Group Begins War on Social Security Privatization

A large and powerful senior citizens organization, the American Association of Retired Persons (AARP), yesterday unveiled plans, beginning with a $5 million ad campaign, to oppose the Bush Administration's proposal to overhaul the Social Security pension program. Still feeling the sting from its endorsement, although tepid, of last year's controversial Medicare prescription program pushed through Congress by the Republican leadership and opposed by many rank-and-file AARP members, the lobbying group now wants to demonstrate a far less accommodating stance on policy matters the White House has on the agenda for its second term.

In contrast to this open opposition to the radical restructuring of Social Security is the subdued, behind-the-scenes support being provided by lobbyists for the banking and securities industries, which will stand to benefit enormously from what could be described as a $2 trillion jobs program for their member firms. Fearing public backlash if they appear too eager for the overhaul to get underway, bankers and stockbrokers must craft an outward appearance of disinterest while at the same time making it clear to key lawmakers that they are highly interested in passage of the necessary legislation.

It is unlikely that the AARP and other advocacy groups opposed to the partial privatization of the New Deal-era Social Security Trust would be able to spend anywhere near the money that financial institutions can bring to bear on waivering Congressmen. However, the AARP's publicity may put pressure on Congress to ask hard questions of the Administration:

• What impact will the government's borrowing of up to $2 trillion to overhaul the program do to interest rates already beginning to rise because of historically large budget deficits the Bush Administration and its Congressional allies chalked up during Bush's first term? With foreign lenders to the U.S. government showing worrisome signs of disinterest in continuing to finance the deficit spending of the federal government, the U.S. Treasury might find itself being forced to pay interest rates that could increase the total cost of the program even more, while simultaneously driving the economy into deep recession because of the high cost of borrowing that businesses and consumers would face.
  
  
• What will the government do under a partial privatization for those whose investments don't perform well? Either through unwise portfolio construction or by a serious downturn in the stock market, large numbers of people now in their prime working years could find themselves in very difficult economic circumstances should the funds they invest for retirement not provide adequate yields.
  
  
• To what extent will other alterations—like increasing the retirement age—still have to be instituted? Many critics of the proposed partial privatization note that projected shortfalls in the past have been well managed by incremental and modest increases in Social Security taxes and the age at which prospective retirees may begin collecting Social Security payments. Already, some insiders are saying that the age at which workers can become beneficiaries will be raised, despite the partial privatization.

With advocacy groups bringing these and other problems of the Republican plan to the attention of average Americans, the White House may find that the Social Security issue dominates its attention for the foreseeable future and swiftly burns up what political capital the ruling party in Washington has to spare.

Dollar Continues Downward, Economy Shows More Weakness

The dollar dropped to a new low against the euro, today, reaching $1.3667 before recovering slightly to $1.3645. As the euro probed new territory in its quest to replace the greenback as the dominant currency of global trade, the exchange rate between the two currencies crossed a threshold at which currency options stop-loss orders came to bear. In the face of expected increases in U.S. interest rates, as already being experienced in recent Treasury auctions of government debt instruments, the continuing spiral of the dollar gives further indication that the American economy is expected to weaken substantially in the new year. All other things being equal, the rising U.S. interest rates should be making the dollar stronger, but that hasn't been the case so far.

More hard evidence of the weakening U.S. economy came today from the business sector, where the purchasing managers' index fell in December by more than 6%, to 61.2, exceeding analysts' expectations of a fall of less than 3.4% from the November index level of 65.2. With the U.S. dollar being so weak, the White House has been hoping for a noticeable upswing in business activity from world demand for increasingly cheap American exports, but the surprisingly large drop in the purchasing managers' index points to a broad-based and growing economic slump that will not be turned around by the exports sector.

The Bush Administration gave no indication today of concern about the new record low for the dollar or the dramatic drop in the purchasing managers' index.

Mortgage Applications Drop, Treasury Auction Goes Off Poorly

The Mortgage Bankers' Association released figures for the week ending December 24, 2004, showing that mortgage applications and refinancings fell for the fifth time in six weeks, falling by 7.9% against the previous week's rise of 5.7%. The drop-off gives evidence of the increasing effect that rising interest rates are having on the housing market and indicates the growing likelihood of an economic slowdown beginning in the first or second quarter of 2005.

What seems contradictory at first is that existing home sales reached a record level last month, although new home sales dropped off dramatically. Many economists see the jump in November existing home sales as the "credit rush" that was in full swing as people contemplating a home purchase moved to fulfill their desire and complete their transactions in advance of expected higher mortgage interest rates they would bear if they waited any longer.

