Bear Witness

IS THE ECONOMY GETTING BETTER? 

A view from under my tin foil hat.

New facts show that 1 in 8 Americans now receive food stamps. Just how big is that number? That's 40,000,000 million people or 13% of the total population. At the end of 2009 it was 28 million. It represents a huge increase in the first 5 months of 2010. You decide, are things better then 6 months ago?

I do hope you all have gotten out of the stock market. Since my warning in April the DJIA has dropped 1284 points or 11.4%. Now with China pulling back on investment in the Euro this could sink the EU. The chilling part is that with all the money coming from the EU into the Dollar, the Pound and the Swiss Franc you would expect our markets to rally, but they are not. Now the Libor Index is on the rise which would indicate bank stress, or to put it another way the banks don't trust other banks.

As we move to the second half of the year the housing markets will erode another 11% to 23% by years end. Unemployment will push up to a national rate of about 10.6% which is really a false number. The reason unemployment will hover is simply because as people loose benefits our government will stop counting them. We could actually see a decrease in unemployment, not because they found jobs, but again because they are no longer being counted.

Yes I know many will point to this weeks headlines and think I am wearing a tin foil hat. So lets look at the headlines.

 "New Home sales up for 3rd. month" 

Yes sales were up and the average price was down 9.8%

Most sales were induced by the $8500 credit. Finally the numbers presented were in signed contracts, not settled sales. 

"Durable Goods report a 2.6% increase"

Durable goods did have an increase, but more then the whole increase came from orders for aircraft, not washers or dish washers etc..    

So how did we get here? It is a combination of factors, but boils down to five main themes.

Entitlements. Worldwide, governments have made commitments they cannot keep. In the U.S., 19% of wages are paid by the government, according to the Bureau of Economic Analysis. Government job growth has outpaced that from the private sector. Many European governments already have bloated bureaucracies and government-spending rates that are well ahead of those here.

And the government in the U.S. is taking on broader responsibilities for health care, as well as seemingly endless extensions of jobless benefits – once designed to be merely temporary stopgaps until people found work.
Overseas, the entitlement culture has rotted some economies from within. Spain’s 20% unemployment rate, for instance, is tolerated because of the public benefits the unemployed receive, thereby killing incentives to find new work.

Unions. “Austerity measures” is the new catchphrase in Europe nowadays, as governments scramble to get their fiscal houses in some semblance of order. But labor unions – notably the public ones – have reacted by holding massive protests. They have become regular events on the streets of Athens – even the Greek Air Force at one point was hit by a pilot sick-out.
Same issues domestically. In the U.S., New Jersey Gov. Chris Christie has faced the toughest resistance to his own budget cuts from the teachers unions, who have largely fought calls to make contributions to their own retirement and health-care plans.

Spending. Government debt and deficits have been driven by over-spending for years, but, lately, that has accelerated. In fact, it’s part of the plan: the way to get out of a crisis built on spending has been to spend even more now, with the promise that more responsibility will come later. Indeed, White House economic advisor Christina Romer said in Europe this past week that governments still have “fiscal room” to spend to reduce unemployment. Indeed, she has warned that cutting back now will hurt, not help.
"It would be penny wise but pound foolish to deal with our long-term problems by significantly tightening fiscal policy immediately or foregoing additional spending to reduce unemployment," she told the Organisation for Economic Co-operation and Development 2010 Forum in Paris. "Immediate fiscal contraction would inevitably nip the nascent economic recovery in the bud.”
Corruption and Lack of Ethics. As Greece gets its house in order, some startling revelations are coming to light. Widespread tax evasion costs the country an estimated $27 billion annually, and it is happening even among the government officials charged with being stewards of its economy. Greece's Finance Ministry, according to an internal report obtained by FOX Business, has found 70 government tax officials who make about $70,000 on average a year, but own millions of dollars in real estate. Another 234 tax workers never filed taxes for 2007 to 2008. The Ministry is also investigating 50 complaints brought against tax workers in 41 government offices, alleging bribery, forgery, and corruption. One out of 7 people in Greece paid a bribe, and a quarter of all taxes owed in Greece goes unpaid, versus an average 7% here in the U.S.

Breaking the rules is common throughout Europe. All 16 eurozone countries have just two requirements: keep debt to 60% of gross domestic product and keep budget deficits to 3% of GDP. Turns out, the track record was never so good. Overall, according to an analysis by Bloomberg News, countries only met the requirements 57% of the time. Greece never met the requirements in all nine years it was in the eurozone. Belgium and Italy missed one or both requirements in all 11 years. Only Finland and Luxembourg met the goals every year.

Over-regulation and Over-taxation. The response among some governments, most notably that in the U.S., has been to increase regulation and taxes. The big highlight has been the financial-services regulatory revamp that passed the Senate, and now faces negotiations with the House. An estimate by Goldman Sachs (GS) suggests the bill would take 19% of profits out of the banking system, because of new rules and restrictions against certain business activities. Europe is considering new bank rules and, notably, a new banking tax. The European Commission on Wednesday proposed that each European Union government assess a special tax on banks to create a fund dedicated to ensuring the "orderly failure" of troubled banks.
And, no matter where there’s a budget problem, a common solution has emerged: tax the rich. On Thursday, Secretary of State Hillary Clinton said wealthy Americans don’t pay enough taxes. “The rich are not paying their fair share in any nation that is facing the kind of employment issues [America currently does] — whether it’s individual, corporate or whatever [form of] taxation forms,” Clinton told an audience at the Brookings Institution.
The numbers don’t bear out that hypothesis: The top 1% of tax returns paid 40.4% of all federal individual income taxes and earned 22.8% of adjusted gross income. Going down the list, the top fifth of households made 56% of pre-tax income but paid 86% of all individual income tax revenue collected, according to the Congressional Budget Office. According to the Tax Policy Center, about 45% of Americans pay no federal income taxes at all.
It’s worldwide, at all levels of government. In Spain, José Luis Rodríguez Zapatero, Spain's Socialist prime minister, said the government planned a new tax on the rich as part of a campaign to reduce the budget deficit. Democrats in New York and New Jersey have floated a special tax on earners making more than $1 million a year. And the UK’s new government is trying to push through a new capital gains tax.

This is just a quick global view from under my Tin Foil Hat.

A PATRIOT