Should We Impeach POTUS?

[The following is an adaptation of two recent missives written elsewhere by Gary C. Harrell.] I n a rural Wisconsin town, drivers traveling along Highway 41 rarely catch a whole lot of amazing sights, but in recent days, they have been treated to an oddity. A billboard overlooking the stretch of road carries a very clear message. In bold, red letters, it begins with “IMPEACH OBAMA”, and that is followed by “America’s Small Businesses Are Failing. Help Us Spread the Message.” Indeed, this billboard, which was sponsored by a local enterprise from that community, has attracted national attention and even stirred a bit of controversy, but it does not stand alone in its uniqueness. Just last night, in fact, I had the pleasure of seeing a bumper sticker that seemed to suggest the same thing. It read, quite directly, “Impeach Obama: Yes We Can.” Judging from the likes of these messages, there is little doubt that people are angry about current conditions in the country, as well as about the general direction we’re heading. And that anger may have good reason to exist. Unfortunately, directing that anger to such a point where some call for the removal of the President from office just might be a futile exercise. Yes, it is true that American businesses, and particularly American small businesses, are hurting. So many, in fact, have had to scale back or shut down in the face of dwindling sales revenue. But why is this, really? Well, in fairness, the current credit crisis is perhaps the major culprit in most small business failures since the onset of the Great Recession. Also, the lack of general public confidence that constrains consumer spending is definitely another reason that follows fast. Neither of these factors, though, can be directly pinned on POTUS. But that is not to say that he will not bare some blame in the months and years to come. Understanding this fact is simple; let's start by looking at consumer spending. Prior to the events that upended our economy in Q3 of 2008, for about a decade, American households saved less that 4% of their net earnings (and less than 1% in 2005 and 2006), while also packing on over $2 trillion in consumer debt just to purchase the goods and services that made them happy. Since then, however, those same consumers have grown quite leery, and are reticent to spend as much. To illustrate that point, consider that personal savings rates have jumped from roughly 4.5% of earnings, the highest levels they've been in almost 15 years. That translates to money off the table for every type of enterprise, from larger concerns like, say, Macy's or Whole Foods to small mom-and-pops--and that really is a whole lot of money no longer in play, particularly when you consider that 2/3 of our economy is based on consumer spending, not actual production. Now to simply say that many of these failing businesses had poor business plans, or that taxation imperiled their growth, is a gross oversimplification and an inaccuracy. Businesses, big or small, naturally develop their strategies based on actual market conditions and reasonable forecasts, and in most cases, they build out their models to meet the demand from the marketplace, as they endeavor to maximize profits. Oftentimes, it is difficult for the business owner to see the macroeconomic currents that might impact his or her businesses, because they don't match the microeconomic situations. Hell, even the best researchers or expert opinions do not easily identify the development of market bubbles or economic threats to local demand until it is too late. In fact, so often, as a business owner, as far as you know from your financial statements, things appear fine when they are not, and professional myopia sets in. This is something that happens all too often. And we can look at it from the perspectives of a oilfield contractor and the proprietor of a small electronics store. As these two individuals sat down to look at their books in the summer of 2008, both might have felt comfortable about their businesses. Oil prices were roaring, and consumer spending on new gadgets was still very high. Fully knowing that there are always risks, of course, neither of them might have foresaw any direct trouble brewing for their enterprises, and microeconomic conditions would have certainly indicated that their planning focus should be on sustained growth, not retrenchment. That's because, at the time in 2008, their customers and clients were still buying, and to pull back on inventory or operational capacity would have resulted in driving business away. For both of these guys, there was just no way to know that credit markets, a few months later, would take such a hit that it could severely wound operations (particularly when so many experts and leaders were contending that nothing worse was on the horizon). These businessmen basically got on the plane with their own limited knowledge of conditions affecting their businesses, and they trusted the pilots. We should talk about credit markets, but I must first make a point about taxation...Taxes en masse, at the federal level, have not changed for business owners since POTUS took office, except for the modest tax cut he worked into the stimulus bill. (State levels, though, are a different story in places like CA and NJ.) Therefore, no one can wholly blame business failures on burdens from DC. There just were not any new ones of which to speak in 2009. A s we all know, the quake in credit markets rippled into the marketplace. Consumers watched helplessly as the costs of capital went nuts, or as their credit lines vanished, because their lenders had to reckon with portfolios of loans that weren't performing. The problems started in the mortgage market--but that isn't where the problems end. In fact, while large lenders are looking over their shoulders at government and corporate debt, many believe that small banks are about to face the next wave of upheaval, because some $120 or $140 billion of $1.1 trillion