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Posts Tagged ‘Business’

Today, the national unemployment rate is at 10%.  So far, the Obama administration has spent only about $200 billion of the allocated economic stimulus money- about 1/4 of what has been appropriated. One might conclude that President Obama doesn’t have a sense of urgency about the country’s economic situation.  While the President’s attention has been turned to health care and Afghanistan, American’s have continued to lose jobs every month since he was elected – and for many months before he was elected. George Bush was equally unable to create jobs for Americans. Why?

First of all, we need to admit that the U.S. government does create a lot of jobs for Americans. About one half of our entire national budget is spent on defense. So, if you work for Lockheed Martin, Boeing, Northrop Grumman, General Dynamics or other defense contractors, or if you work at one of the national labs that does defense research, or if you are in the military – Uncle Sam has created your job. The problem of course is that these types of jobs do not create additional revenue. i.e. the only customer, by definition, is the U.S. government.  So the income that people receive from these jobs is sort of like taking money out of one pocket and putting it in the other – the total wealth of the country doesn’t increase – and by the way, for many people, the money to pay for these jobs is coming out of their pockets and going into the pocket of someone else. Remember – that is fully one half of all the money our government spends, and we have been doing that for many years.  It’s a big part of our economy – such as it is.

The rest of our economy is in a shambles.  We all know that.  That’s why we have been depending on a real estate Ponzi scheme to make money for us for the past several years. Now that the bubble has burst, it is pretty clear that we can’t re-inflate that particular bubble anytime soon.  We’ll have to find another way to make money for the part of the population that doesn’t feed off the defense budget.  And this is where the problem lies. This is Obama’s Dilemma.

There are many places we can turn to illustrate the roots of Obama’s Dilemma, but perhaps none are so illustrative of the problem as everybody’s favorite store: Wal-Mart.  The problem with Wal-Mart can be found in their motto: Save Money, Live Better Wal-Mart.  We all like to save money and it is difficult to find any place that sells stuff for less than Wal-Mart, but that is exactly the problem, and it started a long time ago. Next time you go to Wal-Mart see if you can find anything (except food) that carries the label “Made in USA”.

For those of us old enough to remember, we know that once upon a time television sets were made in the USA. So were refrigerators and other appliances; so were cars; so were airplanes; so were clothes; so was furniture. I guess you can see where I’m going here. We, well not exactly we – but the wealthy people who actually run this country and it’s government – found that they could make a lot more money by building stuff in China and India and Mexico and Costa Rica and Egypt and almost anywhere that much cheaper labor could be found. These “Americans” who own the multinational businesses that make our stuff exported our jobs throughout the world. While the American people played Ponzi real estate bubble, the wealthy class exported our jobs. We now live in a multinational economy but the problem is that we can’t compete because our wages are too high.  We can buy, but we can’t sell.

So, while businesses like Wal-Mart and many, many others flushed our economy down the toilet – while they made fortunes for themselves, most Americans were unaware of what was happening. Now we face a hard reality. The jobs are gone and they are not coming back. The bubble has burst and we can’t play bubble games anymore.  We are a bunch of high rollers who have spent our last few dollars and our credit is no longer any good at the banks.  We need jobs but, outside of more defense jobs, the government is unable to create anything that would have much of an effect.

So, President Obama dabbles with Green technology ideas – as if that will put ten or twenty million Americans back to work.  We have cash for clunkers and rebates for first time home buyers and other little tricks that give temporary surges.  It’s like when your car is out of gas and you add a pint of gas to the tank. It doesn’t take you very far. The question we all need to ask is this: can this thing be fixed?  The answer is no – at least not very soon.

Our wealthy “un-Americans” have enriched themselves at the expense of the entire country’s economy.  Globalization has been a boon to some Americans in the short run – but the short run is over – now we are in for a long-term disaster.  Globalization means flattening, that which is high is lowered (that’s us) and that which is low is raised (that’s China, India, and soon to be Africa).  A few of John McCain’s class will benefit but many, many more will suffer and our government has let this happen, slowly, over the past twenty to thirty years. There are many people to blame, but Obama is not one of them.  Even so, he will be blamed if he can’t solve the dilemma.

The problem is that the solution is not palatable to the wealthy, ruling class.  The solution is to scale back globalization.  The solution is to level the playing field via tariffs on imported goods so that American made goods can compete again.  Only then will there be jobs in the U.S. again.  Our economy won’t be healed until we once again build televisions and furniture here. We won’t have stability until we build quality cars in this country that compete in price with foreign-made cars. We won’t have good technical jobs in this country until we have more than one company building commercial airplanes and at least one company that builds commercial ships.