In separate but related news, the U.S. Treasury Department's auction of $24 billion in 2-year Treasury Notes received scant attention from the global lenders to the United States. In an auction that was characterized as thinly attended even by traditional purchasers—including foreign central banks—of U.S. debt instruments, the price of the intermediate-term Notes had to ease considerably to attract sufficient buying. As the price of a debt instrument falls, its yield rises, and this round of discounting pushed the yield on the 2-year Treasury Notes to 3.12%, the highest yield at such a sale since mid-2002.

Aside from the certain and undesirable effect that rising U.S. interest rates will have on the demand for credit among home buyers, foreign trading partners are hoping that those same rising U.S. interest rates will slow down or possibly even reverse the slide of the dollar against other major currencies. Because U.S. interest rates are the price of U.S. dollars, as those interest rates rise, other nations hope the dollar will become stronger. That would please other nations like the Europeans and the Japanese, whose foreign currency reserves of greenbacks have lost considerable value with the dollar's weakness. A stronger dollar would also make U.S. exports to those countries become more expensive, thereby reducing the negative impact cheap American imports are having on the economies of Europe and Japan.

Unfortunately, despite the yield rise today at the Treasury auction, the dollar hit another new low at $1.3646 against the euro before recovering slightly to $1.3600. The dollar pressed close to an all-time record against the yen, closing at ¥103.93. Together, these numbers indicate that it will take considerably higher U.S. interest rates before the dollar stops it long-term slide; but those same considerably higher U.S. interest rates will spread their adverse effects domestically far beyond the housing market, likely setting the United States on an inevitable course for a recession next year.

White House Backs Away from Tax Code Revamp

Citing the more pressing needs of Social Security reform and budget deficit reduction, the Bush Administration today indicated that it wants to hold off on its previously announced plan to radically restructure the way Americans are taxed, which was reported here last Wednesday.

Using the Washington Post today as its vehicle for communicating the change of plan, the Bush Administration pointed out that the Treasury Department would still convene a panel to study and make recommendations regarding the redesign of the U.S. tax structure.

The less-than-subtle shift from a must-do project to a proposal only under longer-term consideration had observers speculating on the cause. Among the possibilities are these:

• Congressional Republicans may have told the White House that the pressing need to cut the budgets of most domestic programs would absorb far too much time and political capital on the floors and committees of the House and the Senate. The budget cuts, while virtually certain, will nonetheless stir debate and possibly months of wrangling. Simultaneously moving the burden of taxes substantially onto labor and away from capital could have damaging repercussions clear to the mid-term Elections in 2006. Coupled with the expected opposition to the partial privatization of Social Security by a politically weakened but still-powerful coalition of labor unions, senior citizen advocacy groups, and others, Congress may not want a third front opened up in its war with moderates and liberals.



• Radically restructuring the tax code carries the risk of radically re-aligning the timing of and variations in tax revenues collected by the federal government. With the partial privatization of Social Security projected by some analysts to cost as much as two trillion dollars, House and Senate leaders might have quietly expressed something less than enthusiasm for any plan that could cause fundamental disruptions in the flow of tax revenues to the coffers of the Treasury.

At this point, it is difficult to know for certain what sent the President's people out this morning to distance the Administration from the full-speed-ahead statements just days earlier, but no one expects the White House to abandon for long its intention of fulfilling one of the top priorities of supply-side and other neo-conservative economists.

It might be that the tax overhaul plans touted earlier in the week were just a warning shot to get people used to the idea that yet another component of the way things used to be done—the way the government and its citizens dealt with one another for almost three-quarters of a century—will be coming to an end, piece by piece, over the course of the next four years.

Federal Deduction for State & Local Taxes Eyed for Elimination

The Bush Administration and Congressional allies have sent signals that they want to wipe out the federal tax deduction for state and local taxes. Ostensibly, they need to recover tax revenues that will be lost as the Alternative Minimum Tax (AMT) is abolished.

Initiated at the end of the 1960s, the AMT was instituted to ensure that wealthy Americans had to pay some federal tax regardless of the extent and effectiveness of the tax shelters they used to shield their income from taxation. It has been claimed that, in recent years, the AMT has been hitting upper-middle income individuals and families just as hard as, if not harder than, it has been hitting the wealthy. Because the AMT has not been indexed adequately to inflation, taxpayers whose incomes have not risen extraordinarily in "real" (constant dollar) terms have nonetheless seen their incomes rise sufficiently in nominal terms to fall within the provisions of the AMT.

