34 – week 2

I’ve struggled for several days to write this.  I read and watch the bits of news and cometary that stream past me throughout the day (thanks Twitter!), and while it makes me ever more uneasy while I’m awake, I’m afraid it’s affecting my ability to rest as well.   For me, the discomfort is fueled in part by my own recent self-discovery of thoughts on free market economics, limited government and sound money.  But, to be fair, I’ve spent a great deal of time trying to remove those filters to the best of my ability and think about these trying times as objectively as possible.  I know full well that ideologies can’t be completely removed, but I think I’m finally at a point to think out loud – if you will – about the matter.  The final piece I needed to solidify those thoughts was the angle provided by our 44th President.  In this AP blurb, Mr. Obama joked that “By the way, these days everybody thinks they’re economists”.  With that, I had the frame work in which to pen the following:

Mr. President,
In the last couple of days, I’ve read some reports that relayed your sentiments about the breadth of people expounding economic opinions and advice.  I’ll be the first to say that I would not willingly take on the job that you have – even in “good” times.  For that, you do have my respect.  I will also never fault anyone for trying to solve this country’s problems.  I feel a duty, however, to myself, to be able to reason through these complicated matters in the most open and informed manner that I can.  I have painstakingly tried to do so with study and logical analysis – foregoing to the best of my ability the fiery influence of political ideology and the emotions it carries.  With the aforementioned “bemoaning” on your part, I found the catalyst by which I could constructively lay out that which I had deduced.  As of this writing, an agreed spending package has been finalized for delivery back to both Houses for a vote.  While I know that my sole opinion wouldn’t influence you are anyone else in the decision process – even if legislation had not yet progressed beyond this tipping point – it is my sincere hope that the mere penning of these thoughts provides me some rest by knowing I’m at least confident in where I have arrived and the means by which I got there.

I am not an Economist.
I posses no formal training in the science that has gripped so much of the dialogue in America these days.  I only know what I do through self study and reflection.  In fact, I would go as far to say that I’m just an average guy – a husband and father that deeply hopes he is able to not only continue to provide a pleasant life for his family, but be able to make the most of this tough situation for them in the long run.  So, while I’m not versed in the nuances of this country’s macro economic workings, if I shrink them down, metaphorically, to the simplest unit – my own household – I seem to find simple and logical contrasts to the actions of you and your predecessors (some of the approaches I wish to comment on go as far back to Roosevelt).  It is in the light of this basic economic unit that I will elaborate some of those ideas for the remainder of this discussion.

I am not a World Trade Expert
I have not spent significant time watching the flow of dollars in and out of the United States by means of good bought from and sold to our various global partners.  I have, however, heard, for as long as my own cognitive abilities have allowed me to absorb and process effectively, that America is in an increasing cycle of imports vastly overpowering exports.  At first glance, this had no real effect on me since it seemed to be a matter of commerce – goods were still being bought and sold.  “What’s the real problem with this”, I wondered?  It was only when I began to think about the accompanying flow of dollars to these activities that I began to realize the full impact.  If I shrink the macro of the U.S. economy down to that of the basic household, and envision it in a neighborhood where inhabitants’ sole income is derived from exporting a product (or service – although I’ll dig into the danger of this commercial item later), I see some significant challenges.  If my “income” was solely based on that which I was able to provide to my neighbors and all that I consumed was purchased from those same people, I quickly see myself getting into trouble of the flow of money from those transactions was not at least in equilibrium.  Granted, it could be argued that if my household could produce all the goods it needed to exist, I could eliminate the outflow of cash, and, in the event of surplus, possibly even be able to grow my own mini economy through sales of said excess.  The reality, however, is that if I ever had experienced a period where I was forced to consume more external goods than I sold, I would have dug a hole that could only be filled by swinging the pendulum the other way, and in the interim, the deficit would have to be managed through indebtedness.  When I overlay this concept back on the totality of the American economy, it’s quickly obvious that the country is effectively bleeding dollars out – not just because we lack sufficient goods and services produced here for our own consumption, but more importantly, have no useful amount of them to sell to other countries in order to cover the money we spend to buy goods from those nations.  This would logically imply that we are collectively forced to fill this gap through credit and pile upon ourselves the burden of increasing debt until we can reverse the flow of traded goods.  Effectively, this means the U.S. economy must be charging this difference on our national “credit card” in order to pay the bills this imbalance will bring to our “house”.  This activity would not work indefinitely in the confines   home, so i fail to see how it would on the whole of America’s financial picture either.  The actions for stimulus by both the previous administration and your own do not seem ready to encourage business to correct this by relieving our dependence on cheap goods from foreign producers, but more importantly they lack emphasis in facilitating in that needed increase in production flowing in the opposite direction.   Instead, the rhetoric seems to be focused on getting America to spend and borrow – not save and produce.

