Super Recession 2011 – It Ain’t No Movie
As to our economic analysis and forecast, our conclusions haven’t changed very much at all. Here are the major dot points to consider …
Curing the Budget
Tax increases make little sense right now if you want the economy to recover and yet higher taxes are coming in 2011. Do you know what they are? In just six months, on January 1, 2011, the largest tax hikes in the history of America will take effect.
Here’s the history. In 2001 and 2003, the Republican Congress enacted several tax cuts which will all expire on January 1, 2011. These are the “Bush tax cuts” everyone talks about. When they expire, the top personal income tax rate will rise from 35 to 39.6 percent (this is also the rate at which two-thirds of small business profits are taxed). The lowest rate will rise from 10 to 15 percent, which is going to hurt the poor even more. The capital gains tax will rise from 15 percent this year to 20 percent in 2011. The dividends tax will rise from 15 percent this year to 39.6 percent in 2011, and this will drastically alter the landscape of how companies return profits to investors. The “marriage penalty” (narrower tax brackets for married couples) will return from the first dollar of income. The child tax credit will be cut in half from $1000 to $500 per child. In short, federal, state and local taxes will rise quite sharply next year, including tax rates on income earned outside the US!
This does not spell good news for either the economy or the stock market. Think DEEPER RECESSION. Think SUPER RECESSION.
Why? The majority of households today cannot survive on one job. Husband and wife both usually work to make ends meet for the family. Raising taxes just makes that job harder and translates into more foreclosures, more food stamps, more homelessness, more despair. You’ll see it when your 2011 tax bill comes due in 2012. You might even be taxed on health care benefits your company provides but you may have never used. Folks, people are going to SCREAM!
We cannot grow our way out of this recession this time because we exported all the industries that might do so for us. Historically countries try to inflate their way out by increasing the money supply. Won’t work this time either. And if you think inflation, as the FED is trying to do, is the answer, or wars, then read on …
Inflation and Deflation are Coming
That’s right, I see prices rising starting from October. Slow but sure and steady in 2011. Eventually the world will see that the dollar is being printed in such massive quantities that it cannot serve as reserve currency. When foreign central banks try to dump the dollar, up will go the prices of imports and offshored goods on which we are dependent.
However, housing and stocks will likely drop so we’ll see declines in the value of BIG assets along with increases in consumptive purchases necessary for daily living, all the while that the regular guy on the street is strapped for cash from tax increases, afraid to use his credit card, and worried about his job security because of the recession. You’ll have both deflation of debt and inflation of every day prices, and wage pressure at the same time. The middle class will be squeezed.
Wars
Our presence in Iraq and Afghanistan, and our threats against Iran and North Korea, must all be scaled back. What the heck are we doing everywhere other than alienating all sorts of countries, creating enmity that will last for ages and breed terrorists, and wasting lives and dollars? Our wars are benefiting no one but the military-security complex. Reducing our involvement will reduce the US budget deficit by hundreds of billions of dollars per year but you never hear anyone saying that.
Winston Churchill realized that if a king goes to war and makes a mistake, he can stop it on a dime and withdraw whereas if a democracy sends the country into a war, it will likely drag on because the powers at be had to stroke the country to get it going, and reversing makes the leaders look bad. Therefore you almost never get out quickly after you realize a mistake has been made. It drags on and on and on … Afghanistan, the graveyard of Empires, is a perfect example. Some say General McChrystal – a smart guy – wanted to get himself fired because he saw there was no way to win.
We’re getting absolutely no value for this dollar – fighting unwinable wars that lead to no reduction in terrorism, international ill will against that will be remembered for decades, we don’t gain control of these countries or their assets, we lose American lives, and our debt escalates.
The principle of “imperial overreach and overstretch” is what is happening. We’re trying to follow Zbigniew Brzezinski’s The Grand Chessboard playbook for American primacy and hegemony in the Middle East, but his intellectual play book has failed miserably. Alexander the Great, the British, and Russians all failed in Afghanistan yet we decided to go in. Our leaders and strategic planners behind the scene should read Bill Bodri’s book on hegemony to set the record straight: Kuan Tzu’s Supreme Secrets for the Global CEO (formerly The Means to Win: Success Strategies in Business and Politics). The way we are currently going about it is wrong, and China will trump us within a single decade if we don’t change now, especially in Africa where they are buying up assets, and in South America too. Unfortunately our politicians are not trained to think strategically or historically, so I put no hopes in a quick turn around.
For a Recovery, Offshored Manufacturing Jobs Must Come Back
Basically, the only way that the US will again have a flourishing economy again is by bringing back the offshored jobs that have left since NAFTA, and that means bringing manufacturing back to the United States. Ross Perot warned of a great sucking sound, people laughed at him, and he was right … it just takes about 20-30 years for the point of recognition to come, and then it’s too late. The loss of these jobs impoverished Americans while producing financial gains for the largest corporations who wanted more and more profits while the country internally has weakened. “That’s not our problem,” they figure, “We are beholden to no one and have no responsibility other than to maximize profits.” So where have the statesmen been?