Although certified public accountants who prepare personal tax returns have indicated that they are seeing this more and more, some opponents of the Administration argue that, instead of eliminating the tax, it should merely be recalibrated so it again serves its original purpose of making the rich pay their fair share of taxes. Abolishing the tax, critics point out, will benefit the truly wealthy far more than it will help the upper-middle class; and such a restructuring of the tax code is yet another expression of the Bush Administration's long-suspected interest in promoting policies—especially tax policies—that benefit the rich.

Furthermore, eliminating the federal tax deductibility of state and local taxes will have considerable adverse impact on upper-middle income taxpayers, who are very likely to claim this deduction when preparing their Form 1040s. Some observers have pointed out that high-income Americans sometimes don't even pay state and/or local taxes, so eliminating the deduction would have no impact on them. President George W. Bush, who for years lived most of the time in the state of Maine, stayed in Texas long enough each year to meet that state's minimum residency requirements and therefore enjoyed the benefit of the Lone Star state's absence of a state tax.

A few of the harsher critics of the Administration have also pointed out that the elimination of the federal tax deduction for state and local taxes will have a considerably higher incidence of adverse impact in those states that went to Bush's challenger in the 2004 Presidential Election. Upper-middle income taxpayers are far more concentrated in so-called "blue" states like New York, Massachusetts, and California than they are in so-called "red" states like Alabama, Kansas, and Wyoming.

A spokesperson for the Treasury Department, which is considering the changes to the Internal Revenue Code, denied any malevolent, punitive motivations behind the plan to eliminate the deduction. He further denied any ulterior motive to benefit wealthy supporters of Republicans behind wiping out the Alternative Minimum Tax. Despite such official denials, skeptical observers remain unconvinced.

Analysis: The Future as a Lesser Place

Those who visit The Dark Wraith Forums might notice something odd about the headline posts, here. Whereas the major news services like CNN.com relegate economic and financial matters to small, discreet links, this blog puts those stories front and center every day. But more importantly, to the extent that those news outlets do provide stories about the economy and the political world entangled with it, they tend to avoid harsh, objective, critical analysis of what Washington is doing wrong. Analysis requires explanations. Analysis appears to the willfully uninformed as bias. Analysis even invites desire for change.

It is tempting to imagine that, if the leaders of the ruling party were to understand where their errors lie, they would make amends that would set the economy on a better course. Along with this hope, though, is the perhaps cruel but fair assessment that, at this point, the general citizenry of this country doesn't matter at all: those of conservative leanings have the political landscape they want, and they will allow their elected officials to proceed without caution; those of liberal leanings may wail to the wind, but they can do nothing to stop the inevitable turn to the Right the country is making.

In fact, the leaders of the ruling party have no intention of being made to "understand where their errors lie." Ideology is blessed by freedom from errors because the ideologically driven are blessed by freedom from introspection.

Despite what people may hear from the news—what little attention they give it—the economy is not in good shape.

• The headline that some stock market index reached a three-and-a-half year high is wonderful news: that means a stock portfolio formed on that index has yielded exactly zero percent over a three-and-a-half year holding period.
  
• The headline that new home sales reached a seasonally adjusted, blistering high in October is honked for all to hear; but the November decline, the largest drop in almost eleven years from that high, is whispered in a corner.
  
• The headline that America has broken the back of yet another city full of insurgents in Iraq is pounded across the front pages of the news; but somehow, the broad military assessment that America is losing the war—and that it cannot win the war—is nowhere to be found in the respectable press.

The list goes on and on.

The United States right now is running the largest budget deficit in its history. That deficit, along with the ones the Bush Administration has racked up before this one, are soaking up trillions of dollars in lendable funds, thereby setting the stage for a major, upward surge in interest rates. Only because the Federal Reserve has been pouring money into the U.S. economy—and therefore, into the global economy—has this not been apparent. But now, the Fed can do no more coddling of an irresponsible President lest the fires of inflation become stoked by those increasingly worthless greenbacks swirling about.

Unfortunately, those increasingly worthless greenbacks have found their way in boat loads to the shores of other countries by virtue of our staggering trade deficits, and the currency traders of the world have reacted by turning the venerable currency of this nation into a pile of pot metal, Third World coins.

And all the while, the Administration plows forward, vowing to make permanent its ideologically motivated tax cuts, tax cuts that have eviscerated the treasury and the treasure of America. The Republican Party, which claims the free markets and their brutal efficiencies as its inspiration, somehow becomes inattentive when the free currency markets of the world lay down their assessment of what the White House has done to the nation's economic house.

