Thin Resume - Thick Head, Bigger Ego = Disastrous Consequences!

Yesterday Paul Ryan gave a speech that was clear and unmistakable.

He pointed out that Obama claims his policies are not working because Republicans have been thwarting and obstructing him when in truth things are not working simply because his policies were enacted.

In Obama's continuing effort to off load and blame, Ryan reminded the audience Obama and the Democrats controlled Congress in a veto proof mode for two years and that was when much of Obama's misguided and failed policies were enacted.

Obama's strategy has been to make sure any attack on his failed efforts are deemed racially motivated in order to stem the tide of criticism. Well Obama  is our first black president and that is a fact that cannot be ignored. That he is a flop is also a fact that cannot be ignored. If you wish to connect the two be my guest.

It is becoming evident  a thin resume in concert with a thick head and an out sized ego can produce disastrous results regardless of one's color.

The lesson to be learned, which Obama does not comprehend,  is when you feed dangerous bullies food of appeasement spooned by a  message of weakness you are much more likely to increase their hunger for destruction. All the bowing  and scraping will not alter this fact.

Furthermore, the press and media lap dogs cannot save Obama by attacking Romney for pointing out the  feckless response of Obama's own foreign policy advocacy and then instructing the Secretary of State to do likewise is simply heaping more apologetic behavior on the pyre of angry Islamist hate and rioting.

You decide. (See 1 below.)
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This from a dear friend and fellow memo reader:" Dick as you know, I look at Obama's behavior from a different perspective.

I agree that from the democratic viewpoint, he seems to be wrong in all those issues, however, from my point of view and Obama's goals, he is doing those things that appear wrong as the right thing to do to continue to destroy our country and hand it  free of charge to Islam.

 I am sure Obama had been told about the Arab uprising because of his behavior after the facts.  In giving his back to the immense trouble developing in the Arab countries, and going politicking in  his own behalf, he let those Arab countries with new "democracies?????" know that he is with them. 

 He himself said some time ago that if there was a conflict with the Moslem world  and he had to chose he will be with them.

 Let us pray that we will have good luck come November."  M----

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One of the brightest legal minds I ever met, a dear friend and fellow memo  reader gives his take on Obama's possible actions in a second term:  (See 2 below.)

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When you burn bridges you often burn yourself: "Democrat Politician Warns Jewish Voters [Video 3:25]:

http://www.youtube.com/watch?v=rU7Ctg7ddPo&feature=player_embedded


“As a Democrat myself, I am probably voting for Romney this time. Not easy to vote Republican but Obama has left me no choice.”

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Bernanke will keep flooding the markets with dollars until he gets it right but by then we might be underwater. 

Phil Rosen writes Jews are not that stupid but a friend believes they are. I regretfully agree that far too many are just that dumb when it comes to politics.  (See 3 below.)

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So much for believing the words of presidents: "  | Which president said, “I would rather commit suicide than hurt Israel”? Jimmy Carter "

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Mauldin is not maudlin. (See 4 below.)

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Dick

----------------------------------------------------------------------------------------------------------------------1) Post-Arab Spring "moderate” Muslim regimes cornered by radicals


The United States is positioning military forces so that it can respond to unrest in as many as 17 or 18 places in the Islamic world, Defense Secretary Leon Panetta announced late Friday. "We have to be prepared in the event that these demonstrations get out of control,” he said.

Those words dashed hopes in Washington that the anti-US Islamist rampage by now sweeping 21 countries over a video deriding Islam had passed their peak. In fact, by their sixth day Saturday, Sept. 15,the street protests against American embassies and other US symbols of influence were growing more violent and more organized, threatening not only American lives but tearing up President Barack Obama’s entire outreach policy toward Arabs and Muslims. I

In at least four Arab countries, anti-US protesters were no longer just throwing stones but using firearms. The most serious occurred in Egyptian Sinai, where scores of armed Salafist Bedouin linked to al Qaeda firing missiles, grenades, mortars and automatic weapons were able to break down two guard posts at the US-led Multinational Force near El Arish base in search of American victims. A battalion of Colombian troops fought the invaders off in fierce battle for hours, preventing them from reaching the hundreds of US officers, soldiers and air crews pinned down in fortified quarters.

In Cairo, Islamist demonstrators began firing rubber bullets at Egyptian security forces which have still not succeeded in breaking up the disturbances.

In Tripoli, Lebanon, protesters and the Lebanese army exchanged heavy gun fire. In Khartoum, Islamists shot their way into the US embassy and the American school before setting them ablaze.

In Tunis, the American ambassador almost suffered the same fate as his colleague, Chris Stevens and three consulate staffers who were murdered in Benghazi, Libya, last Tuesday, Sept. 11. The ambassador and several US diplomats were rescued from the burning embassy building by a special Tunisian counter-terror unit and taken to safety.

Friday, saw the first five fatalities as well the first violent Muslim demonstration in the Australian town of Sydney.

