Occam’s Razor

Learn lessons today for the next recession

Some years ago, I wrote about the fading middle class. Today, the recent hikes in oil prices appear to be driving a stake through the heart of many in the middle class. I can point you to scary NPR stories like this one. If you are not experiencing the uncomfortable feeling that your middle class lifestyle may be slipping away permanently, consider yourself lucky.

The middle class has been living on its margins for a long time. For years, an accounting was postponed. We postponed it by drawing equity out of our inflated home values and by putting more and more of our debt on plastic. Now the middle class is faced with a triple financial whammy: declining home prices, rising unemployment and rapidly escalating gas prices. For many families this means living very precariously.

As the NPR story documents, some people are drawing from their IRAs just to pay their mortgages. The Washington Post reports today what I wrote about recently: the rapid extinction of the SUV. In some cases car owners are so anxious to ditch their SUVs that they sell them for less than they owe. This assumes of course that they can sell them at all. Gas prices have escalated so quickly that some people paying with credit can no longer pay at the pump. Many cards restrict at the pump purchases to $75 per transaction. Meanwhile, those of you who have a credit card debt, but have been responsibly making your payment every month, may be in for sticker shock. Many credit card interest rates are going up, even if your credit history is spotless. Someone has to make up for all those credit card defaults, so the cost is being pushed down to responsible borrowers. Oh, and by the way, interest rates in general are likely to go up, because The Fed is finally tackling inflation as the primary economic threat.

I hope that our economy is on a sound enough footing where we will experience just a mild recession, but that is looking more dubious. Stock markets reached bear territory today, and the price of oil shows no sign of falling. Perhaps the middle class can take some comfort in that many others are in far worse pain.

As I noted, this recession was probably preventable. I chastised our Congress for emulating its citizens by going so deeply into debt. Nevertheless, Americans are also at fault, spending way beyond our means. This has so many bad effects it is hard to know where to start. Perhaps the worst effect of all this deficit spending is that it pushes up the cost of oil. Since oil is traded in dollars, when the dollar is worth less, it makes oil disproportionately expensive. There is little we could do as a nation to restrain global demand, but had both government and its citizens lived within their means the dollar would not have dropped as much, which would have meant we would be less affected by the current oil shock.

There are compensations for our economic maladies. The rock bottom value of the dollar has made our goods and services a good buy, so our increased exports will help pull us out of recession. (However, the increased cost of transporting these goods may negate many of these benefits.) American productivity has also been amazing. It is infuriating that despite all our increased productivity, wages have been stagnant. The benefits of our increased productivity have gone disproportionately to the wealthy, who are also disproportionately enjoying lower capital gains taxes. In short, they are laughing all the way to the bank on your dime.

Proactive leadership, if it exists, can at least ease most economic hard times. Clearly there has been little evidence of it in Congress, which accounts for its rock bottom approval ratings. No spending of significance has been restrained. Just a few weeks ago by veto proof majorities Congress passed yet another bloated farm subsidies bill.

The Great Depression taught us the painful lesson that banks need to be regulated so they do not do stupid stuff and wipe out their customers’ assets. (This lesson was more recently reinforced in the 1980s during the Savings and Loan debacle.) We seem to have forgotten some other lessons from those Depression years. Then, as today, people lived beyond their means. While credit cards did not exist, brokerage credit abounded, and was used to purchase overvalued stocks with someone else’s money. In this recession, it is our overvalued houses, sold even to people with bad credit or who could not afford them, that triggered the downturn. We should have learned our lesson in 1929.

In short, most economic calamities are self-inflicted. They result from either absent-minded government and/or absent-minded people.

In case you have not noticed, Occam’s Razor has tried to be something of a prophet. Granted, foreseeing the current economic mess was not that hard, I just chose to do something about it. Back in 2004, I purchased a hybrid. A year ago, we installed new energy efficient windows and compact fluorescent lights. I began biking to work. I hired a financial planner. I lived within my means and did not carry a credit card debt. I downsized my life compared to that of my financially distressed neighbors who are now trying to sell their overvalued McMansions and SUVs. I kept a low debt-to-earnings ratio.

Sure, I have financial concerns, but I know that my family will weather this economic downturn. Long ago, I made sure that we were ready to quickly batten down our financial hatches. So many of us though gave nary a thought to our financial comeuppance, living way beyond our means. It is not the least bit surprising that now that an economic storm is upon us that these people are suffering disproportionately. I know my ship’s hull is dry. It appears though that many of my neighbors are busy bailing water.

Should I chastise my fellow human beings? Or should I say that they were just being optimistic? Optimism is generally considered good, but sometimes it can be a foolish trap. Optimism has to be based on something tangible. When it is not, optimism degrades into foolishness. Certainly, it is not possible to be completely prepared for all life’s possible financial hits. If I were to lose my job, I would be in tight straits too, although I am fortunate to have a financial cushion where I could ride out my unemployment for a while. Only the very wealthy can protect themselves against all financial risks. Most of us though through the exercise of intelligence and by living modestly can weather most financial storms.

If you are one of the unfortunates caught in this financial storm, you have my sympathy. I hope you learn a lesson when good times reemerge, as they must eventually. Try to avoid the urge to resume your former lifestyle. Scale it back, even if you feel flush. Apply the difference to building long-term assets and an economic safety net. I doubt anyone going through financial pain today wishes they had overextended themselves, now that the storm is here. The reality is that when these storms occur, it is the financially savvy who profit from the detritus. Money, like matter and energy, does not disappear. It simply moves from one place to another. OPEC countries are clearly profiting. It is likely that by being prudent I will be a bit ahead of everyone else when this storm ends. If you were caught in this one, you should have a goal to end up ahead too when the next one happens.

July 2nd, 2008 at 08:26pm Posted by Mark | Sociology | no comments

An era is passing

My family and I are making plans to vacation in New England this August. We have never really explored it so it makes for a convenient destination. Also part of our calculus is that New England is not that far away (we live in Northern Virginia). Like many Americans, with gas over $4 a gallon we are downsizing our vacation. We will be staying closer to home and will not be as extravagant with our spending as we were.

An era is passing that I do not think will return. Just as my parents remember an era when the milkman arrived every morning and their parents remembered a world where personal transportation meant a horse, our era, centered on the convenience and affordability of the automobile, is ending. Let’s call it The Era of Living Large. The evidence is everywhere but it will take a while before this fundamental reordering of our society will be apparent. Yet there are signs aplenty.

Amtrak, our stodgy national rail system that almost everyone ignored, is getting record usage. Despite our increasing population, we drove 1% fewer miles from November through April than we did during the same period a year earlier. At our local Silver Diner today, there were plenty of empty parking spaces right near the front door. A year ago, we would have had wait for a table. Perhaps the statistic that cemented it for me was this story in The Washington Post. The Washington region has one of the highest foreclosure rates in the country. House prices are dropping in most areas but less so the closer you are to the city or to public transportation. In Fairfax County, where I live, home prices have dropped on average 3.2 percent between April 2007 and April 2008. In our outer suburbs, the change is dramatic. In Loudoun, Prince William and Frederick counties, all about an hour’s drive (in no traffic) from the capital, house prices dropped on average 25 percent during that period. Within the city of Washington D.C., most home prices have stayed steady or have even risen.