I am not an expert on GDP
In truth, it has only been in recent months that I have tried to familiarize myself with concept of our Gross Domestic Product beyond the cursory understanding of it as a basic term in the vocabulary of commerce.  It is in that research, however, that I have found the pattern of economic rhetoric touting our shift from manufacturing to service based over the last few decades.  While there is nothing inherently wrong with this on the outside, it would seem that we need to be more critical of “services” and judge their merit on the ability for us to export them if we are truly replacing physical goods as a fundamental component of our overall economy.  Again, if I shrink these concepts down to the simplest form of my house in the neighborhood market place, it seems logical that in lieu of selling a specific item to my neighbors, I could fulfill some need for them like lawn maintenance and such.  This only benefits, my household, though if I provide my services externally at a rate equal to or greater than what I spend to buy my neighbors goods.  If I view each member of my house like individual businesses in the macro U.S economy, I could build a system where each member of the family is responsible for their own income generation and good purchase.  If we assume that each person chooses to provide a service, then all is well and good unless my expectation is that we would provide those amongst ourselves within the household.  This still would not address the imbalance in the flow of dollars as I discussed above if we were not collectively providing them to the other homes we are purchasing goods from.  Observation tells me that the heavy reliance on retail sales in our current economy points out that we may not be fully aware of this pressing issue.  While these activities do facilitate the transfer of goods to individuals, it is essentially proving a service (specifically the ability to buy a good), the majority of these transactions keep the flow of dollars trapped inside our U.S “house” (since we import the majority of what we consume) and don’t do much to offset the current account deficit we explored in the previous section.  There are some “services” that we can consider in the same light of exports because although they don’t represent widgets that can be boxed and shipped, if they bring dollars in from foreign consumers, then they are just as effective as something manufactured.  I‘ve even read some compelling arguments on the actul GDP calculation being flawed since it is so dependent counting these spent dollars as productive forces in our overall well being.  The danger I see in all this seems to be lost, however, as I mentioned our focus for reinvigorating the economy is to facilitate more borrowing and spending – and assuming that spending is something that would be at best internal to confines of our U.S economy. In fact, the highly debated “Buy American” provisions in this spending package seem to be an additional barrier to rectifying the current accounts.  The intent is logical – it would encourage manufacturing of U.S. goods (and, as some argue, help ease the discomfort on how all these taxpayer dollars would be spent).  While admirable in spirit, the strain the put on relations with the producing countries we are dependent on today would, from my view, possibly open the door for punative pricing on those imported goods and erect barriers to the likelihood that those nations would want to reciprocate the purchase of the fruits of our labor.  In total fairness, I know that you have expressed concern over these same measures and the potential for the very impact I just mentioned (and are acknowledged as doing so in the article I just quoted for context), but since you are the one pushing hard for the bill in it’s entirety, it is essentially viewed as YOUR spending package and since you will either accept for reject it as a whole, this concern has bearing if these measures are not eliminated by Congress.  I would never argue against any effort to get our country producing large quantities of goods again, but it seems to me that a “Sell American” provision to encourage exports of that increased manufacturing would be much better served.

I have never worked for the Federal Reserve
I have no experience with controlling the money supply.  I’ve worked hard, as of late, to try and familiarize myself with its history, structure and function, though.  The more I learn, the more I get concerned about a private company controlling our currency while functioning under no requirement to divulge it’s investors or report any specific activity it takes with other central banks to Congress.  Now, to me, this seems a failure of the Federal Government who could, at any time, legislate restrictions and audits of this institution.  Instead, I see a disturbing trend of blaming the markets and looking to regulate “private” banks while ignoring any attempt to control the central institution that has more influnce on behavior by its ownership of interest rates.  Many have argued the Fed has recklessly reduced the risks associated with mal-investment.  There is no doubt that some of our problems today stem from greed.  Whether it was on the part of individuals, mortgage industry insiders or the large banks and investment houses in the chain, the inexpensive money seems to have reduced the perceived affect of bad decisions and in fact encouraged poor (and in some cases, possibly illegal) activities.  Now I do believe that anyone who broke our contract or fraud laws should be prosecuted, but I’m concerned that there isn’t a concerted effort to back up and look at why the central bank was doing everything it could to influence more borrowing.  Housing was a bubble.  In my own rudimentary understanding I can see that.  The period following the dot com bubble bursting was ripe with building, borrowing, flipping and rapidly inflating housing prices by the fact that just about any individual could borrow and agencies (some government backed like Fannie and Freddie) were doing everything in their power to buy up these loans, convert them into various derivatives and allow the front-line banks to lend even more.  Some of what I have read in my studies says that the Federal Reserve was designed to expand the money supply in times of economic boom.  It has most definitely been doing this, but one has to question if it was doing too much.  Those same commentaries also say that it “should”, by design, contract that money supply during periods of economic shrink.   Looking back over the last few decades, in fact, it appears that anytime natural down turns occurred – as they should following periods of boom – the Fed actually increased the money supply in an attempt to avoid these contractions.  In my household analogy, the comparison is a bit tricky, but if I did have the ability to control the amount of money available to my family members, I would suspect that a consistent practice of increasing that supply would, at a minimum, reduce the value their money had when using it in trade amongst themselves or others in my economic “neighborhood”.  It’s very much like America was cleaning up the “mess” of natural down cycles in the markets by just stuffing everything in the coat closet.  Just like doing this in the physical world, the activity can only go on for so long.  Eventually, the door would give out and one would be forced to deal with a deluge of problems put off irresponsibly.  I’m starting to become afraid that we have already reached that point economically.  Sadly, with some of the Fed’s rates effectively at zero, this trend does not seem to be changing.

