Addressing the Reasons for Lost Confidence

03/18/2008

Paul Munnis


Does this sound familiar?

One day the stock market gasps for breath, the next it jumps forward to new highs. Between government reaction and speculator action the American stock market is thrashing.

Financial companies and big banks are lining up seeking a taxpayer handout. It began with Bear-Sterns and now everyone with a story wants a slice of free taxpayer money. The Treasury is being raided and taxpayers are getting nothing in return.

Most American wealth is tied up in real estate. The equity value in our homes is falling and liquidity of the home asset is under terrific pressure.

The exchange rate between the dollar and the Euro was at 1.5748 yesterday. This means that the dollar devaluation has reached 57.48 % since the EU and the Dollar were last at parity with one another. That is driving up prices and fostering stiff inflation rates in all commodities including oil. That is an incredible fall for our dollar and represents an unbelievable loss of world confidence in the U.S.

To fix the dollar the Bush / Chaney team is trying to use the Fed and monetary policy to fix their political liabilities.

None of what they are doing will restore investor confidence as much as their resignation would. Yet more than just their resignation is needed.

A WORLD AWASH IN DOLLARS

The continuing bailout efforts of pumping money not covered with equity into the system is further weakening our dollar. As examples just look at the $156 Billion stimulus package and the $200 Billion emergency bailout of the financial and banking centers with a promise that we will print more money if we have to in order to cover current liabilities.

History will record this as “The Great Government Give-Away.”

The Bush Administration is just printing more money and thus increasing the money supply and that is aggravating our problem. The result is always the same: “inflation.”

Another problem is deficit spending on war costs of $14 Billion per month ($160 Billion per year). That too is accelerating the growth in money supply on a steady basis and with no end in sight.

What this desperate spending is really doing is watering down the dollar in value as more money is printed to cover the give-away. The money supply is growing too fast and too many dollars are now afloat around the world.

Money is going abroad and thus is not impacting the lives of Americans in a positive way; hence the premise for a stimulus package with the perception being that the domestic economy is not being stimulated enough.

Would somebody please explain how a massive money give-away will fix the confidence of the American people and foreign investors in America and the dollar? I can understand how it will goose sales at Wal-Mart and Target for awhile, but then what?

Nobody is addressing the fundamentals of these problems.

To see what has happened to the money supply under Bush / Chaney just look at the chart below:




A word of explanation of the M values is in order:

• M0: Physical currency. This is not shown separately but is contained in M1. It is A measure of the money supply which combines any liquid or cash assets held within a central bank and the amount of physical currency circulating in the economy. M0 (M-zero) is the most liquid measure of the money supply. It only includes cash or assets that could quickly be converted into currency. This measure is known as narrow money because it is the smallest measure of the money supply.
  
• M1: M0 + demand deposits, which are checking accounts. This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency.
  
• M2: M1 + all time-related deposits, savings deposits, and non-institutional money-market funds. M2 is a broader classification of money than M1. Economists use M2 when looking to quantify the amount of money in circulation and trying to explain different economic monetary conditions. A key economic indicator used to forecast inflation.
  
• M3: M2 + all large time deposits, institutional money-market funds, short-term repurchase agreements, along with other larger liquid assets. The broadest measure of money; it is used by economists to estimate the entire supply of money within an economy
  

I just don’t see how watering down our dollar further will strengthen anything. The money supply is just too big and the dollar devaluation is a matter of wild undisciplined spending to support a war that should never have occurred and that should be stopped today. To cover the war costs Bush / Chaney just flood more dollars into the marketplace.

Neither Bush nor Chaney will buy into that reality and it’s overtaking both them and us.

The money supply needs to shrink and dollars need to come back to America and be taken out of circulation. That is what will really fix the problem – make the dollar once again dear and sought after as a valued currency. Money give-away is the opposite of what is needed. It’s just flooding more paper into a system much too full of such paper.

ENTER FISCAL POLICY

In the housing sector, a root cause of our troubles, the Bush / Chaney plan is to use fiscal management to avoid bank failures. The risk to the individual is that the failure of a bank holding your mortgage could force a payoff demand on the note or else a major problem for the sale of those bank mortgages to a third party. Who would buy them? The government then becomes the buyer of last resort.

That doesn’t inspire a lot of confidence. All those mortgages filled with risk are about to be owned by our central government instead of by individuals who spread the risk. We will bail out American speculators and hold their junk paper is the Bush / Chaney fix. The risk is now held by individuals and it will be made into a central collective risk if monetary policy is used to bailout the banks. What’s more the taxpayers give away their money and they get no equity in return.

Will that really strengthen our dollar and save our economy? I doubt it.

What Bush / Chaney would do is to force the middle class to just sit tight and do nothing while our equity disappears and our savings have their purchasing value steadily decline.

In response the “Hidden Hand” is at work making each person cognizant of what is in their individual self-interest and that is why gold is now over $1,000 per ounce and it is why mortgages are being defaulted on and it is why banks are reluctant to rewrite mortgages with better terms. Those terms reflect risk and the risk is not lower – it’s higher.

People are risk adverse except with the money that represents the difference between their needs and their income. That wedge is investment capital. The wedge is gone for the middle class and the rich are buying gold and are speculating on stocks and commodities with their wedge money. Investment has become speculation and all stability is gone.

CAN ANYTHING STOP THE FALL?

Yes, several things could put a stop loss on the U.S. Dollar and these include:

1. The resignation of Bush / Chaney with Speaker Pelosi taking over until new elections are held in November would be a good start.

2. She would have to put new fiscal controls over the U.S. economy immediately upon taking the job.

3. A stop on War costs is key to stopping the decline of the dollar and that would be job number one;

4. A major conservation and rationing initiative is needed to force conservation of energy onto American appetites for gasoline and fuel oil thus stopping the losses on current account balance of trade. That would be the second initiative.

