Rising Rates Threaten Bank Stocks - WSJ.com

Rising Rates Threaten Bank Stocks - WSJ.com:

People blame the banks for not lending. Let's think about this!


"And, you speak of loans? Let's see? The economy is in the tank. Unemployment is 20% (or very close, 17.5% as of November) and all of the government's policies are to provide artificial (i.e. consumption) stimulus while at the same time passing and planning to pass more and more taxes and cost increases on business and labor!

Example: a bank will lend to someone for 5 years. So let's do an assessment:

1) This isn't enough time for the borrower to amortize the cost of whatever the business is borrowing the money for - so, part of the repayment of the loan will have to come from after-tax dollars. And, lo-and-behold, the government is going to be raising the tax rate so the old forecast (read: business plan) is probably underestimating the revenue that will have to be raised to provide the after-tax income to amortize the loan.

2) Now, the next change to the business plan is the cost of labor. New health care mandates will boost this. We know the government is fibbing on the true costs, but even these will add to the expenses the business has to face.

3) Oh yes, the interest rate. Let's see? Currently the rate is pretty low - but, we are talking about a 5-year loan (could be longer and the situation would be worse). So, if the Feds are going to be spending 25% of so of GDP and the economy is only projected to increase enough to keep the unemployment rate where it is today (Fed tax revenue at 15% of GDP), then one has to look out for higher interest rates. Will they be double-digit of high double digit? Whatever, the interest cost on the loan will be up. Has this been factored into the borrowing?

4) On and on.

5) Oh yes, the FDIC is getting tougher and tougher on wanting safe loans. So, how will the FDIC look at this loan? Let's see, they've already closed over 100 banks this year. How should the bank and its board look at this?

Clearly the answer is - don't lend!!!!!!!!"

The Economy and the 3 Farmers

Someone asked me what I think about the current economic situation in the US (just after Thanksgiving).

One way to think about the economy is to think about the story of three farmers. Each knows that they need to set aside 10% of their harvest as seed for the next season.

A. Farmer A reduces his consumption so that he'll have the seed for the next year.

B. Farmer B is extra hungry so he only saves 9%. Pretty soon his harvest is declining year by year and he is getting hungrier and hungrier and can no longer find grain to sell for the little extras his family had been enjoying.

C. Then there is Farmer C. This farmer is very aggressive. He tightens his belt and saves 11-12% of his harvest every year. As a result, he has more and more to eat and, when he trades some grain or sells it, he gets to have lots of new things to help around the farm and the house and he actually makes his land even more productive. He can now send his kids to school, etc.

Now we have a situation where the government comes along and decides Farmer A is too well off and they will have to take some of his crop (more every year) to help Farmer B who just isn't doing as well as B would like. Government believes outcome equality is more important than equality of opportunity.

So my view on the economy is we have the US government doing what I note above to Farmer A; and we have the Chinese encouraging its citizens to be like Farmer C (which they are succeeding in doing).

A typical sharp economic rebound?

Lots of people think the rise in the stock market is evidence of a sharp economic rebound. Can this be so?

History on markets stress that people tend to react to the way past events unfolded. Not necessarily how current events would suggest one should act.

This is why in the 1970's interest rates always trailed inflation - i.e. people couldn't believe interest rates would go so high.

Now, people are discounting the negative fiscal policies because they don't see the US going the way of the State of Michigan or the American car companies.

Stepping back a bit, it's also like housing prices going up much faster than people's incomes - would you or wouldn't you buy into it? Most people bought into it the same way they used to see pyramid schemes - i.e. the late-comers get screwed.

Right now companies are getting good profits by cutting employment. Will these profits be sustainable (and, if so, where will they keep coming from if the consumer/purchaser doesn't have a job and after (maybe 5-10 years) unemployment isn't extended any more?)?

If one thinks of the price of a stock reflecting the "present value of the future value" of a stream of earnings, then the prices might be low if the future earnings become highly inflated and the discount rate remains - as it was in the 70's - below the inflation rate.

What is clear from current policies in Washington is that jobs are very unlikely to be coming back and in terms of purchasing power, Americans will be living much more like a European lifestyle where people have less, do less and look forward to much less in the future.

And, because the US has such a burden of the religious right, it may be worse than the more secular socialist environment of Europe.

Who knows?

Whatever is said, the sharp rebound does not reflect the economic snapback that is typical of most interest rate led recoveries!

Knowing Your Own Risk Tolerance -- Interview with Michael Cembalest - Barrons.com

Knowing Your Own Risk Tolerance -- Interview with Michael Cembalest - Barrons.com: "we will soon have a month when interest outlays on debt are larger than defense outlays -- for the first time in the country's history."

An Interesting Tidbit on Healthcare

An interesting healthcare (read: European social healthcare) tidbit came to me this week from a friend. They were reading their embassy's report on healthcare in one of the European countries (both countries are in the EU).

The comment was made that the government run healthcare in the subject country was of rather poor quality (I can't mention countries, but it would make you laugh if I could) but that private insurance (yes, no typo - privately paid insurance) offered the respective citizens to have a measurably better quality of healthcare. But, this was from private (and not public) hospitals and physicians.

