The Obama Administration and the Federal Reserve have consistently over-estimated the strength of the US economy. The Fed has, on no occasion since 2009, had a remotely accurate prediction, constantly and consistently over-estimating economic growth by well over 40 percent on average. With that record, one wonders why anyone cares what the Fed thinks about the future. (The Wall Street Journal on Thursday reported, in a graphic, the predictions that the Fed had made over recent years).
Now, economists like Laura d'Andrea Tyson, a Clinton economic advisor, wonders why the poor are getting poorer in the Obama non-recovery since 2009. After five years of government expansiveness and a Federal Reserve out-of-control, the rich are getting richer and the poor and middle class are losing ground.
Strangely, these results were perfectly predictable. They follow from the Obama policies. We have implemented in detail what David Stockman, in his recent book "The Great Deformation," has excoriated as 'crony capitalism' that benefits mainly rich folks. It is no wonder that Warren Buffett supports all of this. He does well in an Obama economy. I doubt that his secretary's income is growing as fast as his personal wealth, regardless of who pays what in taxes.
Buffett, like other rich folks, is a hypocrite. He knows that Obama's policies mainly benefit folks like him and destroy opportunity for the middle class and reduces them to scrambling for part-time work or applying for food stamps and other subsidies. For Buffett, that works. For Obama, that works. For the poor and middle class, this is disaster.
Obama's only economic initiative this year is to encourage expansion of a law that makes it a criminal offense to hire an employee below a certain wage level. This means that low-skilled workers that wish to learn a skill on the job are told.....no! Forget about taking a job, without pay if necessary, to learn a useful skill that will enable you to get a real job. That kind of apprenticeship, long a staple of growing economies, has been criminalized. Obama would like to criminalize it further.
You wonder why Obama doesn't just propose a law saying that no one can hire a worker unless they are willing to pay them $ 150,000 and provide them with free health care. That would pretty much eliminate any opportunity for folks below the top 25 percent in income and wealth. I feel certain that Buffett could endorse such a proposal. Then he could fire his secretary and no longer have to worry about what taxes she pays.
The hypocrisy of folks like Obama, Bernanke and Buffett knows no bounds. They have spent the last five years in a successful effort to shut down the great American economic engine. They have succeeded. Expect the rich to get richer and the poor to get poorer. That's where these folks are taking us.
Saturday 21 September 2013
Wednesday 18 September 2013
A Rose By Any Other Name
The Fed announced today that it would continue it's bond buying binge to the tune of $ 85 billion monthly, a policy that has been in place since the 2008 financial collapse. This has expanded the once miniscule Fed balance sheet to over $ 4 trillion.
The Fed, of course, can create money digitally. That's what it uses to buy the bonds. It just says: "let there be money" and there is money. This massive expansion in the monetary base has created huge excess reserves in the nation's commercial banking system. Why doesn't anyone loan this money out?
The pitiful loan activity is a result of two factors. Dodd-Frank and activism in the Justice Department and others has made it a criminal activity to loan money to anyone who doesn't have the very, very best credit. And people with that kind of credit have lost interest in borrowing to build businesses in the new Obama world of massive regulation and impending soaring health care costs. So, not too many loans are getting on bank books. The reserves are simply piling up.
But what happens if, heaven forbid, the economy recovers? Ah, an outcome not contemplated by the Obama-Bernanke clique. So far, they have successfully prevented any serious chance of a strong economic recovery that would quickly expand loans and the money supply, bringing on the inevitable out-of-control inflation. But, that won't happen if you keep the economy from recovering. I think that I am beginning to understand the Obama-Bernanke plan. It's working.
The Fed, of course, can create money digitally. That's what it uses to buy the bonds. It just says: "let there be money" and there is money. This massive expansion in the monetary base has created huge excess reserves in the nation's commercial banking system. Why doesn't anyone loan this money out?
The pitiful loan activity is a result of two factors. Dodd-Frank and activism in the Justice Department and others has made it a criminal activity to loan money to anyone who doesn't have the very, very best credit. And people with that kind of credit have lost interest in borrowing to build businesses in the new Obama world of massive regulation and impending soaring health care costs. So, not too many loans are getting on bank books. The reserves are simply piling up.
But what happens if, heaven forbid, the economy recovers? Ah, an outcome not contemplated by the Obama-Bernanke clique. So far, they have successfully prevented any serious chance of a strong economic recovery that would quickly expand loans and the money supply, bringing on the inevitable out-of-control inflation. But, that won't happen if you keep the economy from recovering. I think that I am beginning to understand the Obama-Bernanke plan. It's working.
Saturday 14 September 2013
Inequality and the Poverty of Economics
The Journal of Economic Perspectives is an academic journal that summarizes the state of research in various fields of Economics. Perusing this journal shows the extreme political bias of much of modern day economic research. The Summer 2013 issue was devoted to "income inequality." The main theme was that rich folks are getting richer, but, of course, the facts actually show just the opposite. Not deterred by the facts, the various economists that opine in this edition blithely parrot absurdities such as wealthholders ability to "sustain their preeminence.
What is the analysis? Imagine that you wanted to know if baseball teams created dynasties and "perpetuate" their dominance of baseball. What facts would you want to assemble to prove this?
Here's the way economists think: collect data that shows that back in the old days, the baseball teams that won the pennant won 65 percent of their games each year. Then show that, today, the teams that win the pennant win 70 percent of their games each year. (Don't bother to check whether the teams that won in the old days are the same teams that win today. Why would that matter, say economists?) Would that evidence convince you that certain teams are dominant and "maintain their preeminence?" That is the precisely the kind of logic that perpetuates the factually incorrect myth that the rich get richer. Check out the articles in the JEP and you will see.
The truth is that if you list out the 100 richest Americans today and then compare that to the one hundred richest Americans 25 years ago, you will find very little overlap. The richest folks have more of the wealth (if you totally leave out the huge proportion of wealth transferred by government transfers such as social security, welfare, medicaid, food stamps and on and on), but it is a different set of rich folks as time goes on. Wealth rises and falls in the US.
The opposite is true in Europe. The wealthiest families in Europe are the same families that were wealthy 50 years ago. Contrary to the complete nonsense you read from economists, the chances of improving your lot in Europe are almost non-existent.
Now, in the US, the Obama Administration would like to create the European model, which traps people into whatever economic group that are born in....or, actually reduces the life chances of the folks born into the bottom half of the income distribution.
Notice the data since Obama came into office. Since mid-2009, long after the bottom of the financial collapse and well after the Obama $ 800 billion stimulus package, the economic position of lower income folks in the US has deteriorated. The Obama sledgehammer on business has delivered results. Jobs are scarce and what few jobs there are, are part-time. (Obamacare, of course, influences this trend toward part-time employment by creating built-in disincentives to businesses to hire full time employees).
The real truth is that the US has historically always been the best place to be born if you want a chance to move up in the income distribution and it remains the best place for that purpose. Obama is trying to kill off that opportunity, but so far he has not totally succeeded in this strange endeavor.
Economists have done a disservice to the public by presenting facts in a way that is totally misleading and obscuring the real truth about the economy and about the historical dynamism of the US economy.
What is the analysis? Imagine that you wanted to know if baseball teams created dynasties and "perpetuate" their dominance of baseball. What facts would you want to assemble to prove this?
Here's the way economists think: collect data that shows that back in the old days, the baseball teams that won the pennant won 65 percent of their games each year. Then show that, today, the teams that win the pennant win 70 percent of their games each year. (Don't bother to check whether the teams that won in the old days are the same teams that win today. Why would that matter, say economists?) Would that evidence convince you that certain teams are dominant and "maintain their preeminence?" That is the precisely the kind of logic that perpetuates the factually incorrect myth that the rich get richer. Check out the articles in the JEP and you will see.
The truth is that if you list out the 100 richest Americans today and then compare that to the one hundred richest Americans 25 years ago, you will find very little overlap. The richest folks have more of the wealth (if you totally leave out the huge proportion of wealth transferred by government transfers such as social security, welfare, medicaid, food stamps and on and on), but it is a different set of rich folks as time goes on. Wealth rises and falls in the US.
The opposite is true in Europe. The wealthiest families in Europe are the same families that were wealthy 50 years ago. Contrary to the complete nonsense you read from economists, the chances of improving your lot in Europe are almost non-existent.
Now, in the US, the Obama Administration would like to create the European model, which traps people into whatever economic group that are born in....or, actually reduces the life chances of the folks born into the bottom half of the income distribution.
Notice the data since Obama came into office. Since mid-2009, long after the bottom of the financial collapse and well after the Obama $ 800 billion stimulus package, the economic position of lower income folks in the US has deteriorated. The Obama sledgehammer on business has delivered results. Jobs are scarce and what few jobs there are, are part-time. (Obamacare, of course, influences this trend toward part-time employment by creating built-in disincentives to businesses to hire full time employees).
The real truth is that the US has historically always been the best place to be born if you want a chance to move up in the income distribution and it remains the best place for that purpose. Obama is trying to kill off that opportunity, but so far he has not totally succeeded in this strange endeavor.
Economists have done a disservice to the public by presenting facts in a way that is totally misleading and obscuring the real truth about the economy and about the historical dynamism of the US economy.
Saturday 31 August 2013
College Grads and Jobs
There is a growing discussion about whether or not college graduates are generally prepared for the workforce. This is a very interesting (and revealing) discussion.
