What is a Geithner to do!?

I have watched with amusement, as Tim Geithner has been berated by the Republican (and a couple of Democratic) Senators and Congressmen on his policy decisions, and the state of the economy. I watch people accuse him of being soft on the dollar--as if he has a choice. I just want to ask those people calling for his resignation this question: What would you have him do?

Geithner doesn't set the Fed policy on interest rates, nor does he control the Fed's money supply--that's Bernanke's job. Timmy doesn't set fiscal spending policy, nor does he set tax rates--these are Congress and the President's jobs. He can put forth policies to improve both the regulatory review and oversight of the banks, as well as help devise the policies of the treasury, administer TARP, and other such things, and, despite all news to the contrary, this has not been the complete disaster that it has been portrayed as in the press.

Certainly some decisions of the President (bailing out AIG, GM and Chrysler, for example) have been costly, and returns have ranged from incomplete (AIG), to poor (GM) to just foolishly bad (Chrysler). If people want to point to this as the reason to jettison Geithner and bring in someone like Jamie Dimon of JP Morgan, I can't totally argue that this position isn't valid.

But to think that we can blame Geithner for a weak dollar is a little like blaming the Jews for killing Jesus. It may feel good to find an easy scapegoat, but history, and facts on the ground show that things are far more complicated.

Let's try to understand why the US Dollar is in free fall, and sinking fast. For starters, we as a country don't produce what we consume, we don't export any goods or services, and we don't have any fiscal discipline to show that we can support the debts that we service, with dollars that will be worth what they are worth today, in 2, 5, 10, or 30 years. We are in a HUGE fiscal deficit each year, and have a large debt to show for it. I'm not suggesting we shouldn't have done the stimulus (although I can think of a couple of wars that we shouldn't be in!), but it's silly to think that we can continue to run deficits and people will continue to buy dollars for security and strength purposes. Why should they?

For that matter, why the heck should you or I do it!? I'm all for patriotism, but I still want to be able to have a job, and feed my family too. After all, countries such as Canada have shown far greater fiscal discipline, have lower business taxes, great natural resources, and export goods and services at a tremendous rate. Why shouldn't I invest in a Canadian dollar, or Canadian based ETF? Look at the financial services sector. Is it any wonder that large Canadian companies own pieces of America's Investment and Insurance houses? John Hancock? MFS Investments? Putnam Investments? All Canadian owned now. This trend will continue. In about 10 years, each of the major financial institutions we see as American Icons will become foreign owned subsidiaries. Why?

Because it's too cheap for foreign banks and financial institutions to resist. I will grant you that Europe has its own house to put in order, but the Euro is at $1.50:1. It used to be about $0.95:1. What that means is that America became about 60% cheaper than it was 10 years ago. So if I had a Euro, and it used to get me 95 cents, it now buys me $1.60 in the same real dollars. Take a look at Australia, Canada, or Singapore's conversion rates sometime. They are all moving in the same direction. It's not that they are stronger, but rather we are weaker.

So to those of you arguing that it's China's fault, and that they've pegged their Yuan to the dollar, causing an unfair trade imbalance, I ask you this. Do you think we'd be in better shape if they allowed the Yuan to float?

I'd suggest to you that it would be catastrophic. All of the "cheap goods" from China would be 20% more expensive overnight. We'd see inflation here instantly. Since we don't make anything in the US anymore, all of our "trade imbalances" would remain, we'd pick up some jobs, but we'd lose far more in the wreck of hyperinflation, and soaring interest rates, to try to quell the debasement of currency. I can only imagine the billions of dollars that any foreign government would want to invest in our dollar-backed government bonds. "buy US Bonds! They'll be worth 50% less in 2 years!" There's a winning slogan...

So I get back to the question--What's a Treasury Secretary to do? If I were Timmy, I'd be socking money away in Swiss Francs, Silver bullion, and golden eagles. Perhaps an Australian gold mine or two shouldn't be far down the list either. Who knows? Maybe it is time to turn over the keys to the chicken coop to the foxes, let Dimon run treasury, and we can be done with Sarbanes Oxley, and party like it's 1999! Worked for Enron...for a while, anyway...

America Sucks

I'll start this piece by saying that I'm an American, I live here, and I do love and support my country. I'd love to see us return to a country that can lead the world again, with our innovation, strength and intelligence.

However, right now, we suck. I keep hearing people talk about "American Exceptionalism", as if it's a given, and if you don't support the idea, that you are somehow anti-American. Well I'm absolutely PRO-American, and I'm also claiming that, right now, we are in no POSITIVE way, exceptional.

I'd love for someone to explain to me what exactly we are exceptional at. I can list off the things that we are extremely ORDINARY at, and a few things we are exceptionally BAD at.

