Warning: simplexml_load_file(http://blogsearch.google.com/blogsearch_feeds?hl=en&q=How to Fix our Economy / Stop Obama's Recklessness&ie=utf-8&num=10&output=rss) [function.simplexml-load-file]: failed to open stream: HTTP request failed! HTTP/1.0 400 Bad Request in /home1/wealthed/public_html/wp-content/plugins/related-blog-links/related-blog-links.php on line 20

Warning: simplexml_load_file() [function.simplexml-load-file]: I/O warning : failed to load external entity "http://blogsearch.google.com/blogsearch_feeds?hl=en&q=How to Fix our Economy / Stop Obama's Recklessness&ie=utf-8&num=10&output=rss" in /home1/wealthed/public_html/wp-content/plugins/related-blog-links/related-blog-links.php on line 20

Warning: Invalid argument supplied for foreach() in /home1/wealthed/public_html/wp-content/plugins/related-blog-links/related-blog-links.php on line 24

Warning: simplexml_load_file(http://blogsearch.google.com/blogsearch_feeds?hl=en&q=How to Fix our Economy / Stop Obama's Recklessness&ie=utf-8&num=10&output=rss) [function.simplexml-load-file]: failed to open stream: HTTP request failed! HTTP/1.0 400 Bad Request in /home1/wealthed/public_html/wp-content/plugins/related-blog-links/related-blog-links.php on line 20

Warning: simplexml_load_file() [function.simplexml-load-file]: I/O warning : failed to load external entity "http://blogsearch.google.com/blogsearch_feeds?hl=en&q=How to Fix our Economy / Stop Obama's Recklessness&ie=utf-8&num=10&output=rss" in /home1/wealthed/public_html/wp-content/plugins/related-blog-links/related-blog-links.php on line 20

Warning: Invalid argument supplied for foreach() in /home1/wealthed/public_html/wp-content/plugins/related-blog-links/related-blog-links.php on line 24

Jim Cramer has started to promote Gold or the popular bullion ETF, GLD, as the best investment in this whacked market.  With this signal, I have pointed out to investor friends that they should sell gold (see: "Gold, Great for a Trade, Risky as an Investment" ). Cramer has proven to be the ultimate contrary indicator.

But the fact gold is going down just underscores the power of this deflationary environment. Gold does best during periods of inflation.   Deflations are inherently bad for hard assets of all kinds as fiat currencies increase in value (the definition of deflation).  Gold does not escape this effect, though for short periods of deflationary panic, like the past 2-3 months, gold may do well.

Deflationary spirals are self-feeding and there is little to stop them. People will spend less and less first through fear, and later because they are unemployed and have nothing left to spend. Unfortunately for this country, we just elected a president who does not get this (not that the previous one did either). Raising taxes into a depression is a VERY bad idea. It guarantees economic failure (see Hoover administration).  And don’t be fooled by the $200/250K promise to limit tax increases. It will be broken when revenues come in lower than expected because of the declining economy and the need to pay for expensive new entitlement programs.

I have harped here long and hard that the only way to fix a depression is to print money like crazy and “reflate” (see: Reflation Economics (or “The Minsky Solution” and Fixing a Deflation: A Most Intelligent Analysis).  I have even offered some ideas to both fix the housing market, and reflate at the same time, with little added debt to the economy: the 4%, 40 year fixed mortgage program for EVERYONE (not just the irresponsible few), and a no-interest, no-payment loan from the Feds for any balance above market value, repayable on home sale (forced and secured by a Federal lien to guarantee repayment).

These two programs, easy to implement and relatively cost effective (the Fed loan program would cost almost nothing compared to other current proposals like forced bankruptcy and all the court costs that go with that idea), would solve our housing AND banking crisis at the same time. Bank mortgage assets written down to 20 cents on the dollar would suddenly go back to almost 100 cents as even underwater mortgages were repaid in full to take advantage of the 4/40 and no interest loan programs.  The banks holding those "toxic mortgages" would see their balance sheets repaired and the capital ratios improved (every dollar of increased value in the loan portfolio goes directly to capital).  Bank stock prices would move up, dividends would increase and talk of nationalization of the banking industry would stop.  From there, we might be able to rebuild our economy as consumer confidence, and then business confidence would return.

