In the previous essay I covered the coming crash, but how did we get to this point? The following covers the reason why the crash will be nearly unrecoverable. It explains our current economic disposition.
This is not how our house of cards was built, which will be covered in Part III; rather, this section covers the final steps taken by an Administration ill-prepared to understand the impact of its own policies.
A bad hand dealt to a bad player
President Obama was dealt a bad hand. The excesses of cheap dollar policies during the Clinton and Bush 43 Administrations came to a crashing halt in 2008. At issue were collateralized debt obligations (CDOs) which were the culmination of well-intended but economically untenable public policies, such as the Community Reinvestment Act (CRA), low interest rates, manipulated tax structures, and much needed but poorly executed credit reform. The seeds of the CDO crash were sown in 1999 under the Clinton Administration. They went into unreasonable heights under the Bush Administration, which needed the economy to keep growing to pay for its own sins. Simply put, Bush 43 had spent too much money on two war efforts and one badly conceived entitlement expansion. He could not burst the spending bubble he created with his own Congress by calling the economy what it really was in the mid-2000s: a lie. When it finally came crashing down due to the pressure of market forces collapsing upon itself, the US and ultimately the world was in a financial crash the likes of which may go unrivaled in global history.
Then the United States elected President Barak Hussein Obama.
Obama was an inexperienced, first term Senator from a left leaning Midwestern state who had no formal training in economic affairs and never ran a single entity in his life. He was neither a former business leader nor a former governor, both of which would have prepared the President for substantive inputs on fiscal policy. Obama was a great speaker promising change to a populace sick of the status quo. In this regard, he is much like a poker player who arrived to a table in which everyone was losing money and the audience was sick and tired of watching. Obama just needed to say, “I can play poker better” and the people would believe him. They did. Of course, the issue is that he did not know the game AND he was handed a bad hand. Torn by competing forces in the Democratic Party – moderates from the Clinton era, like Lawrence Summers, and uber-Leftists, like Austan Goolsbee – the indecisive neophyte in chief deferred to the Democratic leadership in Congress. Without any substantive Republican counterweight, they sided with themselves.
The results are analogous to the following:: a non-poker player that was playing with a bad hand bet all of the money based on the advice of others who could care less if he succeeded at the table, as long as they walked away with some chips of their own. Nothing short of a disaster. Here is what happened next.
The stack of chips that went nowhere
Obama compounded the 2009 problem in ways that most cannot truly fathom. First, he added to the debt (doubling it) through increases in government spending that produced no discernible yield. This was the American Recovery and Reinvestment Act (ARRA) of 2009, otherwise known as the 2009 economic stimulus plan. Primarily, Obama gave absolute budgetary discretion to Congress. That makes sense. After all, the House is constitutionally mandated with the power of the purse. However, Congress having been controlled by Democrats in both chambers, used the one trillion dollar stimulus to pay back political constituents that enabled their 2006 and 2008 Congressional victories – namely the public sector union employees, to include the teacher’s union.
Consequently, according to the Congressional Budget Office (CBO) only $105.3 billion, or approximately 10% of the stimulus, went to infrastructure that could ultimately yield GDP growth while a nearly equal amount of $100 billion went to the teacher’s or college academic unions that supported leftist initiatives. The latter made no discernible impact on economic growth, except ostensibly to keep teachers and professors employed that would otherwise have been fired in a municipal cost cutting environment. That is not what happened.
A little help for my friends…
Instead, Democratic Party aligned teachers and professors used the money to increase their own wages while simultaneously exploiting desperate, out-of-work employees by raising the cost of higher education. In other words, whereas infrastructure reinvestment could have made a real difference in long term economic growth, the Democrats, led by Pelosi and Reid helped “educators” increase the cost of education by approximately 15% in a two year period of time while overall consumer goods fell by about 2% in the same period. Meanwhile, the President remained largely silent. Of course, educators blamed a drop in state financial support as the reason for higher costs, but they failed to mention the enormous increase in federal budgetary assistance as evidenced in the aforementioned referred CBO report.
