Bull and Bear

By Adam Hughes
| 6:00 p.m. November 14, 2005

Entrepreneurs

Bull and Bear

By Matt Walsh

Editor

Steve Forbes, editor and CEO of the media company that bears his family's name, told attendees at the Wall Street Live Money Show Nov. 4 that the United States "is in a peculiar period of perception gap - of how people feel versus how we're actually doing.

"The economy is doing OK," Forbes said, "but people are saying 'Yeck.'

"There's no reason why this expansion shouldn't be as durable as the expansion of the '80s and 1990s," he said. "The fundamentals are still there":

• Productivity

Technology advances in the United States continue to raise productivity and efficiencies in U.S. corporations, a key measurement of growing standards of living. Forbes remarked how airlines and hotel companies are now using electronic check-in machines to eliminate waiting in lines. Even McDonald's has begun similar practices with positive results. While it has cut down on the number of employees needed at its counters, it has found a higher demand for cooks. The electronic kiosks have resulted in higher sales per order. "Why? Because the kiosks don't stare at you. You don't have some pimply faced teen-ager making judgments about what you order."

• Liquidity

"Rarely have companies' cash made up such a large portion of corporate assets."

• U.S. consumers' balance sheets.

"Incomes are never high enough," Forbes said. "But if you take what people own, add that all up, subtract their credit card and mortgage debt, you end up with $26 billion net."

"You put all of that together, and there's no reason the economy shouldn't go on," he said.

At the same time, however, Forbes acknowledged some economic challenges.

• The Federal Reserve Bank's management of the money supply.

Forbes: "No matter what kind of car you drive, if you don't have enough fuel, you stall. If you have too much fuel, you flood the engine - you're going to get inflation.

"The Fed is concerned about inflation, as well it should be," Forbes said. "It created it."

Forbes said the Federal Reserve has created mild inflation by printing too much money. "The Fed should sell some of its bonds" to tighten the money supply. Raising interest rates alone won't cure inflation, he said. In the 1970s, the Fed raised rates but that didn't cure inflation; there was still too much money supply, he said.

• Economic bubbles.

"It's not real estate. It's oil," Forbes said.

"If the media discusses a bubble, the rule of thumb is there is no bubble.

"If you want to know where the bubble is, it's oil. I'll make a prediction - I hope you don't remember: Next year you're going to see oil go down to $35 a barrel."

Forbes said speculation has fueled the price of oil. He debunked the belief that China's consumption is creating oil shortages. "China has been on a tear for 20 years," Forbes said. "It's pure speculation."

• Taxes

If the cuts on the capital gains tax and dividends are not renewed in Congress, Forbes said, "it's guaranteed, we're going into recession."

Likewise, Forbes urged the elimination of the death tax. "You should be allowed to leave the world without being molested by the IRS," he said.

And once again Forbes called for junking the nation's entire tax code and converting to a 17% flat tax. The current system, he said, "is beyond redemption."

To illustrate, Forbes note:

• The Declaration of Independence has 1,300 words.

• The U.S. Constitution has 5,000 words.

• The Bible has 770,000 words.

• The U.S. tax code has 9 million words and is still rising. Since the 1980s, Congress has added 3 million words to the tax code.

"It corrupts everything we do," Forbes said. "Once and for all, kill the beast. Drive a stake through its heart and hope it never rises again."

With a flat tax, he said, "You'll see this economy rise up like a rocket."

HOW FORBES FORECASTS

THE ECONOMY

As he frequently does, Steve Forbes told his Wall Street Live listeners they can forecast the direction of the U.S. economy by the price of gold.

If the price goes below $300 an ounce, the economy will stall into recession.

If the price hovers between $350 and $400 an ounce, the economy will be fine.