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It
seems the current Chairman of the Federal Reserve is of the belief that
diluting the dollar is the cure for everything from a recession to male
pattern baldness. And like other snake-oil salesmen before him, Mr. Bernanke
is heavy on promises and light on results. Here are five prescriptions that
money printing can't fulfill:
- Lower
the corporate tax rate.
The US corporate tax rate is the second highest in the developed world,
after Japan. Lowering this tax would help American businesses compete
with foreign corporations and unleash the entrepreneurial spirit of our
workforce. In addition, lowering taxes on capital goods purchases and
retained earnings would also encourage expansion projects, new hiring,
and therefore general business development.
- Reduce
crippling regulations.
There isn't a much better example of the current environment of
excessive red tape than the number of "Czars" running around
the White House: 28, at last count. Ronald Reagan had just one. These
sub-cabinet level offices simply advise the President on how to further
fetter American businesses and launch umpteen "independent
probes" every time an issue comes up. But even officials not given
the Imperial Russian title are busy making life hell for small- and
medium-sized businesses because there is too much power in Washington.
- Learn
to compete with foreign workers. The federal minimum wage is $7.25
per hour, and mandated benefits and regulations add even more to the
cost of employment. We need to repeal these laws and allow wages to
adjust freely to market conditions. Initially, incomes may drop, but if
we also lower taxes while reducing the rate of inflation, workers' real
disposable income may actually increase. Meanwhile, as our economy's
underlying strength is rebuilt, American workers will finally be able to
compete with foreign workers on a level playing field. If we ignore
these reforms, high-quality jobs will continue to flow overseas.
- Improve
America's educational system. According to a recent report put out by the National
Academies of Science and Engineering, the US ranks 21st in science and
25th in math out of 30 industrialized nations. And, according to the
World Economic Forum, the United States' K-12 education system now ranks
48th in the world. How can our workers compete in the 21st century
without the necessary technological skills to fill highly paid
positions? We need to dramatically reform our public educational system
by injecting a massive dose of free markets into the mix. Whether this
involves charter schools, private schools, vouchers, or a combination,
public schools must be forced to compete for students and funding. If
consumers were given a true choice by offering tax credits to those
parents that opt-out of the public system, it would go a long way
towards establishing an environment that purges mediocrity and rewards
excellence.
- Balance
the federal budgets.
Balancing a budget simply means spending only what you take in as
revenue. If we were to adopt that simply strategy, it would ensure that:
tax rates would never have to rise sharply just to service debt, the Fed
would never have to print money to 'monetize' the debt, interest rates
would be lower, and spending that benefits one generation would never be
paid for by generations to come. A stable currency, low taxes and the
ability to pay down debts are necessary ingredients for a growing
workforce and a viable middle class.
Unlike
the snake oil of printed money, these genuine therapies take time and effort,
and sometimes have painful side effects. The quack remedies offered by Dr.
Bernanke promise to cure all ills with no effort on the part of the patient.
If the
measures I propose are established in concert, we would lay the groundwork
upon which to rebuild the country's goods-producing sector. If allowed to
flourish, manufacturing can create the needed jobs to lower the long-term
unemployment rate and restore the county's economic vitality.
The
Fed's plan, by contrast, has only one predictable consequence: inflation.
Indeed, Bernanke has already been remarkably successful in sending asset
prices higher. Not only are most commodities soaring in dollar terms, but the
broader measures of the money supply have started to surge as well. The
compounded annual rates of change in MZM and M2 over the last month are 13.3%
and 9.1% respectively. The prices-paid component of the September ISM
manufactures survey jumped to 71, and the YoY increase in the PPI is 4%.
Sure, we can look to the Dow or the stabilization of home prices and say the Fed's
magic is working, but just because the headache has gone away doesn't mean
you've cured the stroke. We can look to the inflation indicators to see that
the Fed has failed to stop the bleeding.
Remember,
the Fed is now printing dollars to purchase the bulk of US Treasuries at
auction, in a process called debt monetization. It is that process of
the Fed expanding the money supply to subsidize federal debt that is causing
domestic prices to surge. It will not be very long before the consumer
acutely suffers from this dangerous policy. On this point, history is clear:
inflation has caused the destruction of every middle class and every economy
that has sought it as a solution.
There
are no quick fixes to our current economic predicament, but there are fixes.
It's up to the American people to decide they've had enough of Ben 'Rasputin'
Bernanke and they're ready for some tough medicine. When that happens, I've
got some great specialists to recommend.
Michael Pento
Senior Market Strategist
Delta Global
Advisors, Inc.
Delta Global
Advisors : 19051 Goldenwest, #106-116 Huntington Beach, CA 92648 Phone:
800-485-1220 Fax: 800-485-1225
A
15-year industry veteran whose career began as a trader on the floor of the
New York Stock Exchange, Michael Pento recently served as a Vice President of
Investments for GunnAllen Financial. Previously, he managed individual
portfolios as a Vice President for First Montauk Securities, where he
focused on options management and advanced yield-enhancing strategies to
increase portfolio returns. He is also a published economic theorist in
the Austrian school of economic theory.
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