial sector, the health care sector, the automobile sector, and probably the state governments next. The risk of spending your own money is a fool’s gamble when there’s money flying out of Washington.

While the first is a concern, the second and third bullet points deal with the heart of why austerity must be done with a purpose instead of half-assed. Austerity only works if we intend to send a message. Otherwise, long live record low interest rates and epic amounts of government debt.

There are two parts to this potato. This merely discusses the first – that austerity must become a part of the economy in tandem with the second half of the potato. I shall discuss the second half of the potato in my next post.

"Market sentiment"

Congratulations, good Republicans, you terrified the nation with talk of “deflation” and “1932″ and various things of that nature. All the while, your various and sundry discussions of market panic drove investors into things like Treasury bills and U.S. dollars, allowing the Good President Obama to continue his spending plans at any cost.

Let me tell you, sirs, that on a classical level, austerity should not result in anything but epic pain for investors. Yet, in a contradiction to my previous post, I am going to condone the use of austerity in the name of market sentiment.

In a move that doesn’t make any damn sense whatsoever, Americans are begging and pleading for less money. Indeed, I think many of them are willing to take personal hits to their own pension plans, provided that the unions take hits to theirs (granted, I would have thought that actually owning a company like GM would be an embarrassing enough hit, but whatever). I foresee, much in the same way that Democrats took Congress in 2006 after Mr. Bush had proven himself to be a fantastic jogger but not much of a president, that Republicans of the “Paul” variety will come into Congress in spades. Not that there will be enough of them to do foolish things like get rid of the Federal Reserve, but perhaps they shall make a stir.

After said Republicans offer a referendum on the Good President Obama’s fiscal policy, Mr. Obama will finally turn out to not be that bad of a president after all. Rather, I imagine he will turn out to actually be a true tight-budgeter, and will welcome the inevitable “corrections” to his earlier policies. Thus, Mr. Obama will be re-elected in 2012, just in time for the world to end.

He'll still be here. Don't worry.

All these things being said, I believe our most pressing issues in the economy can be solved with austerity. Our economy is run by right-leaning individuals with anger in their hearts (read: corporate CEOs and various smaller business leaders), while the government is run by political science majors who are quite sure they know what is best for the world. It is unfortunate, but the economy is currently being held hostage by pissed-off baby boomers who lack the requisite courage to stick their neck on the line and make some deals, Cornelius Vanderbilt style.

Unrelated.

If an austerity pitch injects confidence into business, then maybe our people will start putting some of that cash to work. It is good for the health of the country that consumers are paying down debt and not spending at the moment, but now it’s time to really give the people what they want. Britain’s doing it. Why can’t we?

Some of you individuals here may be of the opinion that I am merely a strange bleeding-heart liberal, in favor of such things as “the environment.” I am no such thing. Rather, I am a staunch pragmatist with the intention of achieving the desired objective by the correct means to do so.

Our current objective, as a country, appears to be “growth.” It seems that we have the desire to “grow” our way out of this little meltdown and reach a place where we may all eat delicious cake, provided to us by willing Chinese folk.

Mushroom cake says "grow"

Yet I must clearly remind you individuals daily that the cake is a lie.

Oh, I know what you’re saying, good people. You’re saying “EXACTLY, good Prophet! It’s that durn Obammer gone take err jobs and give em to the illegals and give em free healthcare! All cuz uh them dam liberrulz.” I translate your vernacular, of course.

I agree that the Good President Obama is not pursuing the soundest course of action here. Yet, honestly, what would you have him do to stop outsourcing? A recent NYTimes article (cited here – you have to register to read it) stated that factories have job openings available but can’t find anyone with the technical know-how to work the machines. $30-$40K jobs here, and all you have to do is perform calculations on the level of ninth grade math. They can’t fill the job vacancies. The government can’t fix that in the time frame demanded. The government can’t create jobs at the level Americans seem to want.

And, as you will see in the comments, many people suggested that the factories should take the time to train those employees themselves. That costs money. Costs impact stock prices. Everybody wants their retirement portfolios to stay up. Therefore, no costs, and no training.

