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Sunday, February 19, 2012

Obama budget dead on arrival

Tony Paradiso

Although a logical choice for today’s column, I’m not going to discuss the president’s proposed budget for two reasons. The first is I haven’t reviewed it. The second – which resulted in the first – is that it will be debated for weeks and then it won’t pass.

My plan is to comment on the budget next week because despite being dead on arrival, it’s undoubtedly good for some laughs. For example, like claiming to be a champion of fiscal responsibility by reducing yet-to-occur deficit spending.

Let me illustrate what the government considers fiscally sound with an everyday example. Assume someone has debts greater than their annual salary. Also assume this person desires a new car. Not just any car, but a top-of-the-line Mercedes. However, understanding their precarious financial situation, the person settles for a mid-range model. Despite unnecessarily adding their debt, the person considers their decision sound because they deem the price difference to be deficit reduction. This is our government at work.

Last week, I mentioned the markets are suffering from Greek fatigue. They aren’t the only ones. I’ve pretty much had it as well. At this point, I don’t care what Greece does, I just wish they’d do it.

Greece and Portugal have the potential to make an interesting case study on the impact of cultural influences on human behavior. Along with Italy and Spain, Portugal and Greece are part of the infamous and problematic PIGS – countries with severe financial concerns. But that’s where the similarities appear to end.

Unlike Greece, Portugal is taking its medicine despite the likelihood that it will endure similar pain. Portugal’s economy experienced a mild recession last year but austerity measures are accelerating the decline. According to estimates by the National Statistics Institute, in the fourth-quarter of last year, Portugal’s GDP shrank 2.7 percent on an annual basis and declined 1.3 percent from the third quarter.

The real test of Portugal’s meddle will come this year as it’s expected that the pace of its economic decline will be double that of 2011. More problematic is that to meet the required deficit reduction targets, big cuts in public wages will be necessary. Still, Portugal Prime Minister Pedro Passos insists he won’t seek more money or time. And he is already enacting structural reforms to increase the country’s global competitiveness.

So keep an eye on Portugal to see if it morphs into Greece or if the Portuguese have the fortitude to tough it out in the short term to achieve a longer-term good.

As for Greece, let me alleviate the suspense. A deal needs to be in place prior to the drop dead date of March 20 for Greece to avoid a disorderly default. Regardless of whether they meet this deadline, Greece will eventually default and exit the euro. The social unrest has already past the point of no return. And with its economy in freefall – fourth quarter GDP declined 7 percent – they are basically chasing a moving target that they can never catch.

For the rest of the world, the hope is that by the time this happens, Europe and its financial institutions will be prepared to absorb the blow.

Meanwhile on the domestic front, things are chugging along. The financial markets are gaining steam although I don’t put much credence in what the markets do. Remember, they went on a similar tear early last year. More importantly, most of the economic indicators continue to signal upward momentum. A key indicator – unemployment claims – has now fallen to its lowest level since March 2008.

A potential fly in the ointment is oil prices. Thanks to the uneasiness over Iran, the spread between Brent and West Texas Intermediate is widening again. Trading just blow $119 a barrel, Brent now stands at a six-month high. There is talk about $5 a gallon gas, and if that happens, it would put a crimp in the recovery.

Four dollars a gallon seem like a fait accompli but to reach five will take an escalation in tensions with Iran. Worst case is an oil blockade occurs and someone bombs their nuclear facilities. If that happens, prices could temporarily soar past $5 to $6. I won’t even hazard a guess as to what will happen. Let’s just hope the international game of chicken that is being played doesn’t go too far.

But no matter what the economy does, nothing will help our beloved postal service. What better example exists of the government’s organizational ineptitude? Projected to bleed money at the rate of $18 billion annually by 2015, big changes are being considered. These include cutting 150,000 jobs, doing away with Saturday delivery and eliminating one-day local delivery. But to compensate for the reduction of services, the USPS is also contemplating a price increase to 50 cents. Makes perfect sense. I see private sector organizations raise prices and reduce the quality of their product all the time – just before they declare bankruptcy.

Author, professor, entrepreneur, radio and TV commentator, Tony Paradiso is a marketing and management expert.