Do No Harm
Research for Online Investors

by John Dalt

10/21/11

We see the problem with sovereign debt, how do countries, or states, escape from the debts that threaten to bankrupt them.  The answer is the same every time.  Quit spending.  The difficulty is convincing politicians to go against their self interest.  The electorate wants more benefits, government employees want higher wages, and lower level governments want revenue sharing.

When was the last time a politician said no, we can’t afford that?  Do you need more police?  It is a local issue, but the town or county doesn’t have any money, so it is easy to apply for a grant for drug training money to hire a SWAT team.

In all of the budget battles and political fights the public losses track of the simple answer.  If the U.S. would freeze the budget, it would be balanced in less than six years.  Baseline budgeting builds in a 7% to 8% increase every year.  Didn’t we have enough government three years ago?  Roll back total expenditures to 2008 levels, and then hold it.  Maybe even cut a little on the edges.  Increase the retirement age one year every five years for Social Security.  Cut out funding for public television and eliminate the department of education.  I have over a hundred channels on our satellite TV; we don’t need tax dollars for more programming.  The department of education doesn’t teach anybody.

There are hundreds of programs that have been layered one on top of the other over the years.  Senator Tom Coburn of Oklahoma did a report this summer called Back in Black, on government duplication of services that borders on criminal if it wasn’t sanctioned by the congress.  We won’t gouge any gourds today, but does anyone believe we could not cut one or two percent out of the budget and NEVER miss it?

In 2008, the government took in $2.524 trillion in taxes and fees.  That represented 18.3% of the U.S. Gross Domestic Product. The 2008 budget was set at $2.65 trillion but the year ended with spending of $2.962 trillion, recording a $438 billion dollar deficit.

Do No Harm

The 2011 budget requested by the president was $3.834 trillion dollars with a deficit of $1.267 trillion.  Is it lost on everyone but me that reverting to the 2008 budget would closely match spending to receipts?  Didn’t we have enough government in 2008?  It doesn’t appear we have a taxing problem, we have a spending problem.

The hole in this is that tax receipts are down because of the slowing economy.  Tax receipts will increase as the economy improves.  The argument by Keynesians is that the government should borrow and spend during economic slowdowns to try to “jump start” the economy.  The argument from fiscal conservatives is that government does not produce anything.  All money spent by government is money diverted from productive activities.  People spend money, if not on taxes then on pizza and cars.  Businesses spend money, if not on taxes then on new equipment or higher wages.

Who should make the decision on how citizens and businesses spend the profits from their labor?  Government through diverting taxes or the person or business that earns the money?  This question is at the bottom of the debate between small government conservatives and socialists that believe they know what is best for society.  Between the Tea Party and Occupy Wall Street.  Lest we forget, our Founding Fathers knew the answer to this question.  It was so important to them, it is in the Constitution.

Section 1, Article 9 says, “No capitation, or other direct, tax shall be laid, unless in Proportion to the Census..”  In other words, it is illegal to tax income or labor that produces income.  All taxes shall be according to population.  This was voided by the Sixteenth Amendment in 1913 under Woodrow Wilson.  He had grand plans for our country, and needed more money to spend.  Ninety-eight years later, we are paying for the changes he set in motion.

I called Brookfield Office Properties this morning with a suggestion on how to remove the occupy Wall Street squatters from Zuccatti Park.  Brookfield owns the park.  It is one of 500 privately owned parks in the city.  Zuccatti Park is named after Brookfield’s Chairman John Zuccotti.  It was originally named Liberty Plaza when it was opened.  It was destroyed when the World Trade Center was attacked on 911, and was reopened as Zuccatti Park in 2006.

Privately owned parks and plazas in New York City were a compromise between the city and developers in 1961.  Developers wanted to build taller buildings; the city wanted more green space to replace the “light and air” that would be obscured by taller buildings.  Constructing a bigger park allowed a developer to build a bigger building.

The private parks are generally required to be open 24 hours per day and police have to be invited in because the park is private property.  “Reasonable rules of conduct” can be proposed by owners of the parks, but have to be approved by the City Planning Department.  They must be posted on a sign in the park to give “reasonable notice” before the rule can be enforced.

The only visible sign in Zuccotti Park bans skateboarding, rollerblading and bicycling.  Brookfield wanted to evict protesters last weekend to clean the park and begin enforcing “existing rules” of no sleeping bags, no lying down on benches and no storing belongings on the ground.  The problem was those “existing rules” were not posted.

So how do they end the occupation of Zuccotti Park?  Turn on the sprinklers.  Water the grass…at 11 p.m. and at 3 a.m. and again at 5 a.m. and then one final time at 7 a.m.  If you water often, it doesn’t have to run very long, just enough to get things damp.

That trick was taught to me by a mentor in business years ago.  His company operated fast food restaurants all over the country, a major franchise, and he had a problem with a motorcycle gang hanging out in the parking lot at a unit in S. Carolina.  This created problems of intimidation for their regular customers.  The store backed up to a steep embankment that had natural brush growing on it.

He flew down to personally view the problem with the store manager on Friday.  That night, sure enough, the motorcycle gang rolled in at seven p.m. to sit in the parking lot.  They were boisterous.  Talking loud with foul language and drinking beer.  Generally having fun, but it didn’t fit with the family atmosphere the restaurant wanted for customers.  Rather than call police and risk retaliation by the trespassers (vandalism), my friend calmly turned on the sprinkler system to water the natural vegetation.  A mist filled the air.  The motorcycles left. My friend flew home on Saturday.

The mailbag:
That's a great point about CA.  These vigilantes are awful!    Make everyone borrow and then come hunt them down.  I'd call them the MAFIA!—subscriber T.M.

John’s reply:  Nobody "makes" California borrow money except the stupid politicians that will not cut spending.  You own bonds...you are a bond vigilante...if you are concerned about being paid back you will sell your bond in a heartbeat.  You would never buy a bond if you thought it was in danger of default.  “We” are the bond vigilantes!

Whoever is writing these reports is uncommonly good.  Consider me his camp follower, so to speak.  And urge him to toss into an upcoming analysis of the EU drama his solutions and their likely consequence.  We know the PIIGS and CA are all in hock up to their teeth.  What's their way out? Reduce spending? Increase taxes? Sell assets? All three? Any two? Occupation (e.g., akin to MacArthur in Japan)?  Inquiring minds want to know.---Subscriber J.R.

John’s reply:  Thanks for the compliment.  I try hard to bring our subscribers good information every day.  I have made another attempt today.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

MarketToday Archive

Back to Top