More Government Spending?

Ask your friends or colleagues if they believe the U.S. Government should be spending more in order to get us out of the recession. The reaction we have gotten from both conservatives and liberals alike has been a resounding “NO” – many times it has been a resounding reaction. In our last update, we talked about how Americans are fixing their balance sheets. Polling strongly indicates that Americans want our government to do the same. Many are concerned about the deficit and it is now a leading issue for candidates. Republicans lost their majority in Congress due to their careless spending (i.e., the “bridge to no where”, Bush not vetoing any spending bills, etc.). It looks likely that the same outcome will beset the Democrats as well. Politicians, in general, seem to have an easy time spending our money.

Many of our politicians have looked to Noble prize winning economist Paul Krugman from the New York Times for additional support of their spending spree. Mr. Krugman believes that more spending is the answer to the current weak economy, with such action preventing a double dip recession as it did in 1937. We respectively disagree with him. In 1937, the main reason for the double dip was uncertainty. FDR won re-election in 1936 and started off with a robust agenda that caused uncertainty in the markets and with business leaders. In our opinion, specifically, two major policy initiatives caused the double dip recession. First, many of FDR’s initiatives in his first term were overturned by the Supreme Court. In order to prevent this from happening again, he proposed raising the number of Supreme Court Justices from 9 to 17 in order to insure the sustainability of his programs. Secondly, and even more destructive to the economy, he increased taxes for both corporations and individuals. For example, the Undistributed Profits Tax, which was enacted in 1936, made it less attractive for companies to reinvest their profits for long-term growth.

Our point is this – no country has ever taxed themselves into prosperity. Americans are not happy with government spending and, we believe, not in the mood for more taxes. Many are hoarding cash because of the uncertainty they feel both personally and in business. If Washington eliminated this uncertainty, it would go a long way in repairing our economy.

Sincerely,

Your THOR Team

Individuals are Getting Their Balance Sheets Healthy

The past year has served as a wake up call to individuals about the risk of too much debt. Many have reduced their spending and are now saving more. Frivolous spending has been replaced with saving. Cash is king and the “good ‘ole days” of living on borrowed money is over for now. People are getting their financial houses in order. The proof is in the statistics:

- As the chart above demonstrates, the personal savings rate has jumped in the last year as consumers hunkered down and stopped spending. Please keep in mind that this savings rate does not include any contributions to 401K plans.

- The increase in the savings rate equates to real savings. The above chart shows that total Personal Savings have jumped from approximately $150 billion in 2008 to over $500 billion today.

- Savings are up and debt is down. According to the Federal Reserve, credit card balances were down 9.5% in 2009 or slightly more than $91 billion and consumers now owe less than what they did at the end of 2006.

In 2002, after the collapse of Enron and MCI because of too much debt, corporations began to shore up their balance sheets by reducing their debt. Like 2002, we believe a sea change is occurring now within the US – spurned by the continued spending of our government. Such spending has created a large amount of anger in our citizens. If our politicians listen, this anger, we believe, will lead to the next wave of savings, namely, a much needed reduction in Government spending. All polls indicate that government spending is one of the major concerns of all our citizens – both Democrats and Republicans alike. We believe it will not be fashionable to “bring home the bacon” for politicians in the future. The free spending days of the Government are rapidly coming to an end.

Sincerely,

Your THOR Team