Counter-terror and intelligence sources draw seven conclusions from nearly a week of surging anti-American violence across the Middle East, South Asia and beyond:

1.  The anti-Islamic video film was not the cause of the upheaval only a pretext.

2. The outbreaks were orchestrated by a number of radical Islamic organizations ranging from the ultraconservative Salafis to Al Qaeda terrorists. They took advantage of swelling anti-US sentiment in many Arab and Muslim countries to weaken local governments which maintain ties with the United States, including the Muslim Brotherhood.

3. It is not yet known how the mechanism coordinating operations among those Islamist extremist groups works, but it has already shown to be faster and more efficient than the American intelligence and counter-terror bodies keeping track of them. Day by day, Washington is caught unawares by fresh outbursts.

4. After firing up Arab and some Muslim streets, this radical coalition believes its component organizations are gathering enough leverage to start pushing out the “moderate” Muslim Brotherhood branches brought to power by the US-backed Arab Spring in order to take their place. The anti-US ferment will therefore not abate, as Washington hopes, until they achieve their goal.

5. The US has sent two platoons of 50 men each of specially trained Marines to protect its embassies in Libya and Yemen and may send a third to Sudan. Otherwise, the Obama administration dare not send in American troops to prop up the new Arab regimes; any visible US military intervention in those countries would only enhance the radicals’ popularity and weaken the regimes they are fighting to remove.

6. The new Muslim Brotherhood rulers of Egypt, Tunisia and Libya face a tough strategic dilemma; Lean more heavily on American support to save their regimes, or bow to the Islamist extremists, turn their backs on America and give them a place in government.

7. Power-sharing with radicals has already begun in some Arab countries, spelling the reversal of Obama’s policies and the goals of the “Arab Spring”

Those policies aimed naively at the removal in the name of democracy of autocratic, secular Arab rulers to make way for “moderate” Muslim Brotherhood regimes elected by the people and ready to work with the United States. This ideal was violently reduced to ashes in the second week of September 2012.

It is hard not to recall another debacle of 33 years ago, when President Jimmy Carter helped overthrow the Shah of Persia only to bring implacable ayatollah rule to Tehran.

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2) Someone asked me if I thought it was likely that Obama could suspend the Constitution and the Presidential elections in four years.  I said it was a possibility for the following reasons:

Obama finds the rule of law inconvenient, at best.  Here are some of the things he has done:

1.  He passed Obama-care through a "reconciliation" process that deprive the Senate of a chance to vote for the final bill.  The Senate never approved Obama-care, just the bill the Senate approved on December 24 before Scott Brown was elected as the 41st Republican Senator; the House, controlled by Democrats passed that bill and then passed an amendment to that bill as a "reconciliation" -- a process that only requires 50 Senators, but that is premised on the fiction that the changes being adopted will not increase the budget deficit.  The reconciliation process was wrongfully used.  Who cares?  No one cares.

2.  He appointed 32 "czars" to oversee major parts of the government without any Senate approval.  The Constitution clearly requires "advice and consent" of the Senate for all such officials of the executive branch.  No one cares.

3.  He has created self-funding agencies with the Dodd-Frank Act.  The Consumer Financial Protection Bureau can impose fees to cover its costs and has no congressional oversight.  No one cares.

4.  His appointment to the Consumer Financial Protection Bureau (Elizabeth Warren, the socialist running for Senate in Massachusetts) was denied her post by the Senate, and the Senate refused to hold hearings on her successor, Richard Cordrey.  No matter.  Obama appointed him as a "recess appointment" even though the Senate said it was not in recess.  But Obama said it was.  No one cares.

5.  He overrode the work requirements in the welfare reform act in a way that is clearly contrary to the letter of the law -- and the intent of the law.  No one cares.

6.  He has used the MACT rules of the EPA to threaten and shut down businesses -- particularly industrial businesses.  He is using the greenhouse gas regulations and other regulations to drive profit-making manufacturing out of the United States.  No one cares.

7.  He took over GM by forcing an extra-legal restructuring on the bondholders, transferring 17% of GM's capital to the unions after a deal had already been reached to give that slug to the bondholders.  No one cares-- not even the bondholders, who could have brought suit.

8.  His Justice Department refused to prosecute persons who intimidated white voters by standing outside a polling place in Philadelphia with billy clubs and baseball bats.  No one cares.

9.  He appointed a woman who worked on Obamacare -- Kagan-- the the Supreme Court, where she ruled on the validity of Obamacare.  No one cares.

10.  He denied the Keystone Pipeline on "environmental grounds" after the EPA and state EPAs had already approved it.  The President can't do that.  He only has the power to consider the pipeline's effect on international relations with Canada.  He ticked Canada off pretty royally, but no one cares.

11.  He imposed a six-month moratorium on offshore drilling in an area where China was drilling off the coast of Cuba.  A federal judge ruled that he had no power to impose a moratorium and vacated it.  He reimposed a moratorium; the judge found his administration in civil contempt.  No one cares.

