Dan’s Blog

Management Deficit Disorder

Dan Calandro - Friday, February 10, 2012

The U.S. Bureau of Economic Analysis reported today that the trade deficit widened to $49 billion for December.  Also in today’s news, President Obama unveiled a budget that calls for another trillion-dollar-plus operating deficit for 2012.

An operating deficit occurs when expenses are greater than revenues -- in other words, spending beyond ones means -- and thus creating a "loss" for the operation.  And since a budget is nothing more than plan, a "budget deficit" is nothing more than a plan to lose money.   

Doing so, in the current manner, is nothing short of gross mismanagement.  

To put the harsh statement above into context, and should the U.S. hit Mr. Obama’s 2012 deficit target, consider that his administration will have spent $14.5 trillion in his first presidential term – adding an alarming $5.7 trillion to the national debt.  A comparison of the three most recent presidents’ first terms is below.

1st 4 Years ($trillion)

Spending Debt

Obama $14.5 $5.7

G.W. Bush  $8.3 $.8

Clinton $5.9 $.7

(source: Congressional Budget Office, 2012 revised for Obama budget.)

Of these three presidents, Bill Clinton was the only to reduce government spending each year in office, while George W. Bush outraised them all, averaging a sizeable $2.4 trillion in annual tax revenues during his term. Neither Clinton nor Obama have come close to that kind of annual raise – higher tax rates or not.  

Americans may recall that a byproduct to President Obama’s first term policy agenda was to increase exports and to stop unemployment from reaching 8%.  He promised to deliver these results with fiscal policies called "stimulus", investments in green energy, new banking regulations, and a continued easy money stance.  

But since reaching 8% in Mr. Obama’s first month in office, the unemployment rate has persisted stubbornly above that target; exports are shrinking, and money isn’t moving.  

What happened?

First the obvious: governments are incapable of producing long term job growth and investment value because they are driven by politics instead of return on investment.  To use a modern analogy, you can throw a ton of money at green energy and create some temporary jobs but that doesn’t guarantee long term benefit.

Profit creates long term jobs and escalating benefits.  Politics, on the other hand, can only produce short term puffs of life.  That’s why radical government spending programs (a.k.a. stimulus) always fall short of expectations.  They embolden waste and corruption.  Look no further than the current state of the green energy market for further proof.  Wasteful spending is not a long term solution.  

Next, Mr. Obama sought to increase exports (and in fact, to create a trade surplus) with a weak monetary stance.  In other words, the administration meant to increase demand for American products overseas via a cheaper dollar.  The expanding trade deficit proves this to be false conjecture.  

A trade deficit means less demand for American goods overseas.  Less demand signifies a shrinking market (a.k.a. recession.)  This, of course, corroborates recent news of recession from Europe and Asia – which also reinforces the fact that cheap money cannot create long-term demand.  Only healthy markets can do that.  Besides, Europe and China followed suit by weakening their respective currencies that leveled the currency playing field.  In short, international monetary policies derailed President Obama’s grand plan.

The problem with the American market isn’t that it’s getting out-performed – it’s getting out-managed!

American central governance has an infectious disease I call: Management Deficit Disorder (MDD) -- a condition when monetary and operational deficits seem to be a profitable way to do business.  

Oh how I wish there was a modern medicine to cure such a condition, but I’m afraid the FDA hasn’t received an application for it yet.  But while we wait for the miracle to arrive, may I suggest starting rehab with fiscal restraint, a strong dollar policy, and drastically reducing the Market’s regulatory and tax burdens.  

To put it bluntly, American governance needs to get out of the way and let American enterprise – and We the People – outperform the rest of the world.  Because that's what we do best.  It is the American way.  

It’s time to stop this dreaded MDD disease.  Until that happens play defense and prepare your investment portfolio for battle.  It is the road to financial independence.  

And let me know if I can help.  

Talk soon,

dan-


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