May 20, 2011

Debt is the number one problem in America. We are heading toward a major national default. To prevent that from happening it is not enough to simply make proposals or advocate a policy change. Every proposal must be judged on its potential to reduce debt and stave off default. We need to be giving our attention to what could work instead of fighting about things we know won’t. Thus far, the Obama Administration has not come up with a single proposal for how to achieve debt reduction. Not one.


Take the proposal to tax the oil companies for example. Will that do anything to eliminate our deficit? No. It will raise about two billion dollars to go against a 1.2 trillion dollar deficit. Two billion dollars is no more than a rounding error and is insignificant in the scheme of things. It is not a solution. Yet this is what Washington is spending its time debating.


The Administration and Democrats in Congress are simply picking a fight. That is the problem in Washington today. Too many politicians are not focused on the fact that in a decade or two, social security and Medicare will no longer exist. Maybe this is a good thing. But if that is the case, let's admit it, so that those that will not have it can start preparing now. That would be the honest thing to do. Either politicians are evading this reality, or they are lying to us about it.


It does no good to propose a budget that does not reverse our deficits and strive for surpluses that will pay down our debt. That is the goal, not simply a "proposal" to do so that ultimately falls short. To suggest that raising taxes on the rich is a solution toward this end is, to be kind, disingenuous.


A raise in a few individual’s or corporate taxes won’t do it. Cutting spending that will not result in a reduction of the debt over time isn’t the answer. A tax increase on the rich, or oil companies, will not pay for the promises we have made. We need to ask the tough question; how can we balance our budget and eventually start paying down the national debt? The answer is simple: raise revenues and cut expenditures. This is simple math. What we face is not an economic problem—it is a socio-political problem.


The answer, as far as I am concerned, is that we need to cut spending on everything, and if we raise taxes, we have to raise them on everyone. My preferred solution has been stated: stop borrowing now. No more raising our collective national credit card limit; we must learn (as a country) how to live on what we have. Let’s back out of our spending plans just the way we came into them – year by year. You would think that a 15 trillion dollar line of credit would be enough! But many say we need more. Much more. Obama proposes increasing the debt another 11 trillion dollars over the next ten years. Not only will this solve nothing, it will just make matters worse.


We need to do away with entire programs and agencies. Now, this is in effect also a default. We would be defaulting on promises made. But this is the default that should occur. Do you know we are paying foreign aid to China? There is no shortage of cuts we can make and promises we can reasonably break. Many are promises we should have never made and can’t keep; such as a blank check for Medicare and Social Security for everyone forever. The terms have to be changed.


The interest on debts we owe to other countries is not a problem. We have over ten to fifteen times the revenue needed to cover the interest on that debt in any given month. So debt default is not in question. The default should be on promises made that are impossible to keep. Such as wages and benefits for government employees that are in many cases twice the market rate. Such as Medicare and Social Security benefits that go to even the richest individuals without regard for where the money will come from. We know this kind of spending needs to be limited or eliminated completely. The only real question is will the default on these promises be now, or a decade from now? I say now. Why put off the inevitable?


We also need to increase revenues by lowering tax rates, and do so in exchange for eliminating all forms of corporate welfare and subsidies. It makes no sense to provide subsidies to farmers or energy companies when they are getting sky high prices for their products and making huge profits. All forms of tax breaks and loop holes should be replaced with a flat, fair, and simple tax.


The problems we face have many possible solutions, for example, replacing the income tax with a national sales tax that would tax everyone and bring in revenues from the underground economy and tax evaders. Or indexing the age one qualifies for social security to insurance actuaries. Or changing the employer health delivery system to an individual health system where we can shop for insurance over state, and indeed, country lines. If there is no lack of solutions, what is the problem? Evasion, finger-wagging, and a total lack of communication need to be replaced with a true debate on what will achieve our shared goal of government solvency.


Americans have become use to seeing the debt clock featured on various news and talk shows as a symbol of the debt bomb we have created. As the debt increases at a frightening pace before our eyes, we are actually witnessing the rate of not just growing debt, but growing spending. Shouldn’t our goal be to someday see that clock run in reverse? It may take 20 years, but isn’t that a goal worth achieving?


Let's keep our eye on the clock and communicate in any way possible to friends, family and all that will listen; that political bickering to no end is a waste of time and money. Let others know that if we are going to have the America we want and have grown accustomed to we will need radical changes. Our goal must be to identify what is necessary to reverse our accumulation of debt in any way we can achieve it. Nothing less will do. We all share this problem, and fixing it should also be our shared goal.

Market Update:

It appears we are returning to the disflationary/recessionary bias of the past. This is not to say we will arrive there, only that the direction has changed. Commodities are no longer rising, they're falling. Growth is no longer increasing to higher levels, it's falling to lower levels. Housing is falling. Retail sales are weakening. Corporate profits are being revised downward. And the stock market is falling while the bond market is rising with the value of the dollar.

Ahead of us we have the end of QE2, the debt ceiling deadline and whatever debt reduction compromise can be made, the Euro crisis debt restructuring, and the beginning of the political season. This is why I went to 100% cash. The trend has reversed, and the uncertainties have increased.


I sold 25% of my holdings in March, another 25% in April, and the remaining 50% in May. Good time to be on the sidelines. I am not looking for a recession, a collapse in the price of gold, or the market. I just think the momentum has ended and a period of stability at lower prices lie ahead. The problem is that could include a 200 dollar drop in the price of gold and some panic selling out of resource stocks, which in a thin market could  take them down substantially. I want to stand aside from that possibility.

Good money has been made. If you don't sell when your stocks have gone up 100% to 1500%, when do you sell? And an even better question is what do you do with the money when you do? It is apropos that my article this week is called “The Goal”, since I have decided to do something I have always wanted to do some day. I am going to pay off my mortgage with the profits made off of penny stocks.


In my archived article, "When To Sell A Stock" one suggestion is to sell when you have reached a personal goal. Paying off my mortgage with what was "pennies" is just such a goal. But I am not selling my core position of gold and silver. In fact I may add to it. And paying off my mortgage will not prevent me from re-investing in the future. In fact, I may buy back my previous portfolio later if it falls, but a smaller rendition of it.


My view is not that resource stocks or gold and silver are going to fall out of bed from here, but more likely stabilize. Gold could trade in a 1550 to 1350 range for some time to come. Low stable prices is what I think we are in for in the coming months -- a stable dollar, a stable stock market, stable interest rates, and stable commodity prices, but at all lower levels.


In my opinion the odds of commodities, like gold and silver, or oil, returning to their previous highs is very low. I will continue to watch the market closely for new opportunities in the future. And if I am wrong, or if new factors pop up, I can always jump back in. For now, for me, it is a time to enjoy the fruits of my labor.