"The most significant threat to our national security is our debt," Admiral Michael Mullen, Chairman, Joint Chiefs of Staff, August 27,2010


Friday, August 13, 2010

"America has created a monster"

Today’s title is a quotation from a recent article in the Financial Times addressing the situation that the Federal Reserve has created. Read the entire article at http://www.ft.com/cms/s/3/3035a2c6-a488-11df-abf7-00144feabdc0.html

This specific quote has to do with the support of the US residential mortgage market which, at best, is quite the gamble. The real gamble is much bigger than just the residential mortgage market. The big gamble, the real monster, is based on the misconceived steps that the fiscal part of government is engaged in; namely, massive deficit spending designed to support a systemically weakened economic growth machine without addressing the serious systemic impairments and burdens that have been placed on this machine over the past 30 years.

TheFundamentals is now completing its second full year of citing facts and figures to support a valid economic analysis of America’s decline vis a vis its developed and developing world competitors.

Our exports are declining compared with our competitors. Our exports per capita place us in the bottom of the top ten exporters. That is a simple fact. We are no longer a leader in exports and we must be if we wish a strong currency and we wish to pay for our massive appetite for imports.

A major burden in our economy is health care costs. Our per capita costs are double, and in some cases triple, that of our major competitors. We, at TheFundamentals, at our road shows and meeting presentations have been asked why this is so. We pay double and triple for the same results; the same outcome; the same consequences as measured by life expectancy as do our major competitor developed nations. Why is that? The components we’ve suggested are: too much litigation; too much lawyering; too much defensive medicine to avoid litigation and lawyering but there are many other possible components including a non competitive environment for the production and maintenance of doctors and nurses; the protection of a pharmaceutical industry that shuns competition and reasonable patent protection expiration and a disproportionate expenditure of resources on aged people at the end of their life spans. Further there is just too much waste on unions; on not for profit activities that are not productive and too much publically funded research with no objective measurement.

We, at TheFundamentals have also pointed out that the US has a much higher level of attorneys per capita than our major developed trading partners. We also lack the basic disciplines that other advanced countries impose on lawyers and litigation. Specifically we do not employ loser pays rules in litigation and we do not employ reasonable limits on non economic damages. These are reasonable limits that others routinely employ. This lack of discipline is a systemic problem.

Perhaps more than any other reason though is the burden on our economy of too many citizens not working in wealth creating jobs. Our labor department indicates a labor force of approximately 155 million Americans out of a total of 310 million. We know that 15 million of the 155 million are unemployed and we know that about 13 million of the 155 million are underemployed. We also know that about 22 million of the 155 million work for local, state and federal governments meaning they are not in wealth creating jobs. If you subtract these three segments you realize that 50 million of the labor force are not working; not working full time or are in wealth consuming job. That leaves about 105 million in wealth creating jobs to support the full population of 310 million. Now that is quite a burden.

Last, we must address the issue of business climate. Business climate is composed of many factors. Here are some:

• Labor costs
• Union issues
• Litigation issues
• Benefit and retirement costs
• Bureaucratic rules and regulations
• Taxation policies - local, state and federal
• Employee relation issues – training, absenteeism, turnover

If you want to know where business stands on the business climate issues listen to a business man; not a politician. What you hear will either astound you or depress you or both.

In closing this essay, TheFundamentals would like you to consider this simple fact. Over the last twenty years, the Federal Reserve oversaw, promoted and enabled the financing of the largest inflation bubble ever recorded in real estate valuations. It spiked the punch bowl constantly and ignored the patently obvious warning signs and then the danger signs. It was complicit with a congress and political leadership that ignored fundamental basic concepts and values of fiscal and personal responsibility.

We are witnessing the encore presentation of this irresponsible and promiscuous behavior. It is now cloaked in the Keynesian concepts of stimulus spending and job creation. Only temporary, fleeting benefits are being enjoyed for the simple avoidance of facing a period of rationalization and resource reallocation in the planned portion of the economy, or the government/public sector. We can pretend that this approach will work; it will not. We can pretend that we can avoid adjustment and sacrifice and frugality; we cannot. We can avoid the burdens we have placed on wealth creation and competition and hope they will be overcome; they will not.

This is the monster referred to in the above article. This is America’s Frankenstein.

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