This is not so much about GPA as it is about more fundamental problems -- attitude tops the list. Far too many college graduates think that they have 'paid their dues' by attending college and collecting a degree. Many seem to think that joining the work force is akin to joining a fraternity or sorority. They seem disappointed that employers' have high work expectations and are in no hurry to provide massive benefits and a club-med work environment to a rookie employee.
What every employer wants is someone committed to work hard, to learn new skills, and to already possess basic writing and mathematics skills. The vast majority of college graduates, measured against these expectations of business do not measure up.
That's the sad truth about higher education. We don't insist that our graduates have adequate writing and math skills to perform at a high level in the work force. Those graduates who do have these skills, likely had them before they entered college. They certainly don't gain or nurture these skills in college.
As for attitude, there is no more-forgiving environment than the modern university. Students can argue a C grade into an A grade, if they understand how things work. It is a simple task to manage one's GPA to end up with a 4.0 without serious study. Meanwhile, skipping classes, scrimping on assignments, cheating, massive drug and alcohol abuse are all tolerated with little or no punishment. Moving from the university environment to a work environment is a real culture shock for most college graduates in the modern era.
More and more the modern college and university is a great four year social experience that probably makes it more, not less, difficult to adjust to the realities of a market-based economy.
This is not so much about GPA as it is about more fundamental problems -- attitude tops the list. Far too many college graduates think that they have 'paid their dues' by attending college and collecting a degree. Many seem to think that joining the work force is akin to joining a fraternity or sorority. They seem disappointed that employers' have high work expectations and are in no hurry to provide massive benefits and a club-med work environment to a rookie employee.
What every employer wants is someone committed to work hard, to learn new skills, and to already possess basic writing and mathematics skills. The vast majority of college graduates, measured against these expectations of business do not measure up.
That's the sad truth about higher education. We don't insist that our graduates have adequate writing and math skills to perform at a high level in the work force. Those graduates who do have these skills, likely had them before they entered college. They certainly don't gain or nurture these skills in college.
As for attitude, there is no more-forgiving environment than the modern university. Students can argue a C grade into an A grade, if they understand how things work. It is a simple task to manage one's GPA to end up with a 4.0 without serious study. Meanwhile, skipping classes, scrimping on assignments, cheating, massive drug and alcohol abuse are all tolerated with little or no punishment. Moving from the university environment to a work environment is a real culture shock for most college graduates in the modern era.
More and more the modern college and university is a great four year social experience that probably makes it more, not less, difficult to adjust to the realities of a market-based economy.
Thursday 22 August 2013
The Nasdaq Flap
The Nasdaq halted trading today and was down for a couple of hours. Listening to the financial media (CNBC, Larry Kudlow, etc.), you would have thought a great crime had occurred. 99 percent of the investing public had no idea and could care less, me included.
What serious investor could possibly be harmed by a two hour shutdown of the Nasdaq? Are these pundits serious? If there was ever an 'inside baseball' issue, this is it. Only manic traders and hedge funds could possibly care one way or another about the Nasdaq shutdown.
No portfolio of any serious investor could possibly be damaged by a temporary shutdown of a stock exchange. This is a ridiculous tempest in a teapot.
What serious investor could possibly be harmed by a two hour shutdown of the Nasdaq? Are these pundits serious? If there was ever an 'inside baseball' issue, this is it. Only manic traders and hedge funds could possibly care one way or another about the Nasdaq shutdown.
No portfolio of any serious investor could possibly be damaged by a temporary shutdown of a stock exchange. This is a ridiculous tempest in a teapot.
Obama and Higher Education
Just what we need, the Obama tenacles reaching into higher education. In typical style, Obama points to a problem -- the high cost of higher education -- and proposes a solution that has nothing to do with the problem and actually will likely make the problem far, far worse than it is now. This has been the pattern with the economic rescue plan, with the 'affordable' health care act, with wind and solar initiatives, and on and on. Every problem that Obama has inherited has become a much bigger problem under his leadership.
What is wrong with higher education? Mainly the government, as in most other things. Federal funding for research grants and student loans has made higher ed less interested in scholarly pursuits and more interested in the pursuit of federal largesse. Students are borrowing huge amounts of money to maintain a college lifestyle that for prior generations was simply unavailable. Who could spend that kind of money on beer and fitness centers in the good old days?
Education itself doesn't cost much to provide; less today than a generation ago thanks to the advent of the digital age. But 'higher education' is no longer in reach for middle income Americans unless they are willing to bankrupt themselves and their children to enrich university bureacrats and aging academics (and they are aging thanks to tenure). There is a growing gap between 'education' and 'higher education.' More and more these two concepts are separate and distinct -- perhaps, incompatible.
Obama is going to measure the inputs to higher education to figure out what the outputs are -- a completely absurd approach to measuring the effectiveness of an education program. Why not measure the difference between a student's life chances when entering the institution with the life chances when leaving the institution. The 'elite' colleges would not fair very well using a measure like that. But, if only inputs are measured -- the Obama plan -- then the elite colleges will do very well indeed (that's why they are called 'elite'), but the community colleges, who fare much better using my measure will not do well under the Obama plan.
Once more, under Obama, the rich get richer and the poor and middle class will be left holding the bag.
What is wrong with higher education? Mainly the government, as in most other things. Federal funding for research grants and student loans has made higher ed less interested in scholarly pursuits and more interested in the pursuit of federal largesse. Students are borrowing huge amounts of money to maintain a college lifestyle that for prior generations was simply unavailable. Who could spend that kind of money on beer and fitness centers in the good old days?
Education itself doesn't cost much to provide; less today than a generation ago thanks to the advent of the digital age. But 'higher education' is no longer in reach for middle income Americans unless they are willing to bankrupt themselves and their children to enrich university bureacrats and aging academics (and they are aging thanks to tenure). There is a growing gap between 'education' and 'higher education.' More and more these two concepts are separate and distinct -- perhaps, incompatible.
Obama is going to measure the inputs to higher education to figure out what the outputs are -- a completely absurd approach to measuring the effectiveness of an education program. Why not measure the difference between a student's life chances when entering the institution with the life chances when leaving the institution. The 'elite' colleges would not fair very well using a measure like that. But, if only inputs are measured -- the Obama plan -- then the elite colleges will do very well indeed (that's why they are called 'elite'), but the community colleges, who fare much better using my measure will not do well under the Obama plan.
Once more, under Obama, the rich get richer and the poor and middle class will be left holding the bag.
Media Misleads Once Again
Reuters has a story today about the jobless claims number that is completely absurd. According to Reuters, "...then new claims... rose...but...gave a positive signal for hiring during the month." This conclusion is based upon absolutely nothing.
What the data, in fact, shows is that jobless claims rose last week and rose more than the market expected -- not good news at all. Worse, the numbers are barely (five percent on average) lower than the numbers in the early part of the year. Given that revisions are typically well above five percent, a drop of five percent is statistically irrelevant.
The real truth is that the economy is not producing enough jobs and the few that are produced are mostly part-time, low wage jobs. Not surprising, given the Obama economic program, which guarantees economic stagnation as far as the eye can see.
The media has made a habit of consistently distorting the truth about the American economy in their cheerleading effort to defend failed policy.
What the data, in fact, shows is that jobless claims rose last week and rose more than the market expected -- not good news at all. Worse, the numbers are barely (five percent on average) lower than the numbers in the early part of the year. Given that revisions are typically well above five percent, a drop of five percent is statistically irrelevant.
The real truth is that the economy is not producing enough jobs and the few that are produced are mostly part-time, low wage jobs. Not surprising, given the Obama economic program, which guarantees economic stagnation as far as the eye can see.
The media has made a habit of consistently distorting the truth about the American economy in their cheerleading effort to defend failed policy.
Read David Stockman
A new book by David Stockman, "The Great Deformation," challenges the current orthodoxy of financial market regulation.
This book is a great read. Don't expect a calm and collected analysis. This book is definitely not calm and collected. Stockman takes on all comers and his style is blatantly polemical. He aims his brickbats at the right and the left as he excoriates the rise of indebtedness, public and private, since the 1960s.
Don't think conservatives get a free ride in this book. They don't. Ronald Reagan and Milton Friedman are targets of Stockman. Indeed, Stockman sees Reagan and Friedman as major culprits in the incredible growth of America's financial liabilities. Some of this is, no doubt, sour grapes for his well-publicized split with the Reagan Administration in the 1980s when Stockman was Director of the Bureau of the Budget. He resigned that post in a feud with the Reagan folks over their unwillingness to support spending reductions to accompany the famous Reagan tax cuts.
But, the heart and soul of Stockman's book is his interpretation of the 2008 financial crisis. Here, Stockman makes a real contribution to what has been an embarassingly simple-minded consensus view of government policy. Stockman argues that the federal government, including the Fed, should not have intervened to save AIG, Morgan Stanley and Goldman Sachs. According to Stockman, saving these firms was the main purpose of the hastily-assembled $ 780 billion bailout backage, known as TARP.
Stockman argues that the financial system and the American economy was not threatened by the collapse of AIG, MS, and GS, as was argued at the time. He shows, by analyzing the balance sheets of these firms, that the American economy could have easily survived the collapse of these firms. Few, today, agree with that, but Stockman makes his case convincingly.