• Creating jobs--we stink. Asia's pulling out of recession. Brazil's survived, and is on the way up. We have more unemployment than the Europeans we had taken to making fun of for their high unemployment rates. And the jobs we create don't support a bustling economy that can grow and create further jobs.
• Fiscal policy--we're not just bad, we're brutal, bordering on Mexico and Zimbabwe-bad. Deficits out for decades. Manufacturing leaving in droves. No small business plans to stimulate real, competitive production in the US. Even our labor jobs are going to cheaper immigrants, legal and illegal. Our tax policy is misguided, our trade agreements are one-sided, our ability to pay off our debt is non-existent, and our day of reckoning with the US dollar, and our obligations to sovereign nations is practically upon us. Won't it be a real hoot when we're all scrambling to accumulate Mexican Pesos and Argentine dollars for their strength and stability?
• Education--"We're number 30! We're number 30!" Glad to see we have our priorities in order.
• Health Care--again, we spend twice what every other first world country does, and get half the care. We can't cover 1 out of 6 people. We're going broke, in both the public and private care spaces. I appreciate the Republican's putting out their health care plan, so I can finally dispel the claim that it's all the fault of litigation. Their efforts to curb such "frivolous lawsuits" would save us $41 Billion over the next 10 years (or about $4B a year), ignoring the unfunded liability of tens of TRILLIONS. Spare me the crap about our system being the best in the world. It isn't. Period. We may have had the best doctors 10 years ago, but to think we have the best here, now, is at best a tenuous argument. I don't have any imperical evidence to say we're the best, but plenty of anecdotal evidence to show that we are in many ways, LESS able to care for even the sickest patients than other countries. Anyone going through an illness (serious or not) in the past 5-6 years can tell you that the system just doesn't work. It's funny how I only hear us in America saying that these other health care systems are broken. I don't hear the French or the British, or the Germans saying that...
• Innovation--What happened to us? All the best stuff is made overseas. All the best American invented stuff is made overseas. What happened to all the green jobs? Stuff's all made in Germany and China. What happened to high-speed rail? We got a $5/week tax cut instead (which got eaten up by my $10/week increase in health care premium increases...). What about scientific breakthroughs? A more fuel-efficient car? "Smart Grids"? Do we know how to do ANYTHING in America anymore?
• Defense/Military--Actually, we do ONE thing better than everyone else. We have the best soldiers, and the best bombs. So we can scare the crap out of everyone. That being said, all the bombs in the world can't convince Afghanistan or Iraq to like us or respect us. Just ask Mikhael Gorbachev about Afghanistan. The best line I ever heard about the Afghan-Soviet war was the Soviet General who said that "we bombed Afghanistan UP TO the stone age", and still couldn't win. I'm all for just wars, but there are reasons the French, Germans, and Russians don't like to fight in wars. They've all had their Afghanistans in the last 80 years (French--Algeria, Germans--WWII, Russians--well, Afghanistan). They learned their lessons. We had Vietnam, but it seems that we didn't learn OUR lesson. Because, hey, we're exceptional, and those other countries can't achieve what we can. We can change the will of soverign nations through force, right? Because I can't point to a single instance of such an endeavour working throughout history...

I'm not writing this because I'm happy about all this. I think my favorite Football team, the Washington Redskins, suck too. I complain bitterly about them, their personnel, their desire, their management, etc. But in the end, I still root for them, and support them, with the hopes that this will finally be the week that they turn it around, and return to glory.

I'm not ready to move to Luxembourg. My point, however, is that until we face up to the fact that the world has caught up to us, and is passing us by, we'll never get back to being leaders in the world. The world used to look up to us. Now they see us as fat, out of shape, past our prime, prone to irrational decisions and possibly violence. Once the world realizes they don't need our dollars anymore to survive, we'll truly have to look in the mirror, and realize that to be considered exceptional, you have to BE exceptional.

That day is upon us.

Getting Real About the US Budget

It's been a busy month, both personally, and in US policy. Health Care reform looks like a real possibility (although in what form still remains to be seen). Afghanistan is on the top of the President's mind. I've made my opinion clear on this (get out now). But it's time to start getting real about the elephant in the room (all references to the GOP aside). We're on the road to financial ruin. And reality is beginning to box us in.

"But Pundit..." you ask, "...weren't you FOR the Economic Stimulus? Aren't you FOR a government option for health care? Aren't you part of the problem..." All I can say to that is, "possibly..." But rather than argue this point, let's take a look at the current situation, and what can be done.

Here are the facts. And they are NOT in dispute:

• Projected budget inflows for the Federal Government in 2010--$2.33 Trillion
• Projected budget outflows for the Feds in 2010--$3.59 Trillion
• Projected deficit--$1.26 Trillion

Pretty scary. But I do get the idea that we've needed to kick-start the economy, and stave off a depression by keeping the faith and credit in our lending institutions and the dollar. That all has contributed to the deficits, and is probably okay.

