Friday, February 13, 2009

My Plan for Prosperity in 2009 (Courtesy of U.S. Government $787 Billion Stimulus Plan)

Knowing that our Government has our best interests at heart, I plan on following the Government model of borrowing money and then spending it, hoping that my household would be prosperous for years to come. Sense a little sarcasm?

Spending borrowed money and hoping for prosperity is what the $787 billion stimulus plan will do. Stimulus is a bad word choice to describe the bill. The plan, in total, is just plain stupid. Take for instance the $30 million being sent to Nancy Pelosi's district to help the Salt Marsh Mouse!

There are fundamental problems with the government spending their way to prosperity. First off, they are mortgaging your future and the futures of generations to come. The U.S. government will invariably be forced to raise taxes and print substantially more money. My readers can hedge against the latter by investing in commodities (like precious metals). You can also hedge by buying government I-Bonds if their fixed interest rate component hits 3%. This might very well happen come May 1, 2009, if deflationary forces continue through the end of April. If you are able to get a 3% fixed rate, you'll get to keep it for up to 30 years. This fixed rate is added to a variable consumer price index based rate to give you a total rate. A 3% fixed I-Bond interest rate is great during inflationary times since the variable rate adds directly to the variable CPI based rate and may lead to a net interest rate in the 7 to 9 percent range. A 3% fixed rate was most recently available between 1998 and 2001. People with I-Bonds from this period of time are collecting between 7.92 and 8.52 percent right now!!!

Investing in the stock market right now is not necessarily a good means to beat inflation but may likely ensure the "deflation" of your own investment accounts. The current problem with the stock market is that the government is tampering far to much with markets. Government policies are migrating from capitalism and sound weighting in contract law to a form of pseudo socialism. This is confusing investors on top of the already ongoing compression of corporate earnings.

Our nation has long term problems with entitlement programs. The current $787 billion "stimulus" plan continues the growth of government and compounds expectations and reliance on entitlement programs. In outlying years the government faces a deficit of roughly $45 trillion due to current entitlement programs alone.

Do not be confused by people quoting Economists as being in favor of the $787 billion stimulus plan. Economists in favor of this plan are picking between the lesser of two evils. There is also a popular saying that Economists can make data reflect whatever policy is desired. The fundamental reason for anybody to refer to Economist support of the stimulus plan resides in the formula for determining our Nation's Gross Domestic Product (GDP). The basic formula reads as follows:

Y = C + I + E + G

where

Y = GDP

C = Consumer Spending

I = Investment made by industry

E = Excess of Exports over Imports

G = Government Spending


Our nation's GDP has been going down since consumers are spending less; corporations are experiencing a reduction in earnings, leading to lower industry investments; and our nation continues to be a net importer (thus no excess of exports over inports). This leaves "G" or government spending. For this stimulus plan to be effective (in the short term), government spending must grow faster than decreases in "C," "I" and "E" in the formula above. Even if government spending increases now, it will invariably decrease in the future since the U.S. cannot afford to continually spend at this rate. Additionally, the government does not ever do things efficiently. Our government's spending now may likely result in higher taxes later which will impede "C," "I" and "E" related investments.

With exception to hard work, education and timely investments, you generally induce prosperity through policy. Paralleling this to the U.S. government, one can eliminate the "timely investment" option since our government does not have surplus funds for investment. In terms of hard work, the government is measured by its legislation. I prefer to think that the $787 billion "stimulus" plan doesn't create any long term jobs with exception to growing a number of government agencies. This growth of government agencies only adds further to our nations deficits in outlying years. Hence, the government gets a grade of "F" from me for this legislation.

I rant so infrequently, but I believe it's important to share this view. Of the two largest political parties, I have aligned myself most frequently with Democrats. Unfortunately, this stimulus plan diminishes my confidence in the party. Congress would win my favor if they focused on deficit neutral policies to improve the economy.

By the way, I just received the book "When Giants Fall" in the mail. I've read about 1/5 of the book today. There are a lot of parallels between this timely book by Michael Panzner and our deteriorating economy. I'll review the book in a later post.

No comments: