Richard Suttmeier says, “Forget the Double-Dip,” We Won’t Kick the Recession Until We Start Creating Jobs”

The stock market continued its sell-off Thursday as investors await Friday’s June unemployment report. The consensus estimate among economists is for a loss of at least 100,000 jobs and the unemployment rate to inch up to 9.8%.The jobs data we have already received this week also doesn’t suggest positive news. This week’s initial jobless claims were worse than expected, growing by 13,000 to 472,000. The four-week moving average is now 466,500. That’s well above normal levels, even during a recession. “350,00 is the recessionary threshold,” says ValuEngine.com’s Richard Suttmeier.The private sector is still not creating enough jobs to make a dent. Wednesday’s ADP report counted a disappointing 13,000 new jobs in the private sector in June. Remember, the government’s data only showed 41,000 new private sector jobs in May.The poor job market is proof the economy remains in a prolonged recession, says Suttmeier, noting that in December 2007, when the recession began, the unemployment rate was below 5%. “Forget the double dip, we’re not out of the first dip, based on that statistic alone.”There is one shred of silver lining, at least when it comes to stocks, Suttmeier tells Aaron in this clip. “The market reaction to the negative side has already occurred this week, so you may get a relief rally,” even if the jobs data is weak.

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“The Worst President in My Lifetime”, Howard Davidowitz on Obama

President Obama is having a rough go of things lately. As noted here last week, for the first time in his presidency, more Americans disapprove of Obama (48%) than approve of him (45%), according to the latest WSJ/NBC poll. And 62% say the country is headed in the wrong direction.“The American people are right,” says Howard Davidowitz of Davidowitz & Co. A critic of Obama’s, from the start, Davidowitz refers to him as the “worst” President of his lifetime, even worse than of Jimmy Carter, based on: * — The War in Afghanistan: Davidowitz doesn’t see the point. As far as he can tell, after 7 years, hundreds of billions spent, and thousands of U.S. lives lost, the Afghans still can’t defend against the Taliban. Plus, the Afghan government is stealing billions in aid from the U.S. The WSJ reports, $3 billion in U.S. aid has been loaded onto planes by corrupt officials and flown out of the Kabul airport since 2007. “If they can’t be trained, if they’re stealing all our money, all our soldiers are dying. I don’t understand how any of this is logical,” proclaims Davidowitz. * — Out of Control Spending: Davidowitz thinks Obama has wasted time and taxpayer money pushing ‘Obamacare’ into law at a time when the debt-to-GDP ratio is expected to hit 62% by year’s end. “We’re going broke because of Medicare, Medicaid and everything else. He added another benefit, health-care. Can you explain that to me?” * — BP Oil Spill: “It could destroy the country,” he says. Davidowitz fears the continued loss of hundreds of thousands of barrels of oil per day will drive gas prices higher, further choking and already struggling consumer. Meanwhile, he questions why the President waited 50 days to contact BP executives. Davidowitz recognizes Obama was handed a difficult hand upon entering office, and admits the political system is dysfunctional. Actually, in the many times Davidowitz has appeared on Tech Ticker he’s rarely had a nice thing to say about any politician, regardless of party. What he’d like to see is a return to fiscal responsibility, lacking these days. “Ross Perot did a huge service to this country when he ran because all he talked about was the budget and what was going on and it forced Clinton to deal with it,” Davidowitz says.

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Value-Added Tax (VAT) – What You Need to Know

Hey – you know we have a debt crisis, right?

A VAT could reduce the deficit and its announcement would signal to foreign investors that we’re serious about deficit reduction, reducing our long-term interest rates and making it easier to borrow.

a VAT is Coming Soon

President Barack Obama’s bipartisan commission to fix our long-term deficit crisis held its first meeting on April 27. But a couple of weeks ago, the Senate overwhelmingly passed a symbolic measure rejecting an important tool to restore fiscal sanity to the budget: the value-added tax. To which you might respond: a what?

Americans like to think of our country as exceptional. Our tax system certainly is. The United States is the world’s only developed nation without a national broad-based consumption tax. As a result, our taxes hit income harder than most countries. Nearly 38 percent of our overall tax take comes from the individual income tax. The OECD average is 25 percent.

As our gaping deficit commands more attention in Washington, some lawmakers and policy gurus are talking about making America a little less exceptional by creating a national consumption tax. That sounds scary. So let’s back up and explain some things about a value-added tax, or VAT: why we might need it, how it would work, and what liberals and conservatives are saying about it.

Here’s why we need it: If you think the deficit looks bad now, wait a few years. Rising health care costs for retired baby boomers will push U.S. debt levels past their World War II-levels. But whereas WWII ended and we owed that debt to ourselves, our entitlement system is woven into American life and we owe half the resulting debt to foreign countries. Approaching this challenge will require some combination of robust growth, spending cuts, entitlement reform and more tax revenue.

Where should this tax revenue come from? There are three reasonable sources. First, some revenue should come from cleaning out the underbrush of special interest deductions and exemptions that hide hundreds of billions of dollars from taxes. But every tax code in the world molds to the interests of the public, and dramatically reducing these carve-outs is unlikely. Second, some revenue should come from higher income taxes on the rich, whose total tax rates have fallen consistently over the last 40 years — while spending grew. But higher taxes on the rich alone won’t close the deficit. That brings us to revenue-source number three: we will have to raise taxes on lower- and middle-class families, and the VAT is probably the most efficient, most equitable, and most non-distortionary way to do it.

So what is a value-added tax, anyway? What it sounds like: a consumption tax on the “value added” at each stage of production. Here’s how that works: Imagine a $1 loaf of bread you buy from the supermarket with a VAT of 10%. You’ve got a farmer, a baker, and a supermarket in the production chain. The farmer grows the wheat and sells it to the baker. The baker makes a loaf, sells it to the supermarket. The supermarket sells the loaf to me. Each link on the production chain pays the government 10% of the price of its product minus 10% of the price it paid for the goods to make that product. Ultimately, the government collects a total of 10 cents on the $1 loaf. At the supermarket, I pay the bread price plus the VAT: $1.10.

Maybe that sounds complicated. But it’s actually much easier to collect VAT than a national retail sales tax because there is a counterparty to every transaction. The baker can try to avoid paying her share of VAT. But the government will see that the supermarket reported the purchase of her bread, and it can go to the baker and say “you forgot to report your sales.” With the individual income tax, we ask the IRS to police tax evaders. With a VAT, the production chain helps to police itself.

For most Americans, this is all happening under the hood. All we would see are higher prices and less overall consumption. Who could want such a thing?

Maybe all of us. Remember that debt crisis? A VAT could reduce the deficit and its announcement would signal to foreign investors that we’re serious about deficit reduction, reducing our long-term interest rates and making it easier to borrow. What’s more, if a tax on consumption discourages some consumption, it might encourage Americans to save more, which might not be such a bad thing considering an avalanche of consumer debt added to the last recession.

Finally, the politics. Conservatives and liberals have different objections to the VAT, but many of them are misguided. Conservatives don’t like the VAT because it’s an efficient, invisible tax — a “money machine.” But one look at our deficit projections is enough to tell you that we need a money machine, as Reagan economic adviser Bruce Bartlett wrote. Conservatives also worry that “invisible” taxes like a VAT would enable the government to grow bigger. The evidence does not agree. “Tax visibility is empirically unrelated to the amount of taxation and government spending,” economist Casey Mulligan concluded.

On the other side, liberals worry that a tax on consumption will hit the poorest the hardest, because lower-income Americans spend more of what they make. But policy makers could solve this regressivity in many ways. Most simply, pairing the VAT with a tax credit for poorer families could actually make the tax progressive. They could also spare some common products from the VAT (indeed, no country’s VAT extends over the entire economy, and realistically an American VAT would probably hit only about a third of GDP). Lawmakers would also probably introduce a VAT in exchange for some combination of cuts to income, payroll, or corporate taxes.

Of course, a VAT could take years to set up and special interests would carve it up with exemptions, just as they have for the rest of the tax system. But there are reasons for both liberals and conservatives to support the VAT. Conservatives want a tax system with a broader base and lower marginal rates. Liberals want to protect programs like Medicare and education spending with new taxes that don’t overburden lower-income families. A VAT would serve both interests.

by Derek Thompson
Tuesday, April 27, 2010

7 Good Reasons Why The Dollar Will Fall and Gold Rise

It’s time to provide some fundamental reasons as to why the dollar is in trouble long term and why the precious metals sector and the commodities sector stands to benefit from these dollar woes.

