I am No Economist, but ..

"President Barack Obama is so out of touch with America", "We are handing down a balooning deficit to the coming generations of Americans" and last if all, the statement that I think sums it up the best "now is NOT the time to experiment with Socialism", said by Alaskan Bison Killer and Senator John McCains running campaign mate, Sarah Palin.   How true are these statements that are being voiced on all talk shows these days? Obama's rating is at an all-time low, unemployment is at 9.6% and inching towards the doubel digits. Despite all the TARP money ($800 Billion) being spent, consumer confidence is still at an all time low. The word on every economists lips these days is "the US is heading for a double dip recession with Europe close behind" once the stimulus package expires in November!!   Liberal Democrats hang their head in dismay clueless as to why things havent worked the way they expected it to, despite the billions of taxpayer dollars that have been spent on Government schemes.  Conservatives are so surprised with the mid term gift of a clear chance of winning the senate, that the democrats have gifted to them on a silver platter and .. and .. the first African American President suddenly seems to have lost all his rhetoric when he needed it the most - (to explain to the American people the steps he has taken so far)!!   Lets step back a little and take a hawks eye sweep of the whole situation. Long Before Lehman Brothers fell, much before Fannie Mae went down under, and  Bear Sterns flipped, the American consumer was a rather different person.     The American Consumer, poor Joe, as we may call him, was spending his livelihood away, biting off more than he can chew, living beyond his means .. whatever you want to call it for past decade. He was taking homeloans at ridiculous rates he could not really afford, with absolutely NO due deligence done. To top this off, he had a pocket full of credit cards, giving him the propensity to spend beyond what he could afford!! Did anyone have a problem?    NOT AT ALL!! In fact, the world welcomed it. "The US economy is the engine of growth, they used to say!!" China became the factory for this never-ending demand, India became the backoffice of the same. Millions of jobs were shifted overseas to these 2 countries to satiate the demand of an already over-leveraged population (the US) where the appetite seemed to be heading in only one direction and failure seemed impossible because of the huge stakes involved!!

 

Then came the housing crisis, and foreclosures began to start pouring in. All those homes taken at the prevailing rates and all those Collateral Debt Obligations repackaged multiple times and sold between the investment banking giants (that backed these loans up) were called in for stocktaking and then the can of worms came tumbling out !!

 

Walk Away's (thats what they call it when Amercans just leave real estate they cannot afford to pay for anymore) began to occur with regular frequency and since the prices of houses kept going lower and lower default was in the air. Banking became very tight and liquidity for the industry was like water in a parched oasis in the middle of the sahara !!

 

Suddenly this seemingly prosperous American Consumer, who was the engine of growth for the most of the century became the butt-end of ridicule almost overnight!! All over the western media, Joe (American Consumer) bashing began !!

 

Why have they bitten off more than they can chew? Analysts used to scream!! "What were they doing? Were they even thinking??"

 

Nouriel Roubini got his once in a lifetime chance to stardom with his index finger, "I told you so this would occur back in 2006"!!

 

Suddenly, the tempo changed. I was in the US during the 2008 elections, when the shit had hit the fan and all over MSNBC, investment analysts were taking calls from anxious homeowners/ordinary American people who were anxious about the recovery and the prospects of their future. The advice being doled out to American Consumers was to SAVE, SAVE, SAVE, DONT SPEND UNLESS YOU HAVE TO!!

 

In one case, even China and India were quoted as economies with very high savings rates compared to the US. I noticed cases where Americans were calling in to seek advice for Christmas spending and analysts were advising them NOT to spend and instead, to save the money for when they would actually need it.

 

Well, after all that the American consumer seems to have wisened up. Moreover with employement almost reaching double digits - he is clearly saving his pennies and spending only on what he needs to spend on.

 

Now this has initited a downward spiral of deflation. Analystys are worried that if the US continues on this path - it will eventually head Japans way and end up with the lost decade.

 

So according to the capitalists/republicans/tea party enthusiasts. There is only 1 way out of this mess, or only one way to revive their sagging economy !! 

 

Its called cutting taxes. Cutting taxes to Business, to small employees, to almost everyone!!