That is not all. Educators used the federal assistance to increase their own paychecks as well as their pension payouts. The United Federation of Teachers (UFT) and the Obama Administration’s Department of Education increased UNION-ONLY teacher salaries at an obscene 4% compounded per year in 2009 and 2010 while signing a contract into law with the Department of Education (DOE) that would continue to increase payouts at 1 – 4% per year until 2018, while American earnings fell 6.7% in the same period of time. In other words, the stimulus, which was paid by hurting American tax payers, was used to pad the pockets of Obama allies in the teacher’s unions, while Americans could barely pay their bills. It gets even worse. The same UFT report which I just cited also refers to a negotiated increase in union pensions of 1% compounded for the next DECADE while other American employees were losing their retirement funds altogether. Mind you, non-union teachers did not receive these benefits. ONLY Obama and DNC allies got this payout.
Meanwhile, infrastructure spending – the 10% to which I earlier referred – dropped to an approximate net zero on transportation improvements. The reason: state revenues declined in an era of diminished tax returns. US federal spending on infrastructure essentially kept existing projects afloat. But what did they really buy?
Instead of holistic regional programs, like port or commercial rail development, money was allocated to programs at the individual state’s discretion which ultimately bought fairly useless projects like Connecticut’s Merritt Parkway beautification project (replacing rusty metal barriers with prettier wood ones) or the expansion of a two lane road for approximately two miles of a state highway leading into economically depressed Elizabeth City, North Carolina. The logic was that “shovel ready” projects (i.e., projects already in the works) would create immediate stimulus. However, no one seemed to care what “shovel ready” meant.
Shovel ready were typically programs that the state had determined were important for some local reasons. The parochial spending priorities that used federal dollars to subsidize useless projects helped some communities get signs that helped the incumbent party get reelected. Namely, you could find signs stating something to the effect of “This Road Expansion is Courtesy of His Greatness, President Barak Obama. Remember that in 2012!” Meanwhile, the ports of Los Angeles, Norfolk, Newark, Seattle, Savannah, and Charleston received zero dollars in ARRA funds. Not a dime, despite the fact that all six seaports account for the bulk of nearly one quarter of the total $17.4 trillion US economy. Thus, while “Eight Mile” in Detroit received pretty new brick crosswalks, and “Barak is Great” signs, infrastructure spending on economic producing seaports received nothing.
Let’s put this in contest: Despite allocating seventeen times the amount of funds authorized for the interstate program of the 1950s. We got nothing close to the I-95, I-10, or I-5s of the Eisenhower-Kennedy-Johnson era. Instead, we got flowers in Democratic voting suburban districts and expanded sidewalks in Democrat voting urban slums.
Meanwhile, the oft-blamed Republicans were completely out of power and had no real ability to guide or direct spending priorities. As such, Republican Congressional Representatives lucky enough to get any stimulus (usually through the support of their fellow legislators who happened to be Democrats from the same state) could not say where that money should go. In this very rare case, the RNC really shares no blame in the shortsighted lack of infrastructure development that came out of the ARRA.
But it gets worse.
Lowering the debt by sleight of hand
Second, In order to pay for this government largess the government had two options: increase taxes (which would negatively impact growth) or reduce the value of the debt through a dollar weakening policy. The Administration chose the latter. While it would ultimately raise taxes through other means, the Administration and its allies at the Federal Reserve chose several rounds of dollar devaluing quantitative easing (QE: i.e., printing dollars to make them worth less) and low interest rates.
This purposeful suppression of the US dollar’s value, in essence creating inflation, was designed to reduce the overall value of the debt. But there was a problem with the strategy. No matter how much the Administration tried to suppress the value of the dollar, other currencies never appreciated. The Eurozone hit its own economic challenges a year after the United States and thus the Euro, the only true competitor to the US dollar, never appreciated to a level that allowed the debt to drop in terms of real value. The accumulated debt that bought no discernible long term impact was not lowered by the Administration’s attempted tricks. One would think after QE 1 did not work that the Administration would try a different policy prescription. It did not. It doubled and then tripled down, issuing QE2 and QE3 in subsequent years.
