Personal Dividends - Money+Lifestyle » inflation

Is Investing Internationally A Good Inflation Hedge?

Arohan — Tue, 04 May 2010 18:33:01 +0000

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Simple answer is No.

But maybe not for the reason you think.

Inflation can be neutral to stocks and other real assets

Inflation means rising costs and prices. It also means rising asset values. It means that the currency has lost its buying power and it now takes more of it to buy the same amount of benefit. If you are worried about US inflation and are looking at US assets than keep in mind that as inflation takes hold, the nominal value of these US assets will be repriced upwards. Which means if you buy some of these assets today, than the future value of the asset will keep pace with inflation, all other factors being equal. Real Estate, Stocks and Commodity investments have traditionally kept pace with inflation and this is likely to be the case for the future.

But maybe not so much for the bonds and other debt instruments

This time around we are faced with higher inflation in the future and rising interest rates at the same time. The US debt quality is under strain and it will take an increase in interest rates to keep the foreign governments and institutions to continue their buying of US debt. As the interest rate goes up, the bond values will decline. If you are investing in domestic bonds today, not only are you getting lower yields but you will also see your principal decline as the interest rates rise. If your asset allocation calls for investing in bonds, you should look outside US. I am pretty partial to Canada and Australia as these economies are relatively stable, well developed and would be able to perform well due to the fact that they are resource rich and will benefit from the continued demand for commodities.

There are other things to consider

Let’s say that the predictions of higher inflation and higher interest rates come to pass. Which means that the economic climate in the country is not as business friendly as it used to. Businesses will find raising money with debt (which is a cheaper way to raise money) more expensive. Fed would have likely started to act to contain inflation by soaking up the excess money supply, which means that credit will be in short supply as well. This would likely lead to the prospect of reduced economic growth. When this happens, it would be more advantageous to invest in emerging markets and economies internationally which are growing much more robustly. Alternatively, you could invest in US based companies that have a large international presence and would be able to adapt and benefit from international growth.

There are many companies that you can invest in today that are not too expensive, will hold up well during inflation and have large international operations such as Johnson and Johnson, Pepsi/Coke, Boeing, Proctor and Gamble, Unilever, and so on. Some of the banks and financial companies with global franchises may also be a good investment.

As a stock and real estate investor, inflation is not necessarily an enemy. If you are looking to invest internationally, and you should, the reasons to do so should be diversification and exposure to high growth and emerging markets. International investing is not necessarily a good inflation hedge.

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Is Investing Internationally A Good Inflation Hedge?

Investing in Economic Recovery

Miranda — Thu, 05 Nov 2009 21:37:49 +0000

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The word is that the recession is over. And with bulls enthusiastically making a run at Dow 10,000, there are thoughts of economic recovery. While it is important to consider that volatility is still a part of the equation, and understanding that this economic recovery is supposed to be a rather gradual one, it is nonetheless time to start considering strategy for an economic recovery, as you move out of your recession investing strategy. (If you are all about the index funds, chances are your strategy is set: Keep doing what you are doing.) There are different considerations involved when determining where to invest as things to start to pick up. Here are some things to consider as you begin planning your recovery investment strategy:

Past economic recoveries

Many investors and economists are noting the similarities the current recession has to past recessions. Looking to see what sectors and types of companies have done well at different points in an economic recovery can be helpful. Understanding the cycle, and where different companies fit into that cycle are quite useful. Industrial and materials companies generally pick up early an economic recovery cycle, and energy stocks often follow later.

Of course, the past cannot predict future results, and things may go differently this time, no matter how closely things appear to be adhering to the past so far. You can use the past to help you find patterns and possibilities, but it is important to be wary of relying wholly on the past.

Revenue growth

Another thing to look at is revenue growth. Many companies reported a profitable third quarter for 2009, but that doesn’t necessarily mean that revenue is up. Indeed, in many companies, revenue remained down. Many profits were the results of lay-offs and other cost-cutting measures. What you want to look for are companies that are starting to see increases in revenue, and that have stopped being so big on cutting costs.

