Trustworthy U.S. Government Needed For Real Economic Growth

By Victor Sperandeo with the Curmudgeon

Introduction:

This week we take a break from our probing comments and analysis of geopolitical, global economics, and markets to focus on the current U.S. political system and its negative effects on economic growth. We'll be back next week with more of our incisive reporting on "bread and butter" topics you've come to expect from this column.

Our guest contributor this week is Brent Berarducci of Blacklion Capital Management who comments on sustaining "the Welfare State."

The Political Week in Review:

The political news this week was dominated by Hillary Clinton's explanation of why she didn't use an official U.S. government ("DOT GOV") email account for her correspondence while serving as Secretary of State. To the best of my knowledge, no U.S. government official before Hillary had their own "private email server." Her answer was for "convenience," as she didn't want to carry two hand held smartphones around with her.

Ms. Clinton acknowledged that it would have been wiser to use a government email for official business, but said she had “fully complied with every rule” and was going “above and beyond” what was required of her in asking the State Department to make public much of her email correspondence.

“No one wants their personal emails made public,” she said, “and I think most people understand that and respect that privacy.”

To paraphrase one of the most honest and admired leaders of the 20th century - three time NYC Mayor Fiorello La Guardia: "I think Hillary should get her facts straight before she distorts them." (Substitute "the reporter" for Hillary and it's exact). The fact here is that you can have several email accounts on ONE smartphone (e.g. Blackberry or IPhone), notebook or tablet computer. So who's kidding whom?

Counter Example: I'm a Commodity Trading Advisor (CTA) registered with the CFTC. I have to maintain ALL the firm's emails on a dedicated server that the government can check anytime. The consequences of noncompliance are penalties that could range from warning to suspension, loss of license and/or monetary fine depending on the level of the breach.

One would think that a U.S. Secretary of State - one of the highest positions in all of government - would comply with the law requiring use of a DOT GOV email account?

U.S. Government Lies & Corruption Leads to Lack of Trust in the System:

Ms. Clinton's actions, and many others where U.S. government officials obviously lied, is reprehensible.

· Consider James Clapper, director of national intelligence who says he "misspoke," but didn't lie about NSA surveillance.

· Or the IRS commissioners (hello Lois Lerner!) false testimony and missing emails.

· Or Eric Holder, Attorney General (head of DOJ) in “Fast and Furious”.

…and many others in government that have lied and are never held accountable.

The result is huge public distrust for the way the government is being run. The public sees the corruption, cronyism, “Pay for Play”, etc., without adherence to the U.S. Constitution.

Further and consequently if the average citizen lies to Congress, it’s perjury, but when a politician lies to the public it's "just politics." Why the dual standard?

This ends with confidence in the Executive Branch at only 11%; Congress a mere 5%; and the press at a new low of 40%, with investigative reporting now a historical footnote or a "thing of the past."

U.S. Government Agencies in Action:

Let's now look at a few government agency operations which illustrate our loss of freedom.

1. On August 31, 2011, Gibson Guitars - a company founded in 1902 - was raided by federal marshals with guns drawn, because the company allegedly bought "illegal" wood from Madagascar.

Gibson vigorously denied the allegations, maintaining that all of its purchases from Madagascar complied with U.S. and Malagasy law. A company attorney said Gibson had presented documents to support that claim and that the recent raid seized legally obtained wood from India. He adds that the company stopped importing wood from Madagascar in 2009.

The key point here is that this raid was done without notice or due process. With the wood confiscated, the DOJ effectively closed the company down. Yet no crime was ever discovered.

2. On January 18, 2012, 40 to 50 heavily armed, hostile government agents raided Mountain Pure Water in Arkansas, because the government didn't receive some paperwork. Again no due process.

3. A short documentary by Jan Morgan called “Rampant Injustice” exposes the federal abuse of power that has taken place since Obama was elected. This underexposed video documents the egregious trampling of the Constitutional rights of Americans during white collar crime investigations by the Department of Justice and the Criminal Investigation Division of the Internal Revenue Service.

4. A Fox News documentary titled, "Enemy of the State" shows many examples of these Constitutional infringements, including the Gibson Guitar raid.

5. The IRS can and does take money from your checking account without due process. That's documented in a 10/24/14 NY Times article titled, "Law Lets IRS Seize Accounts on Suspicion No crime required"

Seriously is this America? Many government agencies (e.g. the IRS) are actually more powerful than Congress. How is that possible?

The important take-away from all of the above agency episodes is that small business is a target of the government and many are closing shop as a result. Also, there's less new business formation because of this type of tyranny, resulting in far fewer jobs being created.

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Curmudgeon Comment: Let's Not Forget the CIA

Remember drone strikes, targeted assassination, water bordering and other forms of torture? Earlier this month, CIA Director John Brennan ordered a sweeping reorganization of the CIA. It's an overhaul designed to make its leaders more accountable and close espionage gaps amid widespread concerns about the spy agency's limited insights into a series of major global developments.