Stupid is as stupid does
Unfortunately, this is not a strategy that is unique to the Obama Administration. This goes back to the Greenspan Cheap Dollar strategies which began in the 1990s. The overall logic was to help US exports and diversify our economy. Cheap dollar borrowing meant arbitrage opportunities in comparatively higher growing overseas markets. This works when those markets hold up their end of the bargain and actually sustain growth. When they do not, as covered in the previous section of this Crash series (Part I), you get deflationary pressures when capital flies to safe havens, like US dollars.
Anticipating this mess, US companies did not spend their huge cash on “stuff,” as had previously occurred during other periods of economic recovery. Financial advisors for the big boys smelled right through the monetizing strategy and held their dollars “just in case.” That is why a company like Apple is sitting on nearly $400 billion in cash of its own.
The big guys are big for a reason: they do not get suckered easily!
Making matters worse, Democratic Party policies which continue to attempt to tax repatriated US earnings overseas [although they may have already been taxed by the host country], have forced companies to park their cash where it can do no good for the US economy. What the DNC has not yet figured out is global banking. Coca Cola does not need a US bank to spend its earnings made from selling Sprite in Sweden. It can park its earnings in Sweden and spend those dollars in Sweden or it can move that money to the Cayman Islands, pay taxes legally, but use those dollars to either (a) secure loans from American banks in cheap dollars or (b) send the funds to build growth elsewhere, like China or India. In other words, the antiquated repatriation taxes embraced by the ever-financially foolish DNC really does no good for anyone but the very companies from which they are trying to carve out their “fair share.” The Democrat’s near religious adherence to a 1940s and 50s global banking model only hurts the two remaining tax payers in the United States: small businesses and the middle class.
Let me paint a clearer picture: if you or I travel to Germany from the United States, we can take our American credit card and buy anything we want. We do not have to have a German bank account. We do not have to have a German credit card. We just purchase what we want, when we want it, because finance has gone global. Visa, MasterCard, and American Express make that possible. Similarly, McDonalds does not have to have a bank in the US to spend its money in the US or Russia. It can bank anywhere and through letters of credit or cash transferences, it can buy anything it wants, wherever it wants. The only issue is that we – the American people – could really use that money in American banks and paying American taxes. But the Democrats have not gotten the credit card memo. They are jealously holding onto an outdated banking and taxation model. That keeps American companies with cash out of the United States, where that money can do the most good.
It wouldn’t be so bad if it wasn’t so bad
Cumulatively, Obama Administration policies have brought the US to a point of no return. A crash like the one I predicted in Part I of this series will be made impossible from which to recover unless we figuratively blow the whole thing up and start anew. It is a broken system. It was made more broken by the man in charge at this delicate point in economic history. But how do we get out of it?
I contest that we cannot.
The reasons are the roots of this catastrophe which admittedly go far deeper than the current President.
That will be covered in Part III.
 Congressional Budget Office, February 2012, “Estimated Impact of the American Recovery and Reinvestment Act on Employment and Economic Output from October 2011 Through December 2011,” http://www.cbo.gov/sites/default/files/cbofiles/attachments/02-22-ARRA.pdf
 Christine Armaro, USA Today, 13 June 2012, “Average cost of four-year university up 15%” http://usatoday30.usatoday.com/money/economy/story/2012-06-13/college-costs-surge/55568278/1
 Jillian Berman, The Huffington Post, 23 January 2012, “U.S. Median Annual Wage Falls To $26,364 As Pessimism Reaches 10-Year High,” http://www.huffingtonpost.com/2011/10/20/us-incomes-falling-as-optimism-reaches-10-year-low_n_1022118.html
 American Association of Port Authorities, 21 April 2015, http://www.aapa-ports.org/Press/PRDetail.cfm?ItemNumber=20424