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America 2030: Why We Must Act - Now |
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Government spending goes nuts: What this
insider says may shock you,
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Finally...this year's DR Financial
Darwin Awards grand champion!
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Plus, Bill Bonner on gravity-defying growth
and the secrets of foreign tongues...
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Joel Bowman, reporting from Tokyo, Japan...
It is said that the only two certainties in one's life are death and
taxes. You might, through some clever accounting and creative domiciling,
mitigate the curse of the latter but, so far as we know, nobody escapes
the grave. Empires...pop divas...authors of books starring Holden
Caulfield; on a long enough timeline, we're all reduced to fleeting
moments in the imagination of another time. As Jim Morrison once famously
observed, "No one here gets out alive."
But we are not here today to bemoan the inevitability of death. Rather, to
celebrate it. (Not our own, of course...that would be morbid.)
No, fellow Reckoner, we are here today to celebrate the death of a
corporate giant...an ill-fated, poorly adapted industrial dinosaur that,
last year, finally found a tar pit of its own.
Readers will recall that we've recently been pondering the nominations for
this year's Daily Reckoning Financial Darwin Awards. In short, it
is our chance to thank those companies that were kind enough to remove
themselves from the corporate gene pool, either through Kamikaze-like
dedication to self destruction or, more often, through a stubborn refusal
to change with the times. It is, after all, in the fertile aftermath of
such creative destruction that the cycle of free market capitalism blooms
anew.
Readers wrote in from all over the country and, indeed, the world, with
nominations for this year's award. By the time we got around to tallying
the votes this past weekend, our DR inbox was brimming with so
many accounts of idiocy and uncompromising incompetence that we briefly
considered nominating it for a government post.
And, as you might expect, there were nominations aplenty for just about
every level of government...from the usual partisan politician bashing to
the lever-pulling loonies at the Fed and the Treasury.
Much as we'd like to give them all their due recognition, we had to cull
the field a bit.
"On a sheer vote count, Ben Bernanke won hands down," we noted in the
Weekend Edition. "Alas! We regret to inform that he must be disqualified
from this particular competition. Remember, we are here to praise the
extinct. But Bernanke is not extinct; he is thriving...like a cockroach in
the fallout of a nuclear blast. His prognostications might have been way
off the mark...he might have forecast a period of 'Great Moderation'
during the bubbliest decade in history...and he also did more to rescue
hideously mutated financial species from extinction than any central
banker in history. However, Bernanke was just ushered in for his second
term. In Darwinian terms, he is adapting to the Big Government era, toxic
as it is, as well, if not better, than just about anyone else in the
ecosystem.
"Nor can we bestow this year's Financial Darwin Awards on any of
the financial mutations or extinctions that occurred in 2008 and before,"
we continued. "So, as much as we empathize with the fellow who wrote in to
raise a hand for 'the year 1913, for spawning the Fed,' we simply must
impose some parameters."
[If you'd like to see a brief list of those honorable mentions that fell
short of qualifying for this year's grand prize,
check out the Weekend Edition here.]
In the end, and notwithstanding the exceedingly strong field, the choice
was rather easy. We are pleased to bestow this year's Daily Reckoning
Financial Darwin Award on a company that, through a lethal
combination of union concessions, bloated bureaucracy and an unrivaled
dedication to fiscal and automotive inefficiency, last year became the
largest industrial bankruptcy in American corporate history.
The award goes, if you haven't guessed by now, to General Motors - also
known, since July of 2009, as Motors Liquidation Company.
Reading through the history of this once mighty American icon is a bit
like watching a car wreck in slow motion...
After William Crapo Durant founded the company back in 1908, GM went
through a series of high profile management evolutions, including the
twice removal of Durant himself, the second time for good. Nevertheless,
the early years for GM were, by and large, years of innovation, of
expansion and seemingly unstoppable growth. The twenties saw a slew of
acquisitions for the Detroit company, including the German automaker,
Opel, and Britain's Vauxhall. Market share grew enormously, both
domestically and abroad. The wind and the ingenuity of the can-do American
was behind her.