Here's the problem. We have no good options to get out of this situation. The gap cannot be wiped out through economic good times alone, as even a 10% growth in tax receipts through improved employment figures won't alone contribute to the bottom line anywhere near the amounts needed to truly close the shortfall.

And this obsession by the Republicans about cutting the pork out of the budget, or "earmarks" is just beyond laughable. It takes our attention away from the true work that needs to be done. The savings on all these crazy projects, while it makes for good PR, and buys John McCain the title of "Maverick", it doesn't really make a dent in the overall problem. So let's look at the stuff in the budget that will really "move the needle" some, shall we?

• Medicare/Medicaid--$1.06 Trillion budget
• Department of Defense--$742 Billion budget
• Social Security--$749.1 Billion budget
• Public Debt interest--$454.5 Billion budget
• EVERYTHING ELSE--$580 Billion

Now, remind me what that deficit was again? Oh yeah, $1.2 Trillion a year. Don't think raising taxes is a good idea? Remember, a 10% increase in the GDP next year (which is HIGHLY unlikely, and could lead to inflationary or other fears) wouldn't get us more than a quarter of the way to solving the deficit problem. So what do we go after to cut?

Want to go after the Department of Labor? Think it's those damn liberals spending on Unions? You'll get $106 Billion in savings, but you'll also lose the $89 Billion set aside for unemployment benefits. Can't do it. People can't be thrown out in the streets. Even if you did, you'd still have $1.15 Trillion to cut, and I'll remind you of that decision if you get laid off...

How about Foreign aid? We must give a TON away to these poorer countries. Time to shut off the spigot! Well...in reality, that will save us about $12.9 Billion. We still have only $1.25 Trillion to go. It only costs us in the goodwill department. I think we've proven during the previous administration that good foreign relations aren't really that important.

Do I need to keep going?

• Housing and Urban Development? Only $54.8 Billion
• Education? $100 Billion
• NASA? $18.4 Billion
• Transportation? $90.5 Billion (half of that is fixing roads...)

All that together, and you STILL have over $800 Billion to go before balancing the budget.

Can we get serious now?

The places we need to cut, to even start to SEE fiscal responsibility are HARD.

Defense--Time for tough choices. Let's forget the geopolitical ramifications of this for a moment, and discuss the costs saved with a pull out in BOTH Iraq and Afghanistan. War supplementals of $183 Billion. Now, let's look at a 10% reduction in purely Procurement, Operations and Maintenance (the cost of our defense weaponry, tanks, etc). That's only going to net us about $40B in costs. Despite what our Liberal base tells us, the costs of the Defense budget is not as full of excess, nor is it as easy to cut, as they would have you believe. Still, a 10% reduction, while SIGNIFICANT, still doesn't close the gap all the way. But let's make these two cuts for argument's sake:

Costs Saved: $223 Billion

Medicare/Medicaid--This is the behemoth! How do you save dollars here? Do we let the government negotiate prescription drug rates? Do we tackle fraud, waste and abuse? Can we really save $80 Billion a year that way? I would suggest that if we cannot, we must at least cap the rate of increase for the premiums paid to the doctors at the rate of inflation. It's going to suck royally for doctors, but the only way this truly works is if we move to a single payer, or public option, because the doctors are going to pass the cuts along to the taxpayers, in the form of higher charges on private insurers. But that's a different discussion, different day. Somehow, we need to get these capped, and find an additional $150 Billion in savings:

Costs Saved: $180 Billion

Social Security--I don't know what you can do here, other than continue to lie about the rate of inflation, and start to creep up the initial age one can draw on the funds provided. This could yield about a $20-30 Billion savings, but in the end, may not do much better.

Costs Saved: $30 Billion

I can't find more savings without a meat cleaver, so let's take our $450 Billion in savings, and combine it with additional tax increases of $400 Billion (IF the economy comes back, and IF the Bush taxes on the top 1% are allowed to expire, and if...), and at least show that cutting the deficit to about $4-500 Billion the next two to three years is achievable. Past that, perhaps a renegotiation of the debt could yield some benefit on the interest owed, but I would see that difference as minimal.

None of my suggested changes are even politically viable anyway, so perhaps we can continue to debate things like federal funds for abortion clinics, flag pins, gay marriage, and the like, while we slowly devalue the dollar, ship our jobs and skills overseas, and end up a third world nation over the next 10 years. Because let's face it, who's going to buy the next round of debt we offer?

Personally, that idea of a carry trade with Swiss Francs or Singapore dollars, looks better every day...