Not to put an undue point on it but, it does suggest how ridiculous and crazy the attempt to give everyone the same high quality of care the healthcare reforms are in the US.

Old Europe has learned that even with high taxes and very low economic growth, eventually you have to get somewhat back to getting what you pay for and everyone doesn't get the same free lunch!

Slishing and Sloshing

Inflation, Deflation, Continued Low Rates - the Banter in the Media

But, one does wonder at what point all of the dollars sloshed against the economic growth rope eventually build up into such a dam that when they breakthrough, inflation follows or higher interest rates follow in the wake?

Perhaps it's a question of can the sloshing keep up with Federal borrowing?

And, one thinks of California's string of budgetary imbroglios, which came to a head this past summer when - finally and after almost unbearable angst (plus an additional 10% withholding of income taxes - the State finally had to cry uncle and start to cut expenses.

Since the Congress appears more intent on increasing expenses in a major way and has a printing press - the idea of the low rate, dollar flood, might surface first in the gold, oil and commodity prices; ah, but wait, higher oil might mean higher gasoline prices and that might be inflationary!

The Dollar and California Here We Come!

Dollar Rebounds on Dubai Debt Worries
http://online.wsj.com/article/SB10001424052748703499404574559273731673930.html?mod=djemTMB#articleTabs%3Darticle

Might the current Washington administration be of a similar mind to their Democratic brethren in California?

If so (and why not since California is the home of Pelosi), then what did California do to keep the benefits rolling until this year? Well, for one they kept spending on every item on their social agenda. They also didn't cut back on anything and gladly raised public "union" salaries and benefits to twice the level of those in the private sector (according to a number of articles in the mainstream press; to wit, the retirement income of the Orinda, CA fire chief was reported in June to be $300,000 per year, at a retirement age of 51).

Thus, if California would be an economic model for the current administration, and it appears from their emphasis on "healthcare funding expansion" rather than "healthcare reform", this is the direction they are going.

And, since the administration and Congress appear to pay only the most cursory lip service to deficit reduction (see how they increased the budget in March for their cherished programs).

And, since they believe higher taxes is always a good idea to fund their social welfare (not unlike California), what might we have to look forward to?

1. Let's see? California has lost a bunch of its tax base as the well-to-do and business decided they didn't like paying taxes - i.e. reduced income and jobs.

2. While California has had some difficulty borrowing, Washington has the Federal Reserve's quantitative easing.

It would be nice to see policies in Washington that don't shout out "California here we come!" but, of course, who'll be bailing out Uncle Sam?

Etc., etc., etc. with respect to jobs and inflation and interest rates and American's standard of living!

In light of the above, does it make sense to hold paper dollars or something that can stand up to the shower of cash from quantitative easing?

On Thomas Frank's - A Liberal Thanksgiving

A Liberal Thanksgiving
http://online.wsj.com/article/SB10001424052748704611404574556130591002784.html?mod=loomia&loomia_si=t0:a16:g4:r4:c0:b29069136

With all this rambling, one can't but question whether the author isn't supporting the Pelosi/Obama alternative of social welfare statism instead of the idea of individual rights, individual choices and individual responsibility.

Clearly the markets confounded many in the heyday of sub-prime mortgages. But, who didn't question the relationship of house prices to income during the recent real estate heyday include those who sit in Congress, as well as an assorted group of supposed regulators, non-regulators, banks and investors. So, who's to blame? Grab a mirror and don't look for a savior. (As PT Barnum (or someone like him) said, "there's a sucker borne every minute".)

Some of those current suckers look as though they believed in the Dubai economic miracle.

And, 53% of blue collar Democrats per a recent survey believe Obama is on the right track with economy. (One wonders what the percentage of UAW members believe and believed the union took the right approach to GM and Chrysler?)

So is there some benevolent, all seeing brilliant parties or parties to be trusted to help achieve whatever goals people have for themselves and others; or, should such brilliance (for hey or nay) be left to the individual?

My vote is for the individual!

GDP and News on the Job Front (November 2009)

Economic Revival Shown Less Robust
http://online.wsj.com/article/SB125906901646162279.html?mod=djemITP#articleTabs%3Darticle


A puzzle is how tax receipts can decline at such a greater rate than GDP? Some variance might make sense - some earned income is being replaced with unemployment benefits; yet, it appears profits are more robust than revenues (which would seem to suggest a lower GDP figure).

Another aspect of the article that was missing was an examination and consideration of the basic production equation (production = (cost of) labor + capital + raw materials).

Obviously, we know the cost of labor in the US is going up (with a direct cost and union risk factor that probably doubles it from what it is on average today). This is clearly anti-job-creation. (The estimated total cost of labor is probably running today at a factor of 3-4 times the gross pay of the worker.

As such the above production equation would suggest that the other inputs have to be adjusted - since the end product cost can't vary (much to the chagrin of the UAW and the other unions).

Also, since capital isn't captive to America, it is going to seek its highest return (beta and alpha/risk adjusted, etc.). In such a situation, we see that capital is either seeking a return commensurate with corporate profits or a risk-free return from government securities. (Government securities of course ignoring or questionably pricing in the inflation risk - except that people are apparently seeking shorter maturities and buying gold).

