We are
THE BLUE MONEY REPORT.
If you are interested in providing your readers with our syndicated column, you can request it here
The Blue Money Report
"The knowledge of an effect depends on and involves the knowledge of a cause."
~ Spinoza
Welcome to the Blue Money Report
Today's Commentary: 07.18.03 "Aw shucks, 4.2 percent of the nation's GDP ain't that bad", he might say inviting you to "think about what that deficit has done for this great nation. We went huntin' for bad weapons and came home without so much as a single sightin'", he would tell you but then he would add "that ain't the point. Point is that this nation is now recognized as the toughest hombre on the block. Terrorist know this.
"So the deficit for that reason alone isn't bad. The information may have been a bit off center but look at the bright side. All of our expensive military toys work just fine.
"I might also say in my defense that the tax cut is beginning to have its desired effects." But Mr. Big Spender (I hesitate to abbreviate) declines to list those effects. He can't really point to a growth in jobs. Jobs are coming to service sectors it is true but the numbers reflect growth as less jobs lost. This leaves us chasing recovery with unemployment still too high for growth to kick in the way it is supposed to do.
The underestimation of the deficit number is historically high and excludes the Social Security surplus. It will probably settle a little higher than released the released number settling in at around 5.7%. The economy is a different place than comparable years past which makes the number seem even higher in my estimation.
What got us to this place in time has little to do with a President that continues on the same agenda: save the country from terror which may stir up deeper hatred than we already foster by the bucketload, secure the homeland in an Ashcroftian police state and quickly re-route a stagnant economy through tax cuts and deficit spending. This little problem began quite some time ago.
Spin the clock back four decades or so to the time when Wall Street announced a post-industrial change that would forever alter the way this country does business. The first blow may have come from the dismantling of the gold standard. The implications of what could economically happen if suddenly the physicality of goods became separated by the financial flow of dollars were not immediately felt. It seemed like a good idea at the time. But what this meant changed the infrastructure surrounding agriculture and manufacturing turning them into something far less tangible.
Paul Volker, former Federal Reserve Chairman sought to put this policy known as the New York Council on Foreign Relations into full play creating when he tried to guide the economy into what was called a "controlled disintegration". This economic dismantling did do exactly as expected. Higher interest rates, at one point reaching 21.5%, brought what was left of old school manufacturing to its collective knees. This would permanently change the way our GDP would be calculated.
Throw in a tax cut, specifically the Kemp-Roth Tax Act during the Reagan administration which lowered the top tax rate to 20% and the deregulation of the banking system and you have the fertile landscape perfect for long term deficits.
The changed economy took tax revenues generated by production and replaced them with the tax generated by capital gains from the stock market and real estate. Revenue to keep the government running should balance according to those crafters of the first budgetary regulations back in the eighteenth century. If you take in less, then spending should adjust. We are taking in less and spending more.
Mr. Bush has mirrored his Presidential hero basing his deficit spending on the same principles espoused by the fortieth president. The policies enacted in a bygone era have come to full fruition of late. Unfortunately, this is a problem.
Yeah, but... Mr. Greenspan may have said through the controlled smile he engaged while testifying before Congress. Even keeled and monotoned with an unusual cheeriness, Mr. Greenspan defended his stance against raised voices that tax cuts are good if spending is in line with the decreased revenue. Without raising his voice he suggested that Congress should be the ones who could make this policy work.
The Federal Reserve Chairman sought to regain his puppetry of this economy by shaking both the bond and the equity markets with his testimony. The concern of the House Finance Committee seemed focused on the chairman's use of interest rates. Mr. Greenspan does, as he told them, have a good deal more room in which to work. He is hoping that the economy recovers in tandem with the President's run up in the federal debt. To cover that debt, bonds will be issued in abundance by the Treasury which will have the effect of lowering prices and raising yields.
He likes the fact that household incomes are up even if that has probably plateaued. Tax cuts he cited were a contributor in the rise as well as continued refinancing. There is only so much equity left in America's homes. Locales with higher values have reached the top and those who did not participate in increased property valuations aren't going to see any change.
Prodded for predictions which he has been unable to do with any accuracy, he simply stated that he thought the economy was fragile.
Yeah, but... where does that leave us in terms of investment strategies. Short term growth looks good as long as we don't let that growth get out of hand. Mr. Greenspan said he would raise rates to stem inflation. The economy will continue to grow and the administration will take comfort in the fact that this is because of tax cuts. No one ever disputed the stimulative albeit short term effects of giving money, even a pittance back to the folks who will spend it.