This Sunday, the NY Times reported another such global miscue: C.I.A. Cash Ended Up in Coffers of Al Qaeda, by Matthew Rosenberg (on line subscription required). While the Obama administration doesn't pay ransom to free U.S. citizens captured by terrorist groups, an Afghan diplomat held hostage by Al Qaeda was released in the spring of 2010 for a cool $5 million. Some of that ransom came from a secret fund that the CIA used to make monthly cash deliveries to the presidential palace in Kabul, according to several Afghan officials involved in the episode. The Afghan government, they said, had already squirreled away about $1 million from that fund.

"The C.I.A.’s contribution to Al Qaeda’s bottom line was just another in a long list of examples of how the United States, largely because of poor oversight and loose financial controls, has sometimes inadvertently financed the very militants it is fighting," Rosenberg wrote in the article.

"The C.I.A. continued dropping off bags of cash — ranging each time from a few hundred thousand dollars to more than $1 million — at the presidential palace every month until last year, when Mr. Karzai stepped down. The money was used to buy the loyalty of warlords, legislators and other prominent — and potentially troublesome — Afghans, helping the palace finance a vast patronage network that secured Mr. Karzai’s power base. It was also used to cover expenses that needed to be kept off the books, such as clandestine diplomatic trips, and for more mundane costs, including rent payments for the guesthouses where some senior officials lived."

Do you think Congress authorized or was even informed of that cash going to Afghan crony officials and later to Al Qaeda?

"The cash flow has slowed since a new president, Ashraf Ghani, assumed office in September, Afghan officials said, refusing to elaborate. But they added that cash was still coming in, and that it was not clear how robust any current American constraints on it are."

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Impact on U.S. Economy:

This slowing of new business development effects the whole economy as small businesses create the bulk of new jobs. It's also reflected in the very low reported GDP numbers. Let's take a closer look.

According to the BEA, the real GDP annual (unadjusted seasonally), reported compounded growth rate is only 1.36% in 2009 dollars (using the government deflator) .

Source: Current Dollar & Real GDP

However, using the CPI as the deflator results in an even more anemic 0.99% annual economic growth rate.

Although reported job growth has looked strong, this has come from the BLS "Birth Death Model" which assumes 75,000 new jobs are created out of thin air each month due to new startup businesses. As per the IBD quote in last week's Curmudgeon post:

"Or is the Fed alarmed that, according to a new report from the Tax Foundation, we now have the fewest corporations since 1974 and they are disappearing at the rate of 60,000 a year, taking jobs with them?"

Due to the ACA, many part time jobs are being created at the expense of full time jobs. That's to get around ACA mandatory requirements for company provided health insurance. As a result, many people are being forced into taking two jobs.

Also, pay is not rising for the average person after inflation and taxes. In fact, real hourly wages have declined for many years. I believe this will be an issue in the 2016 Presidential election campaign for many voters.

Is the U.S. on Track or Headed in Wrong Direction?

The devastation of the Democrats in the 2014 Congressional elections clearly showed the public was not satisfied with the status quo. That's still the case, as noted in two recent surveys.

According to polls by Newsmax and Rasmussen Reports (national telephone survey for the week ending March 5th) 67% and 64% of respondents feel that the country is "headed in the wrong direction or wrong track." Those are incredibly high numbers expressing dissatisfaction with the U.S.

Effect on 2016 U.S. Presidential Race:

The evidence suggests that truth in government will be a large and important issue in the 2016 elections. The public sincerely believes that the next leader should be honest. Some would be Republican Presidential candidates, e.g. Rand Paul, Ben Carson, and Ted Cruz are already discussing integrity as an issue along with lower taxes and ending the IRS.

If the polls are correct on "lack of confidence in government" and the "wrong direction of the nation," Hillary may not get the trust of a majority of the independents, and the powers that be may get tired of her rationalized mentality of how she goes about getting what she wants. Senator Elizabeth Warren (D-Mass.) has said she's not interested in being the 2016 Democratic candidate for president, but perhaps she should keep her options open at this time.

This phenomenon is best expounded by Al Pacino (also credited to be said by Emo Philips):

"I asked God for a bike, but I know God doesn't work that way. So I stole a bike and asked for forgiveness!"

Guest Commentator Brent Berarducci:

We have a fiscal policy ideally structured for the prohibition of private capital formation and accumulation. I'm not aware of any evidence that there is a majority in either major political party that considers an expansionary fiscal policy a priority. There doesn't seem to be any political push to foster private capital accumulation and self-reliance. Why not? That would engender individual liberty and limit reliance on a centralized welfare (both corporate and individual) state. Our major political parties compete for the opportunity to manage the welfare state for their favored constituencies, not to reform or repeal it.

The most pro-growth agenda would be one that repeals reams of laws, regulations, agencies, programs, etc. However, that is a very tough sell with our principal political parties apparently committed to sustaining and expanding the welfare state.

Till next time...

The Curmudgeon
ajwdct@sbumail.com

Follow the Curmudgeon on Twitter @ajwdct247

Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.

Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.

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