Then in 1937, something curious happened. Workers in GM's Fisher Bay Plant
in Flint, Michigan, sat down. They weren't standing up again, they told
managers, until their demands were met: better work conditions, hours and
benefits. It seemed reasonable enough, said many. General Motors is large
enough. It can afford a few extra bob for the poor souls on the production
lines in Detroit. And so the first battle with the union was fought:
United Automobile Workers - 1; GM - 0.
But by the time the score could be tallied, much less properly understood,
WWII had rolled around. General Motors stopped making cars for American
people and began making tanks for Allied soldiers. As history would have
it, GM found itself on the winning side this time and, by the time its
factories were again pumping out Chevys and Caddys, they were the biggest
game in town. By 1954 GM's share of the American market, then the largest
in the world (before China overtook it last month), stood at a whopping
54%. One in every two cars started in a GM factory.
Through the '60s and early '70s, GM cruised along. In 1961 she sold more
than half of all the cars AND trucks in the US. With the introduction of
the GTO Pontiac Tempest in 1964, Detroit's darling set about ushering in
the era of the muscle car. Then something else happened: the energy
crisis. All of a sudden people didn't want a V8 engine in a medium sized
American body; they wanted a four-cylinder engine in a small-sized
Japanese body.
A continuation of that shift through the '80s saw GMs market share in the
US drop from 45% to 35% and, for the first time in 59 years, the company
actually reported a net loss.
Then, in 1990, those workers sat down again. By the time they stood up
again, GM had signed a contract guaranteeing nearly full wages and
benefits for workers, whether or not they showed up at work. UAW - 2; GM -
0. Later that same decade, in '98, the workers scored their 3rd victory.
After seven weeks of UAW protests, it was three strikes and you're out for
GM.
General Motors might have been conceding ground to its union workers...but
it would be damned if it was going to look like a sissy to its
competition. In 1999, GM bought Hummer, making every mom's dream of
driving a military vehicle closer to a reality. SUV sales peaked in
2002...but GM pressed on with its giantmobiles, rolling out new Surburbans
and Escalades even as market sales dwindled and the price of oil marched
higher and higher.
At a time when it most needed to adapt, GM stuck to its guns. But by then
it was unable to move. The more it struggled, the deeper it sank into the
tar pit. Finally, investors began fretting about legacy costs and, in
2005, credit agencies downgraded both GM and Ford.
By the time it became eligible to contest this year's Daily Reckoning
Financial Darwin Awards, GM was at Washington's door, begging for
handouts, bridging loans and credit extensions. Bush gave more money.
Obama gave more time. But the ride was over. Shares of GM, which had
peaked in 2000 at around $94, fell to 75 cents. What was once the richest
company on the Fortune 500 was now a penny stock awaiting bankruptcy.
Much has happened since then...GM sold Hummer to China and Saab to the
Swedes...dealerships across the country were closed by the hundreds...and
yes, tens of thousands of GM workers now cash food stamps in Detroit.
Ideally, marketplace extinctions would occur quickly and quietly, with
little or no life support financing from the poor ol' American taxpayers.
Alas, it was not to be the case for GM. General Motors Corporation is now
General Motors Company...and the majority owner is the government of the
United States of America.
Congratulations to Washington. Commiserations to taxpayers.
[Ed. Note: Before we get into today's essay, below, we'd
like to remind all readers (including the new, taxpaying owners of GM)
that we're holding our Financial Darwin Awards Strategic Short Report
$1 Offer open until
midnight tonight.]
As you may recall, Dan's investment service actually seeks to profit when
foolish and/or negligent corporations come clean with the kind of
"creative accounting" that leads to GM-like extinctions.
When we first presented the offer, back at the start of this year's
Financial Darwin Awards, we noted that Dan had his eyes on a trucking
company that had "expanded too aggressively during the bubble years."
Dan instructed his readers to buy put options on the company...a
play he then told them to exit last week...for a cool 92% gain.
Not bad for a buck, eh?
