This week we have the distressing, gobsmacking news that the Obama administration is once more looking to goose economic growth by Pushing banks to make home loans to people with weaker credit. It is hard to fathom the deeps of the stubborn, wrong-headed thinking still driving government policies today. Yet there it is.
As we have learned the hard way many times over, pushing people to reach for consumption and assets which they cannot actually afford is a recipe for financial pain and suffering; not sustainable growth or increased wealth–but capital implosion, lost income, misery, evictions, deficits, unproductive debt and social instability. The appearance of short-term activity at the cost of longer term strength is something we cannot afford to pursue any further.
‘Add more debt and stir’ policies have driven North America (and most of the world) into a debt ditch. Stuck in the rut of economic malaise, expenditures are rising faster than tax revenues. And as shown on the left, at this rate 100% of government revenues in America will be consumed by entitlements, defense spending and interest on existing debt within 3 years. This means that every dollar needed for anything and everything else will need to be borrowed, adding to the $19 trillion in Federal debt already in existence. A recession in the interim of course, will make this ‘D’ day arrive even sooner.
We have dug ourselves into quite a mess over the past 16 years, but there are many practical, intelligent steps that can be taken now which will work to reverse course and transition to good growth and stronger nations. We need a shift to more simple, equitable and pragmatic rules. John Mauldin outlines two of the most obvious in his essay here: Open letter to the next President, Part 4. Worth a full read, but in a nut shell:
- Amend the Federal Reserve Act to authorize the issuance of 40-year 1% bonds that can be used to provide the estimated $2 trillion needed to update the infrastructure of states, municipalities and cities (water systems, electric grids, bridges, roads, public transportation, airports) This way if the Fed feels the need to do more QE buying with the $3 trillion it has sitting in US government bonds and government-guaranteed mortgage assets, it can buy the new infrastructure bonds. In the process, rather than pool excess capital into over-valued, non-productive asset markets and bank profits, refurbishment projects can create hundreds of thousands if not millions of jobs that will increase consumer spending in local communities and prompt related private investment.
- Lower the current US corporate tax rate from 35% to the 15% rate which is presently offered in countries like Canada and Ireland and motivating US companies to keep capital overseas rather than bring it back for reinvestment in America. In addition add a 10% rate on the international profits of US corporations so that no matter where they make their money, they are paying something to the US. At the same time end all of the other loop holes and 3000+ special, non GAAP deductions (like carried interest for hedge funds) that allow different industries to lower their average tax rate.
In a sense, we have come to the end of ‘globalization’ as we have known it since 2000. Rather than chase mindless consumption in a race to the bottom of quality and labor costs, the new era must return to a ‘Henry Ford’ style revelation that in order to afford consumption your customers must have enough income–not access to more self-destructive debt–but reliable and sufficient income, to afford products and service in the present while saving for the future.