Based on the above and the policies of the government, the picture on the job front wouldn't appear to be particularly good for Americans looking for jobs.

A New Level of the Unimaginable

Government Deficits and Private Growth
http://online.wsj.com/article/SB20001424052748703932904574511243712388988.html?mod=djemITP#articleTabs%3Darticle

We really can't imagine that the US economy won't revive, but...

It's rather like loading up a camel - for a while, it works. When the camel decides enough is enough, the entire load has to be removed. To wit, the entire deficit and transfer of wealth from producers to non-producers.

It's a new level of the unimaginable. But, is it real? Everyone is making bets. Mine would be it's highly likely - but, who knows?


The Business-Labor Divide
http://online.wsj.com/article/SB10001424052748704533904574543662226907336.html#articleTabs%3Darticle

Stern's comment about unions distributing wealth is exactly the problem. It doesn't distribute wealth based on productivity or as a reward for doing one's work well; rather, it ties it to things like longevity/seniority (see teacher's unions and the UAW, etc.).

Also, the union has no ability to evaluate whether the company can stay competitive over time. It wants immediate and long term benefits and rewards.

Thus, we can't ignore what has happened with our domestic car companies and exculpate the unions. Rather, we should be looking in horror at what happened. (I'd jail the union leaders, but that might be going a bit far.)

However, the world sets a price for labor (and this price includes all of the benefits and social charges labor or the employer has to pay for). This has gotten out of hand in America as the individual worker isn't making these decisions (it's his/her union and the government - both at a state and national level).

Why one might ask are there such high salaries paid to certain people and not to others (as union leader Stern says). Well, it might be that the productivity and value of the work performed that generates the ability to pay those salaries is exactly what happens in a world of supply and demand.

Likewise, we've denied society the ability to create and employ people at more menial salaries because we think those salaries are too low, the benefits too sparse. So, either the jobs go undone or they are done by people who drop out of the productive salary-paying economy and do the jobs themselves (the labor conundrum).


The Economy and Finance
http://online.wsj.com/article/SB10001424052748704204304574543920660621900.html#articleTabs%3Darticle

What's missing from this discussion - although closest in what's said by Amex - with a lens of increasing and supporting employment as a focus of all policy decisions - is the issue of individual employee choice on the benefits they want to pay for.

In other words, too much is taken from the average employee to pay for things that government decides are important - but which, the current economic situation doesn't support.

As a result, it may cost an employer $400 for every $100 in gross employee salary; and, the employee will only net $65 or 70 (and some only $45).

With that type of allocation, the government has taken the decision-making away from the employee - with a benevolent intent and high degree of social consciousness - but with an ultimately destructive impact on employment.

Since this overreaching on the part of government was excluded from anything presented, one can't have a very positive view of the jobs picture. Instead, the government and Fed will be pushing on the job string as they have been with easy money. And, as indicated by the price of gold and commodities and the unemployment rate, it looks like investors see inflation down the road. (And, no change on the job front.)

Overcharging, Underpaying - Blame the Government Not the Employer

Weighing Jobs and Deficit
http://online.wsj.com/article/SB125894389767760063.html#articleTabs%3Darticle

Perhaps a look at the jobs forest would be better than looking at the jobs trees?

For example: The electrical contractor hires an electrician. The salary is $100 for the electrician. But, the employer has to pay social security, medicare, unemployment, workmen's compensation, now healthcare, etc. So, the employer needs to charge someone using the electrician's services $300 - let's say for the day or hour.

Now the electrician, who nominally has a salary of $100, he/she also has to pay taxes for social security, etc. plus income taxes. Let's say the electrician takes home a net spendable salary of $60. So $240 has gone to taxes and benefits that the government has decided the electrician should be paying and contributing to.

Now - the electrician himself/herself would like to hire a plumber. But, the plumber has the same cost structure as the electrician - i.e. the electrician will have to pay the plumbing contractor $300 per hour or day for the services of the plumber. BUT THE ELECTRICIAN ONLY TAKES HOME $60 to pay the $300.

In other words, it's more than likely the electrician will try and do the plumbing himself or herself (or just not have the job done at all)!

As such, the society loses productivity (and gross domestic product).

Almost all the policies of the administration are geared to widening this gap between what the worker should earn and what the worker takes home.

One way out would be to make it possible for all workers to be independent contractors and to remove any required contributions to anything but a minimal social security and medicare. If they do contribute their level of contribution would be reflected in their final payout.

Also, for health insurance - let the private insurance industry come up with some bare bones policies. These would be much more like the cheapest health plans offered in Europe.

If something isn't done, the US economy will find it very difficult to add jobs when the competing economies (and we're not talking Europe here) avoid this huge labor conundrum where society takes so much of the income paid to the worker.

Is Michigan Going to Be Like a Camel?

Michigan's Broken 'Promise'
http://online.wsj.com/article/SB125893723996459927.html#articleTabs%3Darticle

We all have heard the story about the "straw breaking the camel's back". Well,Perhaps the straw and the camel have a sad lesson to teach the State of Michigan and the UAW?

