Pay Taxes Or Die
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Pay Taxes or Die:
The Rise of Inflation
The Death of the US Dollar
I am fed up with the amount of spending the Bush administration has done throughout his term in office, and the amount of money the Obama administration has spent since taking over the White House. I am concerned about my countrys financial well being and stability that may be affected by the large amount of our national debt outstanding. Most of all, “printing money”, or “borrowing” funds from a federal institution to purchase newly issued treasury securities will ultimately lead to a weaker dollar and higher inflation. This is money that my generation (as well as those following) are going to have to repay along with astronomical interest expenses. This is on top of the huge expenses my generation is already destined to deal with, like Social Security, Medicare, and Disability benefits as baby boomers age and near retirement.
If the current financial failures have shown us anything it should be that behind an institutions rock solid facade its structure might be crumbling (i.e. AIG, Citibank, Bear Stearns, Lehman Brothers). Many of these companys experienced a shock to their balance sheets when what they thought were assets immediately converted into cash, i.e. “cash equivalents”, lost most of their value. Their stocks went into a sharp decline, mainly because the hardest hit were institutional investors, who therefore began to sell off other assets, i.e. stocks and bonds, to compensate for the holes in their balance sheets. This caused a sharp drop in stock prices across all industries and markets. I am not advocating keeping 40% of a companys assets in cash, but the days of 100:1 leverage ratios need to end. What many people and companies forget during boom times is that leverage can also work in the opposite direction.
I will not lay all the blame on the executives because I believe that they truly thought they were investing in cash equivalents. That being said they had complete control over the leverage ratios their companies were using to magnify their profits. There is not one culprit that caused this problem, but someone is going to have to pay. As it looks right now, it is going to be the American taxpayer: you, me, your children, and many future generations to come. Also, many of the assets these troubled firms financed or insured are foreign assets or entities. Have any foreign governments we have helped repeatedly in the past offered to assist us in recapitalizing these failing multinational institutions? Absolutely not. As of now the only people holding the invoice that reads PAYABLE UPON RECEIPT: $12,235,000,000.00 (which is approximately our current national debt) seem to be the US taxpayers. What is more disturbing is that this number is only set to get bigger.
The current administration is not oblivious to the fact that we are either going to have to raise taxes or cut spending. Obama has stated, “If we confront this crisis without also confronting the deficits that helped cause it, we risk sinking into another crisis down the road,” he has said. “As our interest payments rise, our obligations come due, confidence in our economy erodes and our children and our grandchildren are unable to pursue their dreams because they are saddled with our debts.” The President now faces a tough decision. Do we continue recapitalizing firms or do we try to cut our spending as to not burden our children with our debts?
I personally do not believe that this has to be a unilateral proposition. If wise investments are made with our money we may actually put future generations in a better financial position. This all depends on the strings that are attached to this stimulus package. The government needs to walk a fine line between meddling in the day to day activities of the business, and protecting taxpayer assets. The government should specify what these funds are intended for, but refrain from making management decisions that should be left up to the companies themselves.
To keep spending in check, the government should be investing in our core institutional structures, banking first, then focus on a few other key industries. These industries should have something to do with our national safety or core economic activities. We should not be subsidizing companies that want to continue paying employees $80,000 per year to bolt wheels on a car. All of the earmarks in this bill are not being invested into institutions that can offer us a future return. The money will be spent in specific industries and a dime will not make it back to most taxpayers. Many people will say that because of this spending jobs will be created in these sectors. No reports or studies have been done on what effects this money will have. It was allocated for political reasons and our national debt burden will suffer because of it.
GM accepted a total of $50 Billion in bailout money before going bankrupt. I remember times in my youth (i.e. anytime prior to 2008) when this was still considered a large amount of money. GM promised that with some operating income to hold it over for a few months it would be able to avoid bankruptcy. This, according to GM, would enable it to protect its bondholders, shareholders, and other stakeholders such as the UAW from a detrimental bankruptcy filing.
This is an interesting case to watch considering the future implications it will have. For instance, which stakeholders, at least according to this administration, take precedence over the others? As it looks now the answer to that question is clear, the UAW. Bondholders and equity shareholders are left to feed off the scraps of a company driven into the ground by poor management and the very organization set to run the “new GM”. Despite the fact that GM owed the bondholders roughly 35% more than the UAW, bondholders are only getting a 10% stake in the company. Through a new employee benefit plan, the UAW has already received $2.5 Billion in stimulus money, in which they will receive another $6.5 Billion in preferred shares, and an astounding 17.5% stake in the new company. The only shareholder with a larger stake is the US taxpayer, with roughly 60%.
This is a very scary precedent. The nationalization of GM has shown the emphasis on contractual law that, in the past, was used to dictate the ones who received compensation in the case of a bankruptcy, pretty much has been thrown out the window. It has been replaced by a system of government bureaucracy, wasted taxpayer dollars, and personal preferences. Upon taking control of GM, the government immediately fired its CEO, a person that could be considered largely to blame for the