1)  DEMOGRAPHICS

 

We operate in a consumer spending economy.  That means as consumers spend so goes the economy.  Financial guru Jerry E. Tuma, CFP has done some interesting studies of the effects of demographics on a consumer driven economy.

 

He points out that the first of the "Baby Boomers" will start to retire in 2010. Now retirees generally spend about half of what workers spend.  Why is this important? Will not the next generation pick up the slack of the retiring Boomers?

 

The Baby Boomers are the largest modern generation generally pegged at 76 million people.  Gen. X coming behind the  Boomers consists of about 41 million people.  The Milennial Generation will be even smaller.  So, roughly, for every new entry into the current generation there are at the same time two people retiring (remember how social Security once was 20 people paying for 1 retiree but soon will be 2:1?).  That disparity may grow even greater when the Milennials calculations are made more definite.

 

When you retire you spend less.  You are not buying a new bigger home as you did on the way up the success ladder. Chances are you are now empty nesters.  You are downsizing.  Couples where both work are going from two cars to one car.  You eat out at expensive restaurants less frequently, you spend less on insurance, drive less miles, buy fewer expensive clothes etc.  About the only thing that goes up for retirees  is health costs.

 

Tuma talks about peak spending ages.  For instance the peak spending age for housing is 44 years old, for apparel and transportation, 48.5.  He says that medium peak spending occurs between the ages of 48 and 50.  Therefore if the top of the Boomer population curve hit in 1961 that means that the top of the Boomer driven spending wave will be 2010.  Housing tops first, everything else later.  Thus the top of the housing market was in 2005(We sold our house in September 2004).  In reality the housing market has been slowly going downhill since 2005, although most recently speeded up by a mortgage crisis (another point later).

 

Tuma says, "Companies, products, and services that are past their peak for Baby Boomer buying are not likely to prosper."  If buying power is cut that drastically it can't but have a slow down effect on the economy.

 

 

2   ENERGY CRISIS

Now this is not new news ladies and gentlemen but it is getting worse.  We have been in an energy crisis for years.  And we increasingly place ourselves in the hands of foreign religious fanatics and anti American Dictators to supply our energy needs.  We are at their mercy.  OPEC has already declared that if our alternative fuels are successful that they will flood the market with cheap oil until those businesses go under.  The Democrat party will not allow any additional drilling for oil anywhere in the 50 states of the USA or off its shores.  It will not allow the construction of any new refineries to process the oil.  It has been more than 30 years since we have built a new refinery anywhere in the USA (although we have increased capacity at some).  It will block the construction of any new Nuclear Plants.  And now it says it will stop the construction of any new coal fired plants, even the newer cleaner burning coal.  The Democrats say that they also will block any further natural gas drilling licenses because, although it is environmentally sound to drill for natural gas, once there the companies will also want to take it one more step and get the oil that is there also.  And we can't have that.  You can't even get Ted Kennedy to stop blocking windmills in Hyannis Bay.  Mass production of alternative energy is 25 years away (it takes 5 years to build a refinery).  What do we do here and now?

 

We have plenty of oil deposits all over the USA and off our shores.  We just can't take advantage of them.  I believe we have the technology and the ability to drill for oil and to construct nuclear power plants that do not harm the environment and that have safeguards to protect not only our environment but out people.  Ninety percent of France's electricity is generated by nuclear power and has been so for over thirty years without mishap.  Our country is in the throes of a fervent "religious" movement that wants to take our style of living back to the practices of the Amish.

 

The answer to the problem is not conservation, not houses with the thermostat set at 62 degrees in the winter where we shiver with three sweaters on and 80 degrees in the summer where we walk around our homes in our birthday suits, nor drive three wheel mini cars the size of golf carts where one accident is instant death.  The answer is to increase the supply, NOW!  For the future will bring new technology which will transform our world and make for new ways of making safe energy.  In the meantime the environmental whacko zealots will put us in the poor house.

 

I am sure I do not have to spend much editorial space on the effect on the economy of increased oil prices.  Not only gas for our vehicles, heat and electricity of our homes and offices, but also a myriad of products produced are at the mercy of oil prices.  Increases in the price of oil raise many prices of other products and services across the board.  Just think of the devastating effect of one aspect, $4.00/gallon prices at the pump.  The critics would tell us it is time to invest in a horse and buggy.

 

Why is this all important at this time?  Well, do you see more or less Republicans being elected to Congress?  This looks like a Democrat year to me.  So expect the energy crisis to worsen and expect to pay $4.00/gallon at the pump.  Another reason we are headed for recession.

 

 

3)  MORTGAGE CRISIS

 

This is essentially an over speculation situation.  We live in a world of freedom, at least some left in our lives.  We all have the ability to be stupid.  And greedy scammers have the ability to skirt the law and take advantage of people.  Whether people who should know better or providers who are shady are the problem is not the debate here.  The problem exists.  And problems such as this in a free society seem to repeat themselves.  Remember the dot com bust in the Clinton Administration?  People looking for a way around the rules, people who think they can beat the system, providers who are essentially scammers, they are always with us.