Wal-Mart is not the cause of globalization, but it is the poster child for the siren lure of cheap foreign imports. Our economy won’t be finally healed until the Mom and Pop clothing stores and hardware stores on Main Street can compete fiercely with Wal-Mart. However, that is something that is abhorrent to many, if not most, of our very wealthy Senators and Congressmen, their sycophantic lobbyists, and the hidden oligarchs of our society.

Even so, it must be done, and how to make that happen is Obama’s Dilemma.

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Here’s a question for you: when a mortgage melts down, where does the melted money go? Is there some sort of giant drain in the economy where it all flows? The experts are saying that before the current meltdown is finished the total losses, from the banks alone, never mind the poor guy whose house was foreclosed, will be in the trillions of dollars. That is a virtual flood of melted money. But, I ask again, where does the money go? Are there only big losers in this process or are there big winners too?

If you read one of my previous blogs you might remember that I had mentioned that there is a law of conservation of energy in physics. I am willing to bet there must be a similar law of conservation of money in economics. Let’s face it the money went somewhere; it didn’t just vaporize, right? OK, now for my second question. I turn once again to the immutable laws of physics, Maxwell’s equations to be precise. Remember the one that says Div B = 0? No? Really? Well, let me refresh your memory. It is interpreted as meaning that there is no such thing as a magnetic monopole. In other words for every magnetic north pole there is a corresponding south pole, and vice versa. Taking this law and confidently applying it to economics, there must be a law that says if someone loses a bunch of money then there is somebody else who gains the same amount, and vice versa.

I thought it might be interesting to try to figure out who are the big winners and losers in the great mortgage meltdown of 2008. Let’s see if we can understand this by looking at the purely hypothetical case of Fred Smith. In 2006 Fred attended a seminar entitled “How to get rich buying and flipping houses”. Fred learned that he didn’t need to have any money, a job, credit, or anything, except a pulse, in order to get a loan from his friendly neighborhood bank’s loan officer. That’s because the loan officer had gone to the same seminar Fred had gone to, and it was common knowledge that everyone could make a ton of money by buying and flipping houses. Our friendly loan officer was happy to OK a loan for Fred of $300,000, the full purchase price of the house, and Fred moved in a week later. So where did the money go?

Well, it didn’t go to Fred, except for about one heartbeat. Then it went to the contractor who built the house who turned around and banked some of it in his own, ever-growing bank account, and then gave the rest to his workers who built the house, a few of whom were actually American citizens. Eventually this money found its way to Wal-Mart because these workers needed to buy school clothes for the children and in turn Wal-Mart sent the money to China, after taking a nice profit and putting that in their bank account. The Chinese factory owner took his profit and banked it and then paid his Chinese workers who put their tiny paychecks in their bank accounts.

About six months later, Fred, who hasn’t sunk a dime into the house and has never made a mortgage payment and who hasn’t been able to flip the house for $400,000 learns that the bank is foreclosing and taking possession of the house so they can sell it and get their money back. Except, it’s not the bank he borrowed the money from that is foreclosing, it’s a big European Bank who bought the mortgage, thinking it was AAA rated. It turns out that this was only one of about 10,000 such mortgages this bank bought.

Unfortunately, after Fred is booted from his house, the big European Bank is not able to sell Fred’s house, nor can it sell the remaining 10,000 houses it has foreclosed upon. This bank now has huge losses on paper and the people who have savings accounts in this bank get scared and start withdrawing their money and the bank has to get rescued by the national government, which promises to pay all the bank’s debts. The government raises taxes on everybody in the country and pretty soon the bank is back on an even keel and everybody is happy, except that the citizens of that European country will be paying higher taxes for about…oh…let’s see…the rest of their lives. Meanwhile, don’t worry about Fred because he was able to get another loan and is now living in another house.