This is where a focus on financials might help. The financial sector was hard-hit, and there are many bargains out there. Additionally, as things start to improve, businesses and individuals are expected to start looking for financing, bringing interest revenue to financial companies. And don’t forget that some financial sector companies, notably credit card companies, are actively looking for way to raise revenue through such things as interest rate hikes, increased fees and new fees.

Government projects and economic stimulus

The economic stimulus package passed earlier this year sets aside money for specific goals and projects aimed at creating jobs. Additionally, the government is also focusing on upgrading the road system and pushing alternative energy and improving the power grid. These focuses are likely to lead to more income for infrastructure companies (including those that concentrate on Internet and wireless infrastructure), as well as some alternative energy companies. As the economic recovery gathers steam, it is possible that companies connected to government projects and connected to economic stimulus money will see gains on the stock market. Getting in now could be a way to ensure profits in your investment portfolio.

Consumer spending

This particular economic recovery may not be kind to companies that rely on consumer spending. Many consumers have been shaken by what is being called the “Great Recession.” There has been a shift toward frugality, and many consumers have curbed the free spending habits that marked the run-up to the financial crisis. Additionally, even though the government has tried to promote projects that provide jobs, the employment picture remains relatively weak. With expectations of a “jobless recovery” it is unlikely that consumers will even have the funds to spend a great deal. That means that, even with the holiday shopping season coming up, retailers and the travel industry may lag behind.

You might also consider DRIPs moving forward, which can help you build an income stream while protecting you somewhat from the next crash. Of course, this is just speculation. In the end, you have to decide what you think is most likely to happen as the economy recovers. But looking at the patterns and possibilities can increase the likelihood that you choose a few winning investments that can offer you some solid investment portfolio growth.

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Investing in Economic Recovery

Federal Budget Deficit and National Debt Projections Point to Uncertain US Economic Future

Arohan — Wed, 26 Aug 2009 16:37:30 +0000

White House released projections indicating that the Federal Budget Deficit will rise by almost $9 Trillion by 2019. The new figures also indicate that the national debt in 2019 would have risen to about $23 Trillion, or 76.5% of the GDP.

photo credit: Erik Charlton

How will we as a country spend $9 T more than we take in over the next 10 years? Either we will need to borrow the $9 T, or we will need to print more money to pay for spending (or some combination of both). Raising tax burden on personal and corporate incomes are not an answer (doesn’t mean it will not be tried) as it has been historically observed that the tax receipts manage to stay constant at 19.5% of GDP regardless of the level of marginal tax rates. It is also important to note that increase in tax rates will have the effect of suppressing the GDPs so any attempt to raise tax revenues by raising the tax rates will eventually backfire in the form of lower growth and lower tax base.

Let us look at the two remaining options.

US can borrow more to pay for the projected budget deficits: Certainly a part of the budget deficit will be paid for by increasing borrowings. The problem with this scenario is that already many of our traditional lenders (read China) are getting squeamish about the deterioration in the US balance sheet quality and would demand increasing returns in the future if they choose to continue to fund the US borrowings. This means interest rates will rise to compensate for the increasing lending risk, which will dampen the US economic activity as capital becomes more expensive. It also means that the debt burden on the future generations will increase significantly and the debt repayments will become a greater proportion of the US national budget. Even today the US national debt as a proportion of GDP teeters on being unsustainable, and any further worsening may become a trigger for the problem to spiral out of control.

Worse case scenario includes the possibility that the US will default on one or more of its debt obligations.

US can inflate its way out of the problem by printing more money: Most US domestic obligations (such as medicare and social security) are inflation adjusted, so printing more money is not likely to improve the fiscal situation in this respect. However, the interest payments on the currently outstanding debt (treasuries, munis, federal bonds, etc) are fixed and printing more money will certainly help in devaluing these debt obligations. The problem would be any future new debt issues. Lenders will certainly demand a premium to compensate for the inflation risk.

Worse case scenario includes the nightmare scenario of hyperinflation as the government loses control of the monetary policy. I personally think that this is a feasible scenario and something that we should all be worried about.