Right now, Dan is helping his readers to bet against an overleveraged
hotel company. "I'm sure you've stayed in one of their rooms in the past,"
he reveals, "and you'll be shocked to see what they're hiding in their
balance sheet. Act now and you could see gains as high as 100% by
Mid-February."
The $1 offer to Dan's Strategic Short Report is good until
midnight tonight...and not a minute after.
Here's a quick sign-up sheet if you want in.
|
The Daily Reckoning
Presents: |
Speaking of creeping bureaucracy, unsustainable spending habits and
addiction to debt, here's David Walker, former Comptroller General for
the United States, with a few words of caution for that mob in
Washington, DC. Please enjoy...
America 2030: Why We Must Act - Now
By David Walker
New York, New York
Those of you who are parents (and I'm a parent) may want to reject out
of hand the idea that we are in effect stealing from our children's
future and bequeathing to them a far less prosperous life. But if we
don't begin to address our fiscal challenges soon, it's only a matter of
time before the consequences begin to show up, most likely starting with
higher interest rates. As things get worse, our children will slowly see
their living standards decline. We can still prevent these things from
happening. The ultimate goal of cleaning up our fiscal policy is not to
avoid a recession or even to balance the budget per se - it's to pass on
the kind of healthy, vibrant nation that we inherited.
It's easy to fall back on generalities - that America is a great
country, and that we always rise to great challenges and will do so
again. True, but we can only succeed by taking action, and we have a lot
of action to take. Let's say we do take only small steps to address our
fiscal crisis. Let's say we stop cutting taxes, but we don't increase
them radically either. Let's say our government continues to take in
about the same level of historical revenues, but we hold discretionary
spending to 2008 levels as a percentage of the economy, and we don't
expand health care or other entitlements any further. That sounds pretty
benign, but it's actually a disaster scenario for our children.
Let's take the example of kids born in early 2000, when our national
budget was in balance and the technology-powered future seemed bright.
During the first eight years of their lives, we have learned, the
nation's financial hole grew by 176 percent to $56.4 trillion. And the
number is not standing still. That was its size as of September 30, 2008
- before the official declaration of a recession, before the significant
market declines of October 2008, and before the big stimulus and bailout
bills designed to jump-start the economy and address our immediate
financial crisis. In fiscal 2007, recall, our budget deficit was $161
billion, or 1.2 percent of the economy. By 2009, the deficit soared to
$1.42 trillion, which is about 9.9 percent of the economy. Just think
about that for a second. Our federal deficit grew by almost nine times
in the past two fiscal years!
Given our scenario - no benefit cuts, no tax hikes - the government
would have to finance this gaping hole mainly by borrowing money from
domestic and foreign investors, with interest. Don't forget, according
to the GAO's latest long-range budget simulation, even without an
increase in overall interest rates, our interest payments would become
the largest single expenditure in the federal budget in about twelve
years. And what do we get for that interest?
Nothing!
Of course, something will have to give before we get to that point.
However, the government has overpromised and underdelivered for far too
long. How can we fix things? Will we cut benefits, those mandatory
payments that are chiseled into law? Or will we raise taxes to onerous
levels? We will probably have to do some combination of both. That is,
we will have to renegotiate the social contract with our fellow citizens
and raise taxes. However we do that, our kids will pay the price. And
the bigger the bill we pass on to them, the bleaker the future we will
bequeath to them.
Let's assume that Washington policy makers continue to punt on making
tough spending choices and ultimately raise taxes to address the growing
deficits. Nobody will reach in our kids' pockets and take their money
because the government will take it before it even reaches their
pockets. What will that mean for their after-tax income? Right now, on
average, Americans pay about 21percent of their income in federal taxes
and another 10 percent to state and local governments. By 2030, to pay
our rising bills, that amount could be at least 45 percent - higher even
than the average 42 percent that most Europeans pay. By 2040, it would
be at least 53 percent and climbing. In reality, total taxes in 2030 and
2040 would be even higher than these estimates because of the fiscal
challenges facing state and local governments - such as Medicaid costs,
unfunded retiree health care promises, underfunded pension plans,
deferred maintenance and other critical infrastructure needs, and higher
education funding.