 

Actually the republicans suffer from chronic myopia and their all time solution to any economic issue has always been this.  

 

Why is this a vialble solution !! Well, because, cutting taxes will make people spend. This is wishful thinking. In my opinion, cutting taxes will certainly encourage people to spend, it however does NOT mean that they would spend. Moreover if we think that cutting taxes and encouraging people spend will get American out of this mess, then we are forgetting what got America into this mess in the first place !!

 

Many analysts have said that this is going to be a long U shaped recovery, so the age of limited/controlled spending is here to stay for sometime. This is a fact that should be accepted. 

 

However, recognizing the fact that spending to some extwent has to be ecouraged, Obama's Small Business Bill was signed into Law 2 weeks ago, a bill that offers huge tax cuts to small business in an attempt to boost the situation of sagging demand. Now this would probably go some distance if not all the way.

 

The bill was held up in congress for the past couple of months - and do you know why ?? Because these tax cuts (unlike the Bus tax cuts) exclude the 5% of the large corporations and their profligate ilk!! In other words tax the filthy rich to pay for the recently-arrived-middle-class-poor. 

 

Given the status quo in America this may not be such a bad idea. I watched a CNN Interview with Donald Trump last week. As usual he was condemning the policies of Obama (you can only expect fat cats to do that). He was against these tax cuts not being extended to the filthy rich !! He said if the government levies tax on the rich and wealthy, they wil leave America in droves !!

 

This is something I find unnerving. These same fat cats brought both Wall street and an unwilling Main Street to their knees 2 years ago with their avarice. They were then bailed out with a multi-billion dollar program that was intended to avoid a depression. Last year, while America was struggling with the economy, these fat cats were taking home pay-hikes and NOW they're crying fowl when asked to cough up the extra tax !!

 

Coming back to the topic, the solution does not really lie in raising tax or dropping it. A paradigm shift is the need of the moment. Americans have gone from spenders to savers and NOW have to go to Producers again. Exports have to be their drive, for in an economy where only so much can be squeezed out of the local market, gains are often better attained elsewhere.

 

Here is where the huge problem lies. The American economy has painted itself into a very tight corner with their policies of the last few decades and allowing Big Business (large American Companies) to dictate everything.

 

Firstly, the US has to pressurize China to allow its currency to appreciate. The trade balance there is really distorted and yeah - Big Business has been part of the cause for this. The renmimbi has been slowly appreciating over the past few months but this should also be accompanied by reforms in china's labour markets due to the ridiculously low wages that are paid there.

 

Next, if this doesnt work, the US should raise tarrifs on China made products and bring them almost up to parr with the local American goods. Under the GATT aggrement, a country is allowed to raise tarifs on an importers products if it finds that the prices of the imported goods hurt the local industry. Of course, such a step needs to be done with caution given the fact that China is holding so much of US Debt.

 

Secondly, the US needs to reclaim its pride and place in Innovation. Some of the best labs are available in the US. However, most of the cutting edge developments that are happening in science now are outside the US, in countries such as Japan, Switzerland, Singapore (Stem Cell Research). The US will need to go back to its own article of deceration crafted by the founding fathers to realize that the foundations of the nation were on secular grounds and not the church alongside state agenda that the republican party preaches to its voters. Religion belongs in churches, temples and other places of worship. It may also belong at home, but it needs to be kept far away from government decision making machinery.

 

Thirdly, a lot of money has already been spent, the US debt has gone up considerably into the trillions. Obama, as much as I favour his policies, should realise that Americans are too capitalistic to allow in the spirit of Maynard Keynes, the government to expand just because the private sector is holding on to their purse strings tightly. There are huge funds sitting with American Investment banks and they are not investing because they dont know where the economy is headed. This is probably where the president needs to be seen and heard more.

 

Obama has been till date not too keen on shedding his anti-business outlook. The fact that he has loaded his cabinet with academicans and little or no representation from the captains of Industry leaves many with the opinion that he truely is anti-business.

Obama needs to engage with Big Business and lay out his plans as to what he plans to do for the economy, as America appoaches its worst winter of dissent.