Desperation in Washington DC

Last night President Obama proposed a new jobs program before a joint session of Congress. The President's proposal combines a mix of FICA tax cuts, income tax reductions for small businesses, extended unemployment benefits, cash for local governments, and spending on infrastructure. The projected cost is about $450 billion.

Seems to me that we have done this before with little beneficial impact. Apparently, the elites have found a new list of shovel-ready projects. And providing more funds for local government will simply allow state legislatures and school districts to defer the restructuring of contracts and pension plans for another year or so. Not to mention keeping public unions happy for a while.

Details of the proposal aside, the federal government is now at the desperation stage. In sharp contrast to the feeling of euphoria that accompanied the massive stimulus program enacted in 2009, when the thinking was that Keynesian stimulus as usual would return the country to normal - a condition of households spending their lungs out with borrowed money - the feeling now is one of impending doom. But the government is still not willing to accept the truth, with just enough denial remaining in Washington DC to allow one more attempt at stimulus.

The survival of the federal government in its current incarnation is now at risk. Another downturn in federal tax receipts and the game is over. While the bond market might be willing to finance our present level of deficit spending, it is unlikely to do so indefinitely at historically low interest rates. And as any debtor knows, it is the debt service that ultimately kills you. So, the federal government is in self preservation mode, and stimulus is the tactic of choice because real fixes addressing the underlying rot in the U.S. are too horrible to contemplate.

The truth is that the U.S. private sector, including households, is too deep in debt to support increased frivolous spending. Furthermore, the public has virtually no confidence in the federal government- as virtually, every program managed by the government is failing, whether it is the Post Office, Social Security, Medicare, Federal Pension Benefit Guaranty Corporation, FDIC, Medicaid, Highway Trust Fund, Fannie Mae, and Freddie Mac. Throw in demographics - with baby boomers slashing expenses and debt prior to their golden years - and the headwinds are pretty strong stuff for stimulus to work against.

Until we clear the decks of debt, whether by repayment or writeoffs, we are pretty much stuck. Stimulus in this environment is pretty much like trying to jump start a car with an empty gas tank. Be prepared for slow growth and high unemployment for years to come. If you are fortunate enough to have the cash flow, put cash away and work down your debts.

November 2012 is coming soon. Get involved now.