Saturday, November 08, 2008

More Re: The Obama Market Slump

The method of funded is of little importance compared with how the money is spent (Milton Friedman). The fellow who has a good job can afford to buy a car with his cash in the bank or his good credit at the bank. It is to the individuals benefit and to the benefit of society for our system to encourage the purchase of durable goods when they are needed. When individuals show that they are irresponsible, they lose their credit rating and are forced to ride a bike or a bus until they once again establish their good name. In the case of governments, one administration after another succumbs to the temptation of spending our collective money for the benefit of the few. One can come up with all sorts of good reasons to play Robin Hood but, while the politics of doing so often "wins", moral and economic laws are broken when the politically powerful confiscate assets. When is it OK to tell a white lie?

My favorite bipartisan example of government waste continues to be the ethanol boon doggle. The investments we made in ethanol have been poor ones. One after another, ethanol makers are going out of business, the US government borrowed some portion of the money that we "invested" in ethanol, but most of our "investment" came out of our most recent tax payments (assuming prorated allocation of debt to all government expenditures). Our ethanol "investments" were costly mistakes. We will have to use future tax revenues to pay off what was borrowed, but the tax money raised in the past is just as waisted as the tax money that must be used to pay off the debt. We will never recover the fat fees and campaign contributions that were funded by our tax dollars.

Had the investment been wise, there would have been high returns; 15% or more. Businesses do not routinely borrow capital unless they have expectations of 15% return or higher. The fact that the government only paid 1.7% or so to borrow the funds does not take away the sting of the 100% losses. One of the most simple truths, proven time and again, is that governments are not good at selecting which investments should be made. Investments by nature are speculations. The usual effect of involving government is to cause mistakes to be bigger.

While Warren Buffet is willing to pay more taxes, the reality is that he just keeps on paying more, year after year. In the past 40 years, the portion of total US taxes collected from Buffet has sky rocketed and the businesses he operates pay much more in other taxes than he pays in income taxes. His average return on investment has been better than 18% for decades. The tax revenues the government receives from Buffet have been growing at an average of 18% for these many decades. As citizens, we are all in partnership with Buffet.

It would be absolutely foolish for our government to take extra money from Buffet to invest in infrastructure; bridges that should have been built long ago with money raised for that purpose. If we really need many new bridges, we should instruct the Secretary of Treasury to borrow a billion dollars (or several or several hundred) at current t-bill rates of less than 1% and loan them to Buffet at the same rate. (It would even be profitable for us to give the money to Buffet, no strings attached.) Four years after making the loan, Buffet will have turned each 1 Billion investment into 2 Billion. For sake of simplicity, let's assume Buffet sold the investment at the end of 4 years and paid only 15% in capital gains. The profit to the government, per billion, would be 150 Million Dollars plus, plus, plus. We should even give Buffet the right to bid to build and own bridges with his money. If new technologies were used to eliminate gasoline taxes and to collect a fee for every mile traveled, there would be more good roads in the right places. A lot of dumb bridges would never be built.

To generate a Billion Dollars of profit, Buffet businesses would have generated sales of at least 10 Billion Dollars. Can you appreciate how massive the sum of the sales taxes, property taxes, payroll taxes and income taxes generated by the production and sale of 10 Billion Dollars worth of goods or services?

How Long Can the US Government Borrow to cover a significant portion of the services it provides?


The above is not a recommendation but simply a fact.

Our governments borrowing costs, have always been very low. Today, it is unusually low. Short term t-bills currently trade for .5% or less, not 5% but five tenths of one percent. Over the past 50 years, government borrowing adjusted for inflation has cost us 1.28%, considerably less than our average productivity gains. Right now, in the middle of a tough recession, our most recent productivity gain was 1.1%, more than double the rates on our t-bills.

Your response implied that our SS Trust has been robbed liked the highway trust fund, but that is not the case. When our government needs to borrow money, it is absolutely proper for it to borrow from the Social Security Trust Fund. Just as the widow receives income on her savings by allowing her bank to loan her money, Social Security earns money for its beneficiaries by lending its reserves.

The bridge money was taken from the trust fund and spent elsewhere; the social security checks continue to go out every month and they will continue to go out when the fund balance swings from surplus to deficit.

Ironically, the most important reason to fund government spending with debt is to reduce government spending. The only way to keep the pressure on government officials to cut wasteful spending is to make sure they have to make the choice of more spending and more debt or no spending. Do we really want to replay the 1970's when wasteful spending resulted in hyper inflation?

In the "new global economy" the US dollar will be punished quickly if we waste our resources. Based on where we are in the investment cycle, the US Dollar should continue to rise, however, the rise has stalled. Will it continue? If Obama wants to lower the unemployment rate and boost the income for the average worker, he will cut the the US corporate tax rate.

Last night, in a meeting of several local business owners, accountants, executives and investors, the consensus was reached that Obama will not attempt to pass significant tax increases until the Bush tax cuts are set to expire. The general feeling in the room was that while Libor spreads and other indicators are being rapidly healed through the (almost) Trillion Dollar flood of new reserves, the number of trouble spots is large. The group initially supported the belief that the bankruptcy of GM would be bad news but came to realize the company would continue to operate during bankruptcy while getting rid of decades old hand cuffs. Employment growth in the US auto industry just might resume after decades of declines.

To Obama's credit, his most recent position on the autos is to speed the previously approved funding to the autos without necessarily doing anything else. The government fuel economy mandate (a complicated mess of a bill) included a $25 Billion loan to the autos. Once again, government mandates have proven to be a huge mistake (except for those who have held onto to the power they grave). Once again the government created a crisis and the people once again voted to elect those who created the crisis to use even more government to fix the crisis.

Cast all your anxiety on him because he cares for you. I Peter 5:7

Jack Miller
1825 Curraghmore Road
Clemmons, NC 27012

On Sat, Nov 8, 2008 at 8:55 AM, Al wrote:

As you stated before, we agree on many things. Unfortunately it is not only the highway trust fund that has been robbed. THE BIGGEST HOLDER OF US TREASURY PAPER IS SOCIAL SECURIY. In reality, one must wonder, "How much of the proposed increases are needed to fund current non Social Security debt?"