2 Aug

By Huxley Nixon

Like many of you I was fixed to the Bloomberg business channel today to see if I would need to start searching for new career – maybe farming.  I am sick of listening to “Talking Heads” but Paul O’Neill (ex – Secretary of the Treasury) seemed to me the most credible of all the pundits taking air time.  Anyone watching our financial markets were made aware of the fact our economy is in real danger of dipping into recession again.  Some the reasons:

  • Jobs Growth – UP on average 179,000/month for first four months of 2011, DRAMATICALLY DOWN since May.
  • Consumer Spending – DOWN for the 1st time since July 2009
  • Manufacturing – DOWN for the 1st time since July 2009
  • Unemployment – UP since May 2011
  • Personal Income – DOWN
  • Stock Markets – DOWN seven straight trading days (this has NOT occurred since August 2008), DOWN down 276 points today (lost additional 150 pts after Obama signed bill)
  • GOLD – Reached $1,660, it’s all time high today (August 2, 2011) and this was the eighth time in the past fifteen days.
  • GDP – DOWN (anticipated to be approximately 1-2% for 2011 vs the previous estimate of 3-4%)
  • Housing numbers – DOWN and will not improve until excess inventory is moved through the economy.

The solution is NOT trying to make our existing inefficient government bigger.  Mr. O’Neill believes we need to streamline government and put programs in place that will provide business owners and investment firms such as private equity firms (my comment) an environment that encourages them to deploy some of the over $2+ trillion sitting on the sidelines waiting for clarity on where the economy is heading.  Did you know that the Internal Revenue System’s (“IRS”) annual budget for 2011 is $12.9 BN and that it fails to collect another $400 BN in taxes due?  According to Mr. O’Neill this is due to the impossibly complex tax code (excess of 37,000 pages according some sources) that allows for loopholes for special interests and makes it impossible to effectively manage and collect all taxes due.  But most importantly Mr. O’Neill believes high taxes are a huge negative influence on business owners to take the risk of starting new companies and expanding existing ones and for individuals to invest and save.

The only time in our history have we owed such a high percentage  of debt as compared to our Gross Domestic Product “GDP”) was after WWII.  What allowed the US to become the strongest economy in the world since then was innovation and long term growth in GDP of 3%+.  It permitted us to pay off the war debt and move away from a culture of “Investing and Saving” to one of “Borrowing and Consumption” in the late 1960’s (remember President Johnson‘s “Guns and Butter” speech justifying dramatically expanding government with social entitlement legislation while fighting the Vietnam War).   Thus we have been borrowing against our future earnings potential (GDP) for over 40 years and getting away with it because of our growth.

Unfortunately this chapter has closed.  Approximately 14,000 Americans are turning 65 every day since January 1st and will continue to do so for the next fifteen years.  Current estimates are government is spending approximately $2 Trillion more than we collect in Taxes annually and according to one of the “talking heads” on Bloomberg’s Margaret Breman’s show, after 2020 approximately 76% of our annual budget will be spent on “Entitlement” programs (Medicare, Medicaid, Welfare Programs and Social Security) and the interest on the national debt.

How do we prevent this pending train wreck?

We need to change the culture of Washington, D.C. and Mr. O’Neill believes it will take a strong “Architectural” President in the White House to accomplish this.   I also feel it is imperative to set term limits for members of congress (my comment) to reduce the fiefdoms in congress and promote what is best for the country.  Hopefully, then we can address the TWO critical areas O’Neill feels MUST be addressed  to put our financial house on sound footing:

  1. Reform ENTITLEMENT programs and
  2. Repeal ALL current Federal tax laws and move to a Value Add Tax (“VAT”) that is based on consumption versus income.
    • FAIR – Applies to all that consume goods and services (would provide relief for those below a certain threshold)
    • SIMPLE – Easy to enforce and collect tax
    • IMPROVES EFFICIENCY – REDUCES SIZE of Government – No IRS, etc.
    • PRO JOBS – provides a much more business friendly environment that does NOT penalize the business owner to take market risks than expand the job market

I am not so idealistic to think this will be easy but I feel very confident that if we do NOT change the way Washington operates then according to Alan Beaulieu of ITR Economics by 2030 we will experience the worst DEPRESSION in our history.

My favorite quote of the day was Mr. O’Neill’s comment:

“Washington is the only place that when the CIRCUS leaves the CLOWNS stay in town.”

At least the clowns succeeded in kicking the can down the road today and hopefully we will figure a way to prevent the train wreck – maybe with some new clowns.  I feel more strongly than ever that NOW is the time to act if you are considering a sale of part or all of your company in the next decade.

Author: Huxley Nixon has been involved in M&A (mergers and acquisitions) for 35 years as a buyer, seller and intermediary.  He is founder of the M&A MARKETPLACE by CHC ( where the buyer pays all success fees and the process is only 120 days.  For owners of private companies considering a sale of part or all of their company – it provides a very quick, confidential and competitive alternative to current options less transparent and more disruptive for the owner.

DISCLAIMER:  Opinions and conclusions in this post are solely those of the author unless otherwise indicated.  This article is for general information purposes and is not intended to be and should not be taken as advice on any particular matter nor is it intended to be a solicitation regarding any securities transaction and or investment relationship.  For those desiring additional information please visit our website

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