Since 9/11, there has been a national malaise. We are trying to enjoy the same lifestyle we always have had but it is harder to come by and not as enjoyable when acquired. The economy throughout much of this period did relatively well, but little of it was felt where it mattered most: in our wallets. In 2005, when we traveled to Chicago I remarked how surreal it felt to pay nearly $2.50 a gallon for gasoline. There was a sense of unease even then. Three years later, we would pop a bottle of champagne to celebrate buying gas at that price.

Americans are discovering a new and inconvenient truth: we can never go back to the way things were. To expect that we will have the lifestyle that our parents knew is folly. Those days are swiftly passing. We do not know what the new order will look like, but we have a good idea what it will not look like. This uncertainty breeds unease and malaise. It contributes to polls that show Americans are far more disgruntled about the shape of the economy than the statistics merit.

The era of the SUV is ending. We are not all ditching our SUVs at once but news stories like this one are a harbinger. We demand fuel-efficient cars. I am trying to order a Honda Fit for my daughter only to discover there are few on the lots. We will have to wait for one to be delivered. I hope that it will arrive before her classes start. When we add on the cost of $4 a gallon gasoline, her choice to go to a community college now looks a little less affordable,

The far-flung suburbs are likely to disappear too. What may eventually replace them is the quaint notion of a village. It is hard for many of us to imagine actually living in the same community where we work. In the future employees may be forced to give preference to employees with short commutes. My friend Sokhama lives in Columbia, Maryland. Columbia is about halfway between Baltimore and Washington. She quit her job at a D.C. law firm a few months ago and is currently unemployed. She has had a few job offers, but she has spurned them because all involve a bad commute. She has decided that her next job will be much closer to home.

She is one example of a general trend. Americans everywhere are realizing that they have to rethink their lifestyles. This is why in D.C.’s far-flung suburbs house prices are down 25% from a year ago. Certainly, the sub-prime housing debacle has a lot to do with it. Yet $4 a gallon gasoline is also a major factor. We crave certainty in our lives. Uncertainty is lowered by moving closer to diverse sources of employment and public transportation. A new urban migration is beginning. Modern prospectors know that this is an excellent time to buy before everyone else jumps on the bandwagon.

Bicycle commuting, which I took up a few years ago, is becoming chic. Among all the new light rail projects, expect many communities to also construct bike trails for easy commuting. This will give them a competitive edge against other communities and help encourage progressive businesses to move to their cities. Many families are trying to orient their lives so they need only one car. This will give these families thousands of dollars a year to spend.

The global climate change skeptics are reduced to a crazy handful. Academics suggest that recent flooding in the Midwest is likely a direct result of global warming and using the land in ways for which it was not meant. So far, hurricane season has proven to be benign, but it is just beginning. However, this year tornadoes have been unusually numerous and powerful and have begun earlier. It is hard to escape the feeling that we are reaping the results of ignoring our impact on the environment.

One of our retirement goals is to take a cruise around the world. We are allocating $60,000 for the once in a lifetime experience. Now I am wondering if this is enough money. Perhaps we will have to settle for a cruise of the Pacific instead. With the cost of diesel exceeding the cost of gasoline, I have to wonder if the cruise industry will be one of the casualties of this new reordering.

Our round the world cruise, along with the cross country car trip I had planned, are possible activities we will have to give up due to the societal reordering underway. Perhaps instead of using a car we will take a train across the country. It will likely to be crowded.

I am also looking at my third of an acre lawn, which I meticulously mow weekly with $4 a gallon gasoline. I am wondering if it is time to give up the lawn in favor of a more natural terrain. A lawn is yet another invention of man. Grass has been around for millions of years, but keeping it neatly trimmed is not possible without either a lawn mower or many goats. I do not see our homeowner’s association approving us keeping a herd of goats in our backyard.

If oil prices continue to skyrocket, society may look a lot shabbier in the future. I passed a tree service truck today. Will there be the petrol to fuel these behemoth trucks in a couple decades? If there is petrol available, will anyone be able to afford it but the rich? It is hard for me to escape the feeling that thirty years from now, if I am still alive, that I will hardly recognize the crowded, denser and noisier world that I will be passing to my daughter.

June 20th, 2008 at 03:04pm Posted by Mark | Sociology | no comments

Asleep at the wheel

Based on reading news reports yesterday, it seems the SUV’s days may be numbered. Yesterday, General Motors announced plans to close four truck and SUV plants by 2010 as a result of shrinking sales for these vehicles. Ford Motor Company has also cut production of trucks and SUVs. Sales of large and midsize sports utility vehicles are down 30 percent compared with the May 2007. To try to get rid of them, Ford is offering substantial discounts. Good luck with that. With gas prices in my neighborhood now at $4.019 per gallon and with the summer driving season just starting, buying a SUV or any vehicle with low miles per gallon looks very stupid.

Despite their popularity, the SUV epitomizes America at its worst. SUVs were always expensive. Double the cost of gasoline and it is like adding an extra hundred dollars a month or more to your car payment. Unless your SUV is paid for, this either makes your SUV unaffordable or moves it into the luxury category. Moreover, the more you drive an SUV the more unaffordable it becomes. Even the automobile manufacturers’ attempt to put lipstick on a pig by making hybrid SUVs has not worked. GMC has sold only 1,100 of its Chevy Tahoe hybrids. That’s 1,100 total nationwide.

Unsurprisingly, fuel-efficient small cars are now hot. Fuel-efficient hybrid cars are even hotter. The Washington Post reports that owners of the Toyota Prius compete against each other to prove they are the more fuel-efficient driver. Also rising in popularity is mass transportation. Overall ridership was up 3% in the first quarter of the year compared with a year ago. In Baltimore, light rail usage is up 17 percent in a year. The Metrorail system here in Washington D.C. is running more and more eight-car trains, and most rush hour trains are still standing room only. While only 5% of Americans use mass transit regularly, you can bet many more wish it were an option and would use it if available. They have just unwisely chosen to live in an area that is not accessible to mass transit. More businesses and governments are allowing employees to work four 10-hour days so they can save on fuel costs.

General Motors seems to have figured out that gas prices will not return to nostalgic gas guzzling levels again. In one of the least surprising news stories of recent months, Rick Wagoner, the current GM chairman and chief executive said, “We at GM don’t think this is a spike or temporary shift; we believe that it is, by and large, permanent.” Which is why it is closing plants and laying off employees. GM has shrunk to half the size it was in its heyday and will now shrink even further. Thousands of American workers are among victims of their unenlightened leadership. Our friends in the North American Free Trade Agreement are also feeling GM’s pains. A plant in Canada and another in Mexico are among those that GM plans to close.

While GM’s sales plunged 28 percent and Ford’s dropped 16% compared to a year ago, some automakers are sitting pretty. Honda Motors, which has engineered fuel efficiency into its cars for more than two decades, reports its auto sales rose 18% in May. Both our cars are Hondas. I have been driving a fuel efficient 2004 Honda Civic Hybrid for three and a half years and routinely average 37 to 40 miles per gallon. We will likely add a third Honda to our family shortly. Our daughter needs a car for college, which begins in August. While we looked at used cars, we found we could purchase a fuel efficient Honda Fit for the same price as a used car that is three or four years old.

America’s love affair with the automobile is destined to downsize in the 21st century, but it will not go away entirely. Clearly, we are now in the transition phase where we have to live within our means in an increasingly expensive world. Unlike the oil shocks of the 1970s, this one is not going to go away. It may moderate from time to time. When even General Motors acknowledges the long-term trend is real, you know the gig is up.