  1. The US has a massive current account deficit and it only seems to be getting bigger. Economists may play with the numbers by stating that one month is less than the other and so forth, but the trend is up. It now comes close to 6% of our total economic activity.
  2. The US needs to attract a whopping 1.8 billion dollars a day to compensate for the current account gap. This trend is simply unsustainable.
  3. While Government officials talk big about a strong dollar policy, they actually favour a weak dollar. This serves two purposes, it helps increase exports and it allows the government to pay its debt with lower valued dollars. As long as the Government continues to borrow at these mind boggling rates, it is going to unofficially favour a weak dollar.
  4. By inflating the money supply, the government is imposing a nefarious silent killer tax on the masses. The only way to hedge against this outright theft is to hedge yourself by getting into hard assets (precious metals, lumber, oil, etc).
  5. Our national debt is 12.4 trillion and increasing. However, this does not take into consideration all our unfunded liabilities such as Social Security and Medicare. If these are combined, the debt levels soar to well unimaginable levels.
  6. 44 states are facing budget shortfalls. California is leading the way as it is expected to spend 50% more than it will generate this year. Now that is a really scary thought. Since 2007 US states have collectively spent 300 billion more than they have generated. These deficits mean higher taxes and so far 33 states have raised taxes, but collections have plummeted to their worst levels in 46 years; you cannot squeeze water out of a rock. No jobs means no revenues but states are selling new bonds at record rates to raise funds. It’s a recipe for long term disaster.
  7. Eventually the Fed is going to have to raise rates to continue attracting the huge amounts of money it needs to function. Overseas investors are going to start demanding higher rates. Higher rates will kill this fragile economy. Precious metals thrive in a high interest rate environment. From a long term perspective the bull market in precious metals has only just begun.
About the author: Sol Palha

Paul Krugman says, We’ll be Repeating the Great Mistake of 1937

Paul Krugman

Paul Krugman

That 1937 Feeling

Published: January 3, 2010

Here’s what’s coming in economic news:  The next employment report could show the economy adding jobs for the first time in two years. The next G.D.P. report is likely to show solid growth in late 2009. There will be lots of bullish commentary — and the calls we’re already hearing for an end to stimulus, for reversing the steps the government and the Federal Reserve took to prop up the economy, will grow even louder.

But if those calls are heeded, we’ll be repeating the great mistake of 1937, when the Fed and the Roosevelt administration decided that the Great Depression was over, that it was time for the economy to throw away its crutches. Spending was cut back, monetary policy was tightened — and the economy promptly plunged back into the depths.

This shouldn’t be happening. Both Ben Bernanke, the Fed chairman, and Christina Romer, who heads President Obama’s Council of Economic Advisers, are scholars of the Great Depression. Ms. Romer has warned explicitly against re-enacting the events of 1937. But those who remember the past sometimes repeat it anyway.

As you read the economic news, it will be important to remember, first of all, that blips — occasional good numbers, signifying nothing — are common even when the economy is, in fact, mired in a prolonged slump. In early 2002, for example, initial reports showed the economy growing at a 5.8 percent annual rate. But the unemployment rate kept rising for another year.

And in early 1996 preliminary reports showed the Japanese economy growing at an annual rate of more than 12 percent, leading to triumphant proclamations that “the economy has finally entered a phase of self-propelled recovery.” In fact, Japan was only halfway through its lost decade.

Such blips are often, in part, statistical illusions. But even more important, they’re usually caused by an “inventory bounce.” When the economy slumps, companies typically find themselves with large stocks of unsold goods. To work off their excess inventories, they slash production; once the excess has been disposed of, they raise production again, which shows up as a burst of growth in G.D.P. Unfortunately, growth caused by an inventory bounce is a one-shot affair unless underlying sources of demand, such as consumer spending and long-term investment, pick up.

Which brings us to the still grim fundamentals of the economic situation.

During the good years of the last decade, such as they were, growth was driven by a housing boom and a consumer spending surge. Neither is coming back. There can’t be a new housing boom while the nation is still strewn with vacant houses and apartments left behind by the previous boom, and consumers — who are $11 trillion poorer than they were before the housing bust — are in no position to return to the buy-now-save-never habits of yore.

