Tuesday, October 03, 2006

The REALLY Big Picture...

When conversations shift at your cocktail parties this weekend to tax policy, trade deficits, dollar imbalances and monetary policy (admit it - that's what you really want to be talking about instead of the latest episode of Deal or No Deal) your eyes could glaze over or you might just have the most insightful comment of the night courtesy of Grindstone Financial.

There has been increasing financial press coverage of the US/World and US/China trade imbalances. An op-ed piece here and a nice summary here are good primers on the subject.

In a nutshell, the lack of fiscal discipline exercised by all levels of government - federal, state, local - has led to a massive amount of debt held overseas ($1 Trillion in China, $880 billion in Japan). When the interest on this debt was running 1% it was inconvenient, but not a huge issue. As rates are nearing 5% it's becoming a serious issue. If (when) rates hit 6%, 7%, or 8%+ this will be a full blown crisis.

Now here's the fun part: Most 8th graders with a primer in economics 101 can figure out how to fix this -

* You MUST Raise Taxes
* Recognize and allow inflation to rise
* The dollar has to fall further vs. world currency
* US workers face more wage cuts
and/or
* US consumers have to curtail their spending

Now I ask you in today's political environment, who is going to have the #^$#% to tell the truth and make these recommendations? Could you imagine the ad?

"My Fellow Americans we have spent beyond our means and today the Chinese Collection Agency informed me that we have to raise your taxes 15%, cut the value of the $ by 10%, cut your salary by 10% and you are banned from Walmart, Target, Costco and any restaurants that end in the ee's sound (Chili's, Applebees, etc) until further notice".

There would be riots in the streets before our country would accept a truthiness laced statement like that. So, the REALLY big picture is bleak, but don't expect anyone to tell you that.

** Remember the Dow hit a new high (note my previous post that the resurgent Dow is due entirely to Exxon, Boeing, United Tech, Caterpillar and Altria).

"You Can't Afford to Be Neutral on a Moving Train"

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