Saturday, June 2, 2012

Problems, Problems, Problems...

The debt crisis in Europe shows no signs of abating, China's growth is slowing to the point where their government is taking action, and US job creation statistics have been disappointing for the 3rd month in a row.

So where do we go from here?

Europe is in a tough spot.  Unfortunately, keeping Greece in the Euro may be a bridge too far.   Financial problems can be issues of liquidity or insolvency.  A liquidity problem is one where the entity in question doesn't have enough cash on hand to pay the bills, but has enough assets (although maybe not liquid) to cover the bills.  Liquidity problems are normally solved by allowing the debtor in question extra time to sell some stuff and raise the cash.  Insolvency is where the debtor doesn't have the cash on hand or the assets to cover the debt.  Greece's problem appears to be one of insolvency in that they can't realistically raise taxes high enough or have a big enough state garage sale to raise the necessary cash.  If true, the Europeans shouldn't throw more good money after bad.  Unpleasant as it is, I think they should shift their attention away from Greece and focus their energy and resources on assisting Spain.  The Spaniards may be solvent.

The austerity push that has been underway across the Euro zone for a couple of years now is seen as contributing to their problems.  The euros have become Keynesian junkies over the last 50 years, and their economies have an unhealthy dependency on government spending.  Some European leaders (most notably new French president Francois Hollande) want to mutualize European debt and create Eurobonds backed by all EU countries to fund infrastructure projects across Europe to get people back to work.  Such a plan would be asking EU members to 'double down' on their current bet.  Some of the economically stronger EU members (most notably Germany) have co-signers fatigue and aren't too keen on such a plan.

It's hard to see where this is headed, but the June 17 election in Greece should be very interesting.  Voters may back Alexis Tsipras the anti-bailout Syriza party candidate or Antonis Samaras the New Democracy party candidate who has vowed to stick to the terms of the bailout agreement. Unfortunately, either outcome (outright default or continued can kicking) looks highly problematic.

China's problems aren't really too bad considering the state of the rest of the industrialized world.  When people talk about China slowing down, what that really means is that instead of growing at 9% a year, they're growing at 6% a year.  China slowing down does relieve some of the pressure on the world's commodity markets in that China has been a bigger buyer in recent years of oil, iron ore, etc, etc.  The biggest losers here are countries like Australia that supply China with raw materials.

Now to the US.

Our job creation numbers were looking pretty good last fall and through the winter, but then things have started to slow down in the last few months.  Corporate  balance sheets are in pretty good shape as many companies are sitting on piles of cash.  With all this cash, why aren't companies expanding and creating jobs?  I think there's so much government policy uncertainty looking into the future that companies are reluctant to spend.  Company CFOs are looking at our government debt situation, and are concerned that taxes are going up in a big way in the future.  That hurts companies in that they've got to cough up some of their cash to pay future taxes, and their customers won't be able to spend as freely as they're having to pay up too.

We need some policy clarity from Washington to clear the air.  A 10 year roadmap that lays out a path to debt resolution would do wonders for the country's economic mood.  Give people a credible vision for how we'll get back to financial health by addressing short to intermediate term job creation, future spending on social programs, tax code simplification, and a longer term rebalancing of the economy towards more private sector/less government spending would be a big physiological boost.

Like the Europeans, we've also become Keynesian junkies and need government spending to keep our economy moving.  Given how we've seen austerity hurt Europe, we probably should avoid the  'cold turkey' route and give ourselves a few years of methadone so we can gradually transition away from our reliance on government spending towards an economy driven more by private sector activity.  

So what's our methadone?  Here's a thought.  For years now, the US has under invested in our country's infrastructure.  Our bridges, roads, and tunnels are in need of an upgrade.  How about a federal infrastructure investment program financed by a bond issuance backed by tolls paid for by the users of the bridges, roads, and tunnels?  Revenues from tolls mean the bonds have a more definite repayment stream versus floating more government debt that we aren't sure how we'll repay.

I realize it's very un-Libertarian like for the Unrepentant Capitalist to propose such a government heavy plan, but the Unrepentant Capitalist is a bit more practical than the typical no regulation, legalize drugs, free-for-all Libertarian.

Our government social spending programs are also in need of overhaul.  Forward projections suggest that no amount of tax hikes will cover our future promises.  We may need to raise taxes some, but a much bigger chunk of the fix has to include a cut in benefits.  Cutting benefits means people will have to wait later in life to receive benefits or they'll receive smaller payments or both.  Note: when Social Security was first instituted in the mid 1930s, people had to wait until the age of 60 to receive benefits; this was at a time when the life expectancy was only a little beyond 60.  Now many people live 15+ years after they retire.

We're also in desperate need of tax overhaul/simplification.  Our current tax code is so thick, we've got to clear-cut half the timber in Mississippi to print the thing. Also, it's not unusual for corporations to spend as much or more money for tax preparation fees as they pay for taxes themselves.  Tax partners in the Big 4 accountancies won't like it (the current tax code keeps a lot of people employed - a modern version of a 'make work' program) but we need to simplify the rules.

Washington, policy clarity please!

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