The President’s Plan
In the State of the Union speech last evening, the president said many things. He offered a real plethora, yes a plethora, of programs, benefits, stimulus, taxes, and other things that he believes will improve the lot of Americans–at least some Americans. Many were struck thoughout his speech by the breadth and depth of the things the president wants to spend money on. He offered programs for immigrants, college students, environmentalists, women, minorities, the elderly, the sick, the middle class, teachers, the unions, the poor, the underserved, the military and just about every constituent he could think of, with the exception of two main classes: evil corporations and evil rich people. While not offering a “chicken in every pot” he offered just about everything else to someone or something.
While there were many incongruities in this speech relative to our current economy, at one point President Obama said he wanted to attract private capital. And this is perhaps one of the best areas to discuss relative to this plan and its promise of prosperity for most, but not all Americans. The president was clear, he said he wanted to attract private capital to invest in America. The president, throughout his speech spoke of America and its need to grow manufacturing and our economy. He spoke at one point like an entrepreneur on “Shark Tank” pitching America: The Business. But, few, if any, investors would invest in a business where costs are many multiples of the norm for production in other businesses and where the amount of debt, cumulative interest and liabilities far outweigh the businesses’ ability to pay the investments back.
The problem with all the items he presented in his speech lies not in the heart of President Obama. Clearly, his heart is the ruling body of his being. He desperately wants to “give” certain American’s equality. But he does not equate this “giving,” under his concept of redistribution to the effect of his plan’s “taking” from others. His view of the American dream seems to be different than that of the view of at least half of other Americans and perhaps now–if instant polling during the speech is any indication–after last nights speech his view may be different than even more than half the nation.
America’s issues are not that it does not tax enough, nor are they that there are people in need who don’t have what others have. Americans are starting to understand that the solution is not in trying to redistribute the wealth to those who don’t have it. We are starting to get an inkling that there is a fundamental economic problems which neither of these methods will solve.
It might work to redistribute wealth if our “Business” (America) was growing, productive and profitable, but it’s not. We really don’t have the wealth any more in the first place. We live on borrowed money, and that which we have not borrowed has been created from the printing press we keep in the back room(Federal Reserve & Banks). We have created many new industries and technologies in the past 70 years, but despite this creativity we have, as a nation, purchased in excess of $13 trillion more than we have created and sold to the world. In effect, our wealth is not only non-existent, it has been buried under a huge amount of false valued cash and debt, with interest now accumulating on top of that.
What investor would put their hard earned money into a business that pays its employees higher wages than it can generate in cash from its sales? What investor would put money into a business who offers mortgage assistance to its employees while making no profit nor a foreseeable one anytime in the future or, who bases the value of its business on the very debt the un-payable mortgages create in the first place? What investor would invest in a business, who continues to increase the salary and benefits to its workers and lets almost 15% of them stay at home and not work? What investor would invest in a business who spends money it doesn’t have to send people to unlimited education when what is needed is skilled labor for more manufacturing or raw materials production? What investor would watch a business who made its economic engine sing because for years it successfully “tracked” its youth into either technical skill education or college based on aptitude, then abandoned this practice because it was not seen as “fair” forced the closure of its tech and trade schools, and now wants to invest to recreate the very system it abandoned? What investor would invest in a business that has significant internal materials and energy assets it refuses to use to generate revenues or power its “Business” because a minority of the employees (citizens) don’t want to use them?
The answer is, none! One can’t fault the president’s heart. It is in his head that it seems to be where the problem lies. Cognitively, it is likely that he really does understand that his speech was littered with fiscally conflicting statements. He has to know that we can’t regain our prosperous manufacturing base with costs that are so out of control. He does know we are now in a one world economy. He has embraced this concept and helped tie us even further to this mechanism. The president even announced in his speech last evening an initiative to help other countries where the poor workers are only earning $1.00 a day. Yet he does not equally understand the problem facing us, in trying to regain our prominence in manufacturing, is that these very same workers will work for only 1 dollar a day while our workers cost on average $85.00 per hour all in.
While I applaud the President’s heart, he needs to go back and engage his head–we all do!
The Story of Sam
I have said this before many times, but it needs to be said again. The middle class is being crushed, not by the avarice and greed of the rich, but by the economic and political system we have evolved into. As more money is printed out of thin air to pay for increased entitlements, the poor get subsidies that help them keep pace, the rich have excess assets to hedge against the reduction in buying power, and the middle class get neither the subsidies nor the hedge. They just get screwed.
Increasing the amount of people who get subsidies doesn’t help because it increases our national (“our Business“) costs higher than those of others in the world who are more than willing to survive without the benefits that we demand. Welcome to the one world economy! So, they will manufacture the widgets we want at significantly less cost and lower prices than we are willing to do. We will buy their widgets and they don’t buy ours. And finally, as the government spends more, and more, of the newly printed or borrowed cash directly in entitlements like; Social Security, Medicare and Medicaid, or other subsidies, the positive increases to the economy are more than offset by the loss in buying power. Further, an increasing part of this cash never shows up in our accounts so our apparent wages decline over time as the government directly subsidizes the costs.
Sam’s Simple Math.
Let’s say you (Sam) have 160 ounces of gold and, for the moment, let’s say that you can’t get any more gold. You only have 160 ounces and that’s it. You and your neighbors have agreed that instead of carrying around the heavy gold, you can each print paper that you can use to pay your bills. They recommend that you print one piece of paper (Sam’s Dollars) for every ounce of gold you have. You can print more if you want to but, the face value has to be equal to the number of paper bills you print divided into the ounces of gold you have. So if you have 160 Sam’s then each will be worth one ounce of gold. If you print 320 Sam’s then they are worth only a half ounce of gold each. Wisely, you initially follow others and print 160 Sam’s.