American automobile manufacturers should have learned from the oil shocks of the 1970s. Instead, they chose complacency. Why reduce shareholder profits by making long-term investments in fuel-efficient vehicles? Instead, executives can get big bonuses for short-term profits. Inertia pays because America’s brand of capitalism rewards short-term profit makers. The formula works of course until market forces change the dynamic. Then stockholders get the shaft for their obsession with short term profits. Auto manufacturers like GM are caught flat-footed. This is a company that is so unenlightened that it killed its own experimental electric car, the EV1.

Honda Motors is laughing all the way to the bank. Americans will still need cars, but they will need reliable fuel-efficient cars. The company showed the long-term vision that positioned them well for any change in market dynamics, which will translate into greater market share and greater profits. GM and Ford were largely asleep at the wheel, belatedly reacting to market forces rather than positioning their companies to profit from them. As a result GM and Ford are shrinking.

GM plans to either radically change or sell its Hummer brand. Once the world’s largest automobile company, it now looks in real danger of going out of business. It may join a long list of failed automobile manufacturers.

If I were a GM stockholder, I would be working to fire its whole management team. It needs new leadership with a clue on how to anticipate market dynamics. This way stockholders always win. It needs a consistent long-term vision. More likely though GM will suffer the fate of companies like Bear Stearns, and be sold off in pieces for chump change to some much smarter companies. If that happens, let us hope it is Honda Motors.

June 4th, 2008 at 10:44pm Posted by Mark | Life 2008 | no comments

The price of incompetence

(This post is sort of a continuation of this one, which if you have not read it, you should.)

I was wondering if this year I could report that my wife and I were millionaires. It looks like we may have to wait a few years. In fact, given the fallen dollar, deflated house prices, deflated stock prices, rising unemployment and what looks like the return of stagflation, maybe we need to wait a couple of decades to celebrate our seven figure net worth.

Thanks to inflation, being a millionaire these days is no longer that a big deal. However, if we get there we cannot, like Jed Clampett, go buy a mansion in Beverly Hills with a “cement pond”. In the intervening forty years, one million dollars today is worth $164,000 in 1968 dollars, which was when The Beverly Hillbillies was at the top of the Nielsen’s. To reach Jed Clampett’s lofty income we would need about $6.3 million in today’s dollars, a total we are unlikely to achieve.

In fact, our portfolio is down rather sharply. I am trying to keep this unwelcome news in perspective. The reason our net worth was approaching a million dollars was because much of our portfolio was overvalued. Even so, at the end of 2007, Quicken calculated my net worth at $910,000. Today, just ten weeks later, it said our net worth is $860,000. What happened? Who took away $50,000?

Well, there was a drop in the assessed value of my home that I received recently. When the country assessed it last year, it was worth $511,000. This year, even though I put in new energy efficient windows, it is worth $479,000. In 2006, though it was worth $552,000. In two years, the value of my house has dropped 14%.

At the end of 2007, which had already seen the beginnings of a bear market, our investments were worth $479,000. Today they are worth $455,000, which amounts to a drop of five percent in a little over two months. What happened? The subprime mortgage mess kept happening and its effect is rippling across stocks and mutual funds worldwide. Between the losses in my mutual funds and the lower value of my house, since the start of the year, I have lost $54,000. Fortunately, I reduced debt and added income and that cut my total loss to about $50,000.

I am very mindful that we are some of the fortunate financially. Our house cost us $191,000 when we bought it in 1993, so even at $479,000, it has been a good investment, returning on average about $19,000 a year, if you do not factor in the costs of mortgage interest, taxes and upkeep. If we had been a first time homebuyer in 2006 when housing prices reached their peak, we might well be embroiled in the mortgage meltdown now. Most likely the net worth on our house would be negative. We would resent paying against a mortgage for our house when the loan value exceeded its value. We would be hoping we could keep up on my mortgage payments in our uncertain economy. Of course if we had been one of those reckless buyers who purchased a home with no money down and a variable mortgage interest, we would be likely be screwed. I doubt we could pay the higher interest rates and with our house’s value decreasing. We would be inclined to walk away from the whole mess.

There’s the rub of course. It did not have to be this way. There could have been regulations in place that ensured that only people who were reasonably solvent could buy houses. That has not been the governing philosophy of these last eight years. To quote the fictional Gordon Gekko from the 1987 movie Wall Street (and by implication the late Ronald Reagan), “Greed is good”. If you can earn a fast buck, it does not really matter so much how you earned it as long as you made the quick profit. This is the downside of laissez-faire capitalism. It is a primary reason why Republican ideology just does not agree with me. None of the current economic mess had to happen. Instead, we let it happen. We did not so much turn a blind eye to it as we opened the doors and let the bull into the china shop. As crazy as this sounds, we let the bull in because we thought it was good to have a bull in the china shop.

If Democrats had been in charge these last eight years it is likely much of this mess would have been prevented. Had Al Gore been president, his administration would have had an eye on the subprime mortgage problem and likely, it would have been nipped in the bud. Congress, being in Democratic hands, would likely have had oversight hearings, resulting in prudent regulations on the housing and financial industry to preclude these sorts of problems. Unquestionably, we would not now be embroiled in a winless war in Iraq, draining the economy of three billion dollars a week in direct costs and pushing the down the value of the dollar.

Instead, we have a Republican president and a largely Republican rubber stamp Congress. Whatever the President wanted the Congress went along with it. Congressional oversight became a joke. We had a government of, by and for the corporation and very rich people. Not surprisingly, it reflected the values of corporations and very rich people who, unsurprisingly, want themselves to get a lot richer and the expense of someone else. Tax cuts went disproportionately to the richest people. When wealth trickled down at all, it trickled down to shareholders, not to the laborers who sustained the economy. Moreover, all this additional wealth did little to improve the commonweal. Our infrastructure deteriorated. The resulting detritus is easy enough to see around you: homes foreclosed, gas prices going through the roof, a crumbling infrastructure, the recession that we know is upon us, and the return of stagflation.

My real financial concern is more personal. With the failure of the Wall Street investment firm Bear Stearns, the question is really, “Who is next?” Our portfolio is reasonably diversified, but we have over $150,000 in various Vanguard funds in a retirement portfolio. If Vanguard goes the way of Bear Stearns, will our portfolio be safe? In other words, just how safe is our financial system right now?

Doubtless, I am not the only investor deeply troubled by these events and wondering if there is a severe recession or even a depression around the corner. It is evidenced by $111 a barrel oil and gold priced at over $1000 an ounce. It is clear that savvy investors are lining up by the exit doors. It will take just one little jolt to have them bolt out of the room. The Federal Reserve is trying to preclude this possibility. That is why is took the nearly unprecedented step of offering Bear Stearns a line of credit of $200 billion.

I am irked because this financial crisis was completely avoidable. I am outraged though because I am paying the price for government incompetence. I can see it in my net worth, where $50,000 has disappeared from my portfolio since the start of the year. Multiply my small misfortune across the United States and we have a huge financial meltdown that could be catastrophic.

This is not business as usual, unless you expect incompetence. This is government abdicating its job. This is the White House and Congress largely asleep at the switch, reacting to events instead of preventing them. In case it is not clear to you, we have governments to protect the interest of its citizens.

