Benson’s Economic & Market Trends

The Economy and National Security

April 24, 2003

Capturing 25% of the world’s oil from a lunatic despot is certainly in the interests of the United States’ National Security. The US is the world’s largest oil user. Without oil, the US economy would stop dead in its tracks. Moreover, America is the world’s largest debtor. If the US is to maintain the dollar as the world’s reserve currency, having access to oil to back the dollar will keep the world continuing to use the dollar to settle accounts, even if the dollar’s role as a rock solid store of value is being threatened by trade deficits and a Federal Reserve easy money policy. Therefore, backing the all-mighty dollar by cheap oil paid for with a lot of bombs, and a little blood, is actually sound economic policy for the US.

We will keep a major military presence in Iraq. The Secretary of Defense has officially denied our desire to stay for the long term (there is never any need to officially deny something that isn’t true). The other rulers of the adjacent lands of sand, religious extremism, and oil, know if they move a single foot out of line, it’s “Hello MOAB”! Shock and awe is all about the price and availability of oil. If an oil state doesn’t cooperate, they can always be found a “danger to peace”. The US media will repeat the story until enough good citizens are scared. Appropriate action will be called for and voted for by a patriotic Congress. The US does not need permission by the world, or the French, to protect ourselves and our interests. If we start to invade again, no one can stop us! As long as the US policy keeps oil flowing and the price low, our “go it alone policy” is in the interests of the US, Europe, China, Japan, and much of the rest of the world. Who else really matters? Taking the oil may not be moral, but the world is clearly better off with it in American hands rather than have the money go to buy guns and bombs for religious fanatics. Let the world blame us for making their oil available and reasonably priced. Besides, our National Security is good for World Economic Policy. Our National Security is particularly good for the USA and an oil-backed world reserve currency. As long as the world has to pay dollars for our oil, the dollar will be respected and taken in trade, no matter what it’s worth.

However, a strong economy can also be good for National Security. Currently, the US has seen official job rolls fall by 2.5 million. Unemployment has fallen in manufacturing for 32 months in a row! We have over 8.5 million “officially unemployed”, about 5 million people who have given up looking for work, another 5 million who work part-time but want full time work, 2 million people in jail, and over 5 million receiving Social Security Disability (so we can say they aren’t on welfare or unemployed). After WW II Stalin was afraid of Detroit, and the productive capacity of its factories and workers. Today, we have only 10 million manufacturing jobs left in America. At least 40% of those “so called” manufacturing jobs are in design, marketing, shipping, etc. The only thing left to fear about Detroit is: When will more auto plants close? Where will those workers go? Who will fund the pensions for the vanishing UAW? We are still waiting for the Federal Reserve’s explanation of how outsourcing all manufacturing jobs to Asia is in our National Interest. There are 1.3 billion Chinese, and well over 2.5 billion people in Asia, not counting 900 Million in India. The Fed has been trying to employ as many people as possible overseas by running $500 billion trade deficits. The US obviously can’t employ them all so why do we make moving our factories to China our number one economic goal? Would it not be in our National Interest to employ our own citizens to make the things that Americans want to consume?

George the 2nd has just told the Fed Chairman he can have his 5^th term, running the world’s supply of money and credit. Maybe he doesn’t remember what the Fed Chairman did to George the 1^st? Maybe there was a deal, to keep money easy in exchange for the continuation of power over money?

Basically, if you look at the Fed Chairman’s economic policy over the past eight years, it has focused on one and only one thing: Keep the consumer spending! Do not let the consumer save as saving is anti-growth. The Fed policy says don’t save for a rainy day, the sun will always shine, go borrow and consume. The economic model is consistent - use easy money and super easy credit to push up asset prices. Rising asset prices help people feel wealthy. The Fed wants Americans to feel wealthy because the wealthy spend. We are told that the more we spend, the richer we are, and the stronger the GDP is. It’s a pity they don’t always spend on things of lasting value. Too often it’s party time, and the money just gets thrown away.

