Saving The Economy: You can't combine big wars and big social programs - you must pick one. If you insist on choosing both, you will pay dearly in less than 10 years. We observed the results of the excesses of the 1960s when Lyndon Johnson's failed and expensive Great Society program was launched just as the cost of the Vietnam War was escalating. The result was the Misery Index of the late 1970s - a number resulting from high inflation combined with a stagnant, high-unemployment economy.

Blame it on both Republican and Democratic administrations from 1965 through 1980. In 1981, Ronald Reagan and Paul Volcker limited spending and cut taxes; we also had a period with no big wars. Things got much better. The Misery Index disappeared from the nation's vocabulary.

Everything changed after 9-11. Suddenly we were fighting two wars - Afghanistan and Iraq - but without a necessary reduction in funded social commitments. Instead of wartime frugality, we witnessed an increase in social programs, labeled 'compassionate conservatism': aid to Africa, the Medicare drug program, No Child Left Behind, etc.

All of these added to the federal deficit. Now, as in the 1970s, we are beginning to pay the price. Inflation is virtually guaranteed to increase as the president and congress continue to spend money we don't have. The economy will stall; the Misery Index is likely to return.

Once again, the blame will be on both Republican and Democratic administrations.

One indicator to watch is the personal savings rate. After falling to below zero during the depths of the Great Depression and jumping to 25% during WW II (you can't buy stuff when it's rationed or unavailable), personal savings gradually grew during the postwar era, stabilizing in the 7 to 10% range during the period from the 1950s to the mid-'80s.

Calculated Risk, a financial/economics blog, has noted: "Some of the change in saving rate was related to demographics. As the large baby boom cohort entered the work force in the mid '70s, the saving rate declined (younger families usually save less), however I expected the saving rate to start to rise as the boomers reached their mid-40s (in the late '90s). This didn't happen."

Over the last 25 years or so, the savings rate has been on a steady decline as people kept bumping up their lifestyle beyond their means - 'luxury' SUVs replacing Ford Tempos and Honda Civics, 4,500 square-foot McMansions with three-car garages replacing 2,300 sq.ft. ranchers with two-car garages, Sub-Zeros replacing 14 cu.ft. Whirlpools, $3,000 stainless steel grills replacing $19 hibachis, mocha grandes replacing a thermos o' joe - these are all manifestations of the underlying disease.

During the first quarter of 2009, the personal savings rate has crawled back up to 4.2%.

Catherine Rampell of the New York Times has written: "This is not because Americans have suddenly become more financially virtuous or have learned the error of their free-spending ways. Instead, these experts say, Americans may have no choice but to continue pinching pennies. ... Over the last 30 years, the savings rate has fluctuated from over 14% in the 1970s to negative 2.7% in 2005, meaning Americans were spending more than they made.

This time is expected to be different, because the forces that enabled and even egged on consumers to save less and spend more - easy credit and skyrocketing asset values - could be permanently altered by the financial crisis that spun the economy into recession. ... But many economists believe consumers will change their habits for more pragmatic reasons.

Consumers have lost a huge chunk of their net worth, in the housing bust and the stock market, and to resuscitate their retirement accounts or children's college funds they will have to channel more of their paychecks toward saving - unless those asset markets soar again.

Forms of easy credit that were once prevalent, like mortgages with no down payments, also may not return, either because the government regulates them out of existence or because banks dare not venture back into such risky lending. That means if Americans want to buy a house, they will have to save more and borrow less."

We can all do our part and put a little more away for a rainy day. But the government needs to exercise fiscal conservatism, too ... before it bankrupts us all. (posted 6/5/2009, permalink)

Crisis In The Making: Manufacturing is vital to the economy of the United States because it is a generator of wealth. By taking low cost raw materials (wood, baking flour, steel) and processing it to produce much more expensive items (furniture, cakes, automobiles) creates profit. This in turn creates wealth - for individuals and for a nation.

Furthermore ... (more >>>)

A 'default' is any credit card bill which remains unpaid after 180 days. In 2005, the default rate was only 3%.

Today's credit card traces its lineage back to single-merchant charge cards (printed on paper card stock), which were used to promote gas station loyalty in the 1920s, and embossed metal charge plates used by department stores in the 1930s, '40s and '50s. The Diners Club card, developed in 1951, was the first general-purpose charge card which could be used to pay for meals, hotels and merchandise at any number of different establishments. The first plastic credit card was introduced by American Express in 1958.

Even in the late 1960s, credit cards had limited popularity, despite the creation of BankAmericard in 1958 (later renamed Visa) and Master Charge in 1966. (The name was changed to MasterCard in 1979.) In the 1960s and '70s, people over 50 made most purchases with cash. In the mid-1970s, my parents had no national credit cards, just a couple of department store charge cards. They paid for almost everything with cash.