Who will win the White House race in 2008? Who will win the Congress? There is no doubt in my mind. Democrats will win. You can see it in poll numbers, where self-described Democrats outrank self-described Republicans by more than ten points. You can see it in the primaries and caucuses where Democrats are participating at rates unseen in a generation. You can get a preview of the election by looking at the results of a special election held last week in Illinois to fill former House speaker Dennis Hastert’s vacated seat. A Democrat won it.

For eight years, we have seen what happens when Republicans order the government and the economy the way their principles dictate. What we have is a financial mess not seen since the Great Depression. That event was another completely preventable economic event that was brought to us by Republicans. Will we ever learn? Will Republicans ever understand that their economic principles are not just fundamentally bankrupt, but fundamentally wrong? I doubt it. They are clueless folk. They are looking at the mirage of Reagan’s shining city on the hill, while ignoring that America is falling apart around them.

At least the American public is now fully, painfully and nervously awake. I can only hope that we can get the government we need before our current economic danger devolves into an economic catastrophe.

March 16th, 2008 at 11:12am Posted by Mark | Politics 2008 | no comments

The war taxes you are already paying

Doubtless, you have noticed rising oil prices. At closing today, a barrel of light sweet crude oil was selling at $105.15 on the New York Mercantile Exchange. In my neighborhood, this translates to a price of $3.15 to $3.25 a gallon for unleaded gasoline. Diesel was priced at $3.95 a gallon at a gas station I passed today. In fact NPR reported today that gasoline is now more costly in constant dollars than it ever has been, including during the first Arab oil embargo in the 1970s.

Some investors are seeing crude oil as the new inflation hedge. An NPR analyst estimated that these investors are driving up the cost of oil by about $20 a barrel. Whether their investment will be the inflation hedge they are looking for remains to be seen. These investors may be fooling themselves. At some point, oil may become so overvalued that the price of oil returns to what now seems like reasonable levels, $80 a barrel or so, or even less. I will not shed too many tears for these speculators, but $80 a barrel oil still strikes me as expensive, since it typically results in gas prices of about $2.60 a gallon.

One thing is clear, as these graphs in today’s Washington Post point out. A good portion of the cost of oil is not because the commodity is in greater demand, but because its price is tied to the price of the dollar. If the demand and supply of oil are relatively constant as is currently the case and the value of the dollar diminishes, oil will cost more dollars per barrel.

In case you have not paid attention, the U.S. dollar is reaching record lows too against most major currencies. Last September for the first time since 1976 when we were in the midst of a stagflation epidemic, the Canadian dollar and the U.S. dollar were worth the same amount. Oil prices went up 75.6% since the beginning of 2007, according to the Washington Post. Because the Canadian dollar is in better shape than the U.S. dollar, oil prices went up a more modest 46.6% in Canada. If you bought your oil in euros, prices rose 49.6%. The price of our relatively weak currency means that we pay considerably more for oil than some of our closest trading partners with better-managed governments and economies. As you can imagine, we pay extra for many other things because of our fallen dollar. Oil is an easy one to quantify because it is tied directly to the dollar.

Perhaps you are thinking that our government is doing something to stem the drop of the dollar. If you think this, you are sadly naïve. No, the situation is quite the opposite. Ben Bernanke, the Chairman of the Federal Reserve, told Congress recently that the Fed would drop interest rates again to stimulate the economy. This will undoubtedly drive the dollar even lower. It will also put more upward pressure on the cost of oil and cause inflation to rise, likely adding to the likelihood of the stagflation we saw in the 1970s. In addition, sometime around May you will get a fat check from the government. The government wants you to go out and spend the money to stave off a recession that looks like it arrived in the end of 2007. Where is the money coming from? The government is borrowing it. Who is loaning their money to the government? While many of us do this by buying bonds and treasury bills the bulk of this money will come from foreign governments and creditors. To make sure we have the money now we will raise interest on U.S. treasury bills until it becomes worthwhile for creditors to buy all the bonds we need to sell. Not surprisingly, rates on treasury bills are up.

When the time comes to pay creditors for loaning them their money, the government will not pay them in assets like military aircraft or wheat surpluses. No, it will pay them off in dollars. The problem is that the government has no spare dollars sitting around in a teller’s drawer to give them. The government will not hold up an investment group like Vanguard Securities until they cough up $100 billion. Instead, they will print more money. They are doing this today to pay off creditors who bought securities years ago. Because the economy is not growing fast enough to keep up with our spending, this means there is more money in circulation chasing the same relative assets. Creditors know what this means: their investment is worth less. Thus, the dollar loses value against other currencies and investors require higher interest rates. Prices for everything become comparatively more expensive but the effect is worse for prices pegged to the dollar, like oil.

In short, deficit financing drives down the value of the dollar and is inflationary. Granted sometimes it is hard to tell. When the economy is doing well it may seem that there are no inflationary effects from deficit financing. This is an illusion. Of course, there are times when you have to borrow for an important need. I borrowed money recently to replace the windows on my house. I did receive some value from it. My house is much more energy efficient, our rooms are less drafty and we use fewer kilowatt-hours of power. Unlike the government, I have been paying off my debt. The way our government works, it only very rarely pays down the principal. Instead, it keeps borrowing more and more money. All that matters is whether the government can meet its interest payments. If it can, creditors keep loaning us money. As Dick Cheney reputedly said, “Reagan proved that deficits don’t matter.” Oh, but they do. They do.

While there were many reasons for the prosperity of the 1990s, I think that it was mostly due to the government living within its means. Steadily decreasing deficits gave investors confidence that government was being run by rational people. No recession stimulus could provide that kind of boost. Like a savings account, the interest started compounding, resulting in true wealth that affected all income levels.

If we can stop our addiction to deficit spending, real prosperity is likely to reemerge. However, it will not be easy. Deficit spending cannot be cured by trimming the fat in a few government departments. I do not believe we will have real prosperity again until we end our War in Iraq. It is paid by foreign creditors, many of whom do not have our best interest at heart. It is like a chest wound to the national body. We are losing a lot of blood. We must stanch the wound. Waging a hundred year war, like John McCain has suggested, will simply bankrupt the country. If the country is bankrupt then in some way the terrorists have won because whatever is left of our country will sure not resemble the America we know today.

We should not throw good money away on a bad investment. Iraq not only a bad investment, it is increasing your costs of living. The Iraq War costs us about three billion dollars a week. Those are the short-term costs; the long-term costs of the war are truly frightening. When you factor in costs like caring for our disabled soldiers, paying interest on the debt (but never the principle) the real cost of the war will reach at least three trillion dollars.

If you think you are not already paying a war tax, you are mistaken. If you are applauding President Bush for not raising taxes, you are naïve. You pay the war tax every time you go to the gas station and fill up your gas tank. You pay it in $3 a gallon milk. You pay it in high credit card interest rates and in huge tuition costs. You pay it every day but you do not necessarily associate these costs with the war because the money is not going through the U.S. Treasury. The falling dollar and the inflation it brings is the price of a country living way beyond its means. It is the price of financing a war that we cannot afford but chose to start anyhow. These indirect taxes though do not buy you any additional prosperity. It goes to oil companies and foreign governments, many of whom we do not like. In fact, much of this war tax simply provides the financial means for us to become embroiled in more wars, because we give the money to states that do not like us. It gives them more capital to carry on their animosities. This money does not build new bridges. It does not improve the educational standards of Americans. They are in effect squandered dollars, and squandered wealth — your wealth.