I did not create the concept of the American Dream
As far as I know, along with life and liberty, we are guaranteed the PURSUIT of happiness – not the attainment.  The aforementioned push that everyone should own their own home seems to be just that.  What’s worse, though, is that we now deem institutions “too big to fail” and the government seems determined to guarantee that no one person should experience hardship or failure.   Now, I’m astute enough to know that there are plenty of good, hard working, Americans who are finding themselves in hard times for no fault of their own.  I also know that depending on how bad the economy gets, any job – including my own – could one day end up gone.  The issue I have, however, is this is a risk I take living in a free market society.  Companies that make bad decisions should fail and their assets (and employees) can be put to more productive use by those that follow more successful practices.   Likewise, I take it as my own responsibility to make sure that my total personal financial picture is one that should be structured such that, regardless of what my income is, I have the means to weather any period where said revenue stream is reduced or eliminated.  It that light of self responsibility, I’m forced to consider the risk of any major purchase – expensive consumer goods, a car, a home etc – and it’s impact on the ability to ride out those hard times.   At no point would I assume that my success is guaranteed and it’s the government’s responsibility to swoop in and save me in times of crisis.  To do so at an individual or corporate level means they would be taking from productive segments of the economy to supplement bad decisions in other areas.  While the current focus on getting Americans jobs is admirable, the heavy focus in infrastructure, education and health care mean that those jobs, for the most part, won’t contribute to producing goods that could be exported and begin to offset the account defficit debt that is putting so much strain on our total economic picture.  In my household economy, I could most definitely give each member of the family “work” and pay and allowence of sorts for both, but if the collective is still spending more on our neighbors’ goods then we are making, and those new “jobs” don’t influence this. I’d still be in the tough spot of having to borrow to balance things out.  In this light, it seems like efforts to cut tax burdens on companies and individuals, so they are able to employ and invest capital in endeavors that produce needed goods that can influence the overall inequality in trade, are better served.  In that same breath, however, a government can’t give tax breaks and not cut spending.  Both your party and your oppenents’ discuss reduced taxation to various segments of our economy, but if the government as a whole is still spending more than it is taking in, these tax credits end up increasing the economic pressures and not relieving them.  As just stated, Congress and the President have no means to create jobs or revenue stream of their own – they must take from productive commerce and the citizenry.  Deficit spending would seem to only add increase burden on top of the country’s current account debt.  If the difference is borrowed, then that weight is measurable in dollars owed, but if it’s printed through the activities of the Federal Reserve then an even heavier cross to bear would fall on Americans through inflationary effects on prices and reduced purchasing power of the dollars remaining after the government has taken their share.  This, to me, also looks like a tax.  So while there may be relief on the front side through tax cuts, the net effect is the same as the money left in the pockets of citizens buys them less.  Again, from my limited experience, those cuts are a fabulous idea, but spending – especially the significant amount that attempts to guarantee the American Dream or the “protection” of American interests abroad – must be cut in conjunction or the end game is no different.