In essence, Stockman is challenging the "too big to fail" crowd that dominates government policy today and that dominated government policy in the Bush Administration in 2008. By challenging a hackneyed consensus devoid of analytical underpinning, Stockman has done a great service, writing this book. He's right. Read his book.
This book is a great read. Don't expect a calm and collected analysis. This book is definitely not calm and collected. Stockman takes on all comers and his style is blatantly polemical. He aims his brickbats at the right and the left as he excoriates the rise of indebtedness, public and private, since the 1960s.
Don't think conservatives get a free ride in this book. They don't. Ronald Reagan and Milton Friedman are targets of Stockman. Indeed, Stockman sees Reagan and Friedman as major culprits in the incredible growth of America's financial liabilities. Some of this is, no doubt, sour grapes for his well-publicized split with the Reagan Administration in the 1980s when Stockman was Director of the Bureau of the Budget. He resigned that post in a feud with the Reagan folks over their unwillingness to support spending reductions to accompany the famous Reagan tax cuts.
But, the heart and soul of Stockman's book is his interpretation of the 2008 financial crisis. Here, Stockman makes a real contribution to what has been an embarassingly simple-minded consensus view of government policy. Stockman argues that the federal government, including the Fed, should not have intervened to save AIG, Morgan Stanley and Goldman Sachs. According to Stockman, saving these firms was the main purpose of the hastily-assembled $ 780 billion bailout backage, known as TARP.
Stockman argues that the financial system and the American economy was not threatened by the collapse of AIG, MS, and GS, as was argued at the time. He shows, by analyzing the balance sheets of these firms, that the American economy could have easily survived the collapse of these firms. Few, today, agree with that, but Stockman makes his case convincingly.
In essence, Stockman is challenging the "too big to fail" crowd that dominates government policy today and that dominated government policy in the Bush Administration in 2008. By challenging a hackneyed consensus devoid of analytical underpinning, Stockman has done a great service, writing this book. He's right. Read his book.
Monday 19 August 2013
Time to Buy Emerging Markets?
Emerging market stocks have been hammered this year as the US and Europe have enjoyed one of the best stock markets in history. Why? What happened to the argument that slow (GDP) growth in the developed world and much higher (GDP) growth in the emerging economies argued in favor of a heavy commitment of investment funds to emerging market?
As it turns out, emerging market economic growth has, indeed, been much, much higher than economic growth in the Western nations. So, why did their stock markets put in such a pitiful performance thus far this year? A similar pattern occurred in US history when foreign investors, mostly British and Russian investors, lost bucketloads of money betting on growth in the US economy in the 19th century. This is not the first time that dramatic GDP growth failed to help investors in public stocks.
Many of the most vibrant companies in the countries that fall into the 'emerging market' category are not public companies. They are privately owned companies that aren't included in any of the emerging market portfolios that you and I can own. Instead, roughly 40 percent of the capitalization of 'emerging market' ETFs are typically government-owned or heavily regulated companies, such as the local telephone company or local utility company. Are these good investment bets in a third world political environment?
If emerging markets boom, you are much more likely to make money owning Coca Cola stock than the stock in the local telephone company in Egypt or Venezuela. The inherent logic behind huge investments in emerging markets never made any sense in the first place.
That said, it may now be time to buy the emerging markets, since everyone seems to be abandoning them in a rush. India's stock market lost four percent of its value in a single day at the end of last week.
It may be time to take another look at emerging markets, now that their staunchest supporters seem to be running for the exits. But, one should be cautious. Emerging markets involve stocks that have fundamentally different characteristics and corporate governance rules than Western investors may be accustomed to.
As it turns out, emerging market economic growth has, indeed, been much, much higher than economic growth in the Western nations. So, why did their stock markets put in such a pitiful performance thus far this year? A similar pattern occurred in US history when foreign investors, mostly British and Russian investors, lost bucketloads of money betting on growth in the US economy in the 19th century. This is not the first time that dramatic GDP growth failed to help investors in public stocks.
Many of the most vibrant companies in the countries that fall into the 'emerging market' category are not public companies. They are privately owned companies that aren't included in any of the emerging market portfolios that you and I can own. Instead, roughly 40 percent of the capitalization of 'emerging market' ETFs are typically government-owned or heavily regulated companies, such as the local telephone company or local utility company. Are these good investment bets in a third world political environment?
If emerging markets boom, you are much more likely to make money owning Coca Cola stock than the stock in the local telephone company in Egypt or Venezuela. The inherent logic behind huge investments in emerging markets never made any sense in the first place.
That said, it may now be time to buy the emerging markets, since everyone seems to be abandoning them in a rush. India's stock market lost four percent of its value in a single day at the end of last week.
It may be time to take another look at emerging markets, now that their staunchest supporters seem to be running for the exits. But, one should be cautious. Emerging markets involve stocks that have fundamentally different characteristics and corporate governance rules than Western investors may be accustomed to.
Wednesday 14 August 2013
European Recovery -- Seriously?
The news services are abuzz this morning with the "news" that Europe has finally turned the corner with an economic rebound in the 2nd quarter of this year. Underneath the headline is the dismal number of an annualized 0.3 percent estimated growth rate for the 2nd quarter. Whoop-to-doo! This is a recovery. This number is not significantly different from a negative number, given the pattern of revisions. Meanwhile, unemployment in Europe remains above 12 percent and sovereign debt is soaring on to new highs.
There are further stories that Greece is on the road to recovery. What are their current statistics? GDP only dropped an annualized four percent in the first half of this year. Wow! That's really something to write home about. Combined with almost 28 percent unemployment overall and nearly 70 percent unemployment among youth, it sure sounds like Greece is just humming along.
Wonder what the statistics would show if Europe was doing poorly?
There are further stories that Greece is on the road to recovery. What are their current statistics? GDP only dropped an annualized four percent in the first half of this year. Wow! That's really something to write home about. Combined with almost 28 percent unemployment overall and nearly 70 percent unemployment among youth, it sure sounds like Greece is just humming along.
Wonder what the statistics would show if Europe was doing poorly?
Monday 12 August 2013
Some Good News for the US
Steve Moore's column today in the Wall Street Journal is worth a read. The sequester, according to Moore, has worked. Total federal spending has been slowed, even reversed, in the past two years, according to Moore. This is, indeed, good news. Let's hope it continues.
Moore notes that all it takes to continue to hold federal spending in line is to not undo the budget deal that led to the sequester in the first place. It will be interesting to see if politicians can stick with the plan by doing nothing.
Moore notes that all it takes to continue to hold federal spending in line is to not undo the budget deal that led to the sequester in the first place. It will be interesting to see if politicians can stick with the plan by doing nothing.
Update on Greece
Now, after five years of European Union policies, how do things look in Greece. The headline today on Yahoo looks encouraging: "Greece Beats January-July Budget Target." In fact, Greece did not do any such thing. More bailout funds from the EU, though, made it look that way.
Here is what the EU has done for Greece: GDP today is 20 percent lower than it was in 2008, when the EU bailouts began. Unemployment is at a record pace, pushing toward 30 percent. These numbers are not very different from where the US was in 1933 at the lowest point of the Great Depression.
Meanwhile, civil order is breaking down in Greece. Crime is rife and the only things growing are the nation's indebtedness and the black market. Political discourse is moving to the extremes as the center breaks down.
Finally the debt to GDP ratio is rapidly climbing to 200 percent. The EU has made a small problem into a large problem and has obligated the entire European continent to back a bailout that has absolutely no hope of success. Politicians hard at work again!
Here is what the EU has done for Greece: GDP today is 20 percent lower than it was in 2008, when the EU bailouts began. Unemployment is at a record pace, pushing toward 30 percent. These numbers are not very different from where the US was in 1933 at the lowest point of the Great Depression.
Meanwhile, civil order is breaking down in Greece. Crime is rife and the only things growing are the nation's indebtedness and the black market. Political discourse is moving to the extremes as the center breaks down.
Finally the debt to GDP ratio is rapidly climbing to 200 percent. The EU has made a small problem into a large problem and has obligated the entire European continent to back a bailout that has absolutely no hope of success. Politicians hard at work again!
Sunday 11 August 2013
The Changing Face of the American Workplace
The US economy was once the envy of the world. From 1865 to 1965, the US economy grew faster than any large economy in the world. The great American middle class came into prominence during this period and American income and wealth had no rivals anywhere in the world. For most of these years, there was no Federal Reserve or central bank in the United States, though central banks had a long history in every other large country in the world. For most of these years, there was little business regulation and no income tax. The Federal Reserve and the Federal income tax came into existence in 1913, coming on the heels of the best 60 years of economic growth in the history of the US.
Not that everything was rosy. Financial panics and the great depression occurred during this 100 year span. Unemployment rose and fell. Markets rose and fell. The dynamics of American growth were chaotic, though powerful. But, with all of the chaos and panic, the American pie grew at an unprecedented rate, matched, in world history, only by modern China. The standard of living of the average American grew at the fastest pace ever. Unemployment levels above 6 percent were considered a sign of a 'recession.' The current 7.6 percent unemployment rate would have been seen as an extreme economic slowdown (not an economic recovery).
Since 1965, the American economy has grown at a dramatically slower pace. The American middle class has consistently struggled, except for the 20 year period that followed the inauguration of Ronald Reagan. The financial position of the average American is today untenable, if proper account is taken of the federal, state and local government debt. America is headed for financial disaster and the American middle class is sitting in the passenger seat.