We will leave Iraq and sooner than we think simply because we cannot afford to finance it must longer. What point do gas prices have to reach for us to pull the plug? My guess is about four dollars a gallon. Perhaps at that threshold we will reach national consensus and end this pointless and foolish war.

March 7th, 2008 at 10:14pm Posted by Mark | Politics 2008 | 2 comments

Riding recession’s wave

As we headed for a recession? Are we in the midst of one now and just do not know it? Do I know? Heck, no. Even our best economists do not know. Most likely by the time it is declared official, some six months to a year after it begins, we will be out of it, or climbing our way out.

There is little doubt that recessions hurt. On a personal level, many people lose their jobs and that pain extends to all aspects of their lives. Those of us watching our financial portfolios get upset and nervous when we see the value of our assets decline. Many of us are already stretched to the limit and up to our eyeballs in credit card debt. Our house, if we have one, has provided us the equity we needed to confront life’s little financial emergencies. With declining home prices. for many of us our home equity is tapped out. Moreover, since the average credit card debt exceeds $3000 per credit card holder, taking on more credit card debt looks unwise, particularly at 18% annual percentage rates.

Then there is the problem lenders are having valuing their assets. With so many financial institutions holding bad debt in the form of dubious mortgage backed securities, they are unsure exactly what assets they have and how much they are worth. Without knowing what their assets are worth, it is harder to loan out money. Those of us with dubious credit histories are likely to find there are no lenders who will lend us money.

A recession should serve as a warning notice to those of us in debt. It is hard enough during flush times to live on borrowed money. During a recession, it can become impossible. There are stories locally like this one where otherwise normal people find that their fragile financial cards quickly tumble when the economy turns and end up homeless. Granted, even in flush times it is hard to build financial wealth if you carry a large amount of unsecured debt. Economic factors and job markets are always finicky meaning your hot profession may turn out in a few years to be worthless. During flush times, it is possible to get out of credit card debt and build reserves of cash. These assets may not get you through the next recession unscathed, but you are more likely to emerge less battered and bruised. Spending habits, like eating habits, can be devilishly hard to change. A recession though can give many of us the fortitude to make painful short-term choices for a long-term benefit.

Then there are others like me for whom a recession is in some ways good news. No job is guaranteed but I am fortunate to be a well-paid civil servant. Most likely, I will have a steady income throughout this recession. However, even if I were not in such a situation, many people in the private sector do fine during recessions. Their jobs are in relatively high demand, or they possess some important institutional knowledge that lessens their likelihood of unemployment.

You can usually tell which groups will be unduly affected by a recession. These are the same groups who jobs are tenuous even in good times. Autoworkers, for example, tend to be among the first in the unemployment lines. The financial sector is taking a whack this time around, which is not surprising because of the debt crisis. Any industry that depends on discretionary spending is vulnerable. Those planning a career would be wise to keep these factors in mind.

I have good news for those who have always wanted to own a home, but could not afford one. Perhaps housing prices have not hit bottom yet, but if you have saved enough money for a traditional down payment and have a decent credit history, now is the time to buy. Not only are house prices down but mortgage rates are down as well. There are plenty of houses on the market to choose from now, so you are likely to find that dream house at an affordable price. You should be actively looking around.

Ironically, if you have ready cash, recessions are also a great time to buy most products or services. Businesses everywhere are anxious to cut deals because often they are just trying to stay in business. If you have the money for rather expensive things like getting the roof fixed or replacing the siding on your house, now is the time to get this work done at a discount. You will also help stimulate the economy by keeping people employed.

If you are invested in stocks, bonds and mutual funds, while you may be feeling nervous about the value of your assets, there is also a flip side. Many funds are a great bargain during a recession. Granted there are exceptions and I am certainly no stock analyst but you may find terrific buys out there. Presumably, you are in the market for the long haul. Profit is made by buying low and selling high. Consequently, this is the right time to buy.

It may not be fair but when some part of the economy suffers someone else profits. Recessions tend to happen because people, corporations and governments do foolish things. That certainly is true this time. Mortgage brokers created packages of bad mortgage debt. They sold them under false pretenses to investment firms that should have known better. In addition, our foolish federal government spent the last seven years spending like a drunken sailor on shore leave. Moreover, people in general ignored macro trends like global warming.

Very few of us will be the Donald Trumps of the world. Most of us though can distinguish between speculation, which usually throws away good money, and investments, which allows good money to grow prudently. Prudence and moderation are virtues, not just personally, but financially as well. People ride out and even prosper during recessions by exercising prudence in good and bad times. They do not live beyond their means. Saving money is their highest financial priority. They do not do foolish things with their lives or their money. Their lives may look boring. They may have a Subaru in their driveway instead of a BMW or Lexus. They may be sending their kids to public schools even though they can afford to send them to private schools. They may be buying clothes at Target instead of Nieman Marcus. They may live in a rambler rather than a McMansion. These are the sorts of people likely to live to see their golden years, and have plenty of money to enjoy those years.

If the pain of this economic downturn bites you, you do have my sympathy because I have been there a few times too. I was fortunate enough to learn my lesson early. While I am aware of the pain that recessions cause many people, I also know that recessions are a temporary phenomenon. Eventually conditions change, markets adapt to new realities and prosperity reemerges. While I cannot stop a recession, with some prudence and a little bit of luck I can not only ride recession’s wave, but also soar above the recovery’s crest when it happens.

So can you.

January 27th, 2008 at 02:42pm Posted by Mark | Advice | no comments

Is mutual interdependence the solution?

That is what I have been asking myself this evening. As often happens, I was getting dishpan hands this evening while listening to the radio. Tonight, C-SPAN Radio was featuring speakers at yesterday’s Republican Straw Poll in Ames, Iowa. I happened to tune into a speech given by candidate and former Arkansas Governor Mike Huckabee. He was winning kudos from the friendly crowd by speaking of the virtues of energy independence. He proposed a plan that within ten years would make our country energy independent. He also warned of an even bigger national security issue: food independence. A nation that cannot grow the crops to sustain itself could be blackmailed, he warned. He warned the crowd that we could not let this happen. He received warm rounds of applause for these points.

I too have made similar points in the past. When discussing illegal immigration, I pointed out the consequences to our nation if much of our agriculture disappeared because we could not find sufficient migrant labor to pick our crops. When discussing global warming, I pointed out that conservation and renewable fuels could help us become energy independent. Once we were energy independent, the consequences of another war in the Middle East would trouble us a lot less.

While I still think that both goals are laudable it occurred to me that there is a downside to all this independence. What we are really saying when we talk about energy or food independence is we want our nation to be completely self-reliant. If we can take care of ourselves, then, if necessary, we can seal our borders and live in relatively happy isolation from the world’s chaos.

In our interconnected world, we will never be isolated from the world’s problems again, if we ever were. It is still said that when Wall Street sneezes, the rest of the world catches a cold. This seems to be borne out by the turmoil the last few weeks in our risky sub-prime mortgage market. Now it is also true that when stock markets tank in South Korea or in China, Wall Street catches a cold. These effects of course simply reinforce my point that we are increasingly interdependent. There is no way to go back to our isolationist past. We need to accept this reality. That our economy is growing at all is largely a result of our interdependence. Imagine how you would feel as a shareholder of Microsoft if it could only sell inside the United States.