Nothing can be done to stop the slow skid into a near-recession. The old-time Keynesian fiscal stimulators are off the table: cutting taxes to spur consumption is off the table because the tax cuts have already been made (and the three rounds of them barely made the economy twitch, anyway); creating jobs programs to get people working is off the table, not for ideological reasons, but rather because the government is broke; and stirring up a good, industrial-output pumping war right now wouldn't be such a good idea for rather obvious reasons.

The only path remaining for the Bush Administration and its hand maidens in Congress is to go the one, final step for which the disreputable supply-siders have been crying for three decades: eliminate the "hidden" and "onerous" tax on businesses that is called "regulation." One final tax cut that isn't even a tax cut, at all: it's a long-awaited present to a commercial quasi-nation that has always chaffed under the rule of administrative law far more than the real nation of American citizens ever complained about the rule of civil and criminal laws that apply to them.

As nothing can be done to stop the slow skid into near-recession, neither can anything be done to stop the slow descent of this nation into a hard land of brutishly tough laws on its people and complete license to its businesses.

But this won't be on the news because the sentiments of the people, conservative or liberal as they may be, really don't matter, now.

And there's no good reason for citizens to try to change the future, anyway, because it has already arrived.






The Dark Wraith has spoken.

Consumer Spending Loses Forward Momentum

After rising by a revised 0.8 percent in October, consumer spending slowed to 0.2 in November, an increase that likely did not even keep pace with inflation. This would mean that, in real terms, consumers actually spent less for the month leading into the holiday season. A 0.2 percent monthly growth rate translates into an annualized rate of about 2.43 percent. Inflation may come in at closer to 3% for all of 2004, and it could become more of a problem in the coming year before the recent tightening of monetary policy by the Federal Reserve Board begins to bring the upward trend in the aggregate price level back under control.

In other news, Americans were saving more of their money in November. Although still very low, the savings rate edged up to 0.3 percent of after-tax income.

Taken together, these numbers paint a picture of average Americans in an increasingly defensive financial posture, particularly in light of the fact that interest rates they can earn on savings remain modest despite the recent rise in rates caused by massive federal budget deficits and a more aggressively anti-inflation posture being taken by the Federal Reserve as it ratchets up short-term interest rates.

Historically, strong and growing consumer demand for goods and services has propelled the U.S. economy, so the November numbers add to concerns in some circles that 2005 will be characterized by an economy struggling to hold off recession. This past week, in fact, the President's Council of Economic Advisers dramatically reduced its forecast for the number of new jobs the economy will generate in the coming year. In February, the Council had predicted 3.6 million new jobs, but it has now revised that number downward by more than 40%, to 2.1 million new jobs.

If consumer spending continues to lag behind inflation, the outlook for next year might become even more bleak, since goods and services bought by consumers encourage businesses to hire more workers to meet the demand for their products.

But complicating this assessment is the weakness of the U.S. dollar with respect to the euro, the yen, and other currencies. Some observers point out that this weakness, which causes U.S. exports to become cheaper in other countries, will spur hiring in domestic, export-related industries. Others disagree, arguing that any additional job formation caused by increased demand for American goods and services overseas will be modest, at best, and will be overwhelmed by the negative effects on the broader domestic business picture of rising interest rates and the government's limited policy options for fiscal stimulus.

Dollar Falls to New Low for 2nd Straight Day

The U.S. dollar continued its slide against the euro, crossing the $1.35 level on Thursday, then settling further on Friday to close at $1.3548. Although part of the blame for this string of losses can be attributed to the week's less-than-favorable news about the U.S. economy, the long-term trend downward in the value of the dollar against other major world currencies is being caused by the record U.S. budget and trade deficits.

As the dollar becomes worth less and less against the euro and the yen, U.S. exports will become cheaper in Europe and in Japan. Many believe that this is why the Bush Administration has made no meaningful effort to stop the dollar's slide, despite President George W. Bush's statement that he "supports" a strong dollar. European ministers meeting earlier this week made clear their dismay about the current situation.

The Europeans and other U.S. trading partners want the United States to aggressively purchase dollars with other currencies. Ideally, the resulting increase in demand for greenbacks would cause the dollar's value to start rising against those other currencies; and at the same time, the resulting increase in the supply of those other currencies would cause those currencies' values to start falling against the dollar. In practical terms, governments find that the reserves they have on hand fall far short of what would be necessary to strongly turn currency markets around on the sheer weight of such purchases and sales; but the very fact that governments show the willingness and ability to execute sustained and large-scale currency transactions signals world currency traders that the governments are willing to put real money on the line to stop a trend they don't favor.