12.  He imposed a new regulation (not yet adopted, I don't believe) that would amend the government procurement rules to provide that anyone doing business with the government (or anyone doing business with anyone doing business with the government -- these mandates are pretty broad) would have to disclose political spending on issues.  This was intended to chill political opposition to Obama's mandates.  No one cares.

13.  He granted waivers under Obamacare to his cronies.  No one cares.

14.  He funneled stimulus money to states and recipients who were his cronies.  No one cares.

15.  He has insulted allies and befriended enemies of the United States.  Valarie Jarrett refused to pull the trigger on Osama bin Laden three times before the "go" decision was finally made.  He has told Vladimir Putin to "wait until after the election" when he will have more "flexibility."  No one cares.

16.  He dismantled our forward missile defenses in Poland and the Czech Republic, which would have protected the US in the event of an intercontinental attack from Iran.  Meanwhile, Iran has developed ICBM capacity and will soon have nuclear weaponry.  No one cares.

17.  He has completely stripped the missile defenses in the Southeastern US and the entire Southeast south of Atlanta has no defenses in place.  No one cares.

18.  Whatever you think of the birther issue, the birth certificate on the White House website was clearly a forgery and could be "peeled apart" by anyone with Acrobat.  There should have been no need to post a forgery, other than to get opponents mad, make them look like fools for caring, and see if anyone else cared if the White House lied and forged.  No one cares.

19.  He has revised the immigration policy to refuse to take action against children of illegals without proper citizenship.  When Arizona sought to enforce the immigration laws, he sued the state and its sheriffs who took action to enforce the laws.  No one cares.

20.  He makes statements that are palpably erroneous about what he has said or done, and no one cares.  He blames Bush for the credit crisis, when the only person in government who actually signed a complaint in a lawsuit to encourage more subprime lending under the Community Reinvestment Act was Barack Hussein Obama.  No one cares.

This is just off the top of my head.  Even knowing that he has to face the voters, he has taken breath-taking risks in ignoring the Constitution, the Congress and the laws.  If there is a crisis in the next term -- and it appears likely that there will be at least one existential crisis facing the country in the next few years -- I have no doubt that he feels he can do whatever he wants to do -- including suspending the Constitution.  Because no one cares.

Obviously, there are a few of us who still care.  There are a few of us who still read the Constitution, carry it around with us, cherish the liberty it protects.  There are a few of us who think that laws should be made with due process and that equal protection of the laws is still important.  There are a few of us who keep up with the nuances of regulation when they burden businesses and the citizenry or try to impinge on constitutional rights.  But not enough.  And, beyond those few, no one cares.  

Israel was not created in order to disappear - Israel will endure and flourish. It is the child of hope and the home of the brave. It can neither be broken by adversity nor demoralized by success. It carries the shield of democracy and it honors the sword of freedom. - John F. Kennedy

3) Jews Are Not That Stupid, Mr. President

by J. Philip Rosen


(Phil Rosen is a practicing bankruptcy and real estate re-organization attorney practicing in New York.  He is on the board of the Republican Jewish Coalition and is a friend of longstanding. He is proudly partisan.  This is a work of advocacy directed to Jewish voters.)

I love Barrack 0bama's speeches. I really do. They are filled with wonderful words that turn into pictures, dreams that would make Don Quixote proud.  Even today, after 3 1/2 years of massive failure on all fronts of his Presidency and in all ways, I close my eyes when he talks and think of what the world would be like if only all of his dreams and promises had come true.  But then I wake up, I open my eyes, and the world is just as it was before 0bama began taking us on his latest voyage down the road to La Mancha.  And the magnitude of his failure on all fronts including: the economy, jobs, and foreign policy continues to grow.  And the words that seemed so beautiful were just words. Or even worse, deception. 

Today I want to discuss one group of dreams and one group of listeners. The dreams are the promises this President has made and makes regarding his commitment to the State of Israel and the listeners are the American Jews. 

Start with his appearance before AIPAC in 2008 in the heat of his primary fight against Hilary Clinton. He stood on stage and proclaimed "Let me be clear; Jerusalem must remain undivided."  That statement produced a roaring, standing ovation.  The very next day, after gauging the world reaction, his campaign decided his statement had to be "clarified".  His definition of "undivided" is not the universal meaning – i.e. that the City would not be divided (the common dictionary definition is "Not divided; not separated or disunited; unbroken; whole; continuous; as, plains undivided by rivers or mountains."). He meant to say that after the City was divided, there would be no checkpoints between the two sides. C'mon. That's just wrong, Candidate 0bama. Pure unadulterated fiction. 