It used to be quite difficult to get a credit card. In the '60s, you needed good, stable employment and a verifiable address history. Limits were low, topping out at a few thousand dollars at best. The idea of "carrying a balance" - not paying a bill within 30 days on a credit card was somewhat scandalous even in the late 1970s. (I must admit that I've never carried a balance on a credit card and didn't even start using a card for gasoline purchases until sometime in the 1990s.)

In the 1980s, everything loosened up quite a bit. 'Footloose' debuted in 1984. Unsolicited credit card offers skyrocketed. Ladies' shoulders were freed up and padded, as were credit applications. Big credit lines trended with big hair. From 1989 to 2004, the percentage of cardholders incurring fees due to late payments of 60 days or more increased from 4.8% to 8.0%.

By the end of 2008, 78% of American households had one or more credit cards. The average outstanding credit card debt for households that have a credit card was $10,679. That's shocking to those of us who grew up in a cash-only environment. (posted 4/28/2009, permalink)

Another Day Older And Deeper In Debt: President Barack Obama has repeatedly claimed that his budget would cut the deficit by half by the end of his term. But as Heritage analyst Brian Riedl has pointed out, given that Obama has already helped quadruple the deficit with his stimulus package, pledging to halve it by 2013 is hardly ambitious. The Washington Post has a great graphic which helps put President Obama's budget deficits in context of President Bush's.

The Tanking Economy: I'm weary of reading economic forecasts and explanations from 'experts'. Like local TV weather people, their batting average is no better than the Average Joe. Therefore, I'm providing my own predictions; my past track record in advising business clients on the economy has been pretty good.

Let's start with U.S. vehicle sales. It is expected that October's sales will be well under one million units. November will probably be even lower.

Car and light truck sales fluctuate between about 12 and 17.5 million units per year, averaging 15 mm/yr. I expect that 2009 will set a new low, with sales of well under 12 million vehicles. Because of gradually improving conditions and interesting new product offerings already scheduled, I believe that 2010 sales will revert to the 12-15 mm level. It is probable that one or more of the Detroit Three will declare bankruptcy in 2009. Or be restructured and sold off.

Yes, yes, writers will lament the passing of Pontiac, Chrysler or whatever brands get killed off - but, if these scribes loved them so much, why weren't they driving one? America survived without DeSoto, it muddled through the death of Studebaker and it got beyond grieving for Oldsmobile and Plymouth.

The death of Detroit may spell big trouble for Michigan - although given the political corruption, massive layoffs which have already happened, slums, crumbling infrastructure and used car level housing prices in the Detroit area, you have to ask, "How much worse could things get?" Nevertheless, cars will still be made and sold in somewhere the U.S. But the employees probably won't be UAW members and the car badges may be Asian.

Dismal sales will make for a bleak Christmas at many retailers. Look for several retail chains to go bankrupt in '09. Doom and gloom will continue into the first quarter, as casual investors get their 401k statements and soil their underwear when they discover how much their net worth has eroded. Consumers will get a second shock when they find banks cutting credit card limits and demanding higher minimum payments.

At that point, a vicious cycle is created. Those out of work can't buy anything. They default on mortgages, car loans and credit cards. More people are laid-off ... and the cycle continues. That's why this recession will linger.

As for the U.S. stock market, it's important to remember that - a year ago - when the Dow was air-kissing 14,000, almost no one was complaining that stocks were overvalued. Price-earnings ratios were well within historical levels; in fact, they were about average. The precipitous drop to the 8-9,000 range means that the U.S. stock market is now bargain basement-priced and very attractive to investors with a long horizon. Yes, corporate earnings will drop as the recession kicks in but they will rise again as the U.S. works its way out of the recession in 2010-11. U.S. equities have fared a lot better than European and Asian stock markets; the Nikkei is at levels not seen since October 1982. (In 1982, the Dow was in the 800 range.)

Don't panic sell. The U.S. stock market will rebound. It always does. Buy-and-hold investors will be happy well before the next Presidential election.

All is not bleak. Crude oil is now below $65 per barrel. Remember when it was topping $147 a few months ago and 'experts' were talking about $8 per gallon gas as oil continued its inevitable march to $200 and above? So much for those forecasting wizards.

A few months ago, know-it-all Europeans were laughing at the puny American dollar, kicking sand in its face. The British pound was over $2.00. It's now in the $1.60 range. The Canadian dollar is now 80¢ or so and the once-mighty Euro has dropped from a buck sixty something to $1.29. Gold is now around $740 per ounce; a few months ago it was over $900.

Dropping oil prices and a stronger dollar will help mitigate the effects of the recession.

We are not going to have a depression. But Americans may finally wise up and realign their purchasing habits to reflect the new economic realities:

Don't fret too much. America will recover and prosper. We always do. But it will happen a lot faster if Obama isn't at the helm. (posted 10/31/2008, permalink)

Politics, Corruption And Money: Kevin Hassett writes that if one had taken away Fannie and Freddie, or had regulated them more wisely, this whole mess would never have happened.