So what does this mean? It means, as I have suggested before, that nation-states are moving toward obsolescence. I see this in small ways in my own life. I earn a few bucks on the side installing software for clients. I have yet to meet any of my clients in person. There is one client twenty miles or so away, but even in his case, all of our interaction was accomplished through email. Most of my clients live in the United States, but I have had clients in Israel and Great Britain too. It is not hard to transact business. They send me money via PayPal. I do the work over the Internet. At least in my case I can state that the Internet has made such things that used to matter, like the country where someone lives, irrelevant. Their money may be in a different color when they go buy groceries, but it is green when it arrives in my PayPal account.

It looks like before we ingloriously leave our debacle in Iraq will cost us at least a trillion dollars. Why did we do it? President Bush was quite candid about his rationalization before we invaded: because he perceived a real threat from Iraq to our national security. We thought that given more time Iraq could create atomic weapons that it might lob at us. Apparently, that was unacceptable to the cost of about one trillion dollars and hundreds of thousands of lives. Our ability to remain an independent nation apparently trumps all other needs including the need for all nations to peacefully coexist.

Most economists tout the virtues of free trade. They see it as a cure to the world’s economic ailments. Free trade, they intone, raises all boats. If it is cheaper to import vegetables from Mexico because the labor is cheaper there, this is ultimately good. Consumers benefit. Our farmers may be a bit put out but overall both the United States and Mexico would benefit. Our agriculture would change to be more efficient, or we would develop new industries to replace it. However, what free trade also does is that it promotes our world’s mutual interdependence.

From listening to politicians running for office, I am left to conclude that the world’s mutual interdependence is a bad thing. Is it? Maybe what we really need is to encourage our interdependence. Maybe nation-states are entities that are on their way out. Maybe what the world needs is world federalism instead. If this is where we need to go, from a world of autonomous states, to a world of federated nation-states then we need more interdependence, not less.

My firm conviction is that these dynamics are already well underway. Those who adapt to this new reality, like Europe, are likelier to prosper. The longer that the United States of America deludes itself into thinking that we will always be completely sovereign the more painful and costly our adjustment will be. Arguably, the debacle in Iraq is a one trillion dollar consequence of our delusion.

Imagine a different world where this is no my country vs. your country competition except in sports. I am not naïve enough to think that such a world will happen overnight. However, I do think that since the process is already well underway, the longer we delude ourselves then the more painful our transition will be. We need to discard ourselves of foolish notions like we can provide entirely for our country’s needs. While energy independence may help us find cleaner means of generating energy to reduce global warming, its ultimate goal is to find ways for the world to also do this. For global warming, like much of what ails us, can only be solved globally.

The more we rely on other countries, and other countries rely upon us, the more natural incentive there is for all of us to get along together in peace and harmony. These ties truly bind us together as a planet. We need to listen to the message. China, Russia, North Korea, Iran, Pakistan, India and many other countries need to listen too. The European Union has already heard the message and is prospering.

We cannot solve our national problems by being independent in all things, or even in areas that we consider critical to our sovereignty. This is delusion. However, the world can solve its problems by engaging in them together. Economic interdependence is the means by which a newer and saner world order could emerge. It is likely to be messy, as are most things in human affairs, but it offers a hopeful vision, and seems more viable than our current tactics.

Imagine there’s no countries

It isn’t hard to do

Nothing to kill or die for

And no religion too

Imagine all the people

Living life in peace…

You may say I’m a dreamer

But I’m not the only one

I hope someday you’ll join us

And the world will be as one

- John Lennon, “Imagine”

August 12th, 2007 at 09:35pm Posted by Mark | Politics 2007 | no comments

Hug an illegal immigrant today!

Here is a basic truth about American history that you are unlikely to find revealed in our history books: our success as a country is due to immigration. Most likely, our country’s decline will start when immigrants decide to go elsewhere.

Immigrants have always been crucial to our country’s success. When we could not get enough immigrants, we captured slaves and brought them over here instead. Yet through much of our history, whether here legally or illegally, immigrants have been scorned. In truth, immigrants are the gasoline that fuels our economy. We say we do not want them in our country, at least the ones who are not here legally. Yet if they were to go, our standard of living would decline precipitously. Inflation would go through the roof. Immigrants make it possible for the rest of us to live the American Dream. My vaunted six-figure salary is directly due to the guy making $15,000 working for Goodwill who doesn’t seem to speak English and who hauls away the trash from my office everyday.

Thankfully, there is little chance that people will stop coming into our country, no matter how impressively we build our barriers. It does not matter how low on the totem pole immigrants will be when they get into this country. Invariably they will be better off than where they came from. Cleaning out toilets in airports may not be your idea of a great job. It is probably not their idea of a great job either, but it beats starvation, or regular dysentery drinking the polluted water back home, or raising an uneducated child in a tarpaper shack.

Thank goodness, we have people willing to clean toilets at any price. How long do you think your local airport would be able to stay in business if they had no one willing to do this disagreeable task? How many restaurants would be in business at all if all the illegal dishwashers and potato peelers in this country suddenly disappeared?

The argument I hear is that, “Well, if they all went tomorrow, businesses would have to raise salaries. Good Americans would fill those jobs. And what’s wrong with that?” As a liberal Democrat, I like the idea of our citizens making more money. I just hope it will actually improve their standard of living. I do suspect though that if there are 200 jobs needing to be filled and only 100 people willing to work for wages businesses can afford to pay, there are going to be some economic adjustments and they will not be for the better. Of course, businesses would do their best to cope. They would try to become more efficient and resourceful. At some point, we would end up with an effective unemployment rate of zero. Then the excrement would hit the fan. I am not sure which businesses would be the first to go under, but I bet people who are asked to do the most disagreeable jobs would be the first to bolt. Dishwashers would become very hot commodities. Those restaurants profitable enough to employ them at higher wages would thrive. Those which cannot, and restaurants tend to survive on tiny profit margins, would close shop. I can even see a new version of the draft, not to fight our wars overseas, but to make sure restaurants have enough people to serve meals, sweep floors and do the dishes.

Perhaps with higher wages more of us who are already employed would be willing to work a second job (if we are not already, trying to keep pace with the cost of living). At some point, that market would exhaust itself too. The likely result would be a phenomenon we remember from the 1970s: stagflation. Stagflation is rapid inflation during a period of recession. We would be lucky though if this were the worst of it. The short-term result would be that as unemployment up the food chain increased from the fallout, more and more people would be willing to work in these relatively low wage jobs. The effect though would be to push down standards of living for all of us. These jobs, while necessary, are simply not as productive as those that generally pay more money. Decreased productivity is one of the major drivers of stagflation.

A workforce of course is the fuel of any economy. We may think we can automate everything using computers, but even if that were possible, someone has to keep those computers going. Goods do not magically get from points A to B. It is our willingness to be employed, and in effect be the lubricant that keeps our complex society functioning, that makes our advanced society possible.