The greed of unions and the state to tax, tax, tax and over consume have killed the state's previously existing job engine. Sure, there was China and competition; but, you either meet competition intelligently or stupidly. Sadly, Michigan and the UAW chose the least possibly intelligent route. And, it has failed. As the load on the camel gets bigger, it's harder to get things turned around.

Since they are still loading the camel, Michiganders can only hope that it's not going to take until the last straw and a major restart with everything coming off. This is not a picture one can look forward to.

Not so Different from the Movie 2012

The Coming Deficit Disaster
http://online.wsj.com/article/SB20001424052748704888404574547492725871998.html?mod=djemITP#articleTabs%3Darticle

What do current economic circumstances have in common?

As one recalls how people who held bonds got battered in the far better economic climate of the 1970's, one is only left to imagine how many retirees (and particularly early retirees) will come to rue the days ahead in the economy.

It reminds one of the part of the Titanic movie after the ship had struck the iceberg but the Captain assured everyone there was not problem, so lifeboats weren't launched.

There are those who, as union leaders and followers, had no problem with the bleeding of GM (UAW) or the failure to teach children (40% of Washington's public school students were recently reported to not graduate from high school). Thus, they don't see a problem.

The administration and the Democratic congress clearly don't believe a problem really exists either. They are paying lip service and would like to have more jobs, but don't have the ability to see what the problem is. Red herrings are ever present.

Somehow it seems very similar to religion which relies on faith with or without results.

Those who see the travails a head are giving lots of warning. In a way, it's not unlike perhaps the survivors in the movie 2012. Even seeing what lies ahead doesn't guarantee survival.

Here a job, there a job - whoops, there goes another job.

With the Democrats concentrating on adding more labor costs (the healthcare fund raiser currently before Congress) and hearings on capital hill worried more about what the Fed is doing and the bailout of banks by Geitner, it's clear that the real cause of businesses not hiring and expanding with US labor is being ignored.

Thus, the question about where the price of gold will go.

Because, if the administration and the Congress continue on their current paths, then there will be huge debts, likely another economic downleg and in all liklihood the necessity of having the Fed cover even more of the government's borrowing costs.

None of this is good for jobs - but they just don't seem to be applying any logic. Ah well, they learned from the UAW and the other unions, so what does logic matter. It's all for immediate gratification.

Blinder Ways to Add Jobs

How Washington Can Create Jobs (by Alan Blinder)

http://online.wsj.com/article/SB20001424052748703683804574533843234723498.html?mod=djemITP#articleTabs%3Darticle

What is missing from Prof. Blinder's discussion and the other general jobs discussions? Can we say 'business-friendly' policies?

We hear about a health overhaul, which is designed to find a way to get more money into a health system that is supporting the costs of basically medicare and medicaid (the red herring of bringing the currently uninsured in is basically a money grab for young people who have fewer claims and aren't paying the huge premium costs).

As for supporting business through saner tax policies - let's admit that the administration never saw a taxable dollar from someone with money that they couldn't find a worthy recipient of a government program for!

There does seem to be an implicit admission that we need to find private sector jobs - so, where are the questions about why the jobs aren't forthcoming? My guess is the answers are so strident and obvious and obviously going to gore some constituency or another of both parties that they'd like to avoid the facts and go with the fiction.

It's all nice to think of minimum wages and blaming the Chinese, but we spend too much on consumption in this country - in particular, on the consumption of government services, mandated benefits - and the fact that we don't want to allow wages to reflect the actual value added of the work being performed (the old labor conundrum comes in here - whereby so much is taken out of the salary that could be paid to the worker by the employer that the worker is left with too little net purchasing power - i.e. it costs the employer $300 per day for the worker but the worker goes home with only a $100. Where did the rest go? Government programs.).

Let's get back to letting people know and choose what benefits they are paying for, etc., etc., etc.

The Wrong Trees in the Woods

Overly Stimulating
"ADMINISTRATION ESTIMATES OF JOBS created or saved by stimulus spending are embarrassingly inaccurate..."

http://online.barrons.com/article/SB125815707307947809.html?mod=BOL_hps_dc#articleTabs%3Darticle

Could it be that we're looking and counting the wrong trees in the woods and not considering the actual forest?

In other words, should we even be looking at the jobs created by government spending; or, should we be looking at jobs lost or not created by misbeguided government policies?

I'd suggest we look at whether we are creating a better, stronger, more entrepreneurially rewarding business climate or not. And, my own answer, which I'd posit is reflected in the unemployment rate, is that we are not.

While looking at what government allowed to happen to GM (bankruptcy and equity investor wipe-out to preserve some union jobs and retirement benefits) as the government's plan for the economy, it is perhaps worth considering the impact it has on investors and business people.

Whither the Dollar?

World Tries to Buck Up Dollar
http://online.wsj.com/article/SB125798819587744477.html?mod=djemITP#articleTabs%3Darticle

If foreign central banks buy dollars to protect their trade, that shouldn't matter if the US had its own economy in shape - which it doesn't.

As Milton Friedman said so many years ago – “eventually they have to do something with those dollars”.