In the current situation, however, the Bush Administration has shown no interest whatsoever in using its reserves of euros, yen, or gold to sop up the excessively large supplies of American dollars in the world. As noted above, this may be due in part to the desire of the Bush Administration to assist U.S. exporters by making their goods cheaper overseas, while making foreign imports to the U.S. more expensive. Even though such a strategy for helping the U.S. economy might work in the short run, the loss of value the dollar has experienced recently may lead in the longer term to a loss of stature of the currency in world trading, which would in turn encourage global markets to seek another currency like the euro as the basis for denominating international transactions and as the means of choice for storing value that arises from global trade.

Domestically, even though U.S. exporters will likely benefit from the cheaper dollar, American consumers will find that prices of foreign imports here in the United States will be rising, which might tempt domestic producers of competing products to raise their prices, too. Coupled with rising prices for foreign imports of crude oil, U.S. consumers might find themselves spending far more of their net income on necessities, complicating prospects for the kind of sustained, long-term economic expansion the Bush Administration has claimed its free-market, pro-business policies will create.

New Home Sales Drop Hard in November

November sales of new homes in the U.S. recorded the largest one-month decline in more than 10 years, falling by 12% to a seasonally adjusted 1.125 million units. Steady upward pressure on interest rates has been showing up recently in interest rates on home mortgages, putting the brakes on demand that had seen both ups and downs from month to month throughout the year.



Although many economists are reticent to interpret the disappointing sales as pointing to a broader slowdown of the economy, the fact that sales dropped so sharply from the record level in October is at least of some concern because it points to the possibility that consumers in October were rushing in unusually large numbers to lock in house purchases—and, therefore, mortgage rates—in advance of difficulties they anticipate they would have if they were to wait.

The National Association of Home Builders, trying to provide an upbeat assessment of the large November drop, indicated that wet weather during the month was a contributing factor to the slowdown; however, even the home builders' group forecasts a pullback in new home sales of as much as 5% in 2005.

Adding to the mounting evidence of a slow burst in the "housing bubble" was news released earlier that the median price of a new house in November was just over $206,000, its lowest level since December of last year. Additionally, the time on market for an existing home on the market grew from 3.9 months to 4.5 months, indicating increasing difficulties for sellers trying to meet buyers willing and able to pay listed asking prices.

Traditionally seen as a bellwether of future economic activity, home sales are particularly sensitive to prevailing interest rates, as well as to expectations about the direction and magnitude of possible changes. With the Federal Reserve Board acting in five consecutive actions to raise benchmark short-term rates, and with record federal budget deficits putting unprecedented demand for lendable funds on the capital markets, sustained, strong growth for the U.S. economy in 2005 may prove difficult to achieve.

Administration Talks "Reform" of Tax System

The White House plans to announce a "bipartisan panel" to propose "broad-based reform" of how tax revenues are generated, according to U.S. Treasury Secretary John Snow. Not known for bipartisanship, the Bush Administration will likely use the panel to set forth fundamental and politically irreversible changes in the distribution of the federal tax burden.

The Administration and its allies in Congress, following the advice of supply-side economists, have altered elements of the tax code to the end of freeing capital from taxation. Among the changes already made are the elimination of the taxation of corporate profits earmarked for dividend distributions, reduction or elimination of certain capital gains taxes, and cuts in taxes to high-income taxpayers, many of whom realize a substantial amount of their income not through wages, but through investments. Freeing income generated by capital from taxation, supply-siders would claim, encourages investment, which in turn expands employment. This argument is a modern variant on a long-repudiated idea known as "Say's Law," which posits that supply creates its own demand.

In practical terms, as a smaller percentage of tax revenues is collected from gross income generated by capital, a larger percentage must then necessarily come from the economy's other generator of taxable income: labor. The most compelling way for this shift of the burden to be accomplished—far more profound and far-reaching than the tax changes already put into place—would be to institute a federal sales tax. Such a tax would fall heavily on the income of working Americans since their expenditures constitute two-thirds of GDP. Moreover, a national sales tax would likely take the form of a consumption sales tax (the same as state and local taxing authorities use), and such taxes are overwhelmingly paid by middle-income and working poor individuals and families, not by corporations or the wealthy.

A permanent restructuring of the tax code would likely come within the next two years, while the Administration and its allies are certain to have majority control of both the Senate and the House of Representatives.