In either case, we can all look forward to a significant devaluation of the US dollar in the world markets, rising interest rates, and high inflation. The only way to counter high inflation and rising interest rates would be a spectacular spike in productivity in the US (more production with less capital employed). Maybe alternative energy or nano-technology have the potential to generate this productivity spike. Maybe not.

In any case, it is prudent to re-arrange your assets so you will be better prepared for inflationary environment. I will add one more piece of advice if you are convinced that high inflation is a real possibility (and I do so fully expecting to be chewed up and spat out by the politically correct financial advice providers for doing this). Take as much debt as you can afford today and invest in assets that will retain its value during inflation such as real-estate, commodities, stocks. And make sure the debt you take on has fixed interest rate. That way, when the inflation really hits, your income will grow, the assets you invested in will increase in value with inflation, but your debt payments will stay the same (or decline relative to your overall financial picture).

Uncontrolled leverage caused the financial bubble, but prudent leverage can save you in the aftermath.

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Federal Budget Deficit and National Debt Projections Point to Uncertain US Economic Future

TIPS to Fight Inflation

Redeeming Riches — Fri, 07 Aug 2009 15:28:18 +0000

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Ever since the Federal Reserve lowered their key interest rate to 0%-.25%, there has been talk of rampant inflation becoming an issue. Many economists even consider the possibility of hyper-inflation, a period of rapidly rising prices along with a declining value in the dollar. All signs seem to point to at least a period of higher inflation, but that doesn’t mean you can’t take advantage of it with your investments. This post will focus solely on Treasury Inflation Protected Securities, known as TIPS.

What are TIPS

TIPS were first introduced in 1997 by the Federal Government and have become widely popular among long-term investors looking to preserve their purchasing power. Like all Treasury bonds and notes, they are essentially loans to the U.S. Government. You receive interest every six months at a specified rate. TIPS are designed the same way except that your interest payments will be based on inflation.

TIPS guarantee that your interest payments will go up based on inflation, whereas a regular bond will guarantee you how much you will receive in interest over a set time period. Essentially you are trading the stability of knowing exactly how much money you will receive from your bond with the comfort of knowing that when inflation goes up your purchasing power remains in tact.

How Do TIPS Work

TIPS pay a slightly lower interest rate than comparable Treasury securities because twice a year your principal is adjusted to match the Consumer Price Index (CPI), a widely used measure of inflation. For example, let’s say you have $10,000 in a TIPS bond and the fixed interest rate is 3%. Over the next six months, if the annual inflation rate goes up by 4% your principal will go up by 2% (half of the inflation rate of 4%) to $10,200.

Remember, your interest rate stays the same, it is your semi-annual payment that differs. So your new principal amount earns the fixed rate of 3%, which would pay you $306 ($10,200 x 3%) instead of $300. If inflation goes up again, your principal will be even higher and so on. If inflation eases, your principal will be adjusted lower and will reduce your interest payment.

Tax Treatment of TIPS

Tax treatment for TIPS are a little different than other bonds. The US Treasury records changes to your principal every six months, however, you don’t actually receive that money until the bond matures. But guess what? Uncle Sam still wants to collect his taxes on the increases you haven’t received. Be aware that you’ll have to include these increases in your ordinary income. This is why many people prefer to hold these bonds inside a tax-deferred account like an IRA.

Buying TIPS

TIPS can be purchased at 5, 10 or 20-year maturities in increments of $100. It may be a wise move to “ladder” your purchases, which simply means you buy TIPS with varying maturity levels so that as your bonds come due you have a choice of either reinvesting if interest rates are higher or finding an alternative investment if rates on TIPS are lower.

You can also buy TIPS in a mutual fund or an Exchange Traded Fund (ETF). A mutual fund will pay out your interest earned plus any annual inflation adjustments, which are then taxed at short-term capital gains rates. Before investing into a fund you should carefully weigh your options and consider the funds’ expenses, risk and investment objectives.

With inflation poised to be an issue in the near future, TIPS can be a great supplement to any portfolio to help increase your dividends and returns.