The Fed Chairman’s policy has been for the American consumer to spend enough to not only grow our economy, but generate economic growth for the entire world. No price for growth is too high even if it means pushing the trade deficit to the moon, and gutting and closing every factory in America! No wonder he talks so much about productivity. We’re so productive that we don’t even need to produce things any more. We wonder if this policy has been in the long term interests of National Security.

In contrast, the countries that the US will really compete with are in Asia. Japan and China can actually produce things. They think it is neat to make them better and cheaper than we do. The citizens and governments of these countries value saving and investment. They like the idea that we are moving our factories to their side of the Pacific. The Asians believe that the real power of a country is in its ability to produce, and they will resort to any device in their national interest. Why pay for software when it can be so easily copied? The Chinese and Japanese are willing to buy dollar securities so they can keep their trade surpluses up. As long as we are willing to move our factories to Asia to take advantage of their cheap labor, they will be delighted to take our jobs. It is in their national interest. Asia is building for their future through saving, investing and production.

Now look at America’s Economic Policy. It discourages investment in America and encourages investment abroad, where the poor people there need jobs. The Fed Chairman offers wealth without work or saving. The creation of money and credit to push asset prices is used to justify spending more than is earned. The US can live way beyond their means forever even though we are losing jobs while we are spending. Jobs pay the income that is needed to service the debt and put bread on the table. These policies sound great, but they don’t add up.

Now that George the 2^nd has anointed the Fed Chairman for life, the political realities of mass unemployment in the coming election year lead to one and only one course of action for a second term - the President needs two million jobs, and “trickle down” economics won’t do it in time for the election. The tax cuts may help the next President, if George doesn’t get Kerry’d away. By summer, once the tax cut is out of the way, the real budget busting will start. Manufacturing workers and hundreds of thousands of computer programmers, airline workers, and white collar managers all need jobs. The US needs more government spending. By the end of August, every Congressman will be headed back from the beach looking for some “Pork” for their busted states, cities, and “shell-shocked” unemployed. Besides, America really needs spending on bridges, roads, tunnels, high-speed rail, unemployment benefits, and aid for cities and states. Working people pay taxes. Working people are more likely to vote for an incumbent. That’s what George the 1^st keeps telling George the 2^nd back at the ranch in Texas. Maybe he’ll listen.

Alan gets to keep his job; besides, he is a party animal. There is the old stock market adage, “Money makes the mare go”. Moreover, liquidity can make bad loans look good, while making them bigger! The Fed will be printing more money, a lot more money, and will encourage “risk taking” with your money. They will encourage you to overpay for things by printing up, out of thin air, hundreds of billions of dollars in “Real Money” and Trillions more in credit that can be used to buy real things like stocks, junk bonds, and real estate - as long as it is mortgaged to the hilt. The “Greenspan Put” is back! The Fed will aggressively try to keep all asset bubbles propped up: especially the stock market and housing.

The Fed will try to get inflation and top line revenue going. Inflation is the only way that all the past bad debt can be serviced. To get inflation going and stop the bleeding in manufacturing employment, the Fed and the Treasury will have to “let the dollar go”. Dropping the value of the dollar helps firms raise prices in the US, and bring back more corporate earnings from overseas. A falling dollar makes imports more expensive and helps get prices up and rising. Expect the Fed will drop the currency bomb. It’s the MOAB of Monetary Policy, and it has to be done.

For George the 2^nd to get elected to a second term the trade deficit has to come down. Devaluing the dollar is the ultimate “Greenspan Put”. Besides, Joe Six Pack needs a job to pay for his “Sport Brute”, and fill it up with gas. Don’t save, devalue! It’s in the National Interest. Interest rates will be held down. Just when the drunks in the speculative community were starting to sober up, an election is coming. The President needs a couple million jobs. The Fed Chairman is bringing the punch bowl back, laced with the “good stuff” this time like cutting rates, buying stocks, and pegging interest rates on bonds no matter how many they have to buy. Thank God, no matter what happens, we get to keep the oil. It’s all in the National Interest isn’t it?