Isn't it obvious that the politicians have no idea why the economy is staggering? After the arrogance of January, 2009, when the exuberant victors of the 2008 election proceeded to toss away $ 800 billion in a foolish waste of money known as "the stimulus."
The Obama folks assumed that throwing taxpayer money in the direction of Obama political allies (mostly state employee union members) would magically get the economy back on track. Why the Obama folks thought that, no one knows?
Then the Obama team began the process of erecting roadblocks (think Dodd Frank, Obamacare, the Credit Card Reform act, stifling regulations from the EPA and the NLRB) that would virtually guarantee that the economy had no real chance of recovery.
Now, Obama promises to come up with a new package to deal with the "jobs problem." This would be comical were it not so tragic. Putting up more roadblocks does not remove the original roadblocks.
This economy will not get out of its own way until the roadblocks are dismantled and real market forces are permitted to function again -- especially in the labor market.
Bernanke's comments on Friday were ridiculous. It is time that Bernanke return to academia. Bernanke's Fed is arguably the worst in the history of the Federal Reserve and its results on the economy are there for all to see.
The usual response by defenders of Obama and Bernanke is to say that things would have been much worse had they not done what they did. Really? When, other than the last time policies like these were tried in the 1930s, were things ever this bad.
The Reagan recovery in the 1980s shows how to get it done. Get the government off the back of the citizenry. That is the solution. The government is not the answer. The government is the problem and until it changes course (or gets changed), America will continue its slide into irrelevance.
Monday, 29 August 2011
Sunday, 28 August 2011
The Jobs Problem
If cell phones cost $ 10,000 apiece and required $ 1,000 monthly service bills, who would own them? Well, no doubt, Warren Buffett would own one and perhaps Bill Gates and Barrack Obama as well.
But, what about the average guy. Would he own a cell phone at those prices? What if the economy was very strong, would most folks get a cell phone, if these were the costs?
The answer is pretty obvious. At that price, very few people would be interested.
This is the fundamental jobs problem in the US. Because of government mandates, the anticipation of Obamacare, litigation fears, OSHA rules, threat of unionization, a blithering variety of employment taxes, family leave laws, American labor is priced out of the market for most businesses. There are some businesses for which price is not an issue: Wall Street, the movies, professional sports, working at the White House, etc. But, for most private businesses who do the bulk of hiring in the US, labor is just way too expensive thanks to the various levels of government.
If you are a movie star and a sports celebrity (or even a reality show star), then these are not your problems. The wealthy don't really have a problem in this brave new Obama world. They are a-ok. That is why the Buffetts of the world strongly support the Obama program. It doesn't hurt rich people. It is the average guy or girl who has no real hope in the Obama economy, not the rich guy. The rich guy, like Buffett, is having a ball. this is fun for him.
The average American worker is simply not affordable anymore and it has nothing to do with with wage and salary and has everything to do with government. All of these programs to "help the average guy" have made the average guy way too expensive.
Unemployment is not going to go away in the US. This is the new reality. Those who are protected from the problem, like Warren Buffett, will continue to cheerlead for the programs that devastate middle and lower income Americans. "Let them eat cake" has a certain ring to it for the Buffett-Obama class. But, for the rest of America, life will stay pretty grim. I wonder how long Obama and Buffett can blame all of this on George Bush -- 10 years? 20 years?
But, what about the average guy. Would he own a cell phone at those prices? What if the economy was very strong, would most folks get a cell phone, if these were the costs?
The answer is pretty obvious. At that price, very few people would be interested.
This is the fundamental jobs problem in the US. Because of government mandates, the anticipation of Obamacare, litigation fears, OSHA rules, threat of unionization, a blithering variety of employment taxes, family leave laws, American labor is priced out of the market for most businesses. There are some businesses for which price is not an issue: Wall Street, the movies, professional sports, working at the White House, etc. But, for most private businesses who do the bulk of hiring in the US, labor is just way too expensive thanks to the various levels of government.