It is lucky for the US that those dollars are there since we are borrowing so much and saving so little as a country.

The US has had the choice of cutting back spending and it has chosen, as have so many state and unions, to just try and spend even more. It would strike one as the height of idiocy if done as a family budget - why is it so different if done by government?

As when a family gets in debt, they either use Chapter 13 and restructure and try to repay most of the debt or they do Chapter 7 and wipe the debt away.

Since it is relatively unlikely that the US (although maybe not all of the states) will try not to do Chapter 7, the longer we keep up the spending (i.e. Nancy and her health bill), the harder it will be. The actually spendable part of the (family/government) budget will be less and less and the amount going to repaying past debts will be larger.

So far the US is just spending like no tomorrow and cutting back nothing.

If one thinks about the Obama administration's union-directed goal of a weak dollar to try and retain manufacturing (read: union) jobs with high wages and benefits, one immediately thinks of California and New York where the states are in financial duress with jobs leaving the states and wondering - "do each of these states have their own currency?".

Of course, the answer is "no".

What liberal spenders can't seem to understand is that government is spending too much and the incentives for business and job creation in the US are too weak. High taxes, high healthcare costs, etc. all militate against job creation.

Last nights news shows were replete with discussions of not just a "jobless recovery", but also about how companies don't want to hire any employees. That's the shocker - minimal to no added employment.

This ought to be a wakeup call to the administration and Pelosi and her pals. But, of course nothing is said.

Senator Warner nailed it in the last few days when he stated to the press that the government is trying its health bill because it knows it can't afford the current medicare and medicaid programs and doesn't want to confront the fact. So, it wants to take away the chance of young people to buy homes and pay off their student loans so its social spending can remain unconstrained. This is unconscionable - unless, of course, you're a free spending liberal who look to take from every worker to provide for non-workers.

It appears as though the pit of unemployment and economic stagnation and decline is steepening ever more quickly as the administration seems to have no handle on turning around programs that not only don't work, but have been signaling their failure through both Democratic and Republican administrations.

Back to Basics - Supply and Demand

The Fannie Mae Dice Roll Continues

http://online.wsj.com/article/SB10001424052748704402404574527440083580698.html?mod=djemITP

Part of what should scare the lenders to the US is that the forces of supply and demand, saving and borrowing are being so enormously distorted.

The unemployment rate may be one of the flags evidencing what is going on, while the low interest rates at which the Treasury can borrow seem more like the delusion of constantly rising housing prices.

A question could be at what point of decline and at what level of misery, the US will decide to take a different tack than the one its on? Certainly there are states that are further down the road of economic dislocation and economic misery.

Yesterday's paper stated that New York State income tax receipts were down by 1/3rd. At the same time, the legislature didn't want to cut social consumption spending. So, like the families also highlighted yesterday that run through their severance and savings, the US is using up its capital stock and borrowing capacity - not to fund job creation or economic growth, but to support current consumption.

When and how will the debts be paid?

Nutritious Food for the Economy

U.S., Europe Differ in Approach to Getting Back on Growth Track

http://online.wsj.com/article/SB125772042679937143.html?mod=djemITP#articleTabs%3Darticle

In a response to the above article someone writes:

WSJ: "So this crisis offers a rare case study in how governments should respond to maintain potential growth. If the recession turns out to have been brutal but not seismic in terms of forcing a major adjustment, then Germany's focus on maintaining labor supply may be right. If, however, the fallout means new industries drive growth, then allowing resources to be reallocated while cushioning the effects on demand -- the U.S. response -- will be validated."

The weakness of the US position is that new industries are not being created with the extra profits from productivity gains. Instead they are being reinvested overseas. As a result, we will suffer a deterioration of labor skills and depressed consumer spending from having so many people out of work.


What's missing?
The commenter is correct about the reinvesting overseas but it would be good to better nail the problem.

Business invests as do individuals to get a return on their investment. They also invest to produce products that can sell at a given price point (think "economic utility"). Thus, it makes no sense to invest (say in the US) to produce a product that will have to sell for say $1,000 when the product could be produced offshore (by this business or a competitor) to sell for $800 or $400.

(If the product isn't made offshore, then a competitor will make it and the US producer will go out of business. This was clearly seen in the GM case where they couldn't produce small cars profitably in the US, etc.).

Thus, what's the choice?

1) It's as simple as looking at the production equation, looking at the variables and tuning them up with fiscal policies that promote capital formation, labor qualifications, technological innovation.

Production Cost = Labor Costs + Capital Costs + Raw Materials Costs

What we have with Pelosi and Obama is an administration that is driving up all three of these costs: the falling dollar raising material costs.

Whether a Democrat, Republican or Independent, Americans should be concerned that policies are being put in place and debts increased that negatively impact the ability to bring jobs back to America by overspending and spending too much on consumption.

One can't blame industry any more than one can blame a mother for trying to feed her children nutrition food. What you can blame is a government that deprives the mother of the raw ingredients to make nutritious food.

