Sunday, February 15, 2009

The GOP's New Alternate Reality: Obama is to Blame for our Troubles/Put on a Happy Face Beanpole/ Japan-US Comparisons Continued/GM Wants more dough

1. Blame Obama for the Crisis after Two Weeks in Office? There must have been a memo sent out to all of the GOP apparatchiks by the RNC just within the last week, containing an order to blame Obama for the deepening financial crisis in all of the usual outlets. Never mind that he has just been in office for a couple of weeks. The general thrust of the argument, as given by John Rutledge in a Saturday morning interview, was that Obama was hurting the economy by being so negative in order to convince the Congress to pass the stimulus bill. The same line has been parroted almost verbatim by many others in the usual media outlets. So, the solution has to be, according to the apparatchiks, for everyone to put on a happy face. One way to put on a happy face is to create you own reality like Obama's predecessor. In the alternate reality, it is possible to ignore all the bad news as if it did not exist or even to create your own news with an amenable "news" network, though Fox is already married to the GOP and CNN may not be as receptive to slavishly follow the script written by the Dems. I would also recommend the immediate abolition of all government agencies, like the Bureau of Labor StatisticsU.S. Bureau of Labor Statistics, that will be reporting bad news in the upcoming months. Assign all of those bureaucrats to Iraq to report on how well things are going over there. Instead of having government agencies report all of those dreary statistics, Obama could put on his happy face, and appear daily on TV with some soul that actually found a job, with everyone smiling for the cameras, and then tell the American public that jobs are plentiful. To be convincing the creation of this parallel universe will need the Democrat equivalent of Roger Ailes.

2. John Rutledge's Happy Face Economic Theory: Possibly, Rutledge needs to advise the Europeans and Japan about his happy face economic theory. In happy face economic theory, it is important for the leaders of foreign nations to avoid scaring anyone with facts. So the European leaders will need to deep six the following piece of news and put on that smiley face. The Euro zone economy shrank by an annualized 5.9% in the 4th quarter of 2008.
This was the worst showing since the 4th quarter of 1974. As all can see, their problem is a lack of a happy face by their leaders or is Obama to blame for their grim news too. The U.K. banks seem to be going from bad to worse with the shares of Lloyds Banking Group sliding 32% on Friday after warning about more losses. Lloyds (LYG) is trading under 4 bucks a share now. U.K. is moving closer to an outright nationalization of their major banks.

3. Comparing the Japanese Experience Post 1989 with the Current U.S. Predicament:

Japan's economy is falling faster than the U.S. or Europe.

Japan has been an export driven economy since WWII. It is a bad time to be so dependent on selling goods to the suddenly spendthrift Americans. Japan's 4th quarter GDP is expected to fall at a 12% annualized rate, with the report due on Monday. Japan grew very rapidly after recovering from the devastation caused by WWII. Its growth was fueled by exports. As more countries adopted the Japanese model, particularly Korea and China, export led economic growth was harder to generate, and Japan's frequently strong currency was also a hindrance as it is now. As a result, Japan has been in a slow growth mode since 1990.

The growth in the U.S., in contrast to the Japanese model, is fueled primarily by the American consumer, borrowing and spending other people's money like crazy. The Japanese consumer has always been more frugal and certainly a far better saver than your average American. The Japanese economy did grow in most years during it past two decades, after hitting the brick wall around 1989, with down years in 1998 and 1999 but growth has been meager. Their problem was not the failure of the stimulus plans as enacted by their governments over the years but to their model for sustaining growth. Growth could never be harnessed consistently, and at high levels, regardless of any governmental stimulus, as long as the growth was dependent on one avenue-exports. The Japanese domestic economy was highly inefficient, stagnant, and insulated from competition and change. Japan was also tardy in trying to repair the problems at its banking institutions, as in waiting more than a decade.

The U.S. faces a similar breakdown in its model for growth. Until recently, and unlike the typical Japanese, American consumers were not saving any of their income and were spending more than they earned. Their debt was as high as 130% of disposable income. Debt, and spending borrowed money, has been the U.S. model for growth and that is now broken. As pointed out by Robert Albertson in his interview in in Barron's, it would take 2.5 trillion out of the economy to just return to the debt and savings levels that existed a few years ago and no stimulus program is going to replace that gaping hole.
He expects that it will take two or three years to repair consumer's balance sheets but what then? But I doubt that the American consumers will go that far in debt retrenchment and a shift to being frugal savers, as suggested by Albertson. But, it is hard to see credit flowing like it did prior to 2008 anytime soon either, and new avenues of growth for the economy need to be found to compensate for what may easily be less dynamic and expansive consumer spending for a long time. Part of the stimulus bill does focus on those future opportunities but it remains to be seen how successful some of those initiatives will be. Senator Arlen Specter was able to secure very large increases for medical research in return for his support of the bill, NYTimes.comand this is one area where America can still lead the word-innovation and invention. The bill also contains support for R & D in other areas particularly alternative energy. This is my point. To avoid a fate similar to the Japan experience, new models for growth need to be found, and new avenues of growth for the economy need to be actively pursued other than consumers spending more money than they have.

This is an interesting article about some of the lessons that could be learned from Japan's failures.

There are reports that the toxic debt is generating bids measured in the pennies to the dollar.

4. Democrats and the UAW: One way for the Democrats to become the minority party again would be to accede to the UAW's quest for the government to assume some responsibility for GM's 47 billion dollar obligation in retiree health obligations. Unlike the pension benefits, there is no existing government guarantee for health benefits for a bankrupt company. It does not appear that GM has made any real progress to resolving its problems and will just be asking for more time and money this week.
On top of the 13.4 billion just received, GM probably needs another 5 billion to continue operations after the end of March and it is being kept on life support now with government money. The company needs "several months" to get its act together beyond the existing March 31st deadline set by the Congress. WSJ.comEnough, just stop it, face the truth, and recognize that GM and the UAW have never adapted to the reality of a changing U.S. car market with nimble competitors from Japan for over three decades. GM is too bloated in its brands, factories, liabilities, and dealerships. It deserves to fail. No one is making the concessions necessary for the long term survival of the company. The bondholders want 50 cents on the dollar in the proposed restructuring, and the UAW walked out of a meeting when GM asked for concessions last FridayMarketWatchThe UAW is not going to concede anything of value to it as long as they believe the Democrats will keep GM afloat. The only way to deal with this problem is through the bankruptcy court.

The CBO estimates that 74% of the money from the stimulus bill will be spent by 9/30/2010.A Smaller, Faster Stimulus Plan, but Still With a Lot of Money -

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