 

But like most speculative booms and busts this one has a ripple down effect through the economy.  Foreclosures, on over extended borrowers sold a bill of goods, depresses the construction trades, the investment business and creates a credit crunch, never mind what it does to the housing market.  Fear spread by the media strokes the fires of negativity.  Wall Street refuses to buy mortgage futures.  People are scared.  Credit drys up.  It's a rolling snowball and in any over speculation bust you usually get an over correction.  Unfortunately coupled with other factors this can have a devastating effect on the economy.

 

 

BEYOND THESE FORCES BRINGING DOWN THE ECONOMY OTHER FACTORS EXIST DEPENDING ON WHO GETS ELECTED TO CONGRESS AND THE PRESIDENCY.  IT IT'S A DEMOCRAT YEAR EXPECT THESE ADDITIONAL FACTORS TO WRECK HAVOC.

 

 

4)  GLOBAL WARMING HYSTERIA 

 

Whether we have a planet temperature increase is one thing.  Whether humankind is responsible for this increase is a whole other ball of wax and hotly contested.  Yet still the "Man is responsible Global Warmists" are really a religion based on faith not fact.  And the result of their draconian measures for an unproved hypothesis will wreck havoc on the economy.  These people, mostly congregated in the Democrat party, would like not only like us to reduce our energy consumption but they would like to tax energy even higher to insure people comply.  Make it so expensive that they won't use it, they advocate.  Passing laws that mandate certain thermostat settings, certain gas mileage standards for vehicles, new light bulbs are bad enough.  Blocking any and all energy production on US soil by any means - oil, coal or nuclear is crippling.  Demanding a reduction in C02 emissions would cost billions with a drop in the bucket C02 decrease.  And carbon tradeoffs are a joke, allowing only the rich and famous to enjoy a lifestyle denied to the rest of us.  Think of our elder citizens on a fixed income sitting home freezing to death.  Price controls on energy will reduce supply further, bringing back the gas lines we haven't seen since the Nixon Administration, and home heating/air conditioning bills of $500 every month.  In the middle of an energy crisis created by those who view any energy use as evil and hostile to the planet, these same people are saying that the use of energy is destroying our planet. Their solution is STOP USING ENERGY.  OK, but what do we do to stay alive?  Not our concern they say.  Our concern is saving the planet.

 

The minority report (Republican) of the US Senate Committee on Environmental and Public Works said this:

 

"The estimated costs to comply with carbon legislative proposals in the US would also be unreasonable.  The NCEP approach would do nothing to lessen global warming even according to alarmists, but according to EIA, it would still cost more than 118,000 American jobs simply to make a symbolic gesture"

"And according to an MIT study, the Sanders-Boxer bill would cost energy sector consumers an amount equal to $4,500 per American family of four.  The same study found the Lieberman-McCain bill would cost consumers $3,5000 per family of four.  Similarly, EIA found that it would have cost 1.3 million jobs.  A new EPA analysis shows the Lieberman-McCain bill would cost up to half a trillion dollars by 2030 and $1.3 trillion by 2050."

"Now environmentalists will tell you that is OK.  Dan Lashof of the Natural Resources Defense Council says that EPA's analysis of the Lieberman-McCain bill show 'it is affordable.'  Although EPA finds that fuel costs will increase by 22 percent, he calls fuel impacts 'pretty modest' - Now activists inside the Beltway may think big jumps in gas prices are no big deal, but I doubt the people living in the real America would agree."

 

THE POOR BEAR THE BIGGEST COSTS

 

"What few Americans realize is that the impact of these policies would not be evenly distributed.  The Congressional Budget Office recently looked at the approach taken by most global warming proposals in Congress - known as cap and trade - that would place a cap on carbon emissions, allocate how much everyone could emit, and then let them trade these emissions.  Let me quote from the CBO report."

'Regardless of how the allowances were distributed, most of the cost of meeting a cap on C02 emissions would be borne by consumers, who would face persistently higher prices for products such as electricity and gasoline.  Those price increases would be regressive in that poorer households would bear a larger burden relative to their income than wealthier households would.'

"Think about that.  Even relatively modest bills would put enormous burdens on the poor.  The poor already face energy costs much higher as a percentage of their income than wealthier Americans.  While most Americans spend about 4 percent of their monthly budget on heating their homes or other energy needs, the poorest fifth of Americans spend 19 percent of their budget on energy.  Why would we adopt policies which disproportionately force the poor and working class to shoulder the heaviest burdens through even higher energy costs?"

 

Zealots operating on fiction not fact can not only overburden the average American household, they can put American business at a global disadvantage which could result in a loss for many companies, a loss that would cost jobs.  Try paying for all these increases without a job.  Adoption of these severe global warming policies would hasten a recession and reduce consumer spending in other areas as the percentage of one's budget needed for energy skyrockets.