5. A major investment by the U.S. government in alternative energy thus creating jobs and income and taxes, and more jobs is needed and would be the third reform.

6. A major revision to the high end tax tables is also needed thus injecting more money into the government from the private sector. The government then must withdraw those dollars from the economy rather then spend them and that will shrink the money supply. The way such money is withdrawn is to make a payment on the national debt. We shred the money and we lower the IOU’s of government to the people of America. Thus the deficit goes down and the money supply shrinks.

7. To further reduce the money supply an excise tax on imported goods and services from abroad would be instituted. Again, the money coming in would be booked against payoff of the national debt and the actual cash destroyed thus further shrinking the money supply.

8. Stability in the U.S. election process would also help us. Today investors cannot make a call on the likely scenario of regime change in the U.S.A. This Clinton / Obama bashing is not inspiring anyone to anything positive. It’s also eroding confidence in America. People want to see a genuine leader emerging from this mess not another wonk who thinks they can just negotiate and jaw bone away our American problems. None of that will shrink the money supply and that is what is killing us; we are drowning in dollars that are being spent faster than we can print paper.

We need to shrink the money supply and that means tough policies to do so.

Presently the Administration is trying to use the tools and levers of monetary policy to regain investor confidence. So far it’s not working and is inviting more trouble.

The real problem is that the fundamentals are not changing. The war goes on, Bush/Cheney continue to give away taxpayer money to cronies, foreign energy keeps draining away our resources, and more American money is going into foreign lands than into the U.S. economy even as American jobs move off-shore due to globalization.

Until fundamental change occurs in the U.S. government then investor confidence will remain low.

WHAT IS NEEDED TO REVERSE LOSSES?

1. I repeat: the money supply needs to shrink. Historically one way to do that is with trade. A good Trade Policy means that America exports of goods and services happen and thus dollars come back home. The key problem is with energy. It is sapping our money supply and causing the flow to go in the wrong direction. So an excise tax on foreign imports would help America a lot. We could exempt NAFTA from that. Of course it would screw up globalization and cause the rest of the world a lot of misery. And it would cause a reduction in oil supply too. Therein is another real problem. Conservation of energy goes hand-in-hand with reducing the spread of the dollar and foreign energy expenditures is what really causes the need for such shrinkage. We can see that the policy of the Bush Administration is to create loss-loss scenarios for everyone. That has to be reversed in order to create win-win scenarios instead. If we shrink the dollar supply then we give up globalization and others have a loss too. Those are very vulnerable people with very fragile economies. So then how can we accommodate these two diverse goals? We need a better plan for wealth distribution. One that leaves us all better off. In lieu of that then the dollar supply needs to shrink and dollars must come home and be burned. We must not help other economies by self-destructing. One thing we could do is encourage foreign nations to increase their own ethanol production thus further cutting the oil demand. With lower demand come lower prices.

2. So if Bush / Chaney departed the scene and it was coupled with eight items above then investor confidence would be restored. To really accelerate investor confidence Bush / Chaney need to resign.

3. A complete rethink of globalization is also needed. For example an admission that while America would like to save the world, we cannot afford it. Not even when we raid European wealth and add it to the dollar pile can we save the world. There are just too many hungry mouths to feed and clothe and warm in India, Pakistan, China, and South America. The dollar is just not strong enough to care for all of these woes. Globalization was a noble cause but it has failed. Now what?

As long as Bush / Chaney remain in power then the likelihood of reform happening is near zero and frankly Clinton / Obama are selling more of the same stuff. That is not what is needed. What is needed is a political course change by America.

Waiting for Bush / Chaney to depart the government scene is like waiting for a fossil to regain life. It’s just not going to happen since they seek to clone Bush with McCain and the chances are good that they can once more steal an election. If not, then the GOP will act so obstructionist that no reforms or change can take place. We just end up with gridlock in government. We are witnessing that right now in Washington.

People are sick and tired of the GOP and they look at what is being offered and they do not feel confident. McCain is gaining while Obama and Clinton are in the process of self-destruction. The wealth of a nation is being destroyed in the meantime.

What is happening in my opinion is a titanic struggle between the forces of capitalism and the forces of socialism. The capitalists want to control America and socialists want to dump capitalists and have the people take over ownership once more. This won’t work. We know that we need a marriage of these two opposite partners and an end to class wars. The proof of reconciliation will be when we have bi-partisanship once more operative in our government.

When people lose confidence in their government, when the government refuses to listen to the voice of the people, when a political party splits the citizens of a nation instead of unifying them, when reckless and careless stewardship of money is exhibited, then only a change in fundamentals will restore investor confidence. So the money supply must shrink and reform is needed in our government. That reform must empower people to invest in America.

Since Bush / Chaney continue to be the immediate problem then Americans need to adjust, hunker down, and get ready for business failures, layoffs, job losses, and fiscal ruin or else demand their resignation.

The two questions that Bush / Chaney fear being asked the most by Americans are: “What can we do to protect ourselves,” and “how do we go about it?” As the answers come back and people begin to act on the realizations then change will happen and a nation could come apart at the seams or if we have real depth of character then meaningful reform could happen.

In the meantime Clinton and Obama need to ask what are they really going to do to fix the fundamentals of investor confidence in America? Another chorus of “Happy Days Are Here Again,” is not the answer. Neither is a contest over two roughly equal candidates masking yet another civil rights movement for blacks and women.

When the New Deal came along it fixed the depression as a new program was laid out and people worked together in order to achieve that new vision for America. It’s high time for another New Deal for America.

We owe it to ourselves.