So is that what happened? In some cases, yes, but in other cases, the U.S. banks held onto the less toxic mortgages themselves or sold them to other U.S. banks, or more likely sold them to those great big mortgage magnets Fannie Mae and Freddie Mac. Can you see where this is going? As we all know Fannie Mae and Freddie Mac now own a ton of these toxic mortgages. (That is a new mortgage classification. The classes go from AAA to C and just below that they are officially called Toxic). The money that Fannie and Freddie paid to the U.S. banks has flowed into the U.S. economy as explained above, in enormous amounts, and everybody whose hands the money passed through took their cut starting with the contractor, then to his employees, to the stores they shopped in, to the factory owners in China, then at last to the low paid Chinese worker who banked his rewards from the Global Trickle Down Economy. Now, as Fannie and Freddie are looking at staggering losses we can take comfort in knowing that it won’t be the stockholders of these organizations who will bear the brunt of the losses. I mean, why should they, right? Our far-sighted government recently took steps to make sure that our government stands ready to bail out Fannie and Freddie with the semi-infinite resources of the U.S. Treasury. Oh, by the way, do you know where the U.S. treasury gets its money from? Yep, that’s right, but let’s keep it to ourselves, OK?

You know, it’s interesting, I saw a full-page ad in the paper today. It said that if I attend a seminar I could learn how now is the time to make money in real estate by buying foreclosed properties and fixing them up and selling them. I’m thinking this might be the time to buy – I mean, after all, I don’t see how I could lose. What do you think?

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There is a myth that prevails among many people, including our President, that the free marketplace is sort of like a giant economic computer that always comes up with the correct solution for society. The term “free market” is pretty much a euphemism for business and, in the same way the U.S. and the global “free market” is a euphemism for Big Business. The proponents of Big Business and Big Profits would have us believe that the magic “computer” of the marketplace will benefit us all, even the poorest of the poor by providing the most cost effective, and most efficient solutions for all of our problems. These proponents of this economic view are quick to tell us of the dangers of Big Government and “tax and spend” liberals. The truth is that Big Government has accomplished most of what is good in our society and Big Business has done little more than to polarize our society into two groups: the ultra rich and everybody else. Guess who owns the big businesses.

Here are a few examples of the achievements of Big Government and Big Business:

Big Government has given us Social Security, Medicare, free public schools, the interstate highway system, automobile safety laws, aviation safety regulations, food safety regulations, our military, welfare, disaster relief (such as it is), mortgage insurance, low interest student loans, and more. Think about it. Would Big Business ever build the interstate highway system? Of course not, because there would be no profit in it. Would Big Business be likely to provide everyone with a free education? Let’s be serious.

Big Business’s primary goal is to maximize profits for its owners – period. That probably sounds pretty good if you are an owner, but it certainly disqualifies Big Business as an entity that we should turn to in order to solve our problems of health care, transportation, energy, education, and much more. This is why we need our government to lead us in the search for alternative energy, not the oil companies. We need our government to lead us in the search for a solution for our heath care crisis, not the health insurance companies, and we need the government to lead us in creating a secure retirement for older Americans and not the leaders of Big Business who have been so quick to abandon defined benefit pension plans in favor of 401k plans. In the present administration, we have seen the creeping influence of Big Business in the administration’s attempt to convert Social Security into individually administered stock market investment plans – an attempt parallel to Big Business’s ditching of defined benefit pension and giving people 401k plans.

The ultra rich and their candidates are fond of talking about the dangers of Big Government and “tax and spend” liberals, but remember this: we have a government “of the people, by the people, and for the people”. That great Republican, Abraham Lincoln, said that. We the people are the government – we are Big Government. Big Government is not some alien entity out there – it’s just us, all 300 million of us. Why is Big Business trying to convince us to fear Big Government if Big Government is really just us? That is simple. They don’t want to pay taxes – none at all if possible. They are succeeding in their plan. The have drastically lowered their own income taxes, corporate taxes, investment taxes, and eliminated the estate taxes on their gigantic fortunes so that they can preserve their wealth in family dynasties that will last forever.

Look at the record. What has Big Business ever done for you? Have you received some trickle down benefit maybe? Are you grateful for your trickle down benefits like a lopsided tax code that favors the ultra wealthy? Are you grateful for your disintegrating public schools that the ultra wealthy shun in favor of their private schools? Are you grateful for a Big Business banking system that gleefully participated in a real estate Ponzi scheme that has resulted in worldwide financial chaos?

The simple fact is that Big Business is not some giant, benevolent marketplace computer that always comes up with the right solution. Big Business is a ruthless process of competition that focuses on maximum profits for its owners. It is a process like a lightning bolt or a meander in a river. It always takes the path of least resistance, the easiest, quickest way to a profit. Big Business would never have built any of the great components of our society because Big Business is not interested in benefiting the vast majority of the people. It’s just that simple.

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