In effect, our economy, much like our social security system, is a great Ponzi scheme. Growth, as is always the case, comes from the bottom up. If we cannot convince lots of poor people to start at the bottom and engage in economic Darwinism to try to ascend the economic ladder, the system eventually collapses. I see signs of it already. My daughter, though she has never held a full time job and just recently graduated high school, refuses to work just anywhere. She has her standards. She has decided that she can work at a Barnes and Noble or a Vie de France, but not at a Bloom supermarket, nor at a McDonalds, nor at a Subway … in fact, her list of places she is not willing to work is much larger than her list of places she would work. Fortunately for her the labor market is pretty tight here in Fairfax County, Virginia so she has the luxury of being somewhat choosy.

Of course, she has to survive. If her choice were between starving and working at a McDonalds, I am sure she would choose working at McDonalds. However, why should she do what she considers demeaning work in a business that she does not like? For example, why work at a Wendy’s when she would likely be the only Caucasian woman working there and she cannot speak more than a dozen words of Spanish? Why get hot and sweaty trying to keep up with jangling timers continually going off on the French fries machines when she can work behind the counter in a nice, cool and air-conditioned Vie de France restaurant instead? Others, who came from a harder school of knocks, are supposed to work at Wendy’s. For them a Wendy’s job probably really is opportunity. She perceives it as a low-grade horror.

Arguably, if all the Wendy’s in America went out of business we would probably be a lot healthier. Still, Wendy’s alone pumps a huge amount of money into the economy. The parent company Wendy’s International had sales of $2.45 billion dollars in 2006, owned 12.7% of the burger market and employed 57,000 people. If it closed because it could not profitably stay in business, more than 57,000 people would be affected. Its suppliers would be laying off people. Cattle ranchers would reduce herds. Grain prices would fall. Perhaps other businesses would pick up its market. However, if we did not have enough people willing to work at the bottom of the labor scale the effect on the labor market would quickly spread across the economy, likely causing a chain reaction.

If there were no more immigrants I would end up mowing my lawn again, which might not be a bad thing either. It would cost me more to get my roof replaced, if I could find anyone willing to do it at all. Either my six-figure income would feel a lot more like a five figure income, or I would be a lot busier incompetently trying to do the things I pay people to do for me. I would have to hope that I would die in my bed. It is unlikely I could afford a nursing home at any price. It would be a luxury only for the richest among us. Perhaps the poor house would make a comeback.

While I do not particularly like the idea of immigrants streaming across our borders illegally, I also understand why it has been in our economic interest to look the other way for so long. That our standard of living is rising at all is largely due to our glorious cognitive dissonance on this issue. If we could actually fully enforce our immigration laws then within a year we would be protesting en-masse on the Mall in Washington demanding the immediate repeal of these laws. The last thing we will give up is our slice of the American dream. Immigrants serve us that slice.

The good news is the immigrants who come to our country choose to come here, often at the cost of enormous peril. They understand the tradeoff. They will do our scut work for us, gambling that in time given their perseverance, luck and circumstance they will be in our shoes someday. They might aspire to be Bill Gates, but even if they only get up half the ladder, they are better off than they were. So are the rest of us.

Therefore, instead of railing against immigrants and protesting at local day laborer sites, as some want to do here in Herndon, Virginia, perhaps, if you speak their language, you should be thanking them for coming instead.

August 8th, 2007 at 10:14pm Posted by Mark | Politics 2007 | one comment

Squeezed

For me the last day of the year is a day to take stock of my financial universe. If I wasn’t feeling the pain of most middle income Americans before, after I got through looking at the details of my family’s personal situation I do now. Our upper middle class family is being squeezed too. I feel fortunate that so far, while we have coped rather well. Yet we are being squeezed nonetheless. So are you. Now I have all the proof I need: my income vs. expenses reports churned out by my Quicken financial software.

2005 is the first year since the 1980s that my family has had less income than the previous year. This is due entirely to my wife losing her IT Help Desk job a year ago. She did not find another job in her field until a couple months ago. Where she used to work full time, she is now working part time. She now makes a fraction of her former wages and at least one third less per hour than her old job. In her last job, she had a 401-K and access to health insurance. In her new job, being a part timer, she has neither.

The good news is that she is really enjoying the job. The bad news is that with substantially less income than we had in 2004, we are not living quite as we used to. Granted, we are not eating dog food, but the fact that this is happening at all to my family when we have known nearly twenty years of steady income growth is disquieting.

In 2004 when we were flush, we spent over $6K so my wife could get elective surgery. In 2005, this is totally out of the question. In addition to elective surgery, we have cut back on other medical expenses. We are not getting the level of mental health care we got in 2004. Our insurance is reasonably generous with mental health benefits, and allows up to 26 sessions per year with co-pay. In 2005, these benefits were exhausted by July. We could have paid $150 a visit out of pocket for the rest of the year, but that is $3900. Ouch. In 2006, we will hope that our mental health benefits stay the same. Unless my wife makes a lot more money, although members may need weekly visits it will mean biweekly visits.

I bet that most of you are going through similar experiences. The Bush Administration talks about how wonderful the economy is. Consumer confidence, having tanked earlier in the year, is now rising again. I do not give too much credence to those numbers. I know that in the real America of 2005 things are different. If your family’s fortunes increased during 2005, consider yourself lucky: you are bucking a general trend. I hope your luck continues. My experience and the experience of many others of us suggest you are likely living on borrowed time. Most of the rest of us downsizing our lives. In my case, the downsizing is so far relatively modest, but it is still a bit scary. If my family’s downsizing continues for a few more years, our choices will get increasingly troubling.

Here is the reality for this upper middle class household. Things cost much more than are stated in the inflation numbers. Even though I am fortunate enough to have an existing locked in mortgage, my property taxes are rising. Ours are up about $500 from last year. This means that my monthly mortgage payments are also going up. Other big-ticket items going up: health insurance is up $400 compared to 2004. Copays for medicines: up $300. These three items alone add up to $1200 more money I had to pay in 2005, and with markedly less income. I do not track gasoline as a separate expense, but if I did, I am sure it would amount to at least a couple hundred dollars more a year.

Then there are the nickel and dime things that when totaled amount to real money: cable TV, auto insurance, homeowner’s insurance, association fees and electricity. Except for the cable TV, none of these are services that we can really do without. To compensate we have cut cash expenditures, charitable giving, dining out, entertainment, food (we are eating plainer), and gifts (nearly in half).

When we can, we are also deferring big expenses. We are less likely to engage in project like replacing the roof. Fortunately, before my wife lost her job we had finished all the costly home repair projects. My priorities are to keep a roof over our heads, put as much money as I possibly can into retirement accounts and keep contributing to my daughter’s college education fund. On the latter by May with virtually no income coming in from my wife, we cut our contributions to our daughter’s college fund from $400 to $200 a month. You can only pinch a nickel so far when you are living on one income.

Speaking of investments, I am really disappointed by how mine are doing. I bet you are too. Mine are nothing fancy: mutual funds that tend to track indexes. My USAA Income fund, which I purchased for low risk and started buying in 2002, has had essentially flat performance. Now it is worth about $120 less than what I paid for it. I am losing money on it, although the amount is small compared to the total investment. My USAA S&P 500 fund, which went gangbusters when Clinton was in office and the tech boom was hot, followed the very flat stock market since Bush took office. My total gain is 9.2% or about 1% a year, much of it realized before Bush took office!

These funds are set aside for our daughter’s education. I followed what I thought was sound financial advice at the time. Over seven years I expected some return on my investment that exceeded inflation. However, our non-indexed fund did much worse. Our USAA Growth Fund has lost 26% of its value since we began purchasing shares in 1996.