More on Life in a Nancy Pelosi World

(below is a link to an article in the Wall Street Journal highlighting some of Pelosi's healthcare plan proposals - it will make you gasp unless you're poor and a member of a minority.)

http://online.wsj.com/article/SB20001424052748704795604574519671055918380.html?mod=djemITP#articleTabs%3Darticle


What the Pelosi Health-Care Bill Really Says, November 7, 2009

So, what are the bets on unemployment numbers and real wage gains in the US?

Oh yes, and one of my other favorite numbers is, "How many extra years will it take a young person in the US to afford a house equivalent to that afforded by parents both 20 and 40 years ago?"

Those who win under the Democrats are those who are "underpriviledged". Those who lose are those who'd rather work, get educated and live a healthy lifestyle.

It's hard to believe the dollar is holding up as well as it is and that interest rates aren't already approaching double digits. And inflation Latin America style here we come!

Nancy's Thin Air

It's astounding how the Congress seems to ignore the logic that if we are in an economic environment where we need to have a more educated, capital intensive economy to provide good jobs and that there will be people who won't be able or won't want to move into this economy, that we need to be saving money rather than spending it.

And, we need the brightest, most entrepreneurial people to be supported in job and business creation - not taxed to death.

Meanwhile, Nancy Pelosi keeps thinking we can raise taxes, borrow more money and give more benefits than society can afford (of course she thinks society can afford it and that jobs will come out of thin air - one has to emphasize 'thin' because so little is left to the private economy to create jobs after Nancy's taken her taxes out).

Voter Choices - Mullahs or Spendthrifts

Sadly, the voters aren't really given a choice: would they like to have America restore a competitive labor market or not?

Rather, their choice has been do they want Republican mullahs in power who are concerned about abortions and gay lifestyles; or, do they want Democrats who are socially liberal and will give away the store and pile on the benefits with the unions and the UAW as their economic model.

One look at how great wealth has been allowed by the Communists in China to be created in private hands, should give an indication of the fact that America is taking too much from its workers through taxation and not leaving enough for the worker to spend as they see fit. Thus, the whole labor/production relationship is distorted.

Why do you think it is that the government doesn't want a worker to get a paycheck showing all of the payments the employer has to make on their behalf? Instead of that $600 net out of $1,000, it would more likely read the same net out of at least double that amount of gross pay.

If we want to bring jobs back to America, we need to make it affordable to hire Americans. It's all well and good to tax ourselves for this social cause and that; but, after a while the funds run out. We're taxing ourselves for current consumption and not investment in the future. We can deal with these facts in lots of ways.

The current approach seems to be another trillion dollars for added health consumption with a general lowering of the quality and availability of care a repressed conclusion. And, meanwhile, the U-6 jobless rate is 17% (close to one out of five Americans can't find work or enough work).

Oh yeah, current policies seem to be working swell!

And, let's keep on allowing Obama and Pelosi to put up red herrings. Ah well.....

Useless Canards and the Jobless Recovery

Facing Facts on the 'Jobless' Recovery
http://online.wsj.com/article/SB125746080945231961.html?mod=djemITP#articleTabs%3Darticle

• Some say that Jobless recoveries are the residue of the expansion of globalization. That each recovery is worse than the last one. That endless mergers and labor arbitrage will leave the US with a few big transnational corporations owned largely by foreign investors.

But why does this appear to be happening? Are we really looking in the right places?

Almost everyone receiving them likes government services that come at what appears to be little or no cost. No one really contemplates where this generosity is coming from.

Americans need to realize that there is NO FREE LUNCH.

Retirement at age 50 costs something. Almost free and limitless healthcare costs something.

The bottom line is all this generosity (which is tax or borrowing supported) is costing the US economic vitality and jobs.

We are hurting ourselves and refuse to see it.

• Some people even go so far as to cough up the old canard that no more wealth can be created so dividing up what exists is all that can be done.

One look at the wealth being created in China should dispel this canard for good. So should one look at companies like Google – or, even turning on the internet or getting in your car.

Yes, certain things aren’t around anymore; but, in the aggregate, the total amount of wealth and the better quality of life produced by the creative destruction of capitalism is growing and can grow – unless, that is, capital and the ability of capital to create wealth is compromised.

And, this compromising of capital’s ability to create wealth is exactly what has been happening in America – and, the seat of this destruction sits in Congress and the White House, with unions and with government.

How Sly Could Warren Buffett Be!

Has Buffett Overplayed His Hand?
http://online.barrons.com/article/SB125731575786627535.html#artCommBookmark

Another view of Buffett's move could run something like this:

Assume we are going to be heading into serious double digit inflation and a further devaluation of the dollar. In such a situation, would it be better to own a highly physical asset (as noted above) that may have even more flexibility to raise rates than a real estate investment (rents only on leases) or to have cash.

Not that one would want to think of Warren as a sly old bird; but, there are people suggesting we could have some high interest rates (which would further depress the economy and push up inflation)and this jump in rates could be anytime - although quite a few give it a six month window.

Perhaps it will also be looked upon as terrific luck in hindsight. Who knows?

But, the spending and printing and borrowing sustaining Obama and the Congress don't make any more sense than the housing bubble to me.

Will the Fed Stay in Control or Not?