I am not a financial advisor
I have not been educated or certified in the arena of personal finance, but I have read in great detail the thoughts of many of the prominent ones in America today.  Once common theme they all seem to point out is debt is a burden.  They all agree that in certain instances it can be put to productive use, but in America today the tendency is to use it to consume now instead of saving to do so later.  Along with purchasing goods in a responsible manner, saved capital could also be used for investment in the growth of industry.  Through personal experience, I find that the artificially low interest rates discussed above and unfavorable tax laws regarding capital gains do not encourage either behavior.  It’s as though the whole system all but insits I spend all (or more) than I have right now.   This has to be a contributing factor the heavy reliance on debt as a way of capital infusion for businesses too.  When the heightened economic troubles started last fall, this was one of the main things we were told – “we have to get the credit markets flowing again”.  Now, if the system really encouraged individuals to save and invest would they be as reliant on borrowing for things like automobiles and college as we have been regularly reminded they do today?  Also, in such an environment, would businesses not have access to true capital for short term coverage of payroll or expansion as we were also repeatedly told were problems in the “frozen: credit markets?  I would think so.  The other big problem I have with the influence our current system has on personal finance is the myth of home equity being a key element of one’s net worth.  I’m finding more and more logical discussion around the idea that this is flawed thinking because that value is both trapped (unless completely paid off) and, in the case of today’s world, not always guaranteed to increase because of asset appreciation.  The later is especially relevant now since, as I mentioned earlier, there has been extended, and in many areas, over inflation of housing prices.  Since the myth that the only way to achieve financial success is to own a home, and the system is doing all it can to provide inexpensive money to by them at artificially high prices, I can see that there is a fair percentage of the U.S. population that will be effected tremendously by a reduction in housing value.  Effectively price fixing them by buying “toxic” assets doesn’t seem to me to be a good course.  In fact, one would think that allowing them to stabilize at a more accurate – even if it’s lower – level would open the door for those of sound credit to buy homes in a manner that more appropriately matches their means.  I bought both of the homes I’ve owned in my life with a full understanding of the inherent risks.  Had I been in a situation where prices or other factors outweighed the benefit of ownership, I would have not made those decisions.  I don’t see how the government can ethically work so hard to fix prices for the benefit of those who were not as diligent – especially at the expense of those who have saved, grown capital through investment and lived within a system unfavorable to both in order to be in proper position to purchase homes at their true value.

I could continue on many topics
By no means is this a complete list of the things I see connected to all of these problems and how I have come to feel about them, Mr. President.  I think, though, that enough of them have been thought through here to bring me peace in my decision and comfort in the fact that while my own ideologies influenced my thoughts, there is enough rational data to support my personal opposition to the current course of action.   For example, we haven’t spend much time on facts like the “economic recovery” bill that is meant to “stimulate” things includes items like money for wetlands restoration and numerous other items that don’t seem to have anything to do with creating jobs or the other things we are repeatedly told must be done to solve our woes.  Some of these may be admirable and useful endeavours, and if so, let’s debate their merits and react with appropriate legislation.  Let’s not confuse the issue by lumping them in with the efforts we are being sold on – job creation and economic recovery.  Program specific spending like this make the whole package much more of a spending bill than any sort of “stimulus”.  It’s all government spending in the end, though, and as I’ve pointed out repeatedly here, if we are in trouble because of excessive credit and spending, logic would lead one to expect that more of both of those is not likely to change things.  Again, sir, I am not an economist, but these folks are, and hundreds of them appear to be lining up to point out that the direction we are headed is only accelerating the issues and not correcting course.  This doesn’t seem to match the united front being relayed to us by yourself and others in government.

And please, Mr. President, do not think that I come at this from a purely partisan perspectiveve.  This is not a Democrat failure alone.  The GOP is just as involved.  Nor is it solely on your, or you predecessor’s shoulders.  I think it’s a trivialization to point just to Mr. Bush on the creation of these problems.  Most definitely, his administration exacerbated the issue with reckless spending – a trend your own seems more than ready to continue – but the concept of central planning of the economy and other matters goes back to the likes of Hoover and Roosevelt.  Our attempts to correct the depression only prolonged it and set in motion an ever increasing trend for the Federal Government to insert itself into more and more of individual citizens’ lives.  As one man knows all too well, and he shared on the international stage, trying to central plan everything and being quick to blame free markets as the root of the problem could prove extremely detrimental to the health of the nation and it’s system of government.

So, one last time, sir, I am not an economist.  We seem, however, to have been putting all our eggs in the basket of the theories of a specific one for some time.  From a layman’s perspective, it hasn’t seemed to work, and yet we are poised to do it all over again.  Maybe now is a good time to try listening to someone different (or this perspectiveve, or perhaps this one)  Yes, there is a lot of ideological influence in those suggestions, but if something hasn’t been working, it would seem that exploring the opposite course might be a good place to start.  That’s not a political statement – it’s basic problem solving.

Thank you again, for your willingness to serve our country.  As I said earlier, it’s a job that I would never want to take on myself.  Ultimately, the decision will be up to Congress and yourself.  I just pray that as the pressure builds to rush this bill through the system without much review by law makers or the public, please be very thoughtful in what you are about to do.  As a father, I know the repercussions of any decision made now could have insurmountable impact on my children and future generations.

Respectfully,
a citizen – not an economist

Tags: economy, stimulus