 

 

5)  THE REVIVAL OF PROTECTIONISM

 

Every modern American President since WWII from both parties has endorsed Free Trade.  Free Trade allows each country to specialize in what it does best and barter those goods or services for others that they could not or would not produce.  This passes on the lowest prices to the average consumer.  Chile may not make airplanes, but the USA does.  We may not make leather goods but Chile does.  An even up swap without tariffs (it's not quite that simple but for the purposes of illustration) allows the citizens of each country the lowest purchase price for the goods.  Once you put tariffs on a country's products they will retaliate in kind.  Now a win/win situation turns into a lose/lose situation.  Free global trade makes for an even trading partnership in a market all over the world, a huge marketplace to freely trade in.  Tariffs reduce the marketplace back to each individual country where you then have producers making goods or providing services that are inferior or at a much higher cost.  If you doubt that think of what it would cost you at the store for an American made shirt or trousers or shoes.  Imagine walking into Wal*Mart and finding no goods made in China.

 

Now we have Hilary and Obama running around saying that they will roll back and repeal CAFTA and NAFTA.  Actually Obama told a Canadian official not to take him seriously on what he was saying for public consumption on this issue which destroys his credibility.  In order to win the Presidency either candidate is willing to court the Union vote by endorsing Protectionism.

 

I really have to wonder at this sort of pandering to a voting bloc.  We say that we want to help poor, undeveloped, Third World countries.  What better way to help them then to  allow their goods and services into the USA without tariff.  This allows their businesses to grow and employ more people.  Sure beats just sending them foreign aid money and making them dependent on a handout.  Competition always benefits the consumer.  Unfortunately if the loser is an American voter  count on some politician to intervene in order to gain votes.  Trade barriers make goods and services more expensive and would add fuel to a recession.

 

 

6)  TAX POLICY

 

If it's a Democrat year the asses, er donkeys in Washington will repeal or let run out the "Bush tax cuts for the rich", the main reason for the continuation of the longest peacetime prosperity in the history of the nation.  Part of the Bush tax cuts was the reduction of the Capital Gains Tax from 28% to 15%.  Wait until you see what the stock market does when the old higher rate is brought back. And wait until you see what happens to your 401K.

 

The Democrats justify the need for tax increases to fund all the new additions to governmental programs they want to institute.  How else are they going to pay for socialized medicine?  But the odd fact is that the Bush Tax Cuts, like the Reagan and Kennedy Tax Cuts, actually led to a huge increase in government revenues.  So tax increases may not actually yield more revenue.  On paper they look like they do, but that does not take into account the action of people based on policy.  It is a static model.  A good way to to force people, investments and companies overseas is to increase taxes.  People then flee to where taxes are less.  Same principle works in the USA.  States like California, Michigan and Ohio are losing tons of people and businesses to Nevada, Texas and Florida.

 

Ray Blunt had this to say about the Democrat budget proposal:

 

"So it goes for an annual budget request that envisions the expiration and elimination of nearly every measure of pro-growth tax relief Republicans fought to pass through Congress.  In its place, the bill lays a trap for the American taxpayer in the form of #683 billion in new taxes - far and away the single largest tax increase in the long and ignominious history of the code."

"Of course, to achieve that level of prodigious spending, you need to do more than slash the child care tax credit in half (from $1,000 per child to $500) and resurrect the marriage tax penalty that Republicans once successfully slayed.  You also need to punish low-income Americans by replacing the 10-percent tax bracket (the lowest percentage one can pay and still pay income taxes) with a new rung of 15 percent; you need to dramatically increase the current 15 percent tax rate on capital gains; you need to punish small investors by raising the tax burden on dividends; you need to pave the way for the Death Tax to rise from the grave in 2011; and let's not forget: you need to ensure that an estimated 116 million taxpayers pay an average $1,8333 more to the federal government this year than they did the year before."

 

Both Democrats running for President have pledge to make business pay more by increasing corporate and business taxes. Corporations don't pay taxes; taxes on them however can make them less competitive in the global marketplace.  Competing against countries that do not tax business is very difficult.  Let me repeat that statement - CORPORATIONS DO NOT PAY TAXES.  They pass that cost onto the consumer by increasing their prices they charge for their product.  The higher you tax them the higher they raise their prices always insuring the same percentage profit.

 

With the hefty increase in retirees and the extra burden placed on Social Security and Medicare expect to see increased costs passed onto the consumer.  While increased energy costs may be squeezing the average American budget, increase in Social Security and Medicare Taxes and/or a reduction in services is a fait accompli.

 

So higher taxes mean higher prices, less investment, and everybody trying to dodge the bullet.  Not a good policy to make a vibrant

economy.

 

 

7  CREDIT SQUEEZE