Dow Industrials Reach 42-Month High

The Dow Jones Industrial Average today rose just short of 98 points to reach a level not seen since June of 2001. The broader Standard and Poor's, NYSE, and NASDAQ Composite indices were also higher.

The mark hit by the Dow today means that, if an investor had formed a portfolio in June 0f 2001 of the large-cap stocks that make up the Dow Jones Industrial Average, and had weighted their contributions to the portfolio as the Dow does, that investor today would have realized a total return and an annualized return on his or her investment of zero percent.

That's right: zero percent.

White House Revises Jobs Forecast Downward

The Council of Economic Advisers to President Bush today lowered its estimate of job formation in the U.S. economy for 2005. Previously, the Advisers had predicted that 2005 would see about 3.6 million new jobs; today, however, the Council dropped that number to 2.1 million. Forecasts for later years were also lowered.

For the current year, job growth will come in at an anemic 1.5 million or so, far below the number of new jobs needed to accommodate growth of the labor force. Even at 2.1 million new jobs, there will be little positive distance between the new jobs available and the new labor force entrants needing work. More importantly, the Council did not venture to describe the quality of new jobs that will be posted by employers. This has impact in at least several dimensions:

•  a "job" is a job in these forecasts, whether the compensation is for $60,000 with full benefits or for minimum wage with no benefits;
•  regional variations in hiring may make jobs available in parts of the country other than where jobs are needed most.

Also, in predicting that job formation will be better in 2005 than it was in 2004, the White House is assuming that the economy will grow more robustly than it did this year, an assumption challenged by the inevitability of rising interest rates that will slow down business activity and consumer spending, both of which are key to macroeconomic performance. During the just-concluded Presidential campaign, Mr. Bush was taken to task for predictions during his first term about job growth that proved far too optimistic.

Regulatory Vigilance and Budget Cuts

As the Administration prepares a budget that will reduce funding for domestic programs, we should take note of the increasing demand for censorship by the Federal Communications Commission.

We should also take note of the revenues the FCC is earning from its enforcement actions against media outlets that violate decency standards.

While the radical Right is certainly in favor of cutting the budgets of domestic programs that provide services to low-income citizens and clean up the environment, it remains to be seen whether or not there will be similar applause for cutting the budgets of programs that provide services to conservative citizens who want to clean up the airwaves of America.

Only time will tell.

Analysis: Atonement by Proxy

The Bush Administration yesterday declared that it would submit a "tough budget" to Congress, making it clear that it was planning to get serious about the record budget deficits that have become the fiscal legacy of its first four years.

The Departments of Defense and Homeland Security need not worry: they will continue to be the beneficiaries of substantial and growing sums of money. Perhaps the Department of Education, the Veterans Administration, and NASA will be spared the brunt of the budget axe, too; but any small increases those three areas get will come out of the hide of the remainder of domestic spending. Zero-based budgeting for everything but Defense and Homeland Security means that what was spent last year will be the amount available this coming year.

Of course, the Federal Reserve now grasps, at least in part, that its expansionary monetary policy, which for the past four years has masked the fiscally reckless folly of the Administration's tax cuts, has reawakened inflation, a beast brought under control more than two decades ago. Even if the Fed's newly rediscovered relationship with its one and only one duty—stability of the U.S. aggregate price level—is for real, we are in for a good couple of years of inflation as the anemically growing U.S. economy slowly sops up the excess money the Fed created to help its conservative friends in the White House and Congress look like they knew what they were doing. The inflation we're going to get will make that budget cap set from last year's level worth less in real purchasing power this year.

Hence, the real budget for domestic programs is being slashed for the coming year. What does that mean to U.S. citizens?

• Assistance for people who need help with heating bills will be lower: as heating bills climb and more people qualify for aid, less will be available overall and less will be available for each family that needs it.
• The amount of money available to monitor the health and safety of the nation's food supply will be less.
• The amount of money available for the Securities and Exchange Commission to oversee compliance by public companies with laws designed to protect investors will be reduced.
• The amount of money available to enforce laws designed to protect the environment from polluters will be reduced.
• The amount of money available to prosecute white collar criminals will be reduced.
• The amount of money to regulate businesses through the Federal Trade Commission will be reduced.
• The amount of money to help small businesses with everything from formation to securing small working capital loans will be reduced.
• The amount of money available for basic research in areas ranging from cancer to quantum physics will be reduced.
• The amount of money available for non-commercialized information delivery, art and literature production, and archiving of worthy materials in museums will be reduced.