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TIPS to Fight Inflation

Commodities Trading as Risk and Inflation Hedge

Miranda — Fri, 12 Jun 2009 20:03:26 +0000

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With all the recent talk of economic stimulus, it is little surprise that talk of another kind is cropping up as well. With our economy likely to be flooded with cash in the coming months, many analysts (Peter Schiff comes to mind) are talking about the possibility of inflation. Inflation basically represents an erosion of your buying power as the value of the currency declines. In order to protect yourself against inflation, there are those who recommend that you invest in commodities.

What are commodities?

Commodities are tangible goods that can be traded. Unlike our currency, which has nothing besides promises and a perception of value to back it, commodities represent hard assets. These are things like precious and industrial metals, lumber, oil and gas, livestock and agricultural crops. Commodities are traded on an exchange, either for immediate, physical delivery (spot), or for future delivery (futures) in which the investor rarely receives physical delivery (contracts are settled prior to delivery). Most investing in commodities undertaken by individuals takes place on the futures market; for the most part, only producers and direct users of commodities actually make use of the spot market.

Commodities futures are designed to protect producers. An example is of how this works with farmers. A farmer may have a crop of soybeans that s/he plans to harvest. Before s/he plants it, he can sell it for cash at an agreed-upon price. The farmer may get a better price for it if s/he waits, but there is also a chance that prices plummet. By selling the future crop, the farmer is assured that expenses will at least be met (and maybe some profit received as well). The buyer then puts the contract with the farmer up on the futures market, where it can be “bought” and “sold.” If something happens and the price of the crop heads higher, the futures contract holder wins; the commodity is worth more than s/he paid for it. If something happens to drive prices lower, though, the contract holder loses out.

Right now, commodities that are expected to gain dramatically as the global economy improves include agriculture, uranium, iron, copper, and oil. These commodities, in general, gain fast in periods of economic expansion — especially in the early stages. These are items that are in demand by industrial societies as they gear up for a spike in economic activity. While gold bugs will tell you that precious metals are the way to go, it is worth noting that gold has only grown in purchasing power at the rate of 2.7% per year — hardly an inflation-buster. (But gold is still popular as a safe haven investment in times of economic uncertainty.)

Commodities trading and risk

Any sort of futures trading is risky. On top of that, commodity prices are volatile, changing as new political currents, economic data and natural events come to light. Another factor to consider is that with commodity futures, you are using leverage to control large positions. A commodity futures contract allows you to take a relatively small amount of capital of your own, and leverage it into huge positions in commodities by borrowing from your broker. The chance for profits is greater, but so is the risk of loss. If you do not have the risk tolerance (financial and emotional) for commodities trading, it is a good idea to stay away.

You can reduce your exposure to the risk of commodities by using exchange traded funds. There are ETFs that track commodity indexes, as well as ETFs that focus on a basket of commodities. Commodity mutual funds are also available (but watch out for load fees and other costs). While risk remains, using these types of investments is often less risky than becoming engaged on the commodity futures market. Plus, they can add some diversity to your portfolio. Commodities can make a desirable addition to your investment portfolio if you want to add a little more growth potential and can stomach the risk. However, it is important to be careful, as the volatility involved in the commodity futures market can lead to losses that are even large than the gains.

It should be noted that commodity trading in the futures market by non users is essentially speculation and carries with it great risks. Due to leverage, incorrect trades have the potential to wipe out an investor’s principal and then some. Extreme caution is warranted.

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Commodities Trading as Risk and Inflation Hedge

Recession Stocks and Investing Strategy for Coming Period of High Inflation

Arohan — Mon, 23 Mar 2009 20:47:59 +0000

We have been in recession for more than a year and it is still not clear if the economic shocks are done coming. The recession may last for another year or more depending on if and when the government actions start stimulating the economy. Traditional Buy and Hold strategies call for buying when the stock prices are low. But during recession equities can remain depressed for years at end. This is a right time to reconsider your investing strategy to position your portfolio to weather the recession. Additionally, we would want to consider stocks and investments that can do well in an inflationary environment. All the trillions of dollars that are now being pumped into the economy in the name of stimulus and bailouts, will have significant inflationary effect in the near future.

What Stocks Should we Consider?