In the driver's seat is the new political class. The fastest growing demographic in America is the American government or quasi-government employee. On the defensive is the American private economy. Besieged by so much regulation that most companies are not even aware of most of the regulatory burden that they face, small business is no longer the engine of American economic progress -- government is where the real growth is taking place. Government employment has been the largest source of employment growth in the US economy since 1965.
Unfortunately, government doesn't produce anything but problems for the private sector. Most government employees (including public school teachers, university professors, and bureaucrats of all stripes) view the private sector with suspicion. They see private businesses as quasi-criminal enterprises bent on polluting the environment and exploiting their employees. This culture dominates the media characterizations, not only in the daily news, but in television series and movies.
So what does all of this mean for the workplace in modern America? Private businesses realize that they are the target of the political classes and they make adjustments. They know that if they hire full time employees, their regulatory burden goes up. They know if they hire 50 employees or more, they fall into certain categories that must face significantly higher costs of complying with the modern legal environment that has been imposed upon them.
So, what happens? Small business reacts by hiring as few full time employees as possible. Part time workers are easier to fire and are not subject to Obamacare and other regulatory burdens. Many companies keep their companies deliberately smaller to avoid certain employment trigger levels that put companies under a much more severe regulatory regime. Employees that are 'protected' under current laws -- minorities, women, persons over the age of 55 -- involve far greater expense to a private business than other employees. So, fewer of them are hired. Protecting an employee with legislation simply means making that employee more expensive to the employer. Employers aren't stupid (a common assumption of the political class that supports these 'protections).'
So, today, the workplace is a very rigid bureaucratic environment. The blizzard of paperwork that employees face is nothing compared to the blizzard of paperwork that companies face. There is more concern with what might be said at the water cooler than what the work output might be. Private email communications are now perused for politically incorrect comments. Free speech doesn't apply to the workplace. In financial service companies, mistakes or errors are seen as criminal (the 'whale' episode at JP Morgan is a modern instance). Gone are the old processes of free people making free decisions in free markets. Now you have to worry about whether Barney Frank or Elizabeth Warren is looking over your shoulder.
All of this means that America is in a period of relative economic decline. The middle class will remain an endangered species as the political class bent on the destruction of the middle class continues to claim that all they care about is the middle class. Gradually, less and less of America is based upon free market economics and more and more is driven by un-elected elites, who have spent most of their lives either in politics or academia. The workplace is now a bureaucratic environment with rigid rules and little or no room for initiative and energy. The dull and the routine is more and more a description of the modern American workplace.
The workplace is also becoming more and more a land of part-timers. Businesses in America, like their European counterparts, are increasingly reluctant to hire people that, by law, they cannot fire. Workers now have protections and guarantees that mean, even if workers received no wages at all, they are still very, very costly to business. Increasingly, wages are a smaller and smaller fraction of the costs to an employer of hiring an employee. The result is a much reduced take home pay and more and more of worker income is siphoned off to worthy causes, favored by elite bureacrats in the Elizabeth Warren mold -- bureacrats with virtually no life experiences similar to that of ordinary American workers.
A hundred years ago, a young employee could take a job at a reduced wage or no wage at all as a way of entering the work force and learning a trade. Minimum wage laws, promoted by big unions, are designed to block such work force entrants and preserve a monopoly for existing workers. These laws are effective and help destroy a large part of the Horatio Alger culture that once was. The elite that make these rules don't face such problems since they, by and large, go to elite colleges and universities and find that entry into the work force doesn't involve wage and salaries anywhere near the minimum wage.
It is no accident that college students are in the forefront of the call for a "living wage." A living wage virtually guarantees that the college students will not face future competition from folks whose start in life is not as pampered as their own. The poor simply can't get through the front door, since their skill set rarely justifies a "living wage." Meanwhile, those who support the "living wage' think of themselves as bastions of morality, while crushing the hopes of folks who would simply like to have an opportunity to move up in the world through their own work efforts.
Great wealth creates idle time for the wealthy. It is no accident that the wealthiest US politicians are also those who most vociferously support the agenda of ever bigger government. Why not? It will never effect them. As fewer and fewer Americans derive their living from the free market, the free market has fewer and fewer defenders. The wealthy and the new bureacrats are the power brokers in modern America. Their contempt for the American middle class and for free enterprise is on display every day in our media and in their political program. It has changed the face of America and the American workplace. Meanwhile, folks like Obama ponder why part-time workers are replacing full time workers in America. He blames that on greedy businesses. But, the reality is that Obama policies are one of the key reasons that full time workers are becoming an endangered species.
Not that everything was rosy. Financial panics and the great depression occurred during this 100 year span. Unemployment rose and fell. Markets rose and fell. The dynamics of American growth were chaotic, though powerful. But, with all of the chaos and panic, the American pie grew at an unprecedented rate, matched, in world history, only by modern China. The standard of living of the average American grew at the fastest pace ever. Unemployment levels above 6 percent were considered a sign of a 'recession.' The current 7.6 percent unemployment rate would have been seen as an extreme economic slowdown (not an economic recovery).
Since 1965, the American economy has grown at a dramatically slower pace. The American middle class has consistently struggled, except for the 20 year period that followed the inauguration of Ronald Reagan. The financial position of the average American is today untenable, if proper account is taken of the federal, state and local government debt. America is headed for financial disaster and the American middle class is sitting in the passenger seat.
In the driver's seat is the new political class. The fastest growing demographic in America is the American government or quasi-government employee. On the defensive is the American private economy. Besieged by so much regulation that most companies are not even aware of most of the regulatory burden that they face, small business is no longer the engine of American economic progress -- government is where the real growth is taking place. Government employment has been the largest source of employment growth in the US economy since 1965.
Unfortunately, government doesn't produce anything but problems for the private sector. Most government employees (including public school teachers, university professors, and bureaucrats of all stripes) view the private sector with suspicion. They see private businesses as quasi-criminal enterprises bent on polluting the environment and exploiting their employees. This culture dominates the media characterizations, not only in the daily news, but in television series and movies.
So what does all of this mean for the workplace in modern America? Private businesses realize that they are the target of the political classes and they make adjustments. They know that if they hire full time employees, their regulatory burden goes up. They know if they hire 50 employees or more, they fall into certain categories that must face significantly higher costs of complying with the modern legal environment that has been imposed upon them.
So, what happens? Small business reacts by hiring as few full time employees as possible. Part time workers are easier to fire and are not subject to Obamacare and other regulatory burdens. Many companies keep their companies deliberately smaller to avoid certain employment trigger levels that put companies under a much more severe regulatory regime. Employees that are 'protected' under current laws -- minorities, women, persons over the age of 55 -- involve far greater expense to a private business than other employees. So, fewer of them are hired. Protecting an employee with legislation simply means making that employee more expensive to the employer. Employers aren't stupid (a common assumption of the political class that supports these 'protections).'
So, today, the workplace is a very rigid bureaucratic environment. The blizzard of paperwork that employees face is nothing compared to the blizzard of paperwork that companies face. There is more concern with what might be said at the water cooler than what the work output might be. Private email communications are now perused for politically incorrect comments. Free speech doesn't apply to the workplace. In financial service companies, mistakes or errors are seen as criminal (the 'whale' episode at JP Morgan is a modern instance). Gone are the old processes of free people making free decisions in free markets. Now you have to worry about whether Barney Frank or Elizabeth Warren is looking over your shoulder.
All of this means that America is in a period of relative economic decline. The middle class will remain an endangered species as the political class bent on the destruction of the middle class continues to claim that all they care about is the middle class. Gradually, less and less of America is based upon free market economics and more and more is driven by un-elected elites, who have spent most of their lives either in politics or academia. The workplace is now a bureaucratic environment with rigid rules and little or no room for initiative and energy. The dull and the routine is more and more a description of the modern American workplace.
The workplace is also becoming more and more a land of part-timers. Businesses in America, like their European counterparts, are increasingly reluctant to hire people that, by law, they cannot fire. Workers now have protections and guarantees that mean, even if workers received no wages at all, they are still very, very costly to business. Increasingly, wages are a smaller and smaller fraction of the costs to an employer of hiring an employee. The result is a much reduced take home pay and more and more of worker income is siphoned off to worthy causes, favored by elite bureacrats in the Elizabeth Warren mold -- bureacrats with virtually no life experiences similar to that of ordinary American workers.
A hundred years ago, a young employee could take a job at a reduced wage or no wage at all as a way of entering the work force and learning a trade. Minimum wage laws, promoted by big unions, are designed to block such work force entrants and preserve a monopoly for existing workers. These laws are effective and help destroy a large part of the Horatio Alger culture that once was. The elite that make these rules don't face such problems since they, by and large, go to elite colleges and universities and find that entry into the work force doesn't involve wage and salaries anywhere near the minimum wage.
It is no accident that college students are in the forefront of the call for a "living wage." A living wage virtually guarantees that the college students will not face future competition from folks whose start in life is not as pampered as their own. The poor simply can't get through the front door, since their skill set rarely justifies a "living wage." Meanwhile, those who support the "living wage' think of themselves as bastions of morality, while crushing the hopes of folks who would simply like to have an opportunity to move up in the world through their own work efforts.
