State of the Nation - Denial

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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President Obama gave his State of the Nation speech last night and Governor Jindal of Louisiana gave the Republican's rebuttal. Neither indicated any realistic grasp of the extent of the economic/financial crisis that the U.S. is facing or proposed any innovative solutions. Generally, more of the same things that have failed in past were proposed. As per usual, the talks were long on rhetoric and platitudes that almost everyone can agree on and short on details for implementation. Not only doesn't there seem to be a realistic plan for fixing the financial system, there doesn't seem to be any plan at all.

The three cornerstones of Obama's agenda are improved education, health care, and alternative energy - the same items he emphasized during his campaign. Improved education as an agenda item is nothing new and has been emphasized by most recent presidents - the quality of American education has continually deteriorated during those administrations. As for health care, the government is going to extend it to more people, but costs have to come down (how exactly Obama plans on accomplishing these contradictory goals remained unstated). Increasing the use of alternative energy is indeed a good idea, but it will be a long time before this significantly impacts U.S. energy usage (it was not mentioned if the economically absurd corn ethanol program created during the Bush administration will be closed down).

There were a number of allusions to the financial crisis peppered throughout the speech. Obama did say that when large banks failed to function, they would be set right so they could lend again Apparently closing them down isn't an option, but failure will be rewarded instead (it should be remembered that Obama lobbied Democrats in congress to support TARP and without his efforts TARP might not have passed). Obama also stated that the auto industry was not going to disappear in the country that invented the car. At first, I wondered why he was trying to meddle in the internal affairs of Germany, but then realized he meant the U.S. and was planning on bailing out GM, Chrysler and Ford. There will be more aid for the unemployed and struggling homeowners as well. Obama praised congress for its swift passage of his close to $1 trillion economic stimulus package.

The man whose administration opened with a budget busting piece of legislation emphasized how he was going to get the deficit under control by the end of his first term (I have to admit I was laughing uncontrollably during that part of the speech). How is he going to do this? First, it is obvious he plans on ending the war in Iraq. While this is an incredibly expensive waste of money, Obama himself admitted that many of the costs of the war aren't even listed in the budget (the Federal government's off balance sheet items would be the envy of an Enron accountant). There is also a task force being formed to get rid of waste and fraud. If this works (and you be skeptical until you see proof), this could indeed cut the budget deficit significantly. Subsidies for big agribusiness are going to be cut and tax breaks for companies that send jobs overseas (what exactly these tax breaks are has never been clear to me). But one of the most important components in Obama's plan to reduce the deficit is the increase in taxes that is going to take place when the Bush tax cuts expire in 2010. He didn't mention that in his speech. He also didn't mention that only a very small percent of the estimated $8.5 trillion in bailout money as of the end of last year is included in the budget deficit or national debt. So don't hold your breath for increased transparency that is being promised in this arena.

Governor Jindal for his part admitted that the Republicans were irresponsible when they were in power and had reneged on their long standing promises to the American people and their core value of fiscal conservatism. It of course would be hard to deny this. It took over 200 years to create a national debt of $5 trillion. President Bush, with the help of a Republican controlled congress for much of his administration, managed to approximately double that debt to $10 trillion in just eight years (at least those are the official figures, tripling it to $15 trillion is more realistic). This occurred even though there were budget surpluses for the last few years of the Clinton administration and projections that the national debt could be reduced to zero by 2010. Like a husband caught cheating, Governor Jindal assured the American public that the Republicans have learned their lesson and aren't going to do that again.

The essence of the speeches last night can be summed up as follows: When the Democrats are in control, they spend like drunken sailors on shore leave. When the Republicans are in control, they spend like drunken sailors on shore leave. No one in Washington has any new ideas or approaches for dealing with the financial crisis. The problems will be dealt with by spending more money. The economy is likely to revive because of all of this spending, but you can assume that this will eventually catch up with the dollar and its value will fall precipitously. The economy after all, always looks good during the beginning stages of hyperinflation.

NEXT: Budget Deficit Screams Inflation

Daryl Montgomery
Organizer,New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.