Recession is defined as a period when the economic activity of the country is declining. Which means, that in most sectors of the economy, the inventories are high and capacity to build far exceeds demand. This includes once hot sectors such as high technology and housing. The reasons for demand/supply imbalance could be many; overbuilding due to loose credit for non-essential purchases was the main reason for the current recession, rapidly declining purchasing power may be another reason which is also manifesting itself in the economy today. Recession stocks are stocks of the companies that typically do not have such demand/supply imbalance. This is mainly because they produce goods or services that are essential for consumers, and these goods and services are very price inelastic (meaning consumer demand does not change much if the price changes up or down).

So what are these companies? These companies include sectors of consumer staples (like tooth paste, shampoo, soap, etc), drugs, vice (tobacco), etc. You may also consider companies that do work for the government like defence suppliers, prison management, etc. Many of these companies do steady and boring business with no surprise growth spurts but also no surprise declines. These are some of the sectors you should consider investing in. Respectable dividends are also an added benefit that many companies in these sectors can offer. You can do more research on companies in these sectors using Yahoo Finance or Google if you want to construct your stocks portfolio.

Investing Strategy for coming high inflation

If you are also worried about high inflation in the future, as I am, there are a few investments that you can consider. Keep in mind that a period of high inflation will almost surely decimate the purchasing power of an cash or cash like investments (CDs, money markets, treasuries) that you may have. The only way to keep up with the inflation is to invest in TIPS or to invest in stocks. But which stocks?

The key to figuring this out is to understand that the rise in inflation is going to be due to the freer monetary policy and the countless trillions that are being pumped into the US economy today in the name of stimulus. Similar actions are being taken in Europe and other countries, although, arguably to a lesser degree. High inflation means the value of the dollar will decline rapidly in real terms and also as measured against some other currencies and commodities. So how should we change our investing strategy to protect against this?

Hard assets provide some protection against inflation as they become more valuable as inflation goes up. I do not recommend buying gold, although this has been a favorite of many pundits, for the sole reason that I believe the gold prices have run up to the level where the demand for the commodity will suffer. Gold is NOT one of the essential commodities. I feel that natural resources (mining, timber, agriculture, etc) will be a good hedge against inflation and countries that are rich in natural resources will have stronger economies and will have strengthening currencies against US Dollar. Therefore I would say one would be wise to consider a part of their portfolio to be linked to countries rich in natural resources such as Brazil, Canada and Australia. If you want to play the currencies, you can use the forex markets or even buy cds linked to foreign currencies (I think Everbank offers this facility), but do this purely to hedge. Growth should always come from investing in a business. Even buying real estate in US may be a good move, although I would imagine not everyone will be comfortable doing this for investment purposes in this environment.

US no longer the growth engine of the world

Well, it has not been the growth engine of the world for many years in the past but the size of the US economy has ensured that when US sneezes, the world catches cold. The future is likely to be very different from the past with the relative importance of the US economy diluted even more. There are many reasons why I think this will happen and some of the reasons why I think the US Economic Future is Uncertain are outlined in this article I posted a while back. Needless to say, I recommend that investors increase their exposure to non-US assets or at least start investing in US companies that do a large part of their business overseas. International themes may be hard to play for simple reasons that we may not have time or resources to conduct the research needed. There is also a political risk and currency risk to consider. For this reason, diversification becomes very important when investing abroad and ETFs can be some of the lowest cost option to construct a diversified portfolio.

As always, if you do not yet have a sufficient emergency fund, focus on building that first. Then consider your risk tolerance before you decide to invest in stocks. There are many low risk investments available that will do a better job of preserving the value of your dollars compared to a CD or a savings account. And finally, consider the advice of your professional financial advisor before making any changes to your investing strategy.

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Recession Stocks and Investing Strategy for Coming Period of High Inflation

US Economy – Future Outlook is not Rosy

Arohan — Tue, 10 Mar 2009 17:22:13 +0000

I have let my displeasure be known over the pork laden spending in the stimulus package that was rushed through the congress. The continuing strings of bailouts and life support for value destroying banks is not going to help the US economy either. But there are more potent forces that have the potential to murk the future of US economy and unless the government policies do not firmly and intelligently address these issues, we are in for a long dark period of economic blight.