If you are a movie star and a sports celebrity (or even a reality show star), then these are not your problems. The wealthy don't really have a problem in this brave new Obama world. They are a-ok. That is why the Buffetts of the world strongly support the Obama program. It doesn't hurt rich people. It is the average guy or girl who has no real hope in the Obama economy, not the rich guy. The rich guy, like Buffett, is having a ball. this is fun for him.
The average American worker is simply not affordable anymore and it has nothing to do with with wage and salary and has everything to do with government. All of these programs to "help the average guy" have made the average guy way too expensive.
Unemployment is not going to go away in the US. This is the new reality. Those who are protected from the problem, like Warren Buffett, will continue to cheerlead for the programs that devastate middle and lower income Americans. "Let them eat cake" has a certain ring to it for the Buffett-Obama class. But, for the rest of America, life will stay pretty grim. I wonder how long Obama and Buffett can blame all of this on George Bush -- 10 years? 20 years?
Saturday, 27 August 2011
What Do Markets Assume?
There are very scary stories out there: 1) a European debt crisis; 2) Incredibly slow economic growth in Western countries; 3) A potential for Asian economic growth to top out. Does this mean stocks cannot do well?
Surely "the market" knows what we know. How much worse news is yet to come?
Greece will default. Has the market fully factored that in? While the initial shock of a Greek default would likely cause stocks markets to skid, the reality is that a Greek default could be the harbinger of good news to come. The sooner that defaults and workouts become the order of the day in Europe, the sooner Europe can begin to heal its economic woes.
Why are defaults and workouts therapeutic for Europe? The reason is that politicians will never be able to reverse the spending and entitlement train. They just won't be able to do it. Instead, a default will let the market itself force the necessary reforms on Europe. It won't be possible for Europe to access debt markets in the future unless Europe begins to tackle its unaffordable spending and entitlement programs. Market discipline will solve a problem that politicians have no hope of solving. This is good. So, defaults are good news not bad news and defaults are coming soon.
What about the US? It is unlikely that the US is headed for a recession. Try as it might to strangle the economy, Obama and his allies will not be completely successful in their efforts to destroy the American economic engine. Besides, unless Obama shifts ground and does it quickly, he will be a one-termer and his successor is likely to to do a complete about face on the Obama agenda. This is good news as well, whichever way it shakes out. The hide tide of government intrusion and regulation in the economy may be just over the horizon. In any event, a downturn in GDP isn't likely. Slow growth, not negative growth, is probably our future for the next year or two until the cavalry arrives.
All of this suggests that stocks are probably a good buy for the long term investor. For the short term investor, who knows? But, for the long term investor, this is probably a historic opportunity to own equities.
Surely "the market" knows what we know. How much worse news is yet to come?
Greece will default. Has the market fully factored that in? While the initial shock of a Greek default would likely cause stocks markets to skid, the reality is that a Greek default could be the harbinger of good news to come. The sooner that defaults and workouts become the order of the day in Europe, the sooner Europe can begin to heal its economic woes.
Why are defaults and workouts therapeutic for Europe? The reason is that politicians will never be able to reverse the spending and entitlement train. They just won't be able to do it. Instead, a default will let the market itself force the necessary reforms on Europe. It won't be possible for Europe to access debt markets in the future unless Europe begins to tackle its unaffordable spending and entitlement programs. Market discipline will solve a problem that politicians have no hope of solving. This is good. So, defaults are good news not bad news and defaults are coming soon.
What about the US? It is unlikely that the US is headed for a recession. Try as it might to strangle the economy, Obama and his allies will not be completely successful in their efforts to destroy the American economic engine. Besides, unless Obama shifts ground and does it quickly, he will be a one-termer and his successor is likely to to do a complete about face on the Obama agenda. This is good news as well, whichever way it shakes out. The hide tide of government intrusion and regulation in the economy may be just over the horizon. In any event, a downturn in GDP isn't likely. Slow growth, not negative growth, is probably our future for the next year or two until the cavalry arrives.
