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McCain's Economic Plan Raises Questions
Hello from Washington D.C.! I hope all of you had a great week, or at least a better week than the U.S. Dollar. The buck is getting destroyed, reaching new multi-year lows this week vs. the Euro, the Japanese Yen, and the New Zealand Dollar, among others. Fed Chairman Bernanke's rate cuts, along with eroding confidence in the greenback, have pushed the Euro above $1.50 for the first time since the inception of the currency in 1999.
Regarding this newsletter and last week's, let me be clear - I'm not trying to tell anyone who they should or shouldn't support for President. I'm much more interested with bulls and bears than I am with donkeys and elephants. The economy is just one aspect out of many to consider, and I'm sure it's not the most important consideration for many voters. But it is important to know where the candidates stand and how they will attempt to fix our economic problems, which seem to get worse every day. Today, we'll explore the economic plan of John McCain.
There are many things to admire about John McCain. Instead of allowing a hellish experience as a war prisoner to destroy his life, he built a successful political career. He's an independent thinker, one who doesn't always conform to the wishes of his party. He's not afraid to cross party lines to get things done, and he isn't afraid to irritate members of his own party.
And he's honest. In January, Mitt Romney told job-starved Michigan voters he would "bring the old jobs back". When McCain told voters in Michigan that the old manufacturing jobs weren't coming back, he was being honest. Romney was telling the voters what they wanted to hear, while McCain told the truth, and let's face it, some people just can't handle the truth. McCain's honesty probably cost him the Michigan primary, but it also won him a lot of respect.
But sometimes the honesty that McCain puts out there can be troubling. For example, here are some widely circulated McCain quotes about his lack of prowess in the field of economics:
"The issue of economics is not something I've understood as well as I should," McCain told the Boston Globe late last year. He said that in choosing a vice president he'd look for a person with economic experience to compensate for his own shortcomings. "I'm going to be honest," he told Stephen Moore of the Wall Street Journal three years ago. "I know a lot less about economics than I do about military and foreign policy issues. I still need to be educated."
Not exactly the kind of comments that inspire confidence. So if McCain himself is not the decision-maker, who is? During the Republican debate on January 24, Ron Paul posed this challenging question to McCain; if elected, would he abolish the President's Working Group on Financial Markets? Here was McCain's response:
"But I as president, as every other president, rely primarily on my secretary of the Treasury, on my Council of Economic Advisers, on the head of that. I would rely on the circle that I have developed over many years of people like Jack Kemp, Phil Gramm, Warren Rudman, Pete Peterson and the Concord group. I have a process of leadership, Ron, that is sort of an inclusive one that I have developed, a circle of acquaintances and people that are supporters and friends of mine who I have worked with for many, many years."
Knowing that he was in over his head, McCain simply sidestepped the question. Instead, he used it as an opportunity to drop the names of some economic heavy hitters, to which one would assume he would either delegate authority or at least lend an ear. Here's the problem - there are people in this group who are diametrically opposed to one another. Petersen is a deficit hawk, stressing the need for a balanced Federal Budget, while Kemp is a devout tax cutter who doesn't necessarily believe the Federal budget needs to be balanced. When these two guys whisper into McCain's ear, which one will he listen to?
Then there is the man Newsweek calls "McCain's Brain", Douglas Holtz-Eakin. As the former Director of the Congressional Budget Office from 2003 to 2005, Holtz-Eakin was the legislature's chief number-cruncher. It was his job to give lawmakers objective and independent analysis of the financial impact of proposed laws. In this capacity, he battled both Republicans and Democrats, telling unpleasant truths that Americans and their leaders didn't always want to hear. Three years ago, he had this interesting exchange with a reporter from the San Francisco Chronicle:
Q: "With the combination of tax cuts, rising military spending and big growth in benefit programs, are we facing a fiscal crisis down the road?"
A:"I am an eternal optimist. I believe that Americans will solve their problems. But the current-law autopilot fiscal outlook is unsustainable. It's just not likely to be the case that numerically you can make the spending add up with the kind of revenue that is going to come in."
At least back in 2005, Holtz-Eakin wasn't towing the party line, and the above comments show both an independent streak and a refreshing honesty. It's easy to say "everything's great", but it takes guts to say that the current policy isn't working – especially when it's your party's policy. But that was then, this is now - will he show the same character in 2008? Also, is Holtz-Eakin going to be McCain's economic point man, or will it be Petersen, Kemp, or one of the others? Will these individuals form a seamless team, or a moshpit of clashing economic ideas? Will too many cooks spoil the broth?
Finally, it's no coincidence that we began with the U.S. Dollar. The greenback's performance has been gruesome to say the least, and this has helped push the price of oil and other commodities through the roof. Here is the performance of the U.S. Dollar Index during the past eight years (see figure 1).
Figure 1: The U.S. Dollar Index reaches yet another all time low. Source: FX Street.com
The McCain plan calls for lowering the corporate tax from 35% to 25%, and it does not address the plunging U.S. Dollar. Since U.S. corporations are the chief beneficiary of a weak dollar, which erodes the wealth of the average U.S. citizen, this issue must be addressed – what are McCain and his advisors going to do about the destruction of our currency? The weak dollar is good for U.S. corporate profits – but it generates inflation and drains wealth from individuals. The weak dollar is one of the main reasons why oil costs over $100 per barrel, with no relief in sight. If McCain - or whoever is the architect of McCain's economic policy – has concern for our currency and its effect on our future standard of living, now would be a good time to speak up.
Have a question about Forex trading? Send an email to eponsi@tradingacademy.com and we may use your question in an upcoming newsletter. Until next time, best of luck to you in trading.
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Ed Ponsi is a globally recognized name as a lecturer and teacher and is the former Chief Trading Instructor for Forex Capital Markets. An experienced professional trader and money manager, Ed has advised hedge funds, institutional traders, and individuals of all levels of skill and experience. Ed has appeared on CNBC, CNN International and TheStreet.com, and has recently written his first book for Wiley Finance, "Forex Patterns and Probabilities" (which you can purchase through