And this is not a nuance issue. Jerusalem as the undivided (using the English language definition of undivided) capital of Israel is a fundamental element of the existence of the State. If the world divides Israel's capital and gives a portion to the Palestinians to be the capital of a new "terror" state (we'll come back to that very soon) the world would question the legitimacy of the State of Israel.  Any State that divides its own capital not as a result of losing a war is questioning its own legitimacy.  Nation-state suicide, to coin a phrase. 

• The "undivided" nature of Jerusalem is supported by over 95% of Israelis.  
• It is supported by international law.  
• It was not on the table as a negotiating issue when Barrack 0bama put it on the table in the guise of supporting Israel.  

May 20 was Jerusalem Day in Israel - a day celebrating the unifying of the city.  So fundamental is the "undivided" nature of the city.  A national holiday.  That’s how important it is to Israel.

The President began his term on January 20, 2009.  On June 4, 2009 0bama gave what he declared to be his most important foreign policy speech on the Middle East in Cairo.  As he noted his goal was to bridge a gap that he felt existed between the Muslim world and the west. "A New Beginning" he called it.  He implied that the relationship between the Western world and Muslim society was horrible until June 4, 2009.  And the fault was all on the west. He admitted that extremist Muslim violence was bad. And should stop.  But the West needs to do a whole hell of a lot more to make up for years of bad relations between the West and the Muslim world.  Utterly ridiculous!

And then he gave us further insight into his view of Israel -- he questioned the legitimacy of  the State of Israel in the guise of conveying sympathy for the Jewish people and the fact that 6 million Jews were killed. Tricky.  He tied the legitimacy of the State to the Holocaust. The Jewish survivors needed a place to go. Pure and simple.  Not that G-d gave the Land of Israel to the Jewish people.  Not the 3,000 years of ties to the Land of Israel that had been the key factor until June 4, 2009.  Only the Holocaust.

And then he went a step further.  He compared the Jewish "holocaust" experience to the Palestinian hardships in Israel. The murder of 6 million compared to waiting at checkpoints that were set up to stop terror attacks.  What chutzpah, to use one of our words.

And then we come to his policy change with respect to the "Peace Process" -- 

0bama's policy says the fundamental obstacle to peace in the Middle East are the Israeli settlements; OMG, why didn't anyone think of that until now? 

• Not terror. 
• Not the Palestinian refusal to accept Israel's right to exist. 
• Not Palestinians who "educate" their children to murder Jews. 
• It's all because of Settlements - just settlements.

So, 0bama says to Mr. Netanyahu; stop settlement construction and the Palestinians will come to the table to talk peace. And terror would end.

So Bibi did.  But the Palestinians didn't.  And terror didn't end.  In fact, the Palestinians were given an excuse to blow up and destroy the Oslo "peace process" (to the extent it was still alive).  In fact, on May 19, 2011, President 0bama actually did blow up the peace process himself.  Prime Minister Netanyahu was on his way to the United States to what could have been the warmest reception in history from the U.S. Congress.  As the Prime Minister boarded his flight President 0bama decided that was the time to usurp the center stage from the Israeli Prime Minister and the Republican Congress (after giving assurances to the Prime Minister that this would not occur). 

So 0bama gave another major foreign policy address.  In this speech, the President said that the United States would support using the pre-1967 (Six Day War) borders (with mutually agreed swaps) as the foundation of a peace agreement between Israel and its Arab neighbors.  For Israel, this was a giant shift in U.S. policy.  You see, Israel knows that the pre-67 borders are not defensible.  And so does the U.S.  In fact, this policy ran counter to prior U.S. policy -- i.e. that Israel would never be forced to go back to those indefensible borders.  The previous President promised this in writing to America's most loyal ally, Israel.  With this shift in policy which obviously was rejected by Israel, the Palestinians took it as another invitation to leave the peace table, this time permanently. 

Finally, President 0bama's personal attacks on Prime Minister Netanyahu. From  harsh talk about Israel being the primary obstacle to peace to the personal slights and leaked criticism to the childish chatter with the playboy bon vivant now former Prime Minister of France Sarkozy about the Israeli PM being a "liar" 0bama went after Netanyahu as if he had a target on his back.  The Administration, the press, and the American Jewish liberal leadership made it seem as if it was a personal problem the President had with the Prime Minister, because that could be easily dismissed or rationalized. BB was too tough they could say and 0bama was frustrated. 

To borrow a line from a character we know, "this wasn't personal; this was business."  The animosity was not an attack on the Prime Minister, it was an attack on Israel.  It was, and is, an attack on the Jewish people.  Prime Minister Netanyahu has the support of the People of Israel - maybe 70-80% of the Israeli public. 

An attack on Netanyahu's defense of Israel is an attack on the State of Israel. 

Does President 0bama dislike Israel?  We don't know.  But his actions and in-actions have 

• destroyed the peace process, 
• strengthened Hamas, Hizballah and Iran and,
• left Israel with the feeling that Canada is now its best friend on the world stage.  

As he said to a meeting with Jewish leaders – he wants to be the first President in decades to create “distance” between the United States and Israel.  