All of this suggests that stocks are probably a good buy for the long term investor. For the short term investor, who knows? But, for the long term investor, this is probably a historic opportunity to own equities.
Ten questions and things to know about financial literacy
While on vacation under the Italian sun, I was asked a lot of questions about financial literacy. Rather than writing a blog post about a single topic, I thought it might be useful to answer some of the questions I’ve been asked in order to hit on a lot of general information about financial literacy. So, here is my list of the top ten questions and things to know about financial literacy:
1) What is financial literacy?
Financial literacy is like reading and writing. It is the knowledge of basic but essential concepts that are needed to be able to operate in today’s society.
2) How do I know whether I am financially literate?
You can take a test here:
http://www.rand.org/labor/centers/financial-literacy/widgets/financial-knowledge-test.html
3) How do I compare with respect to others?
The above test will tell you how the average American responded to five financial literacy questions. If you live in the U.S. and you want to know how financially literate people in your state are, check here:
http://www.usfinancialcapability.org/
4) How does financial literacy in the United States (or Italy) compare with respect to other countries?
We have done a comparison of financial literacy across eight countries (the U.S., Italy, Germany, the Netherlands, Sweden, Russia, Japan, and New Zealand). In a nutshell, the world is flat in terms of financial literacy! You can read about this work here (warning: these are long papers but still fun to read)
http://www.financialliteracyfocus.org/academics/FLatW.html
5) Why should I become financially literate? Can’t I be happily ignorant?
There are costs of being financially illiterate. Studies show that those who have low financial literacy are less likely to take advantage of the opportunities offered by financial markets (for example, refinancing mortgages when interest rates go down or getting higher returns by investing in stocks and bonds), are less likely to invest in mutual funds with low fees, and are more likely to have problems with debt and to pay higher borrowing costs. Overall, ignorance is not bliss.
An overview of these studies is provided in this paper:
http://www.financialliteracyfocus.org/files/FLatDocs/Lusardi_Mitchell_Overview.pdf
6) Where do I go for information if I want to improve my financial literacy?
For readers in the United States, a reliable and independent source of information is www.mymoney.gov. One of the best web sites for financial literacy is New Zealand’s national site. Here is the link (after all, we are going global!):
http://www.sorted.org.nz/
7) What if I want to have fun while I’m learning?
Excellent idea! Doorways to Dreams has designed financial literacy games, so you can become financially literate while having fun. Here is their financial entertainment website:
http://financialentertainment.org/
8) What do I do to promote financial literacy and to become financially literate?
Ask for financial literacy programs in your school, your workplace, and your local library. Become an ambassador for financial literacy.
Three examples of initiatives or tools to use are here:
http://www.math.dartmouth.edu/~mqed/FinancialLiteracyProject/
http://nyse.nyx.com/financial-fitness-kit
http://www.finra.org/Newsroom/NewsReleases/2011/P122886
9) Who is promoting financial literacy? Just academic nerds like you?
Are you kidding me? Here is a list of people (and one puppet) who are promoting financial literacy.
(i) Elmo, puppet and TV celebrity (for you younger readers):
http://video.nytimes.com/video/2011/04/15/business/100000000776361/talking-money-with-elmo.html?hp
(ii) Ben Bernanke, Chairman of the Federal Reserve. You can read one of his recent speeches here:
http://www.federalreserve.gov/newsevents/testimony/bernanke20110420a.htm
(iii) Ray Lewis, football star. You can read about one of his talks here:
http://articles.nydailynews.com/2011-04-29/sports/29510296_1_ray-lewis-uaf-financial-literacy
(iv) Both President Bush and President Obama have been supporters of financial literacy, via, for example, the President’s Advisory Council on Financial Literacy
http://www.treasury.gov/resource-center/financial-education/Pages/Advisory.aspx
10) Are there any big initiatives happening on financial literacy?