You must see what I’m driving at, good people. The nature of our existing society is to find the short-term fix. Patch it up. And, if there are any short-term consequences, “obviously” it was done wrong.

If you need further convincing of this, I refer you to this WSJ article from September 30, 2008. If you don’t remember that date specifically, it’s the day after the bailout failed. Yes – in case you forgot – the bailout failed before it was passed. I remember this time vividly, as I worked for an investment bank at the time. We got the news of the bailout’s failure and watched the stock market plunge 9.1%. Panic mode set in. Representatives had received phone calls from constituents on September 29 saying “don’t pass the bailout” and then received calls from those same constituents on September 30 saying “why didn’t you pass the bailout?!?!?! My retirement money is all gone!!!” We don’t do “long-term vision” very well.

If you want a short-term fix, you have to stimulate the economy with taxpayer dollars. If you want to stop patching things up, you’re going to have to rip them apart first.

This is what the Republicans don’t want to sell, for fear that it might hurt their re-election chances. Austerity is going to flipping hurt and in all the ways Republicans don’t want it to. Defense? 20% of the national budget. Medicare/Medicaid/CHIP? 21%. Social Security? 20%. (figures here) That sucks when older 2008 voters were more likely to vote Republican and the party platform is expressly in favor of Reagan-style military spending. And, while the Tea Party has claimed to support spending cuts, I have yet to see a unified front to cut spending on any one of those three items. We can’t be austere without attacking the largest parts of our budget.

I am in favor of austerity, as I believe it will result in a bright future for me and my kind. And, because I like shorting stocks. That’s what will need to be done when austerity drops the market “a few G’s”. A few lean years of pain, where Americans will have to tighten their belts and grit their teeth through it, and then we’ll be purged.

But, if you want your retirement portfolio to keep going up, I suggest you stop reading IntelligencePlease.com and go follow Mr. Krugman.

More to come. Why be austere without a plan afterward – which, of course, I have.

Let’s be clear about something here. Greece does not have a spending problem. Greece has a central bank problem.

Here in America, we have fared just fine spending egregious amounts of coin on all sorts of things, from bank bailouts to Iraqi wars to Social Security and all manner of things in between. France has done much of the same thing, as have the governments of most major countries. This has caused no problems for any of us, and has made me realize that spending must not be a major problem if everyone is doing it. All is well if we have a central bank to continue funding our spending habit, and our Federal Reserve has most graciously continued assisting us in our spending needs by giving us more currency with which to do this.

So, if history has proven that spending whatever we want is fine, then I must conclude that spending does not damage economies. Greece spent, then their central bank (i.e., the ECB) turned on them. Taking an extreme form of logic as my weapon here, I must conclude that Greece has a central bank problem. The ECB and IMF, in a fit of sheer insanity, have demanded that Greece partake in new austerity measures. What does austerity look like, you might ask?

Greek Austerity

Austerity is the kind of thing that makes people firebomb cops. I want you to think real hard about that. Imagine a cop who hasn’t given you a ticket, hasn’t done anything but stand in front of a building making sure no one gets in. Now imagine the kind of situation where that cop gets firebombed, just for standing in front of a building. Austerity breeds insanity.

Austerity is when the government realizes it doesn’t have money to do anything but provide power and water to you and yours. Maybe. No unemployment checks. No subsidized public transportation. No public schools. No subsidized student loans. No retirement checks. No food stamps. All the people who want to talk to me about the need for American austerity have no idea how much of their entire life is partially subsidized by the government in an attempt to keep you in a state of mind where you won’t throw firebombs at policemen.

I believe that the Greek crisis, coupled with the Audit the Fed measures in Congress, are the first shots in what could potentially become a major issue for the world to face. We aren’t ready to let go of the Fed because we aren’t ready for the Fed to let go of us. So, until you’re capable of growing your own food – don’t talk to me about the end of the Fed. We aren’t ready for it.