Once we have a well functioning economy, THEN (and only then), if Obama wants to fund his social engineering programs, noble ambitions that they are, there would be a chance to break even on those programs without crushing the economy and everyone within it.   But as it now stands, he is impatient, suffering messianic impulses and not willing to wait for the economy to recover before he starts redistributing wealth.

How many ways is Obama wrong with his budget and spending plans?  Here are but a few:

1. Eliminating deductions for charitable contributions for the high income tax payers  that provide the bulk of non-profits' budgets will spell doom for many non-profits and needy chartiable organizations.  Those organizations already were hit by the blowup of hedge funds, including the biggest of them all, the Madoff Fund.  Now, when they need financial help most, how ironic  Obama's budget attacks his own natural constituency: non-profits and those that need charity.   He is eating his own children.
2. Eliminating the home mortgage deduction for higher income taxpayers does not help our housing crisis, it definitely hurts.  While this proposal might be defended in that it only hurts high income individuals who don't really need the deduction (sarcasm intended), we all know that the threshold for "high income" will be reduced over time.  Taking away deductions will reduce housing demand and continue the downward spiral in home prices.
3. Eliminates subsidy for student loans through private banks (the Sallie Mae program) which benefit the middle class students and instead redirects those funds to PELL Grants which are only available to low income students.  Obama has made a decision to deny higher education to many middle class students, who might have good high school grades and bright future prospects, and will instead bless the poor who may or may not be good students now or in the future.
4. His ten year budget projects increased deficits (above those of the last eight years) until the end of that period, 2019.  So much for fiscal responsibility and his promise to cut the deficit made just a couple months ago.
5. Increasing income taxes on businesses, capital gains and dividends will not encourage employment, in fact it will insure that the 4-5% unemployment levels we have enjoyed the past decade will be a thing of the past and much longed for in the future.
6. An Environmental inspired "Cap and Trade" system will be applied to businesses that pollute (putting further pressure on our greatly weakened manufacturing sector and the blue collar jobs that go with that sector) and will apply an additional $80 billion a year in new taxes.  A business will have the choice to either clean up emissions or spend money on eco credits to offset emissions.  This will kill many globally marginal "heavy-industry" businesses and cost tens or hundreds of thousands of decent paying jobs.
7. The budget projects increased tax revenues based on assumptions of higher than average economic growth:  an assumption that "the next 10 years of GDP growth will be better than the previous 10".  That is very hard to accept given the current near Depression circumstances and the anti-business, anti-growth leanings of the budget proposal
8. From this week's Barrons: "Debt held by the public as a share of current-dollar GDP will run 58.7% in 2009. Data since 1969 show that it never ran higher than 49.4%, and that was in 1993, when the incoming Clinton administration was concerned about taming the debt.  Yet, even based on the president's rosy (growth) scenarios, the outstanding debt is projected at 67.2% of current-dollar GDP by 2019."

Contrary to statements from his Administration, this is not an "Honest Budget".  There is much in it that is really as dishonest as anything we have seen from any recent President, as compared to the promises made during the campaign and after.

Any of you who would like, take my ideas and send them to your Congress persons. Republicans and Democrats alike. Only they can block the insanity of Obama’s proposals and save the economy (many Dem congresspeople are aghast at Obama’s tax and spend proposals).

Technorati Tags: Wealth, Money, Investment, Gold, Stocks, Bonds, Market, Crash, Crisis, Obama, Politics, Personal, Finance

Related Blog Links

Related posts:

1. Obama a “Leninist”: Greatest Wealth Destruction in US History: Jim Cramer
2. What ECB Must Do to Save European Economy
3. Will Pump Priming get the Economy over the Hump?
4. Will Sovereign Debt Downgrades Sink the Global Economy?