Fed Stands Pat But Shows Its Hand
http://online.barrons.com/article/SB125737428832429223.html


Two potential codicils to Randy might be:

1) While the administration (like the rulers of Argentina) may think that they have stimulative fiscal policies by spending lots of money on consumption, they have EXACTLY THE OPPOSITE fiscal policies on those who produce.

Thus, it is little wonder that the jobless rate is high - because after all, those who want jobs would be producers as well as consumers.

2) In terms of low interest rates and currencies, it is being widely discussed that the foreign central banks that have been purchasing the Treasuries that the Obama Administration is producing like confetti may start to have second thoughts about both the revival of the US economy and the willingness of the government to confront its overspending (note: I'm not saying undertaxing - in fact, just the opposite).

So, while printer Ben may see the need, along with a majority of the prognosticators, to keep rates low in the hope of stimulating the economy, what is going on in the Congress and White House may force a change. Either rates will have to rise to keep attracting foreign lenders; or, rates will rise to crowd out domestic borrowers, sucking capital out of the economy to support social spending.

In light of fiscal breaks on production and the open spending spigot of the administration, the possibility of a much more severe economic downturn with high interest rates, high taxes and high joblessness doesn't seem terribly remote.

UK Money Pump

BOE Expands Economic Bailout; ECB Holds Steady
http://online.wsj.com/article/SB125741247322330459.html?mod=djemalertNEWS#articleTabs%3Darticle

As with the US, is Britain just pumping in liquidity that is pushing on an economic string?

Are either economies sufficiently competitive to bring back employment? At some point taxes are too high, labor rates and benefits out of whack and even with low to extremely low capital costs, entrepreneurs don't see the point in getting going.

Eventually all those low cost dollars have to come back and chase too few goods.

If those goods are all imported, then the currency has to keep going down and the cycle will eventually burst.

Is anything being done to encourage business growth and establishment?

Union Neighbors.....Hmmm!

Tuesday's Biggest Loser: the Union Agenda
http://online.wsj.com/article/SB20001424052748704013004574515681098665524.html?mod=djemITP#articleTabs%3Darticle


What I don't understand is how evenhandedly people consider their neighbors who are in unions when they have had the audacity and hubris to ask for raises while their neighbors are out of work.

The old Amish policy of 'shunning' would appear to be the kindest consideration to give to these union thieves.

As well, why aren't members of the teachers unions who care more about seniority than about the ability of teachers to teach - your kids and my kids!

It would seem reasonable for people who are paying the taxes to support these union members and unions (after all, the union officials are the one's who do the best here - nice salaries, nice benefits, nice union pensions) to make it personal and go after individual union members. Who wants a thug, criminal or selfish lout as a neighbor anyway?

Let's see. You just lost your job and the guy with a union job just asked for a raise! Hmmm......just a thought!

Six Months?

Senate Alters Taxes for Big Companies
http://online.wsj.com/article/SB125738134701529625.html?mod=djemITP

Listening to lots of talking heads over the last few days, I'd say there is a consensus emerging that the US has about 6 months before something untoward is likely to happen unless a clear plan to reduce the deficit is in the works.

Sadly, the government - day in and day out - is more like the family that knows it is spending too much and going more and more in debt and, instead of cutting expenses, decides to tap another credit card (with respect to the government, this means raise taxes as well as borrow).

The idea of the government living within the means of what the economy can afford - with respect to having the capital to sustain its current investment capital and move toward full employment - is just not there.

As one of the commentators last night on Bloomberg remarked, we make look at a nominal 10-year federal deficit of 10 trillion; but, the unfunded social security and medicare liabilities are 100 trillion.

One can just think out what the likely results are for a family budget (one's own) or a company (think of GM) when they are spending too much.

It's hard to believe jobs will come back to America when America is too high a cost place to do business. If taxes are too high and the return to investors is too low, we are back to stagnation at best on the jobs front.

There is no magic bullet to trying to produce something if the cost of producing it is greater than the income from selling it. This was the GM lesson. Their costs were too high due to all the UAW benefits; and, the most hurt were younger GM workers who had to pay for the benefits paid to retirees, union members with seniority and union officials at closed plants.

Nothing is being done by Congress to hold back this kind of squandering of resources. In fact, the threat of unionizing the economy and removing any relationship between production costs and sales values is one of the key things holding back the economy. How could it be otherwise - except in the union and Obama nirvanaland that is but a figment of the imagination. In real terms, people like to be fairly paid and fairly dealt with. Ask two or three young teachers who got laid off so a burned out union teacher with senior could keep their job about fairness?

This Time the Top 1% May Simply Decide Not to Work

http://online.wsj.com/article/SB20001424052748703932904574511833478785674.html?mod=djemITP#articleTabs%3Darticle

Clearly Noonan et al are correct that in this modern world, it doesn't really take that much of an income to live adequately (or remotely).

As a microcosm, here in Europe it's evident when talking to young people who don't see opportunities here and, if more motivated, they leave; if less motivated, they go on welfare.

It's also the connundrum for the average worker that is evident in every news article talking about the need for 'export' markets. Why export markets?