Back in 2005, Fannie and Freddie were, after years of dominating Washington, on the ropes. They were enmeshed in accounting scandals that led to turnover at the top. In 2004, the Securities and Exchange Commissions chief accountant told disgraced Fannie Mae chief Franklin Raines that Fannie's position on the relevant accounting issue was not even "on the page" of allowable interpretations. In 2005, "a serious Fannie and Freddie reform bill was passed by the Senate Banking Committee. The bill gave a regulator power to crack down, and would have required the companies to eliminate their investments in risky assets." Senator John McCain was one of the three cosponsors of that bill. But the bill didn't become law, for a simple reason: "Democrats opposed it on a party-line vote in the committee, signaling that this would be a partisan issue. Republicans, tied in knots by the tight Democratic opposition, couldn't even get the Senate to vote on the matter."

Self-interest, greed, irresponsibility and corruption should not be encouraged. Especially with the government and Congress sprinkling their own self-serving fragrances in the mix. Let's not forget that the Clinton administration, obsessed with multiculturalism, expanded the scope of the Carter-era Community Reinvestment Act, dictating where financial institutions could lend and thereby facilitating the birth of the high-risk subprime loan market. And Congress - Republicans and Democrats - went along, mandating substandard lending to low-income groups. And, as the high-risk loans mounted, the same Congress - under the gun of political contributions - continued to promote the fiscal follies of Fannie Mae, Freddie Mac and their ilk.

When the Fed cut interest rates to 1% in 2003, it created an enormous credit bubble. Leverage-based strategies became so lucrative that many financial market players jumped to leverage up the most leveraged asset on Main Street – housing.

Banks that should have known better made huge loans to people who had insufficient verified income, assets or collateral to purchase houses. (The institutions were later shocked to learn these folks would not repay their obligations. Well, duh!)

Crap mortgage loans were combined and bundled into cleverly decorated packages but - let's face it - they were still sacks of crap. These foil-wrapped stench bombs were marketed by investment houses as fixed income 'investments' which offered better returns than certificates of deposit. I've heard that many were sold to foreign buyers when the dollar was down: "Just think how much you'll make when the dollar goes back up!" Yes, think of it as a large, diversified container of feces with possible upside potential.

Then the housing bubble burst. When the highly-paid CEOs of Fannie Mae and Freddie Mac saw everything falling apart, they ran to their buddies in Congress - Banking Committee Chairman Chris Dodd, Barney Frank, Barack Obama et al. (After all, they had given Obama more than $126,000 in less than four years.) While Fannie and Freddie were running off the rails, Dodd, Obama, Frank and Congress looked elsewhere. That would be the same Barack Obama who, after the stock market dropped 500 points on Monday, made sure his own pockets remained well-lined by hosting a $28,500 per plate dinner in Beverly Hills.

Too many financial firms (banks, mortgage companies, investment firms, etc.) have been busy courting stupid people who haven't a clue how to manage money. Lead by Congressional Banking Committee members who haven't a clue how to manage money either.

Malcolm Berko has a well-written syndicated column offering financial and investment advice. Recently, he got a letter from a dude who had received a debit card which allowed him to 'borrow' money from his 401(k) at 10% interest. "Because our home-equity loan was up to the limit, we used $23,000 from my 401(k) last year to purchase a remodeled kitchen for my wife and a home entertainment center for me." Then he got laid off.

He whined to Malcolm, "Is there any government program to help married family men like me to pay back our 401(k) retirement plan loans because the bad economy caused us to lose our jobs?" In the next breath, he asks about the advisability of using the services of a fellow who "advertises how to make up to 30,000 percent by buying stocks selling for a penny or a nickel. Even if I could make 10,000 percent, I'd be happy and I would pay off my 401(k) loan."

In the past, bankers would make it difficult for idiots like this to become so overextended. But in our fast 'n loose credit economy, this moron can behave like an out-of-control diabetic at Hershey World.

The financial market meltdown is not a result of widespread economic weakness - despite our moron's claim of "the bad economy." There is no recession ... yet. Real GDP has grown 2.2% in the past year and accelerated to a 3.3% annualized growth rate in the second quarter. The non-housing economy, which is roughly 95% of total U.S. economic activity, has been remarkably stable. And, in quite a few cases, prosperous.

It is not the beginning of the next great Depression. (Even if much of The Left seems to think it is and ... of course - in their minds: It's All Bush's Fault). The recent decline in home prices have little impact on the average homeowner. 96+% are making their mortgage payments on-time and will continue to do so.

While it's going to be a bumpy ride, the American economy is strong and this shakeout will help create a healthier economy over the long term. Capitalism still rules. (posted 9/17/2008, permalink)

Stop Whining! A recent Drudge headline proclaimed: 'Consumer confidence falls to 26-year low...' Maybe that's because today's consumers are a bigger bunch of spoiled whiners and pussies than they were in 1982.

I remember '82. Business conditions were abominable. Linn County Oregon had a 27% unemployment rate; the national rate was more than double what it is today. The Dow was at 800 or so. Mortgage rates on conventional 30-year loans were 16-18%, depending on where you lived.