Labor shortages and immigration policy

We complain about jobs being outsourced to reduce cost. We complain about skilled immigrants coming to US and taking over our skilled and good paying jobs. But the fact of the matter is that pretty soon, we will not have a domestic labor pool large enough to fill the positions in this country.

This is a result of the demographic shifts that are occurring in US today. It is projected that severe labor shortages will start occurring by 2015 due to the fact that baby boom generation will start retiring. Improvements in medical care has also steadily increased the life expectancy in US. This will have an effect of increasing the ratio of dependents in the society (primarily older citizens) to the working class. As a result, this will cause great strain on already meager savings rate as well as increased government spending on social programs. This in turn will reduce the capital available in the society to invest in economic growth.

Some of the effects will be mitigated as more and more people will choose to and be able to defer retirement, partly due to lack of savings and partly due to the fact that better medical care means more people are able to remain active for longer.

For long term economic health, we need to produce more children now so more can enter the workforce in the future. Additionally, more emphasis needs to be put on improving education and ensuring that a larger proportion of children go on to finish college so they are able to take on the highly skilled jobs of tomorrow. But still, this is a long term project that we need to commit to as a nation and I am gladdened to see a renewed focus on education and higher learning from Obama administration.

But for the short term, there will still be a shortage of workers for many years and about the only way to mitigate this (if we want to keep the US economy strong and growing) is to allow more and easier immigration for skilled workers. Canada recognized this sometime ago and so did Australia and as a result with right set of skills, immigrating to Canada or Australia is a much simpler and shorter process. Even Germany and other European nations are realizing this and easing their immigration policies. But we as a country are clamping down on immigration. Immigration has always been a political hot potato and the recent populist measures coming out from the Obama administration (examples include Buy American provisions to limit outsourcing, and, Bank of America rescinding job offers to foreign nationals MBAs from US schools due to some obscure prohibition on H1 visas as part of the TARP bailout, etc) do not impart confidence that we really do understand the coming disruptions in the labor market. Government policies are clearly not aligned with the provable facts in this case.

And frankly, given the economic conditions in US and the growth in China and India, we have now started witnessing a growing and alarming trend of reverse migration.

Increasing deficits and debt burden

The unnecessary and large spending that this administration (and also the bailouts during the Bush administration) has engaged in will push the deficits to historically record levels getting very close to being unsustainable in the long term. According to the administration, the deficit will peak at around 12% of the GDP. As a point of reference, US tax revenues are typically around 20% of the GDP. A typically sustainable deficit is around 3-4% of the GDP which is President Obama’s goal for the year 2013.

So where will the money come from? The deficit is being created by borrowing/creating money. Either way, too much money is being pumped into the system very rapidly and this will most likely result in very high levels of inflation (think double digits) by the time President Obama’s term ends. On top of this, the deficit reduction will be paid for by increasing taxes on high income earners (mostly small business owners) and cutting down on war expenses.

Think about this for a moment. Four years from now, we are likely to see high inflation (things are becoming more and more expensive to buy), low business growth (higher business taxes eat up part of the reinvestment capital) and beginnings of a shrinkage in the labor pool in this country. The brief economic spurt due to infrastructure and other stimulus would have run its course.

Hmm, can you say more outsourcing for cost reductions as well as to find workers and possibly avoid or defer paying what is the 2nd highest business taxes in the world in US.

But this is not all,

US coporations will lose the tax deferment benefits for the overseas profits that is not repatriated

As a further obstacle to outsourcing American jobs, the Obama administration is likely to end the deferment of US corporate taxes on American firms on their foreign incomes. Currently, US firms are able to defer US corporate taxes on the incomes they derive from their subsidiaries outside of US as long as they keep the earnings overseas. When the income is brought back in the US, these companies do have to pay US taxes on the income that is brought back. This is almost the only way the US companies are able to compete overseas in spite of the 2nd highest corporate taxes in the world in US. Unfortunately, this deferment may now end, which according to President Obama, will discourage US companies from shipping jobs overseas. However, I think the more likely outcome will be that US companies will no longer be competitive in the world markets.

