Friday, September 28, 2007

Your War Costs

Perhaps the main reason Americans have left ‘W’ get away with his unfunded war in Iraq for so many years is the amazing ability of govt. to hide expenditures. If there is one thing the Federal Govt. can do well, it is hide massive spending and debt. After all, these are the guys who print the money and nobody knows just how much they are printing. In addition, when they need more they sell Treasury Bonds, the most secure investment on the planet since WW II.

The idea of hiding the cost of war isn’t new. Lyndon Johnson didn’t include the cost of VietNam in any of his budget requests for five years. He left the next president so much debt Nixon was forced to take America off the ‘gold standard’ that had been adopted during WW II when the world economy was in shambles.
Only America could back its currency with gold and silver, until VietNam. Even after removing this guarantee, American dollars remained the most secure currency backed by the most prosperous economy for the next thirty years.
All that began to change after the dot com bubble burst in 2001. For the next two years the US stock market struggled. Then, Bush invaded Iraq starting with the most expensive fireworks exhibition in history, “shock and awe”. The most shocking part of that display was the cost [CLASSIFIED].

According to the Washington Post, “…from $48 billion in 2003 to $59 billion in 2004 to $81 billion in 2005 to an anticipated $94 billion in 2006, according to the Center for Strategic and Budgetary Assessments. The U.S. government is now spending nearly $10 billion a month in Iraq and Afghanistan, up from $8.2 billion a year ago, a new Congressional Research Service report found. Annual war costs in Iraq are easily outpacing the $61 billion a year that the United States spent in Vietnam between 1964 and 1972, in today's dollars. The invasion's "shock and awe" of high-tech laser-guided bombs, cruise missiles and stealth aircraft has long faded, but the costs of even those early months are just coming into view as the military confronts equipment repair and rebuilding costs it has avoided and procurement costs it never expected.”

Each Tomahawk or SHRAM missile cost over $1 Million and so does each of the 3,700 MRAP armored transports now being airlifted to Iraq. We are spending over $322 Million a day in Iraq (vs $1M in VietNam) and some of the replacement costs for equipment and most of the medical costs for injured veterans have yet to be determined. Officially, war replacement parts were estimated at $30 Billion last year. But this week the sixth emergency spending bill (outside of budget) Bush has requested for the war is double last year’s $106 Billion request to which Congress added tens of billions more for MRAPs, medical care and other needed equipment.

All these figures are probably news to you since you never saw a penny of tax increase to pay for this war and the top 2% got huge tax cuts instead –a first during wartime. So far, Bush has spent over $1.5 Trillion dollars more than the govt. took in, almost all of it for his war on Iraq.

But don’t think you got away free and simply added this amount to our deficit. Eventually these huge figures have an impact, even on an economy the size of America’s. When tons of new paper currency is printed without income to support it and huge sums of treasury certificates are sold to foreign investors, there is an impact. The value of the US dollar compared to other major currencies is now at a 32 year low (when Nixon had to pay for VietNam).

Just this year the US dollar is down 8% so far and falling. Oil is priced in dollars so even though consumption currently justifies $70 a barrel, today’s spot price closed at $82. Americans are now paying a 15% penalty other countries are not paying because of a lack of confidence in our economy by other nations and economic policies Treasury Secretary Paulsen has put into place to hide the massive debt Bush has run up and stimulate US exports because of our massive exchange imbalance resulting from “Free” trade. What does this mean to you?

Take all your cash, savings, IRA’s and other investments. Take away 10%. That’s what you’ve lost to currency fluctuations and inflation this year. Over the past four years, you’ve lost 44% of the global buying power on your CD’s if you kept them in US dollars. While you thought you were earning 4.4%, after taxes, inflation, and currency fluctuations you were losing more than 5% in real value.
Retirees and others trying to live on investment income really got screwed and will feel the standard of living change, especially if they want to travel.

While global growth suggests the need for higher interest rates, the US FED lowered interest rates to stay out of recession. This will dry up foreign investment that has been paying for the war as investors move to more lucrative markets. To attract needed investment the Fed will eventually have to match global rates and send our economy spiraling downward as all commodity prices rise. This is called Stagflation. I’ve written about it before (see archives). It is out of our control. Only significant govt. spending restraint and years of low growth will pull us out. But our Congress doesn’t have the guts to cut spending so we may not see the end of Stagflation for a decade or more. By that time, MediCare funding will fail and Social Security will need major adjustments we can’t afford. Worse, individuals can’t even move to another country to avoid this mess. It is already too late for most of us. This is the true cost of the Iraq war to all of us.

Tuesday, September 04, 2007

Soprano Security

One of my favorite TV shows is the Sopranos because the characters are so well developed. That's not to say they are normal, but in their world they make sense. We get to see more about what makes them tick than Scorsese or Copola have shown us.

We embrace Tony because he's enlightened. He goes to therapy, is getting in touch with his feelings, and even becomes an avenging angel for some of the defenseless creatures he encounters, especially animals. I can just imagine Tony Soprano after his daughter has graduated college and become his financial adviser talking a business owner into an entirely new approach to paying protection.

"I've always felt that making small business owners pay protection under the table was not the smartest way to go. These days the biggest crooks are the legitimate ones. So my financial adviser has come up with a better way. As the new owner of this business you are financing it through the local savings and loan. We've made special arrangements with them to allow you to include your protection payments in your loan package. This way you get many benefits normally denied to you by the system.

By paying your protection up front as mortgage points paid at closing we give you a very special price. While we normally charge 1% a month on the current value of your business when paid out of pocket, we are prepared to let you pay a one-time price in advance on the initial value of your business that will lock in your cost for the next 30 years, at least on a test basis. Once this becomes popular we may have to make an adjustment every ten years or so, but for our early clients we'll take all the risk of inflation.

By paying in advance, we give you all the benefit of compound interest so you only pay the present value of that fixed amount. Let's say the amount is $100,000 so one payment, 1/360th of that would be $278, but the present value of that future amount is only $95. The rest is interest you pay over time like you do on everything else. By borrowing the money from a legitimate lender you pay reasonable rates, not our weekly double digit rates. Plus, you get to deduct all that money from your business income before paying your taxes. With accelerated cost recover depreciation, you'll get over 1/3 of your protection money back from the IRS in the first five years and all of it within 20 years.

Taxes and insurance don't do that and they go up every year. Imagine your neighboring business owner complaining about his higher insurance and protection money rates. At least you'll know your protection rate is fixed because you had the foresight to pay it in advance.

Of course, doing it this ways causes us some problems. First, the money shows up as taxable income to the bank that they give us under the table, so we had to promise them to invest the money with them for ten years and that means we and the bank must pay taxes on our gain every year. That's the money the govt. give you back in depreciation (like insurance companies, the govt. never loses).

You may wonder why we're willing to do all this when we could just extort the money from you as we've always done. Look downtown and then look up. We want those big office buildings to become our next clients. By offering them a legitimate way to account for the expense, they are much more likely to go along. It's not easy trying to twist a corporation's arm. We can make far more money adding deductible security services, similar to environmental services (automated HVAC systems) to the cost of their building than by picking the pockets of 50 guys like you every month.

We even include an electronic security system that notifies us directly when an alarm goes off. For small businesses the monitoring services are all included in the price. We'll respond promptly and unlike the police have a very good chance at recovering your money or merchandise. Even if we don't, the perpetrator won't get away and you can be certain they'll never be back. We also spread the word that your business is protected by us. That carries a lot more weight on this street than an ADT alarm sign.

I hope you can see how we're trying our best to give hard working guys like you a break and shift more protection costs to those who can better afford it. That's why American is the greatest county in the world."

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