Debt Crisis / Political Sausage-Making: Americans Could Care Less When Held Hostage

Debt Crisis / Political Sausage-Making: Americans Could Care Less When Held Hostage

Political pundits and policy wonks may understand the "Art of Political Sausage-Making," but, to average Americans it may as well be like trying to learn speaking Mandarin. To the Average Joe, instant gratification will always win out over some nifty policy creation that doesn't enhance their lives or kick in until 2014. Let's face it, Joe may be dead before then. So, is it any wonder, then, that the sausage-making process is just something most could care less about?

Not that they should ignore it, but for the most part - people do.

The latest crisis centers on the National Debt and Spending. Yes, average people are paying attention to that all of a sudden - but not because of the long term ramifications of any deficit policy which would rein in the spending down the line. No sir - it is because if a deal isn't struck by August 2nd, according to President Barack Obama, then he isn't sure if he can guarantee that Social Security recipients would receive their benefits.

Hey Now - that has just become an immediate concern!

And I assure you most people could care less about their political principles, or the lack thereof. They want their Social Security Checks - period. But, I don't think people realize that this game of political chicken, at least at this time, is far more dangerous than when President William Clinton and Newt Gingrich butted heads. At that time, the Federal Reserve had far many more mechanisms and levers to pull to ease fears of an eminent default. Unfortunately, that is not the case today.

Our economy today that has no such buffers. Interest Rates are far too low for that. Adding to that, we also have high unemployment while corporations remain operating at diminished capacity, if at all. Business just can't expand, even with interest rates ripe for capital expansion. Besides, why would business want to build more factories when the one's they have are already half-utilized, if at all? At least when Clinton and Gingrich locked horns - the economy was running at a high capacity and employment levels high.

Although it pretty much takes a Rhodes Scholar to figure out the net effects of  any government policy, and the process behind it, most people are smart enough enough to know that this isn't the time to make an ideological stand. If the USA defaults on its obligations, it will have long-term and far-reaching consequences. And not just in the United States! In spite of our lackluster economy, America is still depended upon by other nations when it comes to trade. Losing America's market presence would devastate the global economy. And that is exactly what would happen.

As I said in my earlier post, if politicians are concerned now about a stubbornly high unemployment rate, well, then keep playing this game and force President Obama into not backing down and defaulting. Obama is smart enough to know that whether he capitulates, or not, politically he is damaged. So, if he does decide to default, then unemployment will skyrocket, the markets will crash and inflation will rise rapidly. And again, I will say this with all candor - all politicians involved in this stalemate will suffer a backlash by an irate constituency.

Just to be clear here, though. There is no question that reining in government spending must be addressed and that the problem be solved. However, allowing the country to default will not accomplish that, nor would the pain of it be short-lived. Anyone needing a quick reminder as to what a misguided government policy can do - just look back to Japan in the 1990's. They still haven't recovered!

At the same token, though, I find it hypocritical that the Tea Party Caucus, led by Eric Cantor would oppose taxing say "corporate jets" than playing ball with the president when he was willing to raise the retirement age to sixty-seven. Talk about principles? It is pretty obvious what is going on here. As I have said before, the GOP, and the Tea Party Caucus in particular, have a twisted perspective. And those who wholeheartedly believe in their rhetoric will eventually feel the pains of that folly. What started as a populist movement without regard to political ideology, the premise of that movement was hijacked by an extreme faction of the GOP whose only intent is to make the rich, richer. It is too bad that people have been duped into thinking that these candidates were on the peoples side. They were not!

The Tea Party, as constructed today, is about redistributing wealth to the upper 2-5% of the population and keep them from paying their fair share of taxes. Personally, I don't think it is fair to keep allowing the wealthy to dump their money into off-shore tax shelters while leaving the burden to the little guy. So, it certainly was not about protecting the "Taxed Enough Already" Middle Class, whom they are now trying to wipe out. Quite frankly, the TEA Party is as dangerous as Hitler was when he convinced unsuspecting Germans that building the Autobahns was for something other than his Grand Plan of rolling Panzer's across neighboring borders.

Believe me, this is an observation from someone who was "all-in" with the Tea Party when it began. However, after watching their methodical moves to wipe out labor, which would destroy what is left of the American Middle Class, and then refusing to enact equitable tax reforms on the wealthy should tell you something. So then, who are the GOP / Tea Party protecting? It certainly isn't the Middle Class.

And if you think I am kidding, then wait until those who support the Tea Party realize that they too have been deprived of their safety net. When you consider the zealousness by which the GOP has been trying to push privatizing retirement funding while holding on to the idea that a free market will provide, is somewhat misguided. All you have to do is take a look around and you will see what the financial markets has already unleashed upon us with their greed. Haven't many people already lost large sums in their portfolios, or am I missing something here? Besides, hasn't Old Age privatization already shown us it could fail on the whims of the market? If I recall, that is exactly what happened during Latin America's debt crisis of the 1980's. Look nothing is fail-safe when you rely on the financial markets. We need to strike a balance.

Are there lessons to be learned when it comes to privatization? Sure there are, and they should be vigorously and diplomatically debated. After all there are two distinct schools of thought on the issue. And I certainly understand that privatization, at least in theory, should offer a greater return on the investment. But then again, I must point back to the meltdown of our financial markets. At the end of the day, that has directly led to, and exasperated, the current economic woes we face.

Never the less, nothing ever gets better, let alone solved, because our lawmakers continue to refuse to compromise in good faith. And as I have said over and over again, yes, the National Debt must be addressed. But this isn't exactly the right time to hold America hostage.