Yes, there are many. One important initiative is that of the OECD (Organisation for Economic Cooperation and Development). Starting in 2012, the OECD’s Programme for International Student Assessment (PISA) will measure financial literacy among 15-year-olds in 19 countries. You can read more about this important initiative here:
http://www.pisa.oecd.org/dataoecd/8/43/46962580.pdf
1) What is financial literacy?
Financial literacy is like reading and writing. It is the knowledge of basic but essential concepts that are needed to be able to operate in today’s society.
2) How do I know whether I am financially literate?
You can take a test here:
http://www.rand.org/labor/centers/financial-literacy/widgets/financial-knowledge-test.html
3) How do I compare with respect to others?
The above test will tell you how the average American responded to five financial literacy questions. If you live in the U.S. and you want to know how financially literate people in your state are, check here:
http://www.usfinancialcapability.org/
4) How does financial literacy in the United States (or Italy) compare with respect to other countries?
We have done a comparison of financial literacy across eight countries (the U.S., Italy, Germany, the Netherlands, Sweden, Russia, Japan, and New Zealand). In a nutshell, the world is flat in terms of financial literacy! You can read about this work here (warning: these are long papers but still fun to read)
http://www.financialliteracyfocus.org/academics/FLatW.html
5) Why should I become financially literate? Can’t I be happily ignorant?
There are costs of being financially illiterate. Studies show that those who have low financial literacy are less likely to take advantage of the opportunities offered by financial markets (for example, refinancing mortgages when interest rates go down or getting higher returns by investing in stocks and bonds), are less likely to invest in mutual funds with low fees, and are more likely to have problems with debt and to pay higher borrowing costs. Overall, ignorance is not bliss.
An overview of these studies is provided in this paper:
http://www.financialliteracyfocus.org/files/FLatDocs/Lusardi_Mitchell_Overview.pdf
6) Where do I go for information if I want to improve my financial literacy?
For readers in the United States, a reliable and independent source of information is www.mymoney.gov. One of the best web sites for financial literacy is New Zealand’s national site. Here is the link (after all, we are going global!):
http://www.sorted.org.nz/
7) What if I want to have fun while I’m learning?
Excellent idea! Doorways to Dreams has designed financial literacy games, so you can become financially literate while having fun. Here is their financial entertainment website:
http://financialentertainment.org/
8) What do I do to promote financial literacy and to become financially literate?
Ask for financial literacy programs in your school, your workplace, and your local library. Become an ambassador for financial literacy.
Three examples of initiatives or tools to use are here:
http://www.math.dartmouth.edu/~mqed/FinancialLiteracyProject/
http://nyse.nyx.com/financial-fitness-kit
http://www.finra.org/Newsroom/NewsReleases/2011/P122886
9) Who is promoting financial literacy? Just academic nerds like you?
Are you kidding me? Here is a list of people (and one puppet) who are promoting financial literacy.
(i) Elmo, puppet and TV celebrity (for you younger readers):
http://video.nytimes.com/video/2011/04/15/business/100000000776361/talking-money-with-elmo.html?hp
(ii) Ben Bernanke, Chairman of the Federal Reserve. You can read one of his recent speeches here:
http://www.federalreserve.gov/newsevents/testimony/bernanke20110420a.htm
(iii) Ray Lewis, football star. You can read about one of his talks here:
http://articles.nydailynews.com/2011-04-29/sports/29510296_1_ray-lewis-uaf-financial-literacy
(iv) Both President Bush and President Obama have been supporters of financial literacy, via, for example, the President’s Advisory Council on Financial Literacy
http://www.treasury.gov/resource-center/financial-education/Pages/Advisory.aspx
10) Are there any big initiatives happening on financial literacy?
Yes, there are many. One important initiative is that of the OECD (Organisation for Economic Cooperation and Development). Starting in 2012, the OECD’s Programme for International Student Assessment (PISA) will measure financial literacy among 15-year-olds in 19 countries. You can read more about this important initiative here:
http://www.pisa.oecd.org/dataoecd/8/43/46962580.pdf
Thursday, 25 August 2011
All Eyes on Bernanke...Why?