What’s left? A boom in business investment would be really helpful right now. But it’s hard to see where such a boom would come from: industry is awash in excess capacity, and commercial rents are plunging in the face of a huge oversupply of office space.

Can exports come to the rescue? For a while, a falling U.S. trade deficit helped cushion the economic slump. But the deficit is widening again, in part because China and other surplus countries are refusing to let their currencies adjust.

So the odds are that any good economic news you hear in the near future will be a blip, not an indication that we’re on our way to sustained recovery. But will policy makers misinterpret the news and repeat the mistakes of 1937? Actually, they already are.

The Obama fiscal stimulus plan is expected to have its peak effect on G.D.P. and jobs around the middle of this year, then start fading out. That’s far too early: why withdraw support in the face of continuing mass unemployment? Congress should have enacted a second round of stimulus months ago, when it became clear that the slump was going to be deeper and longer than originally expected. But nothing was done — and the illusory good numbers we’re about to see will probably head off any further possibility of action.

Meanwhile, all the talk at the Fed is about the need for an “exit strategy” from its efforts to support the economy. One of those efforts, purchases of long-term U.S. government debt, has already come to an end. It’s widely expected that another, purchases of mortgage-backed securities, will end in a few months. This amounts to a monetary tightening, even if the Fed doesn’t raise interest rates directly — and there’s a lot of pressure on Mr. Bernanke to do that too.

Will the Fed realize, before it’s too late, that the job of fighting the slump isn’t finished? Will Congress do the same? If they don’t, 2010 will be a year that began in false economic hope and ended in grief.

Niall Ferguson says, U.S. Empire in Decline and on Collision Course with China

The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.”People have predicted the end of America in the past and been wrong,” Ferguson concedes. “But let’s face it: If you’re trying to borrow $9 trillion to save your financial system…and already half your public debt held by foreigners, it’s not really the conduct of rising empires, is it?”Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain’s in the 20th, he says. “Excessive debt is usually a predictor of subsequent trouble.”Putting a finer point on it, Ferguson says America today is comparable to Britain circa 1900: a dominant empire underestimating the rise of a new power. In Britain’s case back then it was Germany; in America’s case today, it’s China.”When China’s economy is equal in size to that of the U.S., which could come as early as 2027…it means China becomes not only a major economic competitor – it’s that already, it then becomes a diplomatic competitor and a military competitor,” the history professor declares.The most obvious sign of this is China’s major naval construction program, featuring next generation submarines and up to three aircraft carriers, Ferguson says. “There’s no other way of interpreting this than as a challenge to the hegemony of the U.S. in the Asia-Pacific region.”As to analysts like Stratfor’s George Friedman, who downplay China’s naval ambitions, Ferguson notes British experts – including Winston Churchill – were similarly complacent about Germany at the dawn of the 20th century.”I’m not predicting World War III but we have to recognize…China is becoming more assertive, a rival not a partner,” he says, adding that China’s navy doesn’t have to be as large as America’s to pose a problem. “They don’t have to have an equally large navy, just big enough to pose a strategic threat [and] cause trouble” for the U.S. Navy.

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John Mauldin Tax Hikes Will Kill the Recovery Which Isn’t Real Anyway

The economic recovery currently underway is a statistical mirage, based on easy year-over-year comparisons and inventory rebuilding, John Mauldin, president of Millennium Wave Securities, tells Henry in the accompanying video.The unemployment rate is closer to 12% when you include people who’ve been dropped from the survey and the “underemployment” rate – people working part-time vs. full time – is 17% to 18%, “and rising,” Mauldin says. “That doesn’t feel like recovery.”Mauldin, who writes the popular Thoughts from the Frontline e-letter, predicts the U.S. economy will be back in recession next year because of higher taxes, both new and with the expiration of the Bush tax cuts.”The Obama administration [and] the Democrats aren’t going to be able to help themselves,” he says. “The deficits are going to be running so high they’ll feel – politically — the need to do something. The way they want to solve it — instead of cutting spending is to increase the revenue. That’s going to suck a lot of air out of the room.”As for the long-term, Mauldin worries America could repeat Japan’s experience of a lost decade (or two), if not the Great Depression itself, citing the risk of policy errors such as trying to solve a debt crisis by issuing more debt.

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