Not visiting Israel during his term as President despite visiting the region multiple times is just the tip of the iceberg.  “Distance” is his goal.  Bridge a gap with the Muslim world and create distance with Israel. 

If President 0bama is voted in to a second term, all holds are off (as he admitted to Russian President Medvedev). He will "have more flexibility" he will be able to do whatever he wants on foreign policy. And to Israel. 

For Israel and the Jewish people, it will mean 

• forcing Israel to choose between existential threats - Iran having nuclear weapons with the declared intent to annihilate Israel or Israel allowing a terror state to exist miles or yards from its cities, 
• giving up control over the Golan Heights (from which you can see and target most of Northern Israel) and, 
• most offensive of all, dividing its own capital.

Mr. President, as goes Israel, so goes the Jewish people. Mr. President, now you can use the Holocaust for analogy. The Holocaust would not have happened if the Jews had had a state.  And, G-d forbid, it can happen again without the State of Israel.  Mr. President, that is a lesson for you and for the American Jewish community.  Jews need Israel.  Pure and simple. 

Mr. President, meeting with groups of Rabbis and so-called Jewish leaders as part of your re-election campaign will not change the fact that you would like Israel to take existential risks so you can put another peace prize on your mantle.  Israel will not take those risks. 

Mr. President, Jews voted against Jimmy Carter in his re-election bid because they saw through him. They saw his hostility to Israel (which has been proven time and again since then).  They will see through you, President 0bama.  

• They will see how you sometimes say the right thing and then reverse yourself; basically that you are a liar,
• They will see how your "policy changes" have led to Israel negotiating from weakness rather than strength as well as the Palestinians walking away from the negotiating table. 
• They will see that your personal attacks on the Israeli Prime Minister are really attacks on the State of Israel and the people of Israel.

Mr. President, Jews are not that stupid.  They will see the truth.

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4)-The Direction of the Compromise

By John Mauldin 

The Economic Consequences of a Political DecisionAmerican ExceptionalismThe Cost of Dealing with the Deficit Which Candidate's Plan Solves the Deficit?

"How did you go bankrupt?"
"Two ways. Gradually, then suddenly."
– Ernest Hemingway, The Sun Also Rises

We are often told that the current election is the most important in recent history. I think I have heard that in about ten presidential cycles, ever since I first voted, for McGovern, as a young man. And looking back, only about one of those elections actually qualified on that score. I think this election does have the potential to be one of those rare times, at least in terms of economic outcomes. In Thoughts from the Frontline we cover economics and investments, money and finance. We only rarely stray into the political world, and then only glancingly. Today, we cross that gray line, but at a somewhat different angle, as we look at the economic consequences of the political decision that will come with the choices we make in November in the US.

But it is not as simple as suggesting that choosing one party over the other will solve the nation's economic ills. If that were the case, we would not be facing the momentous challenge we now do, because both parties have had firm control of the levers of power in recent years, and both have failed to deal with what has become, at least for this economic analyst, the burning issue of the day. Indeed, both have made it worse. Today we look at what the choices are and the impacts of those choices.

The Economic Consequences of a Political Decision

The preview of economic consequences depends on your view of what the most important issues are that need to be decided (in terms of economics). Let me list my top ten.

1.  The Deficit

2.  The Deficit

3.  The Deficit

4.  The Deficit

5.  The Deficit

6-10. Everything Else

I am only being mildly flippant. How we deal with the deficit affects everything else. And not dealing with the deficit leads to a disaster of biblical proportions, the equivalent of all eight of the first eight plagues. Ask Greece or Spain.

It is easy to dismiss the deficit as something that has always been there. Haven't Chicken Littles been telling us the deficit sky is falling for decades? Japan seems to be capable of running large deficits, and we are nowhere near their level of debt. Isn't "Japanese Disease" the worst outcome we are looking at – a slow-growth world that, while frustrating, is not cataclysmic? And some have been calling for even larger deficits in the name of spurring economic growth and jobs, harking back to periods when the government did indeed run deficits and the economy seemed to respond and once again grew.

It is easy to dismiss deficits as something we can deal with later. Like Hemingway's character, who when asked "How did you go bankrupt?" replied, "Two Ways. Gradually, then suddenly."

For most times, deficits are indeed not a problem. Many families and companies and governments run losses and borrow money to keep from having to curb their lifestyles and programs. It is not actually the immediate deficit that is the issue, but the total debt. If debt is low and cash flow is good, then deficits can be a good thing. Debt that is invested in income-producing assets or infrastructure that makes a family or business or nation work more efficiently can be beneficial.

It is when the total debt becomes too large that servicing that debt becomes an issue. And that is when the lenders first ask for more collateral or higher interest and then, if the debt is not brought under control, they stop lending. For a nation, its bond market simply collapses.