Great wealth creates idle time for the wealthy. It is no accident that the wealthiest US politicians are also those who most vociferously support the agenda of ever bigger government. Why not? It will never effect them. As fewer and fewer Americans derive their living from the free market, the free market has fewer and fewer defenders. The wealthy and the new bureacrats are the power brokers in modern America. Their contempt for the American middle class and for free enterprise is on display every day in our media and in their political program. It has changed the face of America and the American workplace. Meanwhile, folks like Obama ponder why part-time workers are replacing full time workers in America. He blames that on greedy businesses. But, the reality is that Obama policies are one of the key reasons that full time workers are becoming an endangered species.
Friday 2 August 2013
Another "European" Jobs Number
162,000 new jobs in July. Not only is that an absurdly low number for an economy as large as the US, the job numbers for both May and June were revised downward as well. No one is much interested in hiring anyone. That's the main message of this report.
A subtext is reflected in the unemployment rate, which fell to 7.4 %. How, if a pitifully low number of jobs are created each month, is the unemployment rate falling? When people give up looking, they aren't counted anymore and more than 6 million have given up looking. Unemployment could get down to 1 percent if almost everyone just gave up and went on public assistance. Is this the Obama plan?
The White House is succeeding in getting the economy that they have wanted -- the European economy -- no growth, no opportunity for the young and ever rising debt levels that have no conceivable way of being repaid. This is the liberal dream.
A subtext is reflected in the unemployment rate, which fell to 7.4 %. How, if a pitifully low number of jobs are created each month, is the unemployment rate falling? When people give up looking, they aren't counted anymore and more than 6 million have given up looking. Unemployment could get down to 1 percent if almost everyone just gave up and went on public assistance. Is this the Obama plan?
The White House is succeeding in getting the economy that they have wanted -- the European economy -- no growth, no opportunity for the young and ever rising debt levels that have no conceivable way of being repaid. This is the liberal dream.
Thursday 1 August 2013
Big Companies More Valuable Than Small Companies
So what explains the surging stock market, when the fundaments of the economy remain weak? Again, micro-factors favor large companies with access to government. This is true for banks as well as for non-financials. Smaller companies are getting hammered by higher tax rates, more mandates, and looming ObamaCare. Large businesses, with some exceptions like coal, can deal with all the bureaucratic regulatory stuff because they have so much scale. Not true for smaller businesses.
So what you're seeing is a change in the playing field. The big guys are doing relatively well and small business is in the doldrums. That is keeping with the Obama playbook of the grand corporate-government teamwork. Obama can relate to big giant companies, because they are so much like the government and, in some ways, indistinguishable. But small business is an annoyance in the Obama scheme.
The problem is: small business produces the new jobs for the economy; big business is a stagnant employer in the aggregate. So folks looking for a job are out of luck. The Obama economy is great if you're big and rich, but not so great if you're an out of work American or a small business enterprise.
So what you're seeing is a change in the playing field. The big guys are doing relatively well and small business is in the doldrums. That is keeping with the Obama playbook of the grand corporate-government teamwork. Obama can relate to big giant companies, because they are so much like the government and, in some ways, indistinguishable. But small business is an annoyance in the Obama scheme.
The problem is: small business produces the new jobs for the economy; big business is a stagnant employer in the aggregate. So folks looking for a job are out of luck. The Obama economy is great if you're big and rich, but not so great if you're an out of work American or a small business enterprise.
Wednesday 31 July 2013
Urban Renewal -- The Big Government Way
Having spent the past four days wandering the neighborhoods of Washington DC, it is clear that this city is a prosperous, booming area. Wonder what business enterprises are sparking this growth? Big government.
Years ago, when I was a newbie intern for the US Treasury, walking a couple of blocks from One Washington Circle (where I lived back when it was an apartment complex) was a dangerous undertaking. No More. For miles around, there are now leafy suburbs with casually dressed joggers and dog walkers. The homes are well maintained and coiffed and the comfortable residents seems at ease with their plush surroundings.
Who lives here? The new "protected" class.
These are the people that work for the federal government or the numerous so-called private businesses that devote their endeavors to providing services to government or lobbying to gain a share of government largesse. These are the folks that view people outside the beltway as moronic environment-destroyers and homophobes. They are comfortable in the knowledge that they are doing God's work, protecting the environment and defending the minorities and the poor from the caprices of the evil private sector. These are the regulators, the tax collectors and the righteous -- living high on the taxpayer.
Out in the hinterland, struggling Americans are laboring with massive unemployment and stagnant economies and providing the tax revenues to support this ruling class that lives in modern luxury in much of Washington DC. No real products are produced here. Indeed, the primary function for most of these Washington upper income folks is to find ways to restrict the private sector and to increase the flow of resources into their own pockets. This is the new "European prosperity" for the ruling classes.
You wonder how much longer this can continue. A dwindling private sector carries this elite group on its backs. Meanwhile the poor in DC are shunted off into ghettoes with some of the worst public schools in America. But, those folks are out of the view of this elite. This elite lives in safe neighborhoods with protected jobs. Even folks who take the fifth amendment before Congress, when they are asked about what they are doing, continue to prosper at full pay with zero work responsibilities. This is the liberal dream, right here in Washington DC.
Years ago, when I was a newbie intern for the US Treasury, walking a couple of blocks from One Washington Circle (where I lived back when it was an apartment complex) was a dangerous undertaking. No More. For miles around, there are now leafy suburbs with casually dressed joggers and dog walkers. The homes are well maintained and coiffed and the comfortable residents seems at ease with their plush surroundings.
Who lives here? The new "protected" class.
These are the people that work for the federal government or the numerous so-called private businesses that devote their endeavors to providing services to government or lobbying to gain a share of government largesse. These are the folks that view people outside the beltway as moronic environment-destroyers and homophobes. They are comfortable in the knowledge that they are doing God's work, protecting the environment and defending the minorities and the poor from the caprices of the evil private sector. These are the regulators, the tax collectors and the righteous -- living high on the taxpayer.
Out in the hinterland, struggling Americans are laboring with massive unemployment and stagnant economies and providing the tax revenues to support this ruling class that lives in modern luxury in much of Washington DC. No real products are produced here. Indeed, the primary function for most of these Washington upper income folks is to find ways to restrict the private sector and to increase the flow of resources into their own pockets. This is the new "European prosperity" for the ruling classes.
You wonder how much longer this can continue. A dwindling private sector carries this elite group on its backs. Meanwhile the poor in DC are shunted off into ghettoes with some of the worst public schools in America. But, those folks are out of the view of this elite. This elite lives in safe neighborhoods with protected jobs. Even folks who take the fifth amendment before Congress, when they are asked about what they are doing, continue to prosper at full pay with zero work responsibilities. This is the liberal dream, right here in Washington DC.
Friday 26 July 2013
Guilty Until Proven Innocent
I carry no brief for people that break laws, but, in the securities industry, indictments destroy businesses and innocent shareholders are usually left picking up the tab. That was the result when Drexel Burnham was indicted in 1988. Many of Drexel employees who trudged silently in the back office found their retirement hopes and dreams destroyed when Rudolph Guliani's over-zealous indictment caused Drexel to go bankrupt overnight -- long before anyone produced any evidence to a judge or jury to peruse. Most of the folks who lost their life savings by the indictment of Drexel were innocent and had no knowledge of any wrongdoing. That's what happens when you indict corporations, as opposed to individuals.
This same theme plays out in the litigation and settlement arena. Pension funds who trumpet their lawsuits against corporations are really only suing themselves and enriching the legal profession. The wrongdoers go unscathed, while innocent shareholders get hammered. This is what happened in the tobacco settlements, in the BP settlement, and on and on. Shareholders, who often have no idea that they are really shareholders, find their own retirement hopes and dreams crushed by breast-beating righteous souls who run these pension funds involved in all of this litigation. The lawyers love this as they salt away fortunes. It's simply a transfer from working class people to wealthy lawyers, while pension executives proclaim that they are fulfilling their fiduciary duty.
In the SAC case, why doesn't the government indict individuals? How can a corporation get inside information without an individual being involved? Could it be, they can't prove their case. By simply indicting SAC, they destroy the business and, presumably, a lot of Stevie Cohen's net worth. But, what if Cohen is innocent (and I am not saying that he is). We may never know. What we do know is that SAC is done for, whether innocent or guilty. The indictment will destroy SAC's future and much of Stevie Cohen's net worth, regardless of guilt or innocence.. At least in this case there are no public shareholders being looted -- just Mr. Cohen as far as I can tell. But, still.
What happened to the rule of law?
This same theme plays out in the litigation and settlement arena. Pension funds who trumpet their lawsuits against corporations are really only suing themselves and enriching the legal profession. The wrongdoers go unscathed, while innocent shareholders get hammered. This is what happened in the tobacco settlements, in the BP settlement, and on and on. Shareholders, who often have no idea that they are really shareholders, find their own retirement hopes and dreams crushed by breast-beating righteous souls who run these pension funds involved in all of this litigation. The lawyers love this as they salt away fortunes. It's simply a transfer from working class people to wealthy lawyers, while pension executives proclaim that they are fulfilling their fiduciary duty.
In the SAC case, why doesn't the government indict individuals? How can a corporation get inside information without an individual being involved? Could it be, they can't prove their case. By simply indicting SAC, they destroy the business and, presumably, a lot of Stevie Cohen's net worth. But, what if Cohen is innocent (and I am not saying that he is). We may never know. What we do know is that SAC is done for, whether innocent or guilty. The indictment will destroy SAC's future and much of Stevie Cohen's net worth, regardless of guilt or innocence.. At least in this case there are no public shareholders being looted -- just Mr. Cohen as far as I can tell. But, still.
