Biz Law Blog

The 2nd Circuit Court of Appeals in McNamee v. IRS, No. 05-6151 just affirmed a federal trial court’s determination that the owner of an LLC (limited liability company) can be held personally liable for unpaid payroll taxes. This is a significant decision, which may well be appealed to the Supreme Court.

Go read the entire piece, especially if you are an owner of an LLC or want to start one. Your choices WILL affect your protections.

Ace got me thinking about Real GDP. He has a great piece about where the old media sets the bar, for Europe and for the United States.

I started digging and created two graphs.



This graph tries to illustrate the similarities and differences between this President’s economy and his predecessor. The major point that I take away from this graph is that real GDP grew every year under Bush, though you would be hard pressed to have read that in the media. Each datum is the percentage increase in real GDP from the prior year. Clinton had solid growth. Bush had the “Clinton recession” but the recovery looks solid and current real GDP numbers are approaching those of the Clinton era.

This next graph is a look at the Euro community, and the G7 nations, versus the United States alone. The US is in the G7 numbers, so when you look at the graph, just imagine how bad the other countries have to be to balance out the good data from the United States.

During the Clinton years, the Euro community and the G-7 seemed to lag the U.S. They have recovered from the “Clinton recession” though not nearly as well as we have. What has accompanied the real GDP growth for both Bush and Clinton has been low unemployment rates [primarily in the later years for Clinton] and low inflation.

Ace’s point is well made. The current economy as measured by real GDP is robust by any definition of the word.

Dr. Cornwall reminds us of a number of issues in business that every business person should read daily.

Beware of the Growth Myth. Focus on growing profits, not sales! Too many entrepreneurs assume that profits always follow sales. This is not always the case. And even when profits do begin to follow sales, cash flow can lag even farther behind.

Bill Quick is beginning to persuade me that a recession is close, very close. Of course, I’m one of the ones who believes the Fed is the real growth killer in the American economy. It certainly appears that the many, many rate increases in 1999-2000 had something to do with the death of the Clinton “boom”. Since 2004 the Fed has done the same to the Bush boom. 17 increase and the boom is dying? I think that may be correct.

There are other factors tugging at the economy. The price of oil certainly is playing a part. The three hurricanes that wiped out much of the Gulf Coast are another. I would also say that the war in Iraq is having some effect, by taking productive employees out of the civilian economy and into the Reserves and Guard for duty overseas.

The one are that has an immediate effect on the economy is the Federal funds rate and it is probably an entire percent higher than it need to be. Housing is looking like it is slowing. Consumer spending is falling. Consumer debt is extremely high.

There is no soft landing. Why? We’re no longer a manufacturing economy where production can stimulate growth. We’re a service and information economy and we sink or swim together. The vampire we call China has a big part to play in this but their crash will be much harder. War, civil war and anarchy will be China’s fate from an American recession.

The Fed needs to lower rates very soon. Rebuilding the Gulf must take priority since there’s enough work their to push the economy back upwards. And no more pussyfooting around with China. They have to float the yuan or face tariffs. I hate the notion, but their production is so underwritten by the state that it can in no way be called a free economy. So, we have to put the pressure on.

NRO prints an interesting column criticizing current Federal Reserve policies. The current policy is to control inflation through rate changes.

I’ve been equally critical of the Fed’s policies based on the Greenspan induced recession that ended just after Bush took office in 2001. I am not at all certain that the Fed is managing inflation or trying to catch up to a perceived inflation. The rate actions that it has taken for the last decade or more have been based on guesses about the future based on very limited data about the past.

The only significant inflator in our current economy is oil pricing. Were we more of a manufacturing economy, world commodity prices would be a close and more worrisome second. For now, oil is the problem.

I would suggest that rate changes based on perceived inflation caused by increasing oil prices are the wrong move. Investment should be encouraged by the Federal Reserve at a time like this, when capital investment may be the best bet for reducing the importance of oil as an inflator in our economy. Making investment capital more expensive is counter-productive.

The authors of the NRO article treat China’s economic moves and choices as if they were a Western nation. This is an incorrect view in my estimation. The Chinese at the policy making level do not yet appear to have an understanding of their place in a world capital and world trade marketplace. The policymakers suffer from Middle Kingdom Syndrome, wherein they believe that China is the center of the world. They clearly realize the peril that their nation is in because of the cyclic nature of government in Chinese history. The central planners hope to maintain their rule while knowing that Chinese governance has gone through many periods of economic and political collapse, ups and downs, over the thousands of years of Chinese history.

China will demand its due from the world, and especially from its neighbors in the next few years. It will do so because the central planners and their rule cannot survive without a dramatic influx of capital and natural resources. Until the crisis begins in earnest, the planners in Peking will continue their Ponzi scheme of funding the past by selling to the future.

The real chances of the Chinese allowing the yuan to float are zero. From their perspective, it’s their currency and they alone can state what it is worth. From our perspective, floating the yuan kills the Ponzi scheme dead by lowering the amount of dollars coming in to Peking’s coffers.

China’s economy is expanding at a non-sustainable rate, provided they are telling the truth about their economic data. They are, after all, Communists, and they lie. At some point they will slow due to Adam Smith and the planners in Peking can do nothing about it. Once China decided to become a player in the world marketplace, it opened itself to market forces and nothing the Middle Kingdom does can stop that.

I am far from expert enough to challenge the authors’ contention that central banks ought to base their rate decisions on commodities and market prices. Gold is cited as an example. I am confident in stating that the Chinese planners are neither basing their decisions on rates or on prices. Their sole reason for action or inaction is the effect on sustaining their rule and what comes to the Middle Kingdom.

At home, I don’t really care how the Fed decides rate policy as long as it does it far less frequently. The irrational belief that you can manage an economy with interest rate nudges is going to put us into another recession. Indeed, I believe that is the Federal Reserve’s true goal, a mild recession that they believe will allow some economic indicators to reset, such as housing markets.

That may be the final straw for China. Commodity prices, including oil, are at dangerously high levels for them. Any disruption in the flow of dollars from the United States, such as that created by a recession, begins a chain of events that ends very badly for the Chinese. They would then be forced to find capital and raw materials which are cheaper. That means Taiwan and the Russian Far East, and war.

The strong similarities between pre-war Japan and China at this time are striking. The sense of entitlement in the nation’s capital. The need for raw materials to sustain both a military and capital expansion. The reduced ability to purchase what is needed. There are a billion Chinese living like the Third World while getting letters and phone calls from their relatives in the cities living in First World condition. And, whether Peking likes it or not, the have-nots are coming. That means more of everything and fast.

The Fed has its eyes on the pebbles in the road, and is swerving the economic car to avoid them, while boulders teeter and threaten to fall from the hillside in front. America needs a strong economy to weather the problems that the forthcoming collapse of China will bring. We need to encourage investment in the United States. They need to quit raising rates.