Whatever Ben Bernanke has to say on Friday is irrelevant to the grand picture. The American economy is stuck in a quagmire that Ben Bernanke cannot do anything about. He can make things worse, indeed he has already. But, can Bernanke do anything that can help? What can Bernanke can do that will convince a business to shoot itself in the foot by hiring someone in a world of massive regulation, litigation and mandates? Not much.
But, I guess the press has to talk about something. So, the Bernanke sideshow continues.
But, I guess the press has to talk about something. So, the Bernanke sideshow continues.
Wednesday, 24 August 2011
Europe and US Face Similar Problem
The "Greek Problem" is really no different than what might be called the "California Problem" in the US. The 50 states of the US are in a common currency, yet each state has its own "fiscal policy." This is essentially the same as the situation in Europe wherein European countries (excepting Switzerland) are banded together in a common currency -- the Euro. Each country has its own fiscal policy.
Greece (and California) are eventually going to be unable to continue financing their outstanding debt. There is no scenario possible that would permit either Greece or California to fund their outstanding debt over any significant future time period. The only way to postpone a default in either place is for someone to step in and bail them out and let them continue to expand their indebtedness.
That's why politicians will soon be clamoring for the US government to bail out California, just as many are pushing the concept of Eurobonds in Europe to bail out Greece (and Spain and Italy and on and on).
These bailouts permit profligate countries to expand their indebtedness and postpone making the decisions that would be required to put their financial house in order. This only makes the impact of the ultimate default (which will come in any event) that much worse. Meanwhile, along the way, to entice the bailer to do the bailout, Greece and eventually California, will be asked to enact "austerity" measures that their populations will not support. Greeks will eventually reject the austerity measures and proceed to a default "workout" on their own. Three is no way that Greeks will, voluntarily, agree to the kind of austerity that the bailout folks will want to impose on them. Ditto for California.
In the US, there is a growing list of states that will join California in the rush to get a federal bailout. Essentially, the idea is to have states like Texas and Alaska, who haven't behaved stupidly with their spending, provide the money to bail out the delinquents like California, Illinois, New York, etc. This is the same idea as having Greece saved by the frugal German taxpayer.
All of this, as it takes place, rewards those who made bad decisions and punishes those who made good decisions. Ultimately, it won't work anyway as the bailer and the bailee will all be forced to some kind of debt default. Pity the poor bondholders who fall for all of this. They will be big losers.
But, there are other losers as well. The citizens of Greece and California and other profligate places will face economic paralysis as they put on the austerity straight jacket, which the bailers will insist upon. There will be a global economic paralysis brought on by the foolish idea that those who made good decisions should pick up the tab for those who made decisions. Foolish economic policy by the Eurozone and US politicians will cause a lengthy period of economic pain which will end with massive defaults through the Western economic structure.
It is possible that the citizens of Europe and the US might wake up before this situation develops too far along the bailout road. We shall see. The optimistic scenario is bolstered by the rise of the tea party and the focus of current debate upon the problems of sovereign debt. So, maybe, just maybe, the Western world will stop the bailout process before it goes too far and is irreversible.
Greece (and California) are eventually going to be unable to continue financing their outstanding debt. There is no scenario possible that would permit either Greece or California to fund their outstanding debt over any significant future time period. The only way to postpone a default in either place is for someone to step in and bail them out and let them continue to expand their indebtedness.
That's why politicians will soon be clamoring for the US government to bail out California, just as many are pushing the concept of Eurobonds in Europe to bail out Greece (and Spain and Italy and on and on).
These bailouts permit profligate countries to expand their indebtedness and postpone making the decisions that would be required to put their financial house in order. This only makes the impact of the ultimate default (which will come in any event) that much worse. Meanwhile, along the way, to entice the bailer to do the bailout, Greece and eventually California, will be asked to enact "austerity" measures that their populations will not support. Greeks will eventually reject the austerity measures and proceed to a default "workout" on their own. Three is no way that Greeks will, voluntarily, agree to the kind of austerity that the bailout folks will want to impose on them. Ditto for California.