What happened to the rule of law?
Monday 22 July 2013
Same Ole; Same Ole
So what is the New York Times offering up this morning.
First, European sovereign debt continues to skyrocket to new levels -- both in absolute terms and as a percentage of GDP. Guess the bailout is working, if more debt is the goal. Meanwhile the long running recession in the Eurozone continues unabated with no end in sight.
What about the US? Economists are now busily reloading their economic forecasts, according to the NY Times this morning, to accommodate much slower economic growth in the US than they anticipated previously. The latest consensus forecast -- 1.5 percent. That's barely a pulse.
Meanwhile the same article puzzles over why this is such a jobless recovery. They should be reading my blog.
Here's what they are missing: employers do the hiring. The Times (and the Obama Administration) don't seem to get that. Along with their main cheerleader, Paul Krugman, the Times believes that government borrowing and spending is all it takes to convince someone to hire employees. After five years of this, you would think they would see the folly of their ways.
The coup de grace this morning is, of course, the NY Times' coverage of Detroit. Think of Detroit as a snapshot of the American future -- promises abandoned, hopes crushed, politicians running for cover, unions screaming for justice, and no money left in the till. NY Times can't seem to figure out how Detroit came about (especially while the auto industry's profits are soaring).
Same ole NY Times.
First, European sovereign debt continues to skyrocket to new levels -- both in absolute terms and as a percentage of GDP. Guess the bailout is working, if more debt is the goal. Meanwhile the long running recession in the Eurozone continues unabated with no end in sight.
What about the US? Economists are now busily reloading their economic forecasts, according to the NY Times this morning, to accommodate much slower economic growth in the US than they anticipated previously. The latest consensus forecast -- 1.5 percent. That's barely a pulse.
Meanwhile the same article puzzles over why this is such a jobless recovery. They should be reading my blog.
Here's what they are missing: employers do the hiring. The Times (and the Obama Administration) don't seem to get that. Along with their main cheerleader, Paul Krugman, the Times believes that government borrowing and spending is all it takes to convince someone to hire employees. After five years of this, you would think they would see the folly of their ways.
The coup de grace this morning is, of course, the NY Times' coverage of Detroit. Think of Detroit as a snapshot of the American future -- promises abandoned, hopes crushed, politicians running for cover, unions screaming for justice, and no money left in the till. NY Times can't seem to figure out how Detroit came about (especially while the auto industry's profits are soaring).
Same ole NY Times.
Saturday 20 July 2013
Denial in Detroit
Detroit's problems are not the fault of the decline of the auto industry -- an industry that is, in fact, on a bit of a roll these days. Detroit's problems are the same problems that plague Illinois, California and the US Treasury -- promises paid for with ever increasing levels of promises and debts.
Detroit's problems were compounded by corrupt and incompetent politicians, which are a staple of modern big city government in the US. Citizens vote for these folks, so there is some justice in the fact that these cities are all collapsing fiscally. The absurd notion that taxing a few rich people can solve a city's problems simply matches a similar absurd notion at the national level. (Taxing a few rich people is mainly a way of having rich people move to friendlier places).
No defined benefit pension plan is ever going to survive. Social security is a defined benefit system . It won't survive either. Any system that makes future promises without any means of payment is not going to make it. Detroit is just the beginning; Chicago can't be far behind. And yes, Virginia, you will have your day in the bankruptcy court as well.
All of those defenders of defined benefit systems forgot to ask what happens when there is no money to pay the benefits. Is the great advantage of a professional investment process worth much when the system can't pay the benefits? Even bad investments by individuals in defined contributions systems would have been way better for Detroit pensioners than the outcome that is headed their way.
By the way, it is worth noting that it is not possible to be on a financial loss if you own a typical index fund. Not possible. How's that? Well, as of Thursday's close, the stock market has never been higher.
For all of the villification of Wall Street by the Obama Administration and the media, it turns out that a simple buy-and-hold strategy by ordinary investors is a ticket to wealth that has been and is available to everyone. I bet a lot of Detroiters now wish they had had the opportunity to opt out of the defined benefit system and invest their own money, their own way.
Not to mention that if you have a defined contribution plan and you die, your children can inherit the assets, something that cannot happen with defined benefit and and its twin -- social security.
Just like ObamaCare, promises are made that politicians have no intention of keeping. But, the media pretends that these promises are true. Detroit shows us the reality.
Detroit's problems were compounded by corrupt and incompetent politicians, which are a staple of modern big city government in the US. Citizens vote for these folks, so there is some justice in the fact that these cities are all collapsing fiscally. The absurd notion that taxing a few rich people can solve a city's problems simply matches a similar absurd notion at the national level. (Taxing a few rich people is mainly a way of having rich people move to friendlier places).
No defined benefit pension plan is ever going to survive. Social security is a defined benefit system . It won't survive either. Any system that makes future promises without any means of payment is not going to make it. Detroit is just the beginning; Chicago can't be far behind. And yes, Virginia, you will have your day in the bankruptcy court as well.
All of those defenders of defined benefit systems forgot to ask what happens when there is no money to pay the benefits. Is the great advantage of a professional investment process worth much when the system can't pay the benefits? Even bad investments by individuals in defined contributions systems would have been way better for Detroit pensioners than the outcome that is headed their way.
By the way, it is worth noting that it is not possible to be on a financial loss if you own a typical index fund. Not possible. How's that? Well, as of Thursday's close, the stock market has never been higher.
For all of the villification of Wall Street by the Obama Administration and the media, it turns out that a simple buy-and-hold strategy by ordinary investors is a ticket to wealth that has been and is available to everyone. I bet a lot of Detroiters now wish they had had the opportunity to opt out of the defined benefit system and invest their own money, their own way.
Not to mention that if you have a defined contribution plan and you die, your children can inherit the assets, something that cannot happen with defined benefit and and its twin -- social security.
Just like ObamaCare, promises are made that politicians have no intention of keeping. But, the media pretends that these promises are true. Detroit shows us the reality.
Wednesday 17 July 2013
The 1970s Without the Inflation
We are now entering a long term period of economic stagnation that is reminiscent of the 1970s. The only real difference is that inflation is subdued today. The term "stagflation" came to prominence as a description of the 70s economy, as inflation soared toward the end of the the 1970s. Ronald Reagan rescued us from all of that after his election in 1980. How soon we forget.
Inflation, of course, is only temporarily subdued. The only way to retire our absurd debt levels is to inflate our way out of them. That's coming.
For now, we live in world of never-ending promises of things that cannot possibly come to pass -- medicare, social security, ObamaCare, state and local pension funds. All of these things will run out of funding within the lifetime of those now reaching adulthood. As politicians dream of even more things to promise the citizenry, the funding for the existing promises is rapidly drying up.
Meanwhile, a dwindling percentage of Americans are actually working these days. While records are being set every day in the percentage of Americans on welfare, on food stamps, on disability, the percentage of the economy devoted to the free market is shrinking.
The culture is following suit. Think of the last time that you watched a television show where the bad guy wasn't a businessman or woman -- polluting the environment, stealing from unwitting investors, or fleecing someone in a novel way. Who are the media heroes? -- the government or the non-profit world (or media).
Making a profit is viewed with suspicion in our modern American culture. Unfortunately, that means creating wealth and hiring folks is tainted with the same brush. There is a certain consistency here, since working for a living is losing its hold on the American lifestyle.
Inflation, of course, is only temporarily subdued. The only way to retire our absurd debt levels is to inflate our way out of them. That's coming.
For now, we live in world of never-ending promises of things that cannot possibly come to pass -- medicare, social security, ObamaCare, state and local pension funds. All of these things will run out of funding within the lifetime of those now reaching adulthood. As politicians dream of even more things to promise the citizenry, the funding for the existing promises is rapidly drying up.
Meanwhile, a dwindling percentage of Americans are actually working these days. While records are being set every day in the percentage of Americans on welfare, on food stamps, on disability, the percentage of the economy devoted to the free market is shrinking.
The culture is following suit. Think of the last time that you watched a television show where the bad guy wasn't a businessman or woman -- polluting the environment, stealing from unwitting investors, or fleecing someone in a novel way. Who are the media heroes? -- the government or the non-profit world (or media).
Making a profit is viewed with suspicion in our modern American culture. Unfortunately, that means creating wealth and hiring folks is tainted with the same brush. There is a certain consistency here, since working for a living is losing its hold on the American lifestyle.
Tuesday 16 July 2013
"We're Recovering"
It is now mid-July of 2013, more than 4 1/2 years since the financial collapse and still we hear the phrase: "we're recovering." How long are we going to hear that?
Below 2 percent economic growth and almost 8 percent unemployment means that the US economy is paralyzed. The Obama Administration seems to have thrown in the towel on the subject of growing the economy. Right they should! The Administration policies, piled on top of the policy history of the past fifty years, virtually guarantee that the vibrant economy of the Old USA is not in our future.
There are bright spots -- autos, housing, energy -- but there are always bright spots. What is missing is small business vitality. That's gone and not coming back until folks figure out how to get around the mass of regulations and taxes that bedevil the American economy. Other than outsourcing, it is not clear how to avoid the strangling effect of American regulatory policy. As for employment, hiring anyone seems downright irrational, given current tax and regulatory policies.