This is to name but a few of the thousand or so ways that life in America will be changed by the neo-conservative authors of the solution to the record budget deficits. And we are facing these cuts in the domestic budget in part because of the lack of any fiscal sense by an Administration obsessed with pressing into service ideology-driven theories that didn't work the first time they were tried during the early years of the Reagan Administration.

No, cutting taxes does not cause tax revenues to rise. Instead—shock of all shocks!—it makes revenues generated from taxes fall.

No, driving federal budget deficits into the stratosphere will not "starve the beast" of socialist programs the Right has for decades been dying to kill, even as such programs progressively expanded in budget and numbers from Roosevelt on through every Administration afterward. The only way the Right is going to fulfill its fantasy of a return to the superstitious and brutish world of every-man-for-himself is by wrecking the Social Security Act of 1933, a venture that will be attended by the unavoidable borrowing by the federal government of perhaps several trillion dollars.

But right now, this Administration wants to show resolve. The world at large must know that the Americans aren't going to send their national debt into insolvency territory; the fiscal conservatives must know that the neo-conservatives really didn't mean what they said about deficits being irrelevant; and the evangelicals of the religious Right need to know that Mr. Bush does, indeed, plan to reshape the American society into some 21st Century version of a Puritan nation marching on in self-reliance and fear of God.

And so the Administration, which could do none of this in its first term—an Administration that failed at every turn to deliver solid results to just about every constituency that props it up—will now show its will to do what it swore it would.

And America's people—its poor, its vulnerable, its thoughtful, its needful—will bear the brunt of Mr. Bush's newly minted, Right-wing spine.

But what could we expect? This is an Administration that, by its sustained and appalling incompetence and obsessive focus, utterly failed to protect us from a coordinated attack within the continental United States by a pack of amateurs carrying nothing more than box cutters. Idiots with box cutters successfully did more than $30 billion dollars worth of damage to the most powerful nation in the history of the world. This outrage could have been stopped at a mere fraction of the cost we now pay in treasure and liberty for Mr. Bush's failure.

This is an Administration that, again by its sustained and appalling incompetence and obsessive focus, put the United States at war with a nation that now generates insurgency able to frustrate the most powerful military machine in the history of the world, even as that machine levels city after city in a land already lain to waste. This outrage could have been avoided all together; but instead, young American men and women, together with the young and old of that shattered nation halfway across the world, now pay with their very lives for Mr. Bush's failure.

For every sin this Administration commits, someone other than Mr. Bush pays. Lives full of promise are sacrificed, nations are laid to rubble, the poor are stripped of hope, and the republic is flogged into the future by the whip of fear.

And with every act of atonement through his unwilling victims, the President is absolved of his sins; and he is born again.


The Dark Wraith has spoken.

White House Vows "Tough Budget"

At a White House conference today, President George W. Bush said he was "...going to submit a tough budget" to Congress in February, indicating that most domestic programs would be subject to zero-based budgeting. The effect would be that many domestic programs would be under an aggregate spending cap at the previous year's level, so any increase for one program or agency would be at the expense of others. Because inflation is currently running at or above 3%, the freeze on domestic spending would represent an erosion of real purchasing power for affected budget items.

Excluded from this budgeting rule would be defense, homeland security, and several other programs. White House officials have signaled that education, veterans programs, and space exploration would be granted modest, though unspecified, increases.

The federal budget deficit has hit a record level under the Bush Administration. Massive borrowing by the Treasury to pay for the imbalance has been the subject of growing concern both within and outside the U.S. Although the government's robust demand for lendable funds should have put upward pressure on interest rates long before now, the Federal Reserve Board earlier this week all but conceded that it had pursued a loose monetary policy to keep interest rates at historically low levels. Now, concerned about mounting inflationary pressures because the growth of the money supply has exceeded real growth of the economy, the Fed has vowed to put the brakes on money supply growth. Because the price of U.S. dollars is the interest rates they can earn, this tighter monetary policy is expected to cause domestic interest rates to rise, which they already have begun to do: not only has the Federal Reserve in recent months been consistently notching up the benchmark discount rate and the federal funds rate, but recent sales of government debt at Treasury auctions have seen lower prices, and therefore higher yields, fetched. Perhaps more immediately troubling, home mortgage interest rates have recently been edging upward, threatening to slow down the growth of the housing sector.

The rising interest rates—coupled with cuts in federal spending and little room for further fiscal stimulus in terms of additional tax cuts—bodes ill for the U.S. economy, already laboring under several years of lackluster performance, especially in terms of job formation, which has not kept pace with the growth of the labor force.