In the US, there is a growing list of states that will join California in the rush to get a federal bailout. Essentially, the idea is to have states like Texas and Alaska, who haven't behaved stupidly with their spending, provide the money to bail out the delinquents like California, Illinois, New York, etc. This is the same idea as having Greece saved by the frugal German taxpayer.
All of this, as it takes place, rewards those who made bad decisions and punishes those who made good decisions. Ultimately, it won't work anyway as the bailer and the bailee will all be forced to some kind of debt default. Pity the poor bondholders who fall for all of this. They will be big losers.
But, there are other losers as well. The citizens of Greece and California and other profligate places will face economic paralysis as they put on the austerity straight jacket, which the bailers will insist upon. There will be a global economic paralysis brought on by the foolish idea that those who made good decisions should pick up the tab for those who made decisions. Foolish economic policy by the Eurozone and US politicians will cause a lengthy period of economic pain which will end with massive defaults through the Western economic structure.
It is possible that the citizens of Europe and the US might wake up before this situation develops too far along the bailout road. We shall see. The optimistic scenario is bolstered by the rise of the tea party and the focus of current debate upon the problems of sovereign debt. So, maybe, just maybe, the Western world will stop the bailout process before it goes too far and is irreversible.
Monday, 22 August 2011
A Bad Idea Can Do Some Real Damage
What we are experiencing now are the fruits of the "too big to fail" mentality. In the US, the crisis of the Fall of 2008 began with the government orchestrating a purchase by JP Morgan of Bear Stearns with a $ 29 billion guarantee by the US government. That was the beginning. Before they were done the politicians had bailed out half the financial system, even those who did not wish to be bailed out.
Now the European politicians are doing the same thing. Greece was too big to fail. Now, Spain and Italy are too big to fail. Germany and France are, no doubt, to big to fail too, but there is no one left big enough to bail them out.
This is all ridiculous. No one is too big to fail. The world would not have come to an end if the various financial institutions that were liquidity starved had been permitted to fail in 2008 (or provided some orderly form of Chapter 11 bankruptcy). There was absolutely no reason to protect bondholders from the risks that they had assumed. They should have suffered not the taxpayer. Ditto today for Greece, Ireland, Italy, Spain, and Portugal and, if it gets that far, Germany and France.
Bondholders take risks too. Why shouldn't they pay the price, if they have taken a foolish risk.
By not letting the chips fall where they may, the Western economies now face austerity programs, zombie institutions, and economic stagnation for generations. Is this price worth paying just to protect a few bondholders?
The problem is that politicians love this. It makes folks like Tim Geithner feel really powerful to wander around distributing taxpayer funds to those in need. But, it is very bad economic policy and we are paying a horrendous price for such bad policy.
Now the European politicians are doing the same thing. Greece was too big to fail. Now, Spain and Italy are too big to fail. Germany and France are, no doubt, to big to fail too, but there is no one left big enough to bail them out.
This is all ridiculous. No one is too big to fail. The world would not have come to an end if the various financial institutions that were liquidity starved had been permitted to fail in 2008 (or provided some orderly form of Chapter 11 bankruptcy). There was absolutely no reason to protect bondholders from the risks that they had assumed. They should have suffered not the taxpayer. Ditto today for Greece, Ireland, Italy, Spain, and Portugal and, if it gets that far, Germany and France.
Bondholders take risks too. Why shouldn't they pay the price, if they have taken a foolish risk.
By not letting the chips fall where they may, the Western economies now face austerity programs, zombie institutions, and economic stagnation for generations. Is this price worth paying just to protect a few bondholders?
The problem is that politicians love this. It makes folks like Tim Geithner feel really powerful to wander around distributing taxpayer funds to those in need. But, it is very bad economic policy and we are paying a horrendous price for such bad policy.
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