of commercial-property loans are "impaired". This is particularly noteworthy, because small lenders are the ones typically churning out SBA loans and LOCs for many small enterprises. All told, the summary disappearance of the liquidity has been a disaster to American small businesses. When you provide a B-2-B good or service and your business clients have seen their outside financing slashed, it is likely your sales revenues will be cut, and you will have to scale back or be inventive in your invoicing (i.e., offering your own terms). If you are a retailer and your customers lack job security, you too will likely see less traffic and woefully impacted sales (unless offer deep discounts and stress value). Hence, any businesses that did not have near-term reserves of capital for such contingencies (and most did not) were destined to face the very real prospect of failure. Now does POTUS play a role here? Well, while he shouldn't wear the collar of blame for the disappearance of liquidity from the markets, most conservatives are right about his current approach to the crisis. If he was smart, he'd keep his @$ out of the thick of this. POTUS cannot assume that it is now the federal government's role to step into the gap, to offer more lending when credit markets are not healed or to create more jobs when there simply is no real demand for them. Set aside the argument about stoking moral hazards, and let's look at the real hazards. What POTUS is doing by trying to fill the breach between liquidity needs and supply only creates more indebtedness for the government, because it encourages the Fed to print more dollars (to buy our own debt) and the Treasury to pour those dollars in a marketplace that cannot readily absorb them. In 2009, for example, the federal budget deficit to GDP ratio rose from 3% to just under 12%, the largest post-WWII jump in history. And our overall debt-to-GDP numbers are less impressive. (With the new budget, overall debt is projected to be as much as 103% of economic output.) So concerning is this phenomenon that even the Chinese have taken to unloading US treasuries in December, because they clearly see what will come. No, POTUS might not have caused the conditions that led to business failures, so far, and so, he does not deserve to be impeached. But if he stays the course of massive government spending, his actions will surely move this country from a credit crisis, which is painful but a natural process, and into a much larger and more enduring sovereign debt crisis. By that point, more than small businesses will be the ones hurting. P OTUS has a big problem. He sailed to victory on a wave of public anxiety following the September 2008 shakeup in the financial markets. The first trouble for him, though, was that an economic crisis had never been part of his agenda. This country was in a mess as POTUS took office in 2009, and he had a choice to make: set aside his own agenda, and focus on the immediacy of the crisis at hand; or push forward with what he wanted, while de-prioritizing the crisis. He chose the latter. In fact, the choice was articulated, early on, byRahm Emanuel who said, quite foolishly, "You never want a serious crisis to go to waste." In effect, the Chief of Staff was expressing the fatally arrogant view that this party could somehow still focus on their expensive, single-minded agenda and wrestle an economic crisis, all at the same time, as if the latter was not as gravely important as we all knew it was, and as if it could be ridden like some trivial campaign issue. Of course, they were wrong. Even though a lot of the indicators suggest that that the Great Recession has subsided, the feeling of uncertainty, as you rightly point out, is still with us. GDP is not negative or stagnating, but we are not net-hiring, either. In fact, some jobs just will never come back at all. Our production levels are increasing, but this is happening to replace inventories that we allowed to bleed off in the downturn. And we are automating, outsourcing, or contracting to fulfill those production needs. American workers are rightly nervous, because know that job security is a myth, and so, they are not spending in a way that can juice up our consumption-based economy. Hence, business are hurting, just as the billboard says, and our banks are still scared, just as we discussed, because loans are not performing. It is easy to understand the frustration that led to the billboard, however unfeasible part of its message is. The real clarion here is that the American people want leadership; they want to know that their representatives are addressing the issues that affect them now. But these people are not feeling the love. For his own part, POTUS has not offered too much direction. He has been good at jawboning for some sectors but still gives no real substance to his words. That's because he's too focused on passing elements of his agenda, which are not getting very far, because his Congressional compatriots now fear for their jobs. The Democrats know, just from the general public tone, they made a miscalculation in the first year of this new administration, and many of the vulnerable are back peddling in an effort to paint themselves as engaged to the needs of their electorate. I think that the last vestige of the detached single-mindedness that led the Democrats afield is in the White House, and the American people see that, particularly because they expect--no, they need--genuine and immediate leadership from POTUS. And when they don't get it, he becomes the easiest of straw men. Unfortunately, POTUS is likely too confused, too convicted, or too proud, to give up what he wants without a fight. Therefore, a fight is what the American people will give him: the type of dumping in the mid-term elections that compels him to change his tone and his priorities, lest he will accomplish nothing for the remainder of his presidency. Written by: Gary C. Harrell Founder & Managing Principal Axiom Strategy Advisors, LLC