What a fool I was. I was taking mainstream actions, just like you I bet, and we still got screwed. I feel that we have been taken to the cleaners by the Bush Administration. No wonder Bush’s attempts to privatize Social Security fell flat with the public. Americans simply had to look at their portfolios and realize, “We sure don’t need more of this!” Bush may be good for his big business cronies, but he is not good for the average investor who will need the money they are so diligently and painfully saving. Business taxes and capital gains may have been cut, but it has not resulting in any more wealth for me because I am not realizing any gains! The only good thing about selling a fund is that since I am losing money on it, I can take it as a deduction on my tax returns.

So just how is Bush really good for business? The reality is that stock prices have been flat. If a company has profits, they are more likely to use it to buy back their own stock instead of passing the profits on to shareholders. As The Washington Post reported this week, it is not translating into increased share prices, as it has in the past. It does however give the company more clout over its own future, and shareholders less.

I am no longer fooled. Don’t you be fooled any longer either. The Bush Administration and our Republican Congress have proven over five years that they are bad for your bottom line. Just run your family’s financial numbers as I did. I bet you see a similar trend. Bush and his Republican cohorts in Congress are systematically and very deliberately stealing wealth from all but the richest of us. If they continue with their reckless foolishness, we will be back to a society of rich and poor, with no one in the middle. As long as this crew remains in charge, you can expect the trend to exacerbate.

With the New Year comes mid term elections in November. If you are planning to vote your economic interests, you would do well to send as many of Republicans as possible in Congress packing.

December 31st, 2005 at 06:28pm Posted by Mark | Politics 2005 | no comments

The chickens have come home to roost, at last

Occam’s Razor likes to peer into the future. Sometimes I get it right, and sometimes I get it wrong. Overall though my ability to prognosticate is good. After all not many like me were predicting prior to our war in Iraq that it would turn into the insurgency that it did.

My timing can be off though. Perhaps I see trends too early. Clearly, after reelecting Bush a year ago Americans are now having buyer’s remorse. Had the election been held even a month later the presidency might well have flipped. However, shortly after last year’s election, I pointed out that Bush had set in motion events that could not be stopped. His comeuppance could not be forever postponed.

Events in 2005 have cascaded into a crescendo of bad news not just for Bush, but also for Republican rule. Bush’s approval ratings have tumbled even further, averaging recently at around 37%. While we will have to wait a year to find out the damage done to the Republican’s hold on Congress, we might get a hint from scattered elections this month that another political earthquake is coming.

One sign that should be very worrisome to Republicans is that Tim Kaine (a Democrat) won the governorship here in reliably red state of Virginia. It took a lot for Democrat Mark Warner to win the governorship in state four years ago. To win he had to convince Virginia voters that he was both a good ol’ boy and was not a liberal.

As governor Warner defied conventional logic and proved that even in a red state voters will support pragmatic taxes increases. Working with minority Democrats in the state assembly and a handful of moderate Republicans he was able to pass a modest half-cent increase in the state sales tax. As a result serious money started flowing into urgently needed transportation projects. In addition Virginia schools were able to receive desperately needed additional aid to keep up with growing population and testing demands. His pragmatic approach found wide support across the state. Arguably Tim Kaine, the former Lieutenant Governor, rode on Warner’s coattails. He won the gubernatorial election by more than five percent against his Republican opponent, Jerry Kilgore. More astonishingly, solidly reliably counties like nearby Loudoun County voted solidly for Kaine. Kilgore’s antitax message rang hollow and seemed shrill. Virginians are returning toward embracing pragmatic government again. Apparently good schools and roads are more important than paying a half a cent more in sales taxes.

Kilgore found that being a Republican was no longer much of a selling card, even in Virginia. He avoided President Bush, who wanted to campaign with him in the state, until the very end. His one campaign appearance with Bush shortly before the election seemed to seal his defeat. Yes, even here in the reliably red state of Virginia, more people disapprove of Bush than approve of him. The result of these elections suggests Bush is now toxic. In addition Republicans are being viewed by voters with jaundiced eyes. Apparently even Republicans can interpret poll number and are sobering up. They realize they may be out of office next year if things don’t change. Consequently we are witnessing serious fractures of the Republican machine in Washington. Despite all the odds, the budget cuts proposed by fiscal conservatives, which targeted the poor by cuts to Medicare and Medicaid, could not win over moderate Republicans. The bill could not even pass by removing the requirement for oil drilling in the Arctic National Wildlife Refuge. This is an amazing denouement for a party that just a couple months ago believed it could ram through congress pretty much anything its leadership wanted.

I do not need to spend much time restating Bush’s problems because most of you keep up on current events. Bush has been carpet bombed since his reelection. From the deepening quagmire in Iraq (for which we have no realistic exit strategy), to his surreal and deadly mishandling of Hurricane Katrina and its aftermath, to skyrocketing gas prices, to fumbled Supreme Court nominations, to indictment against Vice President Cheney’s chief of staff, I. Lewis “Scotter” Libby, Bush is more than wounded. He has had limbs blown off.

Americans are in a surly mood. The economy is doing okay, but the benefits are not trickling down to them. For the average American, expenses keep exceeding income. The new expenses are costs we can do little to trim back. As a result the middle class continues to shrink. Many, like my wife who managed to find a new job recently, will work for much less than they made in their last job. While many find their income is down, necessary expenses like health care, gasoline and home heating oil keep skyrocketing. We wonder how much longer the American Dream will be available. And we wonder why we are allowing the dream to slip away. Why did we elect people who did not serve our interests, but instead slavishly served only the interests of those that funded their campaigns? This anxiety is reflected in rather disturbing consumer confidence statistics.

The voters are sobering up. Over the last five years our country has been raped and pillaged by Republicans. What we are witnessing is the intense anger, and even hatred, of those who were disenfranchised. We no longer have a government that even makes a pretense about serving the common good. It serves those who support Bush and the Republican Party and gleefully shafts the rest. Both the president and the Congress are drunk on power. More tax cuts for the rich in a time of soaring budget deficits? Until recently, this was not a problem. Weaken air pollution laws as a response to hurricane relief? Sure, why not? Cry over Terri Schiavo’s brain dead body, but let senior citizens drown to death in New Orleans’ nursing home? Not a problem either. After all, they couldn’t vote and beside they were not one of their kind.

I do not think this situation will improve. I think it will continue to get worse. I hear people say that at 37% approval ratings, Bush has reached his floor. I don’t think so. I think it will go even lower in the months ahead. Bush is now in the rapids and he is losing control of the ship of state. The time is ripe for a change in congressional power, and we should see it in the 2006 elections. It remains to be seen though whether Democrats are savvy enough to fully capitalize on the moment. As I suggested Democrats need a new Contract with America. It is painfully clear at this point what one party Republican rule has delivered misery for the average American. A clear vision for the future should turn the House of Representatives back to its traditional Democratic Majority. With only a third of the seats up for grabs in the Senate in 2006, it is less likely that Democrats can take that chamber too, but it is not outside the bounds of possibility. Bereft of the public trust, Americans have little choice but to embrace an alterative or to suffer through even more disastrous mismanagement of their government.

A stiff wind of pragmatism is beginning to sweep across America again. It will be good to feel it again. It has been sorely missed.

November 14th, 2005 at 09:03pm Posted by Mark | Politics 2005 | no comments