The Obama Administration has reduced the expectations of most Americans to the kind of future that Europeans now have -- stagnation, limited opportunity for the young, guarantees for the oldest demographic that are coming apart at the seams, and debts that no one has any intention of honoring.
So the phrase "we're recovering" is getting tiresome. We're not recovering, we're changing. The quasi-socialism that has supplanted free enterprise is preventing a serious recovery like the one we had in the 1980s. The "bad old days" were actually "good old days" as Americans are learning to their dismay.
Below 2 percent economic growth and almost 8 percent unemployment means that the US economy is paralyzed. The Obama Administration seems to have thrown in the towel on the subject of growing the economy. Right they should! The Administration policies, piled on top of the policy history of the past fifty years, virtually guarantee that the vibrant economy of the Old USA is not in our future.
There are bright spots -- autos, housing, energy -- but there are always bright spots. What is missing is small business vitality. That's gone and not coming back until folks figure out how to get around the mass of regulations and taxes that bedevil the American economy. Other than outsourcing, it is not clear how to avoid the strangling effect of American regulatory policy. As for employment, hiring anyone seems downright irrational, given current tax and regulatory policies.
The Obama Administration has reduced the expectations of most Americans to the kind of future that Europeans now have -- stagnation, limited opportunity for the young, guarantees for the oldest demographic that are coming apart at the seams, and debts that no one has any intention of honoring.
So the phrase "we're recovering" is getting tiresome. We're not recovering, we're changing. The quasi-socialism that has supplanted free enterprise is preventing a serious recovery like the one we had in the 1980s. The "bad old days" were actually "good old days" as Americans are learning to their dismay.
Wednesday 10 July 2013
After the Great Recession, where’s the financial education?
The economy may be slowly recovering from the Great Recession, but Americans continue to carry debt and still don’t understand basic financial concepts.
In the study, fewer than 30 percent of respondents were offered financial education at a school, college or workplace. But 89 percent responded “yes” when asked whether financial education should be taught in school. A key recommendation of President Obama’s Advisory Council on Financial Capability is that financial education should take its rightful place in American schools.
According to the 2012 National Financial Capability Study (NFCS), whose findings were released on May 29, 2013 here at the George Washington School of Business, Americans are more satisfied with their personal financial condition today than they were three years ago, and they are finding it slightly easier to cover their monthly expenses. But financial strain is still evident; only 41 percent of Americans make more than they spend, and in excess of one-in-five have been late with a mortgage payment in the last three years.
Individuals are tapping their retirement assets: 14 percent reported borrowing from those accounts. In fact, many Americans are turning to high-cost borrowing methods such as payday or auto titles loans, pawnshops or tax refund advances. As many as 30 percent of U.S. adults have used these methods in the last five years, and a startling 43 percent of young respondents have done so, suggesting that the young are growing accustomed to borrowing outside of the traditional banking system.
The NFCS, supported by the FINRA Investor Education Foundation, was launched in 2009 to assess and establish a baseline measure of the financial capability of American adults. The 2012 study, which was developed in consultation with the U.S. Department of the Treasury, other federal agencies and the President’ Advisory Council on Financial Capability, updates key measures from the 2009 study and covers new topics. Its timing gives insight into what has transpired since the Great Depression.
The study found that Americans continue to grapple with debt. More than a quarter have unpaid medical bills, 14 percent report that their houses are worth less than they paid for them and 35 percent carry a balance on their credit cards. Student loan debt haunts citizens across the age spectrum—and half of those carrying loans are concerned they might not be able to pay them. While 36 percent of respondents age 18 to 34 had student loans, a surprising 19 percent of Americans age 35 to 54 still carry student loan debt.
In tandem with these troubling statistics, the survey revealed that financial knowledge has not improved over the last three years. The level of financial literacy, as measured by questions that assess fundamental financial concepts—such as compounded interest, inflation, and investment risk—shows no change. Only 39 percent of respondents correctly answered at least four of the five quiz questions. A mere 14 percent answered all five questions correctly.
Financial illiteracy is pervasive. And the most vulnerable demographic groups face the greatest struggle: women, the young, the old and those with low educational attainment. The survey findings underscore the need to rigorously explore innovative and scalable ways to build financial capability in the United States.
Despite this, we have failed to add financial education to the curriculum in most states.
In the study, fewer than 30 percent of respondents were offered financial education at a school, college or workplace. But 89 percent responded “yes” when asked whether financial education should be taught in school. A key recommendation of President Obama’s Advisory Council on Financial Capability is that financial education should take its rightful place in American schools.
As the NFCS made evident, it is time to heed the council’s call.
Friday 5 July 2013
The Real Message in Egypt
The Egyptian economy has collapsed. This was a process that began with the 'Arab Spring' and accelerated with the election of Morsi, deposed over the weekend by the Egyptian military.
What this shows is that the average Egyptian, Islamist or not, prefers to have food, shelter and safety to political ideology. Democracy doesn't mean much of anything if there are no free institutions.
The US foreign policy is not helpful here, because the US government is busily dismantling free institutions as a cornerstone of its own domestic policy. The US can hardly be expected to promote free institutions -- a free press, for example -- if it doesn't believe in free institutions on its own home turf.
A rule of law would be helpful as well, but current American domestic policy -- witness, the recent suspension of the employer mandate in the Affordable Care Act until elections are safely over -- is mainly a retreat from the rule of law. Actions speak louder than words and the world is plugged in these days.
The right to start a business and provide for your family is all that the average Egyptian wants and the demonstrations that crushed the political power of Morsi were a testament to that desire. Perhaps the Obama Administration should take notes.
What this shows is that the average Egyptian, Islamist or not, prefers to have food, shelter and safety to political ideology. Democracy doesn't mean much of anything if there are no free institutions.
The US foreign policy is not helpful here, because the US government is busily dismantling free institutions as a cornerstone of its own domestic policy. The US can hardly be expected to promote free institutions -- a free press, for example -- if it doesn't believe in free institutions on its own home turf.
A rule of law would be helpful as well, but current American domestic policy -- witness, the recent suspension of the employer mandate in the Affordable Care Act until elections are safely over -- is mainly a retreat from the rule of law. Actions speak louder than words and the world is plugged in these days.
The right to start a business and provide for your family is all that the average Egyptian wants and the demonstrations that crushed the political power of Morsi were a testament to that desire. Perhaps the Obama Administration should take notes.
The Next New Thing
Are you ready for this? How about "unlimited vacations for all." Paid for, of course.
Check out the NY Times editorial page today. These folks have launched their latest job-killing, economy-crushing plan -- unlimited paid vacations.
That should really entice employers to increase their work force. The new idea from the left is to have employees on the payroll who, in reality, are always on vacation.
Check out today's NYTimes editorial page if you think this is a mirage.
Check out the NY Times editorial page today. These folks have launched their latest job-killing, economy-crushing plan -- unlimited paid vacations.
That should really entice employers to increase their work force. The new idea from the left is to have employees on the payroll who, in reality, are always on vacation.
Check out today's NYTimes editorial page if you think this is a mirage.
Thursday 4 July 2013
Affordable Health Care?
The truth on ObamaCare is gradually unfolding. Two things are becoming increasingly clear: 1). Health care provision in the United States is going to deteriorate dramatically in the future because of the 'Affordable Care Act'; and 2). Health care costs in the US are going to escalate dramatically because of the 'Affordable Care Act.'.
You would think that the above two facts are inconsistent, but they aren't. There are a number of parts of the Act that are driving 1) and 2), but they can all be summarized by the following: The "Affordable Health Care Act" promises services but provides no real means of payment. Sound familiar? The same truth is why medicare and social security (and public pension funds) are on a pathway to insolvency.
The Obama Administration's decision to postpone enforcement on the 'large employer' part of the "Affordable Care Act" is an open admission that they don't want the public to see the true costs of the new laws and regulations. Once the elections are past, then, they say, they will enforce the law. The "Act" itself does not provide the Obama Administration with the wiggle room to postpone enforcement, but in the new Obama world of 'selective enforcement' of American law, the Obama Administration announced (in a blog message, no less) that they do not plan to enforce the large employer provisions until elections in 2014 are safely over.
The best health care system is a free market health care system. The insurance industry should be free to offer whatever health insurance plans they wish, to whoever they wish to offer them to.....period.
Concern about the uninsurable can be dealt with in the same manner as is done with auto insurance for drivers that are not normally insurable.
There is no reason for the government to take over the health care industry in the US. Just as with public pension funds and social security, the government promises to take care of its citizens, but, in reality, has made no plans to honor those promises. Ditto for the Affordable Care Act.
You would think that the above two facts are inconsistent, but they aren't. There are a number of parts of the Act that are driving 1) and 2), but they can all be summarized by the following: The "Affordable Health Care Act" promises services but provides no real means of payment. Sound familiar? The same truth is why medicare and social security (and public pension funds) are on a pathway to insolvency.
The Obama Administration's decision to postpone enforcement on the 'large employer' part of the "Affordable Care Act" is an open admission that they don't want the public to see the true costs of the new laws and regulations. Once the elections are past, then, they say, they will enforce the law. The "Act" itself does not provide the Obama Administration with the wiggle room to postpone enforcement, but in the new Obama world of 'selective enforcement' of American law, the Obama Administration announced (in a blog message, no less) that they do not plan to enforce the large employer provisions until elections in 2014 are safely over.