President Expresses Social Security Concern

President George Bush today stated that he wants to repair the problems with Social Security before they become a crisis. Economists have projected that a gap of 19% between benefits and revenues will develop in approximately 40 years, a shortfall that economists like Paul Krugman calculate could be closed by repealing Bush Administration tax cuts for the top one-half percent of all American taxpayers. In stark contrast, the President's plan calls for partial privatization of the system at a cost that may exceed several trillion dollars, money that will have to be borrowed from creditor nations already providing the bulk of debt financing for the U.S. government.

The President's concern about a possible crisis 40 years in the future is a bold departure from the apparent lack of concern on the part of the Administration about looming crises facing the environment, depleting world petroleum reserves, growing insurgency in Iraq, widening and deepening clashes between the Muslim and Christian worlds, the continuing loss of American jobs to other countries, widespread and growing loss of confidence in the results of U.S. elections, and other matters far more immediate.

Fed Declares End to "Policy Accommodation"

On Monday, as it announced a quarter-percent hike in the key Federal Funds rate, the Federal Reserve Board stated that "policy accommodation" was at an end. In what is otherwise generally obtuse, vague, circumspect, and diplomatic language of statements released by the Fed, this declaration stands out as a virtual admission that the Federal Reserve has been allowing the money supply to grow at a high rate to keep U.S. interest rates low during the past several years. Put another way, the Fed has been printing money at a rate exceeding the real growth of the money supply to finance, in part, tax cuts and aggressive spending by the Bush Administration and its allies in Congress.

In a separate development, the Federal Open Market Committee (FOMC) released notes of a recent meeting in which its members called for "fiscal discipline." Interestingly, the minutes of this meeting were released in a more timely manner than has been the tradition of the FOMC. The early release was hailed by analysts as a move toward greater transparency of Fed activities. However, most financial news outlets did not mention that the early release of these minutes with the call for greater fiscal discipline happened in striking coordination with the Fed's open statement on Monday about the end of monetary policy accommodation.

Taken together, these two overtures seem to indicate that the Federal Reserve Board has begun a carefully coordinated information campaign to signal the Bush Administration and Congress of significant concerns in financial circles about Administration economic policy, along with the Fed's unwillingness to be a party to it any longer.

Record Trade Deficit Reported

The U.S. trade deficit for October rose 8.9% from the September deficit to hit a record level of $55.5 billion, and the cumulative trade deficit for the first 10 months of 2004 reached a record $550.5 billion, exceeding the trade deficit for all of 2003. Although historically high petroleum prices were in part responsible for the October results, the rising tide of red ink is consistent with trends set over the past several years.

As U.S. dollars flow out of the United States in the so-called "current account," those greenbacks will be returned through the "capital account" by foreign, long-term investment in the U.S. A significant portion of this investment will be to finance record U.S. budget deficits.

The continuing and increasing dependence of the United States on both commodity assets like petroleum and financial investment from overseas is of concern to many private economists and goes a long way toward explaining the U.S. government's reluctance to stop the free-fall of the dollar against other currencies. Theoretically, as the dollar weakens, foreign imports will become more expensive, while U.S. exports will become cheaper in other countries. Eventually, this should have the effect of narrowing the trade deficit while at the same time stimulating business activity in domestic export industries.

However, the dollar's recent, precipitous decline has significantly reduced the marked-to-market value of dollar reserve holdings by foreigners—particularly foreign central banks—which erodes global confidence in the U.S. dollar as the reserve currency of choice for the 21st Century.

Whether or not this loss of confidence is permanent will depend crucially upon policy and actions in Washington over the coming months, especially with respect to reigning in federal spending.

Fed Rate Hike on Deck

The Federal Reserve is poised to notch interest rates up, once again. Greenspan and his fellow Governors have no choice in the matter: market rates—driven primarily by the staggering and escalating borrowing by the U.S. Government—are pulling away from the somewhat symbolic "discount" and "Federal funds" rates.

The Good News: You'll be getting better rates down the road on all of that money you plan to save for retirement... unless, of course, you were planning to throw it into the stock market, because stock markets don't like escalating interest rates (see The Bad News, below).

The Bad News: Interest rate hikes slow economic activity, so you'll be lucky if you even keep your job, let alone gather buckets of money to invest.

Don't worry, though: this is a slow-motion B-rated movie. You'll have time to sit back and watch the descent in leisure. Think of it as family-friendly entertainment.


The Dark Wraith reaches for the popcorn.