I am not so sure that we can tighten our investment horizons much more without jeopardizing the chance that we might shake off this long term hangover. Paul Krugman of the New York Times suggested on more than one occasion that we are becoming a banana republic, debtors to the world. Gene Epstein spars with him from the pages of Barron's suggesting that this is nonsense. So who is right?
In this economy with its multiple and divergent movements and jerky starts and stops, both are. If the whole of the economy rests on the capital gains in the stock market and those gains aren't there and when they are they are taxed at a lesser rate, then real estate will be the only remaining prop on which this revival rests. Alan can pull at the strings all he wants, the administration is holding the economy's marionette feet by the ankles.
Today's Commentary: 07.14.03 "The good news is that more and more Americans are starting to save for retirement," Steve Judge said in a press release issued on March 14th. Mr. Judge is the Securities Industry Association's senior vice president, government affairs. He quickly added that "the bad news is that they aren't accumulating as much as they will need to retire comfortably."
Based on some firm numbers, the amount of people who have failed to save an adequate amount for their future is staggering in spite of increased plan participation by many workers. A full 70% of the current workers have amassed less than $50,000 in retirement savings. While this number is horrible in itself, the average person is making some basic assumptions concerning that savings that Congress might be overlooking.
Retirement is being redefined in this country by folks who realize that the everyday cost of living does not allow them to save large portions of their income. Those that do make a contribution to their 401(k) plan in most instances barely meet their employers matching funds. Saving more even in a pre-tax situation as this proposed bill will allow can be difficult to justify when the wages we receive are not what they used to be. As this nation drags its feet out of a prolonged economic downturn it is important to note that the current unemployment number does not help the overall savings rate. More importantly, that number of people out of work usually leads to less workplace security. less security in the workplace means that saving for far off future events such as retirement get bumped down the to-do-list to least important.
I have taken Mr. Bush to task over the wisdom of this tax cut and the underlying theory behind it. His belief that returning money to the tax payers in the highest brackets will in turn create an atmosphere of reinvestment. Returning money to the lesser brackets will create a new consumer confidence and increase spending. Neither is likely to happen without jobs and the security that accompanies them.
And now, in another ill-conceived move the administration has sought to attach some pension reforms to the bill which lie in direct conflict with the spirit of the legislation.
Currently we have problem in the pension industry some of which was brought on by the companies themselves. What were once healthy overfunded plans are now falling dramatically short of the mark. Much of that problem does come from the fall of portfolio value and aggressive money management but a good portion of it originated with the disappearance of the 30 year long bond. In the name of pension reform the administration has launched yet another salvo in the battle to change the way we think money should work. In review, the long bond was retired to create a more efficient method to increase the deficit (er...I mean to allow the government to borrow). The once healthy surplus paid off old debt and new debt was issued that was much more attractive. So from those same folks that brought you that thinking comes the solution to the pension problem.
Trouble is the fire is almost out. If the recovery is as robust as supporters of the tax cuts propose, underfunding will seem like a bad dream. If the tax cut does its what it was supposed to do, we will have a rally in confidence to revitalize this country's economic outlook and and the direct beneficiary, the stock exchange.
The plan which would appear as an amendment would allow the company to use the same fuzzy math the often used in the past by this administration. It works like this: If you unleash the companies estimates from the long bond and tie them instead to a corporate bond, balances and underfunding take on a whole new perspective. If you can shrink the liability by changing the benchmark interest rate you will do two perhaps three things. First and I agree with this wholeheartedly it will force companies to disclose their real liabilities (and assets) on a yearly basis that is grounded wth better use of termination numbers. Secondly companies with shaky plans would be forced to live within their means which on the surface is not such a bad idea. With one exception. Companies are notorious for using their pensions when they're good to bolster their balance sheets. When they're doing poorly or underfunded, they bury the information on the lowliest pages of the financial statement.
And lastly, this is only postponement of the inevitable. Companies with high termination rates, meaning that their employment base is older, likely to retire soon, and will severely drain the pool of available cash sooner and faster than expected will not have their problem solved with a change in accounting. The financial chicanery that will be used will instead set the stage for a more subtle change in pensions. What would come under fire is the traditional defined benefit pension that creates greater value for the employee (and on the flip side, a greater burden to the employer and the plan) in the last ten years of employment. The Bush administration strongly supports a complete overhaul of the pension program in favor of cash balance plans that favor younger workers. Changes in this type of accounting would diminish the amount of promised benefits to older workers.
The argument for the change is simple. The insurance industry copes with similar methods of estimation called duration, the pension industry should as well.
COLUMN REQUEST
| ARCHIVE
|
WHO WE ARE
| CONTACT US | LEARNING
CENTER |