With reductions in disposable income like that, the children of 2000
will inherit a much different kind of America in 2030. That's when they
will be turning thirty, entering their most productive years.
So much of their money will be devoted to keeping the government afloat
that they'll have relatively little for everything else in life. Their
homes will be smaller and drabber. There will be less to spend for cars,
vacations, dinners out, and big TV sets, all of which their parents took
for granted. They'll still read about the consumer society and
conspicuous consumption, but mainly in history texts. Maybe it's a good
idea for America to become less materialistic - but the idea should be
to give our children that choice, not to impoverish them.
Regards,
David Walker,
for The Daily Reckoning
Joel's Note: Mr. Walker served as United States
Comptroller General from 1998 to 2008 and is now the President and CEO
of The Peter G. Peterson Foundation. He is also the author of
Comeback America: Turning the Country Around and Restoring
Fiscal Responsibility, from which the above essay is
excerpted.
You may also be interested to know that we've just confirmed Mr.
Walker as a key speaker at this year's Agora Financial Investment
Symposium, to be held in Vancouver from July 20-23. If you
haven't done so already, make sure to reserve your spot at the
conference. Tickets to our annual event are already selling fast and the
early release discount won't last long.
In the meantime, be sure to tune in next Monday when we bring you Part
III of Mr. Walker's series on fiscal responsibility.
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And now to Bill who has today's reckoning from Baltimore,
Maryland...
Well, it's a new world, after all...
Maybe we were wrong. Maybe the mainstream economists are right.
You know, up to now all they've been good at was explaining why the
forecasts they made in the past didn't work out. But maybe they're
right, after all. Maybe up IS down. Maybe better IS worse. Maybe you can
squander trillions of dollars and yet have more!
It is all too much for us. Our head aches thinking about it. But there
it is, right there on the front page of the weekend news:
"US growth accelerates..." announces The International Herald
Tribune.
Right there in black and white. And it must be true. The newspapers
wouldn't lie, would they? And, the economists who fiddle the numbers for
the US government wouldn't hit a false note on purpose, would they?
Nah, that never happens. But how is it possible for the economy to go
right back to Bubble Era growth rates after taking only a couple
percentage points off of US GDP? We all know it was a credit bubble,
right? We all know it couldn't last, right? We all know, too, that the
fuel for that growth - bubbly gases coming out of the banks and the real
estate sectors - has disappeared. So where is this growth coming from?
On Friday morning, the stock market got excited about the stronger-
than-forecast growth numbers, along with news that Ben Bernanke was
around for another four years. The Dow rose more than 100 points. But by
the afternoon, investors were asking questions again.
If the economy really is recovering, maybe the feds will reduce their
stimulus...
If the economy really is heating up, mightn't it melt all that money and
credit frozen by the depression? Doesn't that increase the odds of
inflation - and higher rates from the Fed...?
If the feds tighten, won't the US economy fall back into the second part
of the W-shaped recession...just like Paul Krugman says?
By the close of business the Dow had lost 53 points, which makes us
think the final push to the bottom has begun. Even good news can't stop
it. When 5.7% growth - after the worst slump since the '30s - doesn't
get investors excited, there's something wrong.
Wait a minute...
"The biggest lift to economic activity," continues The New York
Times, "came because businesses ran down their stocks of unsold
goods at a much slower rate than earlier in the year..."
In other words, the 'growth' came because businesses restocked their
shelves at a faster rate. So, there's more on the shelves to buy. Hmmm.
Wonder if it will sell...?
The only way you could have real, sustained growth is with a recovery in
employment - and earnings. Looking at it broadly, Americans were earning
a certain amount of money in 2007. Then, they discovered that much of
what they were doing was not worth doing. They were building houses for
people who couldn't afford them, for example. And they were spending
money that was "taken out" of their houses. At the peak, a substantial
part of US GDP - and virtually ALL the growth - came from these sources.
That money has disappeared. People aren't getting paid to build houses
that no one will buy anymore. And shops aren't selling to people who pay
with money from mortgage equity extraction. They've already extracted so
much that there's nothing left. Or less than nothing. Many homeowners
have net negative equity.
