“The Great Depression of Debt” is a hardcover updated edition of “The Second Great Depression, Starting 2007, Ending 2020.” “The Great Depression of Debt” can be purchased at most bookstores or at Amazon.com: http://www.amazon.com/Great-Depression-Debt-Survival-Techniques/dp/0470423714
THE WEEK’S STOCK MARKET AND THE STIMULUS
The important thing to note is that the market gain realized on Thursday when the positive GDP numbers were released was overwhelmed by the down market on Friday when the negative consumer spending numbers were reported. The S&P 500 actually lost 4% for the week. Apparently, more investors are recognizing that the 3rd quarter gain in the economy was driven by the cash-for-clunkers program and first-time-home-buyer credit, which are both now ending. There was no real economic recovery.
Congress is also aware of this and is thinking about extending both stimulus programs, with some modifications. For example, on the first-time-home-buyer credit, they are considering extending the end date beyond November and including a $6500 credit for those who want to trade-up from homes they have lived in for more than five years. Neither program will have much effect except to give money to those who were going to buy anyway. A $6500 credit to someone to buy a more expensive home in a market with falling prices (and with a difficulty of even being able to sell their existing home) is not likely to motivate anyone. And most first-time buyers already made their move since they thought that the program was ending in November. So we will just be giving away taxpayer money to those who are going to buy anyway with no resultant long-term gain in the economy.
In fact, as reported in CNN Money, Edmonds.com has calculated that taxpayers paid $24,000 for every extra car sale generated by the Cash-for-Clunkers program. Of course, the White House disputes these numbers and the way Edmonds calculated these numbers; but even if the per car costs are off 50%, it was a very expensive program versus any long-term benefit.
The first-time-home-buyer credit has a similar cost issue. The National Association of Realtors (NAR) reports that 1.8 million buyers got the first-time home buyer’s credit. But the NAR estimates that only 350,000 of these sales were due to the first-time buyer credit. The National Association of Home Builders (NAHB) estimates that only 150,000 additional home sales were due to the first-time buyer credit. On the basis of the above numbers, each additional home sale cost the taxpayer either $41,000 per home or $96,000 per home. It is worth noting that neither the NAR nor NAHB are politically motivated to make these numbers look worse than what they really are.
In fact, the whole stimulus program has had questionable and costly results. CNN money reports that after $150 billion in stimulus spending, 650,000 jobs have been created. That is a $230,769 cost per job.
OUR FRIENDS IN CHINA
Chinese-made drywall that emits sulfurous gases carbon disulfide, carbonyl sulfide, and hydrogen sulfide, was used in an estimated 100,000 U.S. homes built in 2005/2006 at the height of the home price bubble. Not only do these homes now smell like rotten eggs and perhaps cause health issues, the pipes and electrical components are corroding. To repair these homes is going to cost an estimated $80,000 to $100,000 per home. Insurance companies are not only refusing to pay for the costs of repair, but they are also refusing to renew insurance policies on these homes. Since most mortgages require home insurance, this and the cost of repair is forcing many of these homes into foreclosure. Since many of these homes will be unsalable even after repair (would you buy one?), the banks could end up eating the whole cost of the mortgage. If the home values average $250,000, that will be a total loss of $25 billion.
As this is going on, a Chinese producer of wind power turbines has just won the contract to supply the components for a $1.5 billion wind farm in Texas. Just a year ago, T. Boone Pickens attempted to build a giant wind farm in Texas but was thwarted due to lack of funds. Somehow, our stimulus to help develop clean U.S. renewable energy isn’t working. And after the Chinese’s performance on baby formula, children’s toys, dog food, dry wall, etc, I don’t think that I would want to stand under those whirling wind turbine blades!
SO NOW WHAT?
Consumers continue to cut spending, foreclosures continue to rise, and unemployment is expected to keep growing. So, the likelihood of the government being able to cut back on stimulus seems unlikely unless they want to risk the economy getting as bad as it was in The Great Depression. However, continued high deficits are also unsustainable. So what’s a government to do? Here are some examples (note, examples only!) of what our government could do to continue stimulus support for our economy while reducing our deficit. These steps would reduce the continuing drop in the dollar, reduce the likelihood of extreme inflation, and give our economy the time needed to heal from its excessive consumer and government debt.
For a start, it may be worthwhile to compare the U.S. to other countries. First, the portion of our country’s wealth that is in the top few percentage of our population far exceeds that of any other democratic country. In fact, the average annual income of the top 1% of U.S. households is $1.2 million. So, let’s put a 20% off-the-top tax on this income, which will increase U.S. tax income by $276 billion. Now, that doesn’t solve our nearly $1.5 trillion deficit; but it sure takes a big bite out of it. Some may say that this tax is unfair. But was it fair that this top income group was the only group that has prospered by the economic gains of the last 10 or 15 years? And, it isn’t like this tax would put this group into the poor house. The poor dears would just have to learn to get by on an average income of almost a million dollars per year.
Another area where we differ dramatically from most countries is how much money we put towards defense. The amount we spend on defense is almost equal to the total of all other countries combined. And we spend nine times as much as China, who, as mentioned above, is coming in to build a wind farm in Texas because we can’t afford to do it ourselves. Our 2009 Department of Defense budget is $651 billion. And that includes the $1,000,000 it costs us each year for each added soldier in Afghanistan and nearly $500,000,000 for each soldier in Iraq. Well, we can no longer afford to be the world’s policeman. So, let’s cut this in half by bringing half of our boys (and girls) home. Note! We want to keep them in the service because otherwise we would add to our unemployment issue. Our returned military personnel will be used to guard our ports and to help rebuild our infrastructure. From numbers I can find, there are roughly 300,000 U.S. troops overseas. If we bring half of them home, that would be 150,000 more people requiring housing and spending money in our own economy, both a positive boost. And, several of the countries that currently have our troops, like Japan, don’t want them there anyway.
As for us being needed in Iraq, Afghanistan, and near North Korea to protect our security, few can show how troops on our own borders won’t protect us even more. In fact, many people believe that our presence in the Middle East does more to promote terrorists against the U.S. than anything else. But, in any case, if we keep running $1.5 trillion deficits, we are likely endangering our long-term future far more than if we pull most of our military back to the U.S.
So, if we cut our military budget back 50%, we will save $325 billion a year, even more than what we gained by taxing the extremely rich. Between the two, the increased taxes and reduced military budget, we reduce the deficit by $600 billion per year. That would reduce our deficit from $1.5 trillion to $0.9 trillion. Still high, but this reduction will greatly reduce the pressure on the dollar and enable us to keep helping the economy until the consumer is whole and unemployment starts to go down. Then the stimulus can slowly be reduced along with the deficits.
THE STOCK MARKET
The Price/Dividend (P/D) ratio for the S&P 500 is now 54. This can be compared to the historical median P/D of 26 and the 17.2 target I use to get back into the market. At current dividends, the market will have to drop more than 50% to get down to its median P/D and drop 68% to get to my own entry target P/D.
Do not interpret the P/D ratio as a predictor of the direction of the economy. It is a historical unemotional measure that I believe reflects whether the market is overpriced. The P/D ratio can stay very high for many years with little rationale, as it did in the nineties.
Here is where I get my P/D ratios. http://www.indexarb.com/dividendYieldSortedsp.html. Go to the bottom of the table and read the value opposite “Average Dividend Yield (%) of All S&P 500 Stocks.” Take the inverse of this number X 100 to get the price/dividend.
As always, people should use their own judgment/data to affect their own investment strategies; and they should not blindly use the above information. Intelligent people can, and do, disagree.
Warren