The best health care system is a free market health care system. The insurance industry should be free to offer whatever health insurance plans they wish, to whoever they wish to offer them to.....period.
Concern about the uninsurable can be dealt with in the same manner as is done with auto insurance for drivers that are not normally insurable.
There is no reason for the government to take over the health care industry in the US. Just as with public pension funds and social security, the government promises to take care of its citizens, but, in reality, has made no plans to honor those promises. Ditto for the Affordable Care Act.
Wednesday 3 July 2013
Political Unity Collapses in Portugal
Enforcing austerity doesn't win much popular favor as the politicians in Portugal have discovered. The center right government in Portugal has pretty much collapsed over the weekend. Greece is also back in the news as it struggles to implement its own version of austerity.
No European government backing austerity will survive. Germany's Angela Merkel will be the most prominent casualty as she faces the electorate next year. Gone already are the political leaders of Greece, Spain, Italy, and France. It won't be long before their successors are under siege as well.
The EU-ECB plan of increasing debt and forcing austerity on their populations has been a failure from day one. The political unraveling of Europe was easy to predict and not at all surprising to watch. The fear is that extremists of the far left will eventually assume power and Europe will become a different place.
No European government backing austerity will survive. Germany's Angela Merkel will be the most prominent casualty as she faces the electorate next year. Gone already are the political leaders of Greece, Spain, Italy, and France. It won't be long before their successors are under siege as well.
The EU-ECB plan of increasing debt and forcing austerity on their populations has been a failure from day one. The political unraveling of Europe was easy to predict and not at all surprising to watch. The fear is that extremists of the far left will eventually assume power and Europe will become a different place.
Monday 1 July 2013
China Slows
Asia is beginning to weaken. Given the stagnation in the western economies, this is not good news. Unemployment in the Eurozone remains above 12 percent and US unemployment rates have fallen only because of the massive shift of workers out of the work force. Growth in the West is so slight as to be within the margin of error for measuring the data. The only real global economic strength has been Asia and that may be ending.
Granted there are bright spots in the US -- fewer in Europe. US housing is stabilized and there are pockets of feeding frenzy here and there in the residential market. But, overall, there is still weakness. Now with Obamacare looming and the unleashing of the EPA, things could easily deteriorate in the US.
While everyone watches the Fed, the real story is a micro story. The mass of regulation, rules and additional costs that businesses face, even if demand were to increase, will keep a lid on economic expansion. Debt problems will also limit the future of Western economies. Too many promises, too few resources to deliver on those promises.
Fed activity is mainly important for inflationary expectations and pressures. With a sick economy (made sick by federal policies since 2008), there isn't much inflation. But there will be. That's what the recent uptick in treasury rates is all about.
Granted there are bright spots in the US -- fewer in Europe. US housing is stabilized and there are pockets of feeding frenzy here and there in the residential market. But, overall, there is still weakness. Now with Obamacare looming and the unleashing of the EPA, things could easily deteriorate in the US.
While everyone watches the Fed, the real story is a micro story. The mass of regulation, rules and additional costs that businesses face, even if demand were to increase, will keep a lid on economic expansion. Debt problems will also limit the future of Western economies. Too many promises, too few resources to deliver on those promises.
Fed activity is mainly important for inflationary expectations and pressures. With a sick economy (made sick by federal policies since 2008), there isn't much inflation. But there will be. That's what the recent uptick in treasury rates is all about.
Friday 28 June 2013
Moodys is Right On
Moodys released a report on state pension funds today that implied that such funds currently hold only 48 cents out of every dollar needed to properly fund their obligations. Three cheers for Moodys!
For decades, state and local pension funds have released grossly misleading and inaccurate figures suggesting that they are better funded than is merited by the facts. Politicians have acquiesced in this charade since it was inconvenient, to use Al Gore's phrase, to speak the truth.
The chief method of disguising the truth is to make over-optimistic assumptions about future asset returns and unrealistic assumptions about the contributions that will be forthcoming in the future.
Based upon false information, state and local governments have touted reforms that hardly make a dent in the real problems. Virginia is a great example. The so-called pension fund reforms enacted by the Virginia General Assembly and backed by Governor McDonnell were misleadingly hailed as a 'major' improvement in funding. Nothing could be further from the truth. By maintaining mostly a defined benefit system supported by optimistic and unrealistic assumptions, the Virginia reforms simply locked in concrete a failing system without any serious reform.
The only properly funded pension systems are defined contribution systems. Period. If you are a participant in a defined benefit system (social security is a good example), the best advice for you is to start saving as much as you can. Your pension system is most likely in deep, deep trouble.
For decades, state and local pension funds have released grossly misleading and inaccurate figures suggesting that they are better funded than is merited by the facts. Politicians have acquiesced in this charade since it was inconvenient, to use Al Gore's phrase, to speak the truth.
The chief method of disguising the truth is to make over-optimistic assumptions about future asset returns and unrealistic assumptions about the contributions that will be forthcoming in the future.
Based upon false information, state and local governments have touted reforms that hardly make a dent in the real problems. Virginia is a great example. The so-called pension fund reforms enacted by the Virginia General Assembly and backed by Governor McDonnell were misleadingly hailed as a 'major' improvement in funding. Nothing could be further from the truth. By maintaining mostly a defined benefit system supported by optimistic and unrealistic assumptions, the Virginia reforms simply locked in concrete a failing system without any serious reform.
The only properly funded pension systems are defined contribution systems. Period. If you are a participant in a defined benefit system (social security is a good example), the best advice for you is to start saving as much as you can. Your pension system is most likely in deep, deep trouble.
Thursday 27 June 2013
Wanted: Ambassadors for Financial Literacy
In a country where people talk about sums in the millions and billions of dollars, where workers must figure out how much they need for retirement then wander off on their own to make those investments, and where borrowers are bombarded with opportunities for piling on debt, one in four adults cannot do a simple 2 percent calculation.
Yes, we are a country of financial illiterates.
And fewer than one-third of Americans can answer three simple questions that assess basic numeracy, knowledge of inflation and understanding of risk diversification.
Yes, we are a country of financial illiterates.
That’s what was revealed in the 2012 National Financial Capability Study, released a few weeks ago, which evaluates adults. When you look at teenagers, the results are even more chilling. Data published bi-annually by the Jump$tart Coalition for Personal Financial Literacy showed that only 7 percent of high school students are financially literate.
Seven percent!
But it’s not so much about the statistics. What’s most important is the behavior that results from that lack of basic financial knowledge. People who are not financially literate are less likely to plan—or save—for retirement. And they are more likely to rely on costly borrowing, paying high fees and ending up in financial trouble. A paper by Stephan Meier at Columbia Business School and other scholars published this week concluded that people who are stymied by financial concepts are far more likely to default on subprime mortgages.
The President’s Advisory Council on Financial Capability issued a report a few months ago that outlined strategies to address financial literacy. One recommendation stood out: to include financial education in school curricula. There are four compelling reasons to support this.
First, you must be financially literate to navigate today’s complex world. This has become so evident that the OECD’s Programme for International Student Assessment (PISA) last year added financial literacy to the skills (along with math, science and reading) that it tests in 15-year-olds around the world.
Every three years, PISA gauges the following: Are students well prepared for future challenges? Can they analyze, reason and communicate effectively? Do they have the capacity to continue learning throughout life? The goal is to see if students nearing the end of compulsory education have the knowledge and skills essential for full participation in society.
There is a second reason to bring financial education into the schools. At age 17, young people face a life-changing decision: whether to invest in higher education. What they decide carries vast income consequences over a lifetime. It also determines whether they begin their work years with instant debt. Options for financing higher education have changed and the cost of a college education has risen rapidly. That confluence means an average college student now takes on $26,000 in education loans. Graduation celebrations are now tempered with the reality of immediate—and significant—debt.
Financial education in schools also addresses the issue of equality. Who makes up that small percentage of students who are financially literate? White males from college-educated families. And research shows that this distinction is a lifelong one. Women, African Americans, Hispanics and the poorly educated display much lower levels of financial literacy than their counterparts at every step: in school, in middle age, before retirement and after retirement.
Perhaps not surprisingly, this inequality in knowledge translates into inequality in wealth. As they near retirement, financially literate people tend to have greater levels of wealth than their counterparts who are not financially literate. According to my calculations, about half the difference in that wealth can be explained by financial literacy.
Finally, by anchoring financial education in schools, we ensure that people are knowledgeable before, rather than after, they engage in financial transactions. Today many transactions—from using a credit card to opening a checking account to buying a car to signing up for a cell phone plan—start at an early age. They involve decision-making that is by no means simple.
You need not wait for our politicians to bring financial education into schools. Be an ambassador. Push your local high school to add financial literacy to an existing math or English curriculum. Ask the business community to support the initiative and train the teachers. It should not take much to convince a business-savvy person that it’s more economical to learn about finances in a high school than in the school of hard knocks.
Organizations like the Jump$tart Coalition for Personal Financial Literacy and the Council for Economic Education have designed standards that can be used in teaching. They have materials for both students and teachers.
To naysayers who claim financial education does not work, I must point out that ignorance does not work either. Give education a try. As an economist, I know people need an incentive to take action. Here it is: Without some basic financial know-how, your children will move back in with you after college.
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