But hostage she remains by a GOP bent on protecting the wealthy.

What a Disgrace!

 

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  • Great piece Michael-a very practical argument. Thanks.

  • In reply to koolking83:

    Thank You - Very Kind

  • I take it that the privatization to which you refer is investment of Social Security funds.

    The original justification for the present system was that the government didn't want to take over the private sector. On the other hand, the trust fund, investing in U.S. bonds, doesn't have anything except the full faith and credit of the United States. If, as you believe, Congress is willing to jeopardize that over the debt ceiling, there is nothing in the vault. Also, there won't be nothing in the vault if the paper evidence of those bonds is cashed in to meet future liabilities.

    Things are worse in the state pension area, plus that the state can't print money.

    On the other hand, unless one speculates in derivatives (which is actually what brought down the economy), there should be productive assets behind private investments. The stock market hit rock bottom in March 2009, but has doubled since then. So, people other than those who bought at the peak (NASDAQ at 5200 in 2000, or Dow at 14,000 in 2007) are still doing o.k. Heck, one of my mutual funds in which I had a small investment even went back to break even, even though it had stakes in AIG and Merrill Lynch, which became worthless.

    Hence, I am not that adverse to what I understand was part of the Bush plan to allow people to invest a small portion of their Social Security taxes in an IRA.

  • In reply to jack:

    Ahh - but that is the point. The full faith of the government is a bond between the people and its government. That must be maintained or you have nothing.

    Of course there needs to be a mechanism towards privatization, however I believe it needs to be two-pronged so that in the event the economy crashes and burns (which is where we are pretty much at) people are protected. Look, it is like former Treasury Secretary Summer said on Charley Rose, you have to have money made available even to the disabled and infirm to motivate the economy. When unemployment runs rampant and there are no benefits - no one spends and the economy grinds to a complete halt. Summer also said we are near "stall-speed" now. Interest rate are too low and the Fed has no levers left to pull.

    So while agree privatization - it must be "semi." The financial markets and their perverse need to reduce everything to junk status derivatives is what fails total privatization. I am glad some of your investments came back in spite of - but mine haven't yet. And I am not in anything aggressive.

  • In reply to Michael Ciric:

    As far as investments, I (after finding out that I had no talent at stock selection and especially timing) only deal with mutual funds. In about 2002 (when I got my 401k transferred), I went mostly for value funds. Basically, I stayed with what I had unless there was a reason to get out (such as being p.o.ed at a fund manager and deciding to realize capital losses on the individual account). In 2008-2009 I was putting new money into brokered CDs, which at least were FDIC insured and paid something then, but obviously that isn't going to work in the future.

    Basically though, doubling one's money since March 2009 just relies on the indexes.

    Getting back to the Social Security threat, I gave it more thought after seeing some TV discussion. If there is a reason not to make the August payment, it isn't for lack of an appropriation or the like, but apparently because there isn't any cash, just the government bonds. The way it sort of sounds is that if Social Security has to cash its bonds, Treasury has to borrow more money to cover that. But that hit me as essentially the reason why Madoff went to jail.. (As the Wilpon scheme was described, he guaranteed deferred compensation for Mets players at an 8% interest rate, because Madoff guaranteed him 12%, except Madoff didn't have the money. If my analysis of the August problem is correct, that is no different.)

  • In reply to jack:

    When I was working I did the usual 401k thing and mixed it up between mid and aggressive. When I stopped working, though I did the prudent thing (for me) and went with Blue Chips. The idea there is that while it goes up and down like the tide, if you stay in for the long term it usually balances out. Too bad I didn't stick with a Greek friends advice on Cincinnati Bell which has diversified nicely and split a gazillion times. Pretty remarkable considering their market size, but reinvent was their thing and my friend did well. Again long-term was the secret. Now I have had GE for quite awhile and given their size and diversification, market - they have gotten clobbered.

    As for your assumption on the bonds - yea I think you are right.

  • Today's BC may also be in point.

  • In reply to jack:

    Indeed correct.

  • Which gets me back to why I don't own individual stocks.

    For instance, at one time Cincinnati Bell and Rochester Telephone were similar in that both were independent companies surrounded by a sea of AT&T and GT&E. CBT did o.k., while RTC became Frontier (just name change), but got took over by some fiber optic company that went bust.

    GM was a blue chip, but had problems exacerbated by the credit crunch (car makers are dependent on credit for both their own operations and for their buyers and lessees) including having too many trucks when gas prices went up. Again, with the mutual fund I mentioned, AIG was a stable blue chip until it went into the toilet, and the manager of the fund had a four page explanation of why one wouldn't foresee that it would go bust as it did, very little of which was understandable. However, even with a nondiversified fund, he still had 28 stocks that recovered.

    I don't own any Vanguard, but I see their point that one can't beat the indexes. I also ignore semiannual results, because those depend on the date of the report, but try to see what funds have consistent performance. Finally, I have taken the position that the individual stock picker is "swamped" in the market because most shares are owned by mutual funds or pension funds. For instance, before Inland Steel was sold, it was reported that the controlling shareholder was Fidelity, in the sense of having 13% of the outstanding shares.

  • In reply to jack:

    I know what you mean exactly. Makes sense too. About the only thing that I am sure of these days is that a PE ratio of 10-15 is a pretty good barometer for when I pick a new good priced stock. naturally you have research their market aim and the other blah, blah - but I have never really gone wrong with that. At least for a short term buy low - sell high scenario. Doesn't work for everyone, but the profits to earnings tell the big picture for me.

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