Friday, January 23, 2009

A letter to a congressional staffer in charge of the economic issues

I just wrote this to a contact I have developed with my congressional representative office. The congressperson is a senior member of the appropriations committee.

I advise reading this - because it likely means you have interest or are practitioners in finance and have some pragmatic experience - to write your representative and stay at it.

This is becoming an incredibly dire national and global emergency.

My letter (and there have already been a few):


Once again I am not sleeping at night.

The current environment is as sweet as it could be to someone with my trade - ostensibly an expert in long term fixed income investments which is the key area as pension funds and investors set out to survive this crisis. So I should be happy. But a combination of both the pragmatic need to have a platform (which is at risk) to practice my trade along with a civic minded concern of the misery and extreme political pressures that may be forthcoming have returned me to despair.

The "American Recovery and Reinvestment Bill" looks like it will fail - not in passage but in meeting the intent.

Just, in robust fashion, consider that the amount that went to Appropriations for the $825 billion bill, as per Appropriations rules, was for $358 billion of spending, which is a good indication of the actual "meat" or true stimulus in the bill.

The rise in savings and drop in consumption that has either already arrived or is coming shortly is about $750 billion and if it is matched with only $358 billion then it will continue to rise to in excess of $1 trillion. That is standard econ 101 which all economists, right and left, agree upon.

If the increase in savings and drop in consumption goes to $1 trillion, then we are approaching a 10% excess in labor and capital investment and as the capital investment cannot be sold given the fact that little in liquidity or interest in buying, the adjustments will be made in labor. This implies a unemployment number in mid teens. A very persistent feed back loop develops at that point which is why unemployment went to mid 20% in the 1930s.

Current market prices are reflecting this as a new wave in bank failures seem to be upon us, international trading partners GDP is being reduced on a leveraged basis to decrease in USA demand, and the negative earnings resulting from excess capacity is forcing re-adjustment of prices in the stock market. The SP 500 stock market index has continued down from highs around Christmas,as the Obama-Biden Plan and now the "American Recovery and Reinvestment Bill" is causing dismay.

We are back to the edge where we are at high risk for an explosion in unemployment, corporate default, nationalization of the larger banks, bank holidays, and a stock market crash. Already massive damage has been done to retirement plans and pensions to the extent of never being able to repair, and another adjustment down will produce a chronic crisis in that area of our populace least able to protect themselves - the elderly. Migrations to more comfortable climes for retirement will cease and massive numbers of elderly in poverty will remain in XXXXXXXX.

As I have pointed out in the Fall, I am still seeing little if any signs of literacy of key economic concepts and the realization of the potential outcome in Congress - otherwise how did the "American Recovery and Reinvestment Bill" leave Appropriations? Why is there no terrified and shrill and even hysterical debate? I could be wrong but the potential outcomes I outline are in the realm of reasonable discussion and therefore responsible people should be extremely careful and diligent now. I do not see this occurring. I do not read about this occurring. I do not perceive the necessary responsible and civic change has occurred.

I think my insights are topical and correct, please put me to work. We are now all Keynesian and right left, Republican or Democrat, as in war time, these labels are not of issue. After the rescue and some normalcy returns we can all divide back to our various disciplines but for now the country requires steady civics.

I can also gather a very learned and credentialed small group for Congresswoman XXXX and for your education. Please relay this to the Congressperson and also please accept the market outcomes as they are developing and accept the information they are providing - the "American Recovery and Reinvestment Bill" is stillborn.

I see an obvious chain from the first week of January as the first draft of the "Obama-Biden Plan" was released to Romer's disastrous defense of the tax effect in the "O-B Plan" to the President's inaugural address and the development of the "American Recovery and Reinvestment Bill" - all have obvious economic flaws that will result in disaster. That is what the market is relaying to your office.


1 comment:

  1. Fascinating blog. It's now on my list of must reads. I particularly enjoyed your What I and Believe Post as it is very much along the line of my thinking. Your critique of Barro was also helpful as after reading his WSJ editorial yesterday, something didn't smell quite right. The federal highway investment is a much better example.