After a few years your family wanted more stuff, and you decided to print more Sam’s to help them get what they want. You give your wife four extra Sam’s because she is a good wife and keeps a good house. You give your son four extra Sam’s because he takes out the trash and mows the lawn every week, and you give your daughter four more Sam’s because she makes the beds and helps with the dishes. No one is really using the gold anymore, so who cares. Your family looks up to you and they deserve the things they want. So you print sixteen more Sam’s and give them to your family. They go out, buy their stuff, and you can also argue this is good for the neighborhood economy. Soon though the vendors begin to notice there are more Sam’s in the market and they raise their prices 10% to capture them. You now need more Sam’s to support the stuff your family bought with the new Sam’s you printed, so you print 16 more Sam’s. Again the vendors catch on and raise their prices 10%. Then, the same cycle again, you print more Sam’s, they raise prices and then again, and again.
Your wife has been accumulating more stuff than the other wives, and she wants to invite them over to see it and have a party. But to do this she won’t be able to clean the house and make the food. Since she has saved some of her extra Sam’s, she hires a cook and a maid. This is going to cost more than she has saved but each month or so she has been getting more Sam’s anyway. So she reaches what she thinks is the logical conclusion that the increases in Sam’s she sees will keep growing—so there is really no problem with the extra expenses. Her income will rise faster than the expenses come online.
Your son, always more frugal, has saved some of his Sam’s and is paying the neighbor’s kid to cut the grass and take out the trash because he wants to spend more time playing on his new big screen TV’s video games. And your beautiful daughter is now more beautiful from the tanning salon she goes to and the hair extensions and new clothes that the additional Sam’s she is gaining each month pay for. She simply doesn’t have enough time to make the beds and do the dishes and stay beautiful so when she asks you for more Sam’s to increase the maid’s hours to do her chores as well, you oblige because you want her to see you as a good dad and because you do not want her to lose her self-esteem by being embarrassed in front of her friends. So you just print more Sam’s and everyone stays happy…
But soon, the market has a whole bunch of Sam’s and its getting more costly just to buy the things you really need to live. Your Sam’s are worth so little you don’t even have enough to buy the paper to print more Sam’s. Fortunately, the paper vendor will sell to you on credit so you can buy more paper and print more Sam’s but in exchange for the credit he wants one Sam’s in interest for every ten Sam’s of credit he extends. So now, instead of printing sixteen more Sam’s you just print seventeen Sam’s and he gets the extra Sam’s. But each month you have to pay him one Sam’s. And you really have to print a lot of Sam’s just to keep up with the rising prices. The more Sam’s your family has gotten for the basic things they want, the less they are willing to do the things they used to do to get them in the first place. Your wife doesn’t do any work, your son plays all the time and your daughter spends all her extra Sam’s on going out with her friends.
You can’t stop printing the Sam’s or they will get upset with you and you will be a bad father because they will lose all the things they really love, TVs, nice food, hair extensions etc. And if you’re seen as a bad father by your neighbors, or you can’t p[ay your accumulating debts as you have had to get other vendors to give you credit, your own self esteem will suffer, and that you just can’t have. You’re spending so much time printing Sam’s you don’t have much time for anything else. There are so many Sam’s in the town now that others are equating the value of their own currency to Sam’s. Fred down the street now says he will give you one Fred for seventeen Sam’s. Last month you could get one Fred for just ten Sam’s. Your son, always the bright one, starts trading his Sam’s for Fred’s because in a week he can buy more with the Fred’s as the Sam’s devalue.
Soon, you have so many Sam’s printed you spend more to print the Sam’s than the original gold was worth. And since you keep having to buy more paper from the paper vendor to keep pace, and the Sam’s keep devaluing, you now owe the paper vendor more than you even have if you add up all the Sam’s you have ever printed. And since you have been printing just enough extra Sam’s to pay the interest, you can’t even borrow enough to buy the paper to print the Sam’s you need to pay the paper vendor.
What are you, Sam, going to do?
You, Sam, are clearly in a pickle! What are you going to do? You thought about going and getting a job working for Fred, but you need to get paid 16 Fred’s for every hour you work in order to keep your family happy and just pay your bills, not including what you owes to the paper vendor others on your spiraling credit lines. But when you make your offer to Fred, pointing out that you are the best printer in the neighborhood, Fred laughs at you and says, thanks but no thanks. Jim, Bob, Mary, and Eustis, down the street will work for one half of a Fred per hour—by now that’s equal to thirty-five Sam’s–and while they may not be the best, I just can’t afford you and your high falutin’ ways.
So all along while you thought you were just printing Sam’s in effect you were taxing your family. You gave them more money but they just bought less. And the interest was building behind the scene as was the principal of the debt you were creating. Printing more money did not equate to any more gold (value). And your effect on the neighborhood was not positive as you originally thought, you have gone a long way to destroying their fortunes as well as you now will default on their bills, in the end devaluing their own, Fred’s, Jim’s, Mary’s and Eustis’s as well.
Sam realizes he has a big problem. What is poor Sam to do? He can’t sell anything to anyone else because his costs are too high. He can’t stop printing Sam’s or his wife will leave him, his son will go on a rampage and is daughter will get depressed and loose self-esteem and his neighbors will likely come and lynch him, make his family pay off the debts, or if he is lucky or otherwise very persuasive, perhaps they will just take away all his stuff in partial payment and outlaw the creation of Sam’s.
It’s a big pickle, don’t you know!