So in addition to making business environment more difficult at home, we are also likely to see US companies becoming less competitive overseas and unable to outsource. For a multinational and global company in US, this might mean it is time to move their base to a different and more business friendly country.

There is a reason the stock market is getting more and more worried as more of Obama’s plans and government policies are detailed. There is a reason why some have openly called Obama as anti-business. Whatever his real leanings may be, it is going to be a really tough act for Mr President to align his vision for revival of the US economy with the facts of economic reality.

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US Economy – Future Outlook is not Rosy

Obama economic stimulus package is a disaster

Arohan — Thu, 29 Jan 2009 07:51:46 +0000

This is quite an extraordinary bill that just passed in the House of Representatives. It is such an unmitigated disaster that one would suppose that it was written by people who intentionally chose to go against the basic principles of economics. Atleast, as understood by anyone with some semblance of common sense. For some excellent analysis of the pork barrel spending in this bill, I refer you to the excellent editorial at Wall Street Journal titled A 40 year wish list. This takes apart the main thesis of infrastructure spending in the package and how it will stimulate the economy. Here is an excerpt:

In selling the plan, President Obama has said this bill will make “dramatic investments to revive our flagging economy.” Well, you be the judge. Some $30 billion, or less than 5% of the spending in the bill, is for fixing bridges or other highway projects. There’s another $40 billion for broadband and electric grid development, airports and clean water projects that are arguably worthwhile priorities. Add the roughly $20 billion for business tax cuts, and by our estimate only $90 billion out of $825 billion, or about 12 cents of every $1, is for something that can plausibly be considered a growth stimulus. And even many of these projects aren’t likely to help the economy immediately. As Peter Orszag, the President’s new budget director, told Congress a year ago, “even those [public works] that are ‘on the shelf’ generally cannot be undertaken quickly enough to provide timely stimulus to the economy.”

Rest of the money is earmarked for fulfilling every democrat’s fantasy and to bring about transformative changes in the economy in the direction of alternative energy and climate change. Now, I am against wasteful spending at all times, but the size of it in this package is just astounding. The government, of course, will need to find a way to come up with the cash to spend (this is also true for the previously approved TARP program). This can be done through one of three ways

Print money: This would result in high inflation rates in the coming years. High inflation may be a nightmare scenario for the country as the economy is currently reeling from record unemployment and declining incomes.
Raise taxes: a bad idea in any time, let alone in these times.
Borrow: Well, the only way to entice someone to lend money to the US government, with its less than stellar balance sheet and record deficits, would be to offer high rates of interest. The interest payments would ultimately put the cost of the stimulus to over a trillion dollars. Presumably, China and other countries’ appetite for US debt is boundless. Curious to see that the Obama administration has added programs aimed to get US out of foreign oil enslavement but maybe willing to get into foreign economic enslavement to pay for it. Maybe our kids and grandkids will figure this economy thing out and will be in a better position to repay these loans (notice, we are effectively burdening the future generations with this debt load).

Yes, the congress is willing to take these risks so that $252 Billion can be transferred to those people who sit on their derrieres and do nothing

Government is not the most efficient job creator

This whole package is based on a faulty premise that the government can create jobs more efficiently and cheaply than the private sector. Yes, some of the projects are worthwhile to do and should be done but even for those, the benefits may take some time to be realized. What the economy needs is a stimulus that is immediate and goes straight to those who run businesses and can actually help with job creation. I would recommend that President Obama and his team seriously consider expanding the corporate tax cuts as well as consider ways of easing capital flows to small and medium sized businesses. These businesses form the entrepreneurial backbone of America, are integrated in the communities and create the most jobs. Help them grow and the economy will start growing Editor’s Note: Hal in his comment to this Opinion referenced an article which I believe should be read by everyone. Here is the link to “Turning Japanese – The Audacity of Reality” editorial by James Quinn at Financial Sense If you agree with the opinion expressed in this article please take a moment to share it with others using the share/save social media button below. This will help in getting our voices heard. The future of our country and our future generations is at stake

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Obama economic stimulus package is a disaster