Rodney Johnson | Wednesday, October 24, 2012 >>
“I want the truth!”
“You can’t handle the truth!”
It seems like we, the American people, are desperately screaming at the television this election season, just like Tom Cruise screamed at Jack Nicholson in the classic A Few Good Men. We want the presidential candidates to drop their posturing and just tell us the truth… about the economy and how exactly they intend to fix it.
Of course, Romney and Obama never give an answer. They just spout more platitudes and generalities like, “I’ll lower taxes and businesses will spend more,” which has not worked. Or, “I’ve saved millions of jobs, we just need more tax money to spend,” which is also a non-starter.
It’s as if they think we don’t know what’s right before our eyes – a weak economy that shows no signs of this wondrous recovery they keep alluding to.
They tell us to believe all their promises… if only we elect them then things will be all sunshine and roses.
Well, I’ve got news for them…
It is not us, the workers and taxpayers of America, that are dazed and confused. It’s Romney and Obama… and their ill-fated advisors.
To turnrn the phrase around, it is not that Americans “can’t handle the truth.” It’s that the politicians refuse to acknowledge the truth!
So, today I give you what the frank, clear discussion of our economic situation should be about. And, for good measure, I throw in some broad examples of what we can do to start moving our economy forward.
Why Stagnation Lies Ahead
The long-term forecast today is for a period of stagnation. Why? Because the largest group in our economy, the Baby Boomers, are paying off debts. They’re preparing for retirement. This type of activity doesn’t lead to strong GDP growth where problems like unemployment take care of themselves.
Just as the Boomers spent aggressively to grow their families from the early 1980s through the mid-2000s, which led to an amazing run of debt-fueled growth in the country, they now hold back. They refuse to budge when enticed with low interest rates or other fiscal stimulus.
The reason for the change is clear: Baby Boomers now have different goals. It is no longer about the biggest house or newest car. It’s about preparing for a comfortable retirement, or even any retirement at all.
With this new reality staring us in the face, what can our political candidates do?
For starters, they can work to understand their constituents and acknowledge the major financial concernrns people have. They must recognize the current economic Winter Season that Baby Boomers have created as they move into their saving years.
Next, Romney and Obama et al could clearly identify what won’t work in the years ahead. Enticing consumers to spend their every last nickel AND incur more debt won’t jumpstart the economy.
In fact, every time I hear someone say that lower interest rates will make everything okay it makes me want to scream!
How in the world can piling more debt onto consumers fix an economy that is weighed down by too much debt? This is so idiotic a 10-year-old could point out the flaws.
If we can just set aside this failed idea, then perhaps we can have a discussion of what might work to help lower unemployment… to balance the books of our states and country. We have some suggestions…
Fix America Step #1:
Recognize Why Enticements Won’t Help
If everyone has a DVD player and the price of DVD players fall to $1, how many more would sell? Not many!
Sure, people will buy some as replacements, or perhaps to have one in another room of the home, but there wouldn’t be a surge of demand.
This is where we are in the economy, but the “good” in question is not a DVD player, it’s debt.
The Boomers, that huge mass of people in our economy, already have all the debt they want and then some. Simply forcing down interest rates or easing credit will not have the hoped for positive affect.
In fact, this “enticement” has more of a negative affect…
When the Fed holds down interest rates, savers and those on fixed incomes feel the pain.
The exact actions being taken to boost the economy are what are making it even worse. Brilliant!
Fix America Step #2:
Raise Tax Rates
There are no two-ways about this one. The lower consumption and higher savings trends prevalent in our economy today constrain growth. This, of course, cuts into any sort of growth of tax revenue as well.
There will have to be higher taxes. The Bowles-Simpson report is a good model for this, where tax increases are affected by vastly reducing or even eliminating deductions, while at the same time lowering marginal rates and the corporate tax rate.
As a side note, there will have to be a mechanism for transmitting sales tax on Internrnet purchases back to the consumer’s state of residency. Today billions of dollars in sales tax are not collected, even though voters agreed to this tax mechanism.
Now, no one wants to pay more taxes. But most people I meet do want to be responsible. They understand taxes might have to rise, but before they pay another nickel they want to know that all the money sent to the governrnment is being spent responsibly. This makes sense.
Fix America Step #3:
Spending Will Have to Fall
Again, Bowles-Simpson has a good plan, but we think adding in some suggestions by Rep. Coburnrn’s “Back in Black” report will make it better.
The general notion is to raise the bar for entitlement payments… to critically review current governrnment spending. One area that we highlighted in our latest book, The Great Crash Ahead, was U.S. military bases maintained in foreign countries. Certainly the presence of tens of thousands of American soldiers in Germany is not as necessary today as it might have been in previous decades.
Fix America Step #4:
Housing Is Not the Issue, It’s Debt
The estimates of underwater homes – those that are worth less than the mortgage outstanding – vary, but are always large. Whether the number is 11 million homes or 12 million doesn’t matter.
The U.S. housing market is in a deep freeze because of two huge forces. First, demographically the Baby Boomers bought their trade up homes in their early 40s, pushing up demand from the late 1990s through the mid-2000s.
The group behind them, the Gen X’ers, is smaller, so demand softens naturally.
Second, the big run up attracted easy credit and speculation, which turnrned a naturally rising industry into a bubble. Now the bubble has burst and is deflating. This is a very long and very painful process.
It can be done – albeit still with pain – quickly, which will help the economy heal faster. This would require either an equity-sharing plan as we outlined in our book, where lenders take equity in lieu of a portion of mortgages, or something like the imminent domain plan being considered in Californrnia.
Both would require a breach of mortgage contracts. The question is, “How long do we want the housing pain to continue?” What is it worth to solve this thornrny issue sooner rather than later?
There are several other suggestions we could tell the presidential candidates about… but none of them are easy. That’s why we don’t think Romney and Obama really want to hear the truth. They just want to win an election.
P.S. We’ll be giving away copies of our book, The Great Crash Ahead. If you’d like a copy, watch your inbox for details shortly.
Ahead of the Curve with Adam O’Dell
Applying Fibonacci Retracement to the Market Decline
Yesterday, I talked about how Fibonacci retracement levels help investors get in tune with the market’s natural inhale-exhale rhythm.