We can’t impose tariffs or interfere with “free trade,” or all hell will break loose, but these jobs can be brought home by taxing corporations according to where value is added to their product. This is a serious proposal which is going around because it is in effect a tariff, which is the one of the things that does protect a country’s working middle class. If value is added to a U.S. company’s goods and services produced in India, corporations would have a high tax rate according to this plan, and thus there would be an incentive to produce at home. On the other hand, if value was added to their products and services in the US, they would have a low tax rate.
That will bring back old jobs over time, but what about new jobs? New jobs and new industries get us out of recessions, not the government. Those new jobs all come from individuals, entities and groups that have no representation of lobbyists in Washington, and they supply 66+% of new jobs, yet this is the group we ignore. Some way we have to get small businesses up and running again, hiring and creating new forms of products and services that the world has never seen before.
One of my favorite long term suggestions: start teaching TRIZ (“The theory of inventor’s problem solving”) to engineers or students in high school, and have them start thinking of how to create and invent things and solve problem that create new industries and products using this modeling mechanism. As these people graduate, they will be equipped with the thinking skills that invents new products and solves problems, and the industries they create will slowly help repopulate the country with winners.
I remember Wayne Green (publisher and founder of 73 Magazine, Byte, CD Now, etc.) writing how he encouraged the King of Jordan to encourage ham radio as a hobby in all the high schools so that more kids would turn to engineering, and so that the country could over time cut down on expensive imports of foreign technicians. That’s exactly what happened. But only because the King and his ministers took personal interest in it and followed it rather than just pass a law. In time the strategy worked in spades. You cannot pass a law in Washington and hope this sort of stuff happens. Unlike Obama, you have to be very interested in these things and make them work rather than pass a law and walk away.
And by the way, please read How Rich Countries Got Rich…and Why Poor Countries Stay Poor, by Erik Reinert, to understand why you must have manufacturing on your shores. A country gets rich because it turns away from decreasing returns to scale activities (commodity production) to increasing returns to scale activities (manufacturing), and becomes poor when it loses that manufacturing base. You cannot replace the manufacturing sector with services or financials. Witness what happened to us. It’s always too much debt that pops the bubble, and emphasizing this sector is basically amplifying the potential for trouble. Now things must unwind and it will take years since it took years for us to get here.
Any New Laws to Pass That Would Slowly Help Us Amend Things?
I sound like a broken record: campaign contributions from PACs should be outlawed because they are the biggest barrier to turn-around. They are in actuality thinly disguised bribes and payoffs. Corporations are not people and should not be allowed to contribute to contribute to political campaigns. Neither should organizations. Both of these can outspend us. If you are not a citizen and cannot vote, you should not be allowed to contribute. Period. I don’t care what the Supreme Court says, make a law to end this. Be like the Founding Fathers and work out basic principles and legislate them. You don’t think a man under 35 is mature enough, in general, to be President? Fine, legislate that. You don’t think corporations, PACs and foreign entities should be able to contribute to elections? Fine, legislate that. Think about principles and go from there.
Second, break up the press conglomerate. Return to the old system where there were countless newspapers and radio stations owned by hundred of entities rather than 4-5 large organizations. That diversity kept politicians honest because reporters/journalists were investigating everything. Now they are just corporate job holders afraid to say anything factual that’s “out of line.” The fourth estate has become ineffective at helping to police the government and abuse, including imperial overstretch. Unquestioning journalists quivering about losing their jobs. Let’s go back to what worked before.
For finance and industry, let’s also put back what was in place that worked, like the Glass-Steagall Act and the Sherman Antitrust Act. This is what stopped the large industrialists from raping the country previously, so put it back again and take control away from the corporations. Return banks to their function of making loans rather than playing with money in the market. I’m tired of hearing “they’ll make less profits.” We always become afraid to do the right thing “because it will hurt some industry” and then the industry goes hog wild and imperils everyone – witness the NOW – because we did not act. I expect the same thing to happen with seeds and agriculture because we are letting the large agro-conglomerates decide everything and not legislating against their abuses that are imperiling our food supply. This is a national strategic concern, but lordy, lordy we’re afraid to threaten profits in the slightest while their moves with terminator seeds and geneticall engineered crops that fail en masse endanger us all.
The bottom line is let’s work on restoring the middle class because without it, a country weakens. The best bank is to store money among the people, not the corporations, but we’ve designed it so that the highest paid in America are accumulating all the wealth and assets, and it’s happening over the last 20-30 years and is likely to continue. Whenever that happens, history shows that we get social unrest, democracy or not.
In any case, expect the recession to worsen next year. Arthur Laffer, of Laffer curve fame, also predicts that the U.S. economy is heading for a very big fall in early 2011. “Today’s corporate profits reflect an income shift into 2010. These profits will tumble next year, preceded most likely by the stock market,” writes Laffer in a recent Wall Street Journal article, Tax Hikes and the 2011 Economic Collapse.
That’s my story on the “Super Recession” I think is coming. We can’t inflate our way out of it this time because we’ve finally reached the limit. It’s time to restructure.