In a book that we have looked to many times, This Time Is Different, Ken Rogoff and Carmen Reinhart detail over 200 instances where nations had a credit crisis. One of their main points is that nations seem to be able to borrow money right up until what they call the "Bang Moment" happens, and the bond market no longer functions. Right up until that moment, proponents of ever more debt argue that "this time is different," but it never is.

In the opening line of Anna Karenina Leo Tolstoy says, "Happy families are all alike; every unhappy family is unhappy in its own way." And governments and nations that get into debt problems get into them in their own way, as well. Spain, we are told, is not Greece. And it certainly is not. Spain created a completely different route to its own debt crisis than did Greece . And France, which will argue that it is neither Greece nor Spain (nor Italy nor Portugal, etc.), will find that if it does not quickly adjust its finances (and it certainly appears to be in massive denial), it will devise yet another way to have a full-blown debt crisis, with the bond vigilantes at her door.

It is a process I describe in Endgame. Much of Europe faces a debt crisis. It will not end happily. Spain and Greece have falleninto what can only be described as a depression. Much of the rest of Europe is either in recession or at the tipping point, and a slip into a full-blown, continent-wide depression is quite possible, for reasons we have explored in previous letters. Simply, Southern Europe (along with Ireland) borrowed too much money (for different reasons), all European banks leveraged themselves too much (with the blessings of the regulators), and the Europeans created massive internal trade imbalances.

It is impossible to balance out a fiscal deficit while running a massive trade deficit, especially if there is capital flight. And a fall in currency prices, which is the normal balancing mechanism for a trade deficit, is not available to Greece, Spain et al. as long as they remain in the eurozone. This leaves a very large shift in labor costs as the only way to rebalance, and that solution cannot come quickly in the peripheral countries, without politically impossible structural reforms. The eurozone has no good choices. No matter what they (as a collective Europe and as individual countries) choose, it will mean years of extreme economic hardship.

Japan, as I am wont to say, is a bug in search of a windshield. They have transmuted the savings of two generations into the largest debt ever for a country that I am aware of (in terms of GDP). It is now approaching 220% and rising at a prodigious pace, about 10% in 2011. They have gone from a savings rate of 16% to around 1%, largely due to an aging population that is now living off its savings.

When that savings rates goes negative, and it is a demographic certainty that it will, Japan will either be forced to pay higher interest rates or print massive amounts of yen or cut government spending by equally massive amounts. All of those options are ugly in the short term. If interest rates rose by a mere 2% for Japan, they would be spending more than 70% of their budget on just interest expense within a few years. That is not a workable business model. Today, we can't get into the election later this month in Japan, but it will be an important one.

American Exceptionalism

The US deficit (held by the public) is now over 72% of GDP and rising.

"Egan-Jones Ratings Co. said Friday [September 14] it downgraded its U.S. sovereign rating to AA- from AA on concerns that the Fed's new round of quantitative easing, or QE3, will hurt the U.S. economy. The ratings agency said the Fed's plan of buying $40 billion in mortgage-backed securities a month and keeping interest rates near zero does little to raise GDP, reduces the value of the dollar, and raises the price of commodities. 'From 2006 to present, the US's debt to GDP rose from 66% to 104% and will probably rise to 110% a year from today under current circumstances; the annual budget deficit is 8%,' Egan-Jones said in a note. 'In comparison, Spain has a debt to GDP of 68.5% and an annual budget deficit of 8.5%.'" (MarketWatch)

(For what it's worth, I don't count the "Social Security Trust Fund" as debt, as it is an accounting fiction. It does not exist except on a fictional balance sheet, thus I see the debt as less than Egan-Jones does, but they are correct about the deficit.)

There is no set debt-to-GDP ratio at which point a nation loses its ability to borrow money at reasonable rates. For Russia it was 12% in 1998. Japan, as noted above, is at 220% (the exact figure is somewhat up for debate, but this is close enough). Spain lost access without major ECB intervention at less than 68%. Italy is at 120% and has seen its rates rise to levels that cannot be sustained.

At some point, if a nation does not get its debt and deficit under control, it will lose access to the bond market at reasonable rates. There have been no exceptions. There is a point at which the bond market begins to worry about the ability of a nation to repay its debt with a currency that is now worth less than when the money was lent, and then interest rates begin to climb.

There is no reason to think the US will be an exception to that rule. That is not what is meant by American exceptionalism.

Why do I think the deficit is such an issue? What makes me concerned that we can't wait another four years until the US loses access to a low-interest bond market? Would that really be a disaster?

First, in a world without Europe or Japan, the US could probably go out to the latter part of this decade running large deficits. We have the world's reserve currency, we are the major superpower, the engine of free markets, etc.

But I think Europe is likely to hit a real wall by the end of 2013 or the middle of 2014, if not sooner. Ditto for Japan. I am afraid that the bond marketeers will look at their losses in Europe and Japan and tell the US government something like this:

"We have already watched the movies about European and Japanese debt. Those did not have happy endings. The US debt movie seems to be based on the same script; so if you don't mind, since we know how this ends, we are going to slip out during intermission."