What does this mean? It means that people are earning less, borrowing
less, and spending less. What else could it mean? A substantial part of
the economy, 2003-2007, was fraudulent - in which excessive consumer
credit masqueraded as real purchasing power. That part of the economy
has gone away. So should that portion of the GDP. In theory, GDP should
go down and stay down until new industries, businesses, and jobs are
found.
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---------------------------------------------------------------
And more thoughts...
America's president proposes a tax credit to businesses that take on new
employees. We never met a tax cut we didn't like. This one is no
exception. It lowers the cost of labor, making it easier to hire and pay
people. So far, so good.
But is Mr. Obama proposing to cut government spending also? Not really.
He's pretending that the feds can have their cake and eat it too...that
they can forgo the income given up by the tax credit...and yet, still
spend it.
How is that possible? It's not. It's the feds' old shell game. It won't
do the economy any good because the resources represented by the tax
credit can't be in two places at once. They can't be available to the
employers and be available to the government too.
But 10% unemployment tells us that wages are too high. They should fall
- along with stock prices and housing prices. But it's hard to cut
wages. That's the real secret to the Keynesian's fiscal stimulus.
Government spending causes inflation...which lowers wages
surreptitiously.
Everybody likes fiscal stimulus. Economists like it because it makes
them look like they know what they are doing. Politicians like it
because it makes it look like they are doing something to help the
masses. And the masses like it because they believe them! Finally, even
employers like it because it reduces real wage costs.
Trouble is, inflation doesn't work very well in a real depression. The
Fed increases the monetary base. Congress showers boondoggles over the
nation. But the money moves likes molasses.
The median price of an existing house sold in 2008 was $196,600. In
2009, the price fell to just over $170,000. But this seems to have
brought out the buyers. At $170,000, reports Floyd Norris in the NYT,
the housing market corrected all the way back to 1997, adjusted for
inflation. Twelve years' worth of real pricing gains have been wiped
out.
But when people realized they could buy at '97 prices, they stepped up
to the plate; 4.6 million houses changed hands last year - 5% more than
the year before.
The real problems were in the new housing sector. Only 373,000 new
houses were sold last year - fewer than in any year since 1963. Prices
sank, but not quite as much as in the used house market.
New houses, of course, are not the subject of foreclosures. You can't
foreclose a mortgage that hasn't been written yet. This permitted the
housing industry to control sales and prices - at least to some extent.
While foreclosed houses flooded the used-house market and drove down
prices, builders must have held back inventory waiting for better
prices.
What will happen in 2010? Most likely, the inventory of unsold
houses...along with the 'hidden inventory' of houses that owners would
like to sell...will probably continue to hold prices down. One way or
another, the average house has to go down to a level where the average
owners can afford it. Where that level is, we don't exactly know, but
it's probably lower than today's prices. Remember, millions of
homeowners are underwater. Some of them will drown. Others will get out
through the windows...leaving the house to sink, along with the housing
market.
We were feeling nostalgic for the pampas last week. So we went to dinner
at El Sur a restaurant in the heart of Paris. It's the real thing. The
décor, the wine, and best - the meat - are all authentically porteno
(pertaining to Buenos Aires).
We went with our Spanish teacher, son Jules, and some friends. The
conversation was in Spanish.
"Jules, your Spanish is very good," we said afterwards.
"Five years of it in school. But, Dad, I don't know how much you can
learn from these sessions..."
"Well, learning languages is cumulative. You just keep at it. Little by
little it sinks in..."
"I wonder if it's worth all the effort..."
"Sure it is. Languages hide the accumulated wisdom of generations of
dead people. Each word is an idea. And different languages have
different words...and different ideas... The more languages you know,
the more ideas you've encountered. The more you know, generally...
Besides, if you don't speak the language you can't enter into a culture
and discover its secrets."
"Oh...."
Regards,
Bill Bonner,
for The Daily Reckoning
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Here at The Daily Reckoning, we value your questions and
comments. If you would like to send us a few thoughts of your own,
please address them to your managing editor at
joel@dailyreckoning.com
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