In my opinion, the deficit needs to be dealt with in 2013. If we wait until 2014, we will be in the middle of another election. As we will discuss below, solving the deficit is going to involve politically unpopular compromises for either or both parties. While I am optimistic that something can be done in 2013, I am cynical enough to think that 2014 is much more politically problematic.

By 2015 the debt will be well above 90% of GDP. As outlined in previous letters, there is increasing evidence that when the debt of a country grows to 90%, GDP slows by about 1%, which of course makes it harder to grow your way out of debt.

Interest rates start to rise as a result, and that makes it harder to balance the budget. Yes, I know, the Fed can hold rates down and print money; but printing money in quantity is not a strategy designed to bolster bond market confidence in the value of the dollar.

Not only the research of Rogoff and Reinhart, but numerous other studies also point out that when confidence goes, it is a fairly quick process. It is indeed the Bang! moment.

If rates start to creep up, perhaps Congress will be forced to do something. But at that point, it will be time for higher taxes and deeper cuts than any of us can now imagine. The longer things go on as they are, the worse the final result and restructuring will be.

We have often been told that borrowing money creates a problem for our children. And that is true. But it is also creating a problem for this generation in the here and now.

Much of Europe and Japan are going to fall into a depression as a result of their unwillingness to deal with the deficits and the structural issues they face. 25% unemployment is an ugly, ugly reality that is spreading across Southern Europe. Japan will face its own version of a debt crisis, and I think the result will be significant inflation in its import prices and a drop in the living standards of its elderly.

Perhaps I am wrong and the US can go on for another four years before we reach our own Bang! moment. Things can sometimes go on for longer than we think, for reasons we (or at least I) do not understand. But waiting longer certainly will not make it any easier. Entitlement programs are steadily getting into worse shape, and interest costs will be another $80 billion a year for the additional debt we will take on (my back-of-the-napkin estimate – you can make your own). Trying to solve the problem four years from now will require decisions even more difficult than those we have to make now.

The Cost of Dealing with the Deficit

Let's be clear. For reasons I have written about at length, there is a significant cost to cutting the deficit. It will impact current-year GDP. I certainly would not advocate balancing the budget all at once or even in a few years. I would suggest cutting by no more than 1% of GDP per year, or about $150 billion a year. Even that little will produce growth headwinds.

Tax cuts or increases have an impact on the economy. Quoting from Forbes:

"A powerful analysis by President Barack Obama's first Chair of his Council of Economic Advisers (CEA) indicates the President's proposed tax increases would kill the economic recovery and throw nearly 1 million Americans out of work.  Those are the extraordinary implications of academic research by Christina D. Romer, who chaired the CEA from January 28, 2009 – September 3, 2010.  In a paper entitled "The Macrcoeconomic Effects of Tax Changes," published by the prestigious American Economic Review in June 2010 (during her tenure at the White House), she stated: 'In short, tax increases appear to have a very large, sustained, and highly significant negative impact on output.'

"The AER paper, co-authored with her husband and fellow UC Berkeley Professor, David H. Romer, examines the impact of tax increases and reductions on U.S. economic growth for the period 1945 to 2007.  One of the innovations in the paper is its focus on 'exogenous' changes in taxes, that is changes in taxes that were meant to either increase the rate of economic growth (not simply offset a recession), such as the Kennedy, Reagan and Bush tax cuts, or to reduce the budget deficit, such as the Clinton tax increase.  Excluded were 'endogenous' tax changes that were purely countercyclical, such as the 1975 tax rebates, or were used to 'offset another factor that would tend to move output growth away from normal', such as the tax increases to finance the Korean war and the introduction of the payroll tax to finance Medicare.

"The Romers' baseline estimate suggests that a tax increase of 1% of GDP (about $160 billion in today's economy) reduces real GDP by 3% over the next 10 quarters. In addition, the Romers used a variety of statistical tests to take into account other factors that could influence economic growth at the time of the tax changes, including government spending, monetary policy, the relative price of oil, and even whether the President was a Democrat or Republican (it doesn't matter much).  A summary of the statistical work estimates that a tax increase of 1% of GDP would lead to a fall in output of 2.2% to 3.6% over the next 10 quarters.

"'In all cases,  the effect of tax changes on output remains large and highly statistically significant,' they write.

"'Thus the finding that tax changes have substantial impacts on output appears to be very durable.  That including controls for known output shocks has little effect on the estimated impact of tax changes is important indirect evidence that our new measure of fiscal shocks is not correlated with other factors affecting output.'

"'The behavior of output following these more exogenous changes indicates that tax increases are highly contractionary.  The effects are strongly significant, highly robust, and much larger than those obtained using broader measures of tax changes.'"

Forbes goes on to say that "In his 2013 budget, President Obama proposes $103 billion in 2013 tax increases, including $83 billion of higher income taxes on those who make more than $250,000 a year, or about 0.65% of GDP. Using the Romer baseline estimate, that would reduce real GDP by 2 percentage points over the next 10 quarters.  Based on the general relationship between economic growth and unemployment, such a fall in output implies a loss of more than 800,000 jobs."

(Note: There are those who disagree, often vigorously, with the conclusions of the paper, but offer no counter-data that I am aware of. Romer resigned less than two months after publishing the paper.)

Basic economic accounting and academic research suggest that cutting spending will also have a contractionary effect on GDP for about 4-5 quarters. But if you cut 1% a year for 5 years, then you have reduced potential GDP by 1% year for those 5 years, which does not help job growth.

Of course, if the US loses access to low-cost bonds, that will be a disaster that even worse for jobs. We face either a difficult situation or a disastrous one. That is the nature of the Endgame, when the Debt Supercycle is in its final throes. There are no easy choices. Right now the US merely has some very difficult choices. If we put those off much longer, we will be faced with the disastrous choices of Europe.

Which Candidate's Plan Solves the Deficit?

I am not going to go into detail about how to balance the budget over time in this letter. There are numerous ways to get there. Simpson-Bowles (the presidential debt commission) is one path. It gets rid of many of the so-called tax expenditures and actually reduces the top rate by 24% and raises more taxes.

I would prefer to get rid of almost all tax deductions, except the earned-income tax credit, and end up with a lower top rate. The large majority of tax deductions favor those with higher income, anyway. If I really got my wish, there would be some type of consumption tax (like a VAT) and much lower income taxes across the board, and perhaps we'd even get rid of the Social Security tax as part of the deal, which would clearly help lower-income citizens. For what it's worth, consumption taxes have less of a negative impact on the economy than income taxes.

Neither the Romney proposed budget nor the budget Obama submitted to Congress (and that did not get even one positive vote from his own party) is politically doable, and both have serious problems in dealing with the deficit.

To get to a real budget solution is going to take a compromise, which means some combination of spending cuts and tax increases. It must deal with entitlements and health care. In one sense, the election is about how much health care we want and how we want to pay for it. Everything else is "easy" after that.

I have talked with lots of Congressmen, Senators, and their staffers in the past few years, from both parties. They all get that something must be done, and my sense is that they will do something after this election. The consequences of doing nothing would be disastrous, especially given the "fiscal cliff." Facing such a scenario, I think Congress will act.

The question then becomes, what is the nature of this compromise? And that, gentle reader, will be the real economic effect of this election.

We are voting about the direction of the compromise. Pure and simple.

One path will mean a larger government and budget, and the other a (relatively) smaller government, although I can see no path to a truly smaller government in terms of tax burden, unless we decide we want a lot less health care, which I do not see anyone predicting or advocating.

A "sweep" by either party would be a game changer, but that does not seem likely, according to any poll I am looking at today.

As we saw last week, in research I cited from Europe, there is a correlation between government size and GDP growth. Which makes sense, in that jobs really come from the private sector. Government jobs depend on taxes, which come from the private sector. Please note that this is not the same as saying that we should get rid of all government costs to increase economic efficiency – that is clearly not true. But we should recognize the costs of government spending and taxing of the private sector.

It will come as no surprise that I favor the smaller-government version. But I hope that while we are on the way to compromise we will completely overhaul the tax code, simplifying the process and lowering overall rates while eliminating most tax deductions. And perhaps getting rid of all special corporate tax deductions, while lowering the rate to 15% on US income and 10% on foreign income. That would mean the very large corporations that shelter income by various means and domiciles would pay taxes just like local businesses. We could drop the rates that low and still collect more taxes and really boost our economic competitiveness.

If we balance the budget over time (say 5-6 years) and lower tax rates, while eliminating special deductions and tax expenditures (and I say, get rid of almost everything!), and drill more oil and gas so we can start exporting energy, I will become a raging bull, and not too far in the future. In such a scenario, the future of the United States would be better and brighter than ever. It is the one I want for my kids.

And if we don't act responsibly? Then we need to get ready to batten down the hatches, because if it going to be an exceedingly rough storm. I think we'll know by the middle of next year. And yes, I know our choices will mean radically different investment environments ahead, but that is why this election makes such a difference. It really is about avoiding a depression.

In the very near future, I am going to post for the public two interviews I did along these lines, one with Newt Gingrich and the other with Erskine Bowles. I think you will find both very interesting.

If you feel the way I do about the need to balance the budget, you might want to sign the "Citizen's Petition To Fix The Debt" The petition can be found at www.fixthedebt.org.

While I prefer the smaller-government path, the more important thing is to balance the budget. As businessmen, we can deal with reality. I prefer one where I have more left over to save and invest in growing my business, but I will cope. To not get serious about the budget and the debt is a sure path to disaster. Let's all tell our Congressmen and Senators to work together to get the job done.

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