I'd argue that by government taking so much of a worker's productive net worth for social distribution, the employer is unable to fairly compensate the individual worker for their individual contribution to the productive enterprise. Thus, the worker who should be earning $1 (or with the employer $2, where the employer's dollar should be their as a resource for greater production or as a reward to capital and entrepreneurship), is left with perhaps 35 cents. Out of that 35 cents the worker then has to buy the production of other workers.

Of course, some of this production is bought by those receiving government benefits; but, not enough. Thus, the society is unable to afford its own production.

Part of this is wrapped up in the concept of 'economic utility' - but, that's an extended discussion.

The bottom line is the worker is deprived of the ability to purchase their own production - sort of the exact opposite of Henry Ford's original $5 a day wage where Ford workers could afford to buy a Ford car back about 1915. Today, they wouldn't be able to afford that car because Ford could only pay them $2 and the government would have happy retirees and welfare recipient's, etc. enjoying the other $3.

Bubblicious

Small Business Gets Breaks in House Financial-Overhaul Bill (WSJ,NOVEMBER 4, 2009)

http://online.wsj.com/article/SB125729617077326787.html?mod=djemITP#articleTabs%3Darticle

Congress should pay attention to the evidence that the venture capital IPO virtuous circle of job creation and economic growth in America is severely injured - and, injured by government.

It makes no sense to whine about lack of jobs when many of the major causes have come right out of Congressional legislation and the intents of this administration.

As shown elsewhere in today's paper, current expansionary policies are like pushing on a string and very bubblicious.

Reports of Fed Plans to Pull Money Back Out

* NOVEMBER 3, 2009

Brian Sack Engineers Big Moves at Fed

http://online.wsj.com/article/SB125720947716624249.html?mod=djemITP#articleTabs%3Darticle

Could we be seeing why banks aren't lending out any liquidity and are bracing themselves for the higher interest rates the Fed will need to offer (read also discounts to face) in order to pull this capital out of the economy?

Also, why corporations may see that they will need to hold cash since liquidity will all be flowing to the Fed and the government (crowding out)?

The Inverse of the Rule of 72 - Obama Style

Heard of the Rule of 72 for savers? It also works in reverse and applies to what is happening to the US economy.

It has consequences which are being ignored.

Sadly, along with all this government spending and entitlement is a shrinking of the real economy - and, in particular, the very jobs the economy wants to retain for the less skilled and less educated.

As the society adds costs to any employment (and we've seen and are seeing this in spades), the less valuable or affordable jobs are dropped. But, somehow the administration is oblivious.

If they spent some time in Europe, they'd get the picture very quickly. The flip side is lots of very low paid jobs and jobs with very little purchasing power.

Thus, it pays to watch the percent of GDP the government plans to take and is taking.

And like the inverse of the rule of 72 with investing, the less principal you leave each year, the lower the growth rate can be - no matter what the intrinsic rate of return.

Thus, take two economies growing at the same rate (say 6%). If one third of the growth is siphoned off into consumption in Economy 1, then Economy 1 will have only 2/3rd of the growth left for reinvestment (say 4%). With the rule of 72, this would 18 years to double. If the other economy left all 6% to reinvest, it would double in 12 years.

Now, take a situation where it's not just the growth in the economy that is taxed away but the equity built up (read: unionization, etc.), then the real growth will be even less.

So, as the US is heading hell-bent-for-leather down the road of expanded entitlements, it is also eating into the meat of the economy and it is hard to believe this won't have the same impact on the economy that exactly the same types of policies had on GM, where the UAW took the meat out of the company year-in, year-out.

Obama's German Union Quandry

Obama starts out the month of November wondering why the Germans can have both an export economy and be heavily unionized.

Does anyone need to wonder both the direction and the non-fate of America? As written about before, Obama has a view of an American nirvanaland that has U-6 unemployment at 17% and no reason to see it shrink. Sadly, just the opposite.

Unions, like Obama, think there is an endless money train they can tap for benefits. But, what is the reality?

Let's see: GM and Chrysler are easy - the companies had to be refunded by taxpayers; investors got wiped out; large parts of the company (and jobs) were lost; young workers are getting screwed to protect and provide additional benefits to older workers.

In terms of public employees - the State of CA is broke; and, in Philadelphia, last week it was reported on Bloomberg that the police/fire unions wanted 12% wage increases for each of the next two years. Meanwhile their neighbors don't have jobs.

The unions don't get it. There is a world outside the borders of the US. Other people are actually struggling for jobs and they are educated and seeking more education; taxes are lower and benefits are lower.

If the GM - UAW experience is the model that Obama and the unions seek, then it's no wonder that companies are holding onto as much cash as they can. They clearly don't want to create jobs in America where the price of labor (particularly its benefits) and taxes will make it uncompetitive to produce (exactly as with GM, where 5 car brands are now down to 2 - if that).

As the unions get the last blood out of the economy, they think they are winning. However, with the 17% U-6 unemployment rate and no one even suggesting that there will be a strong rebound in jobs, it would seem reasonable to consider maybe something is wrong? And, I'd suggest the unions are high on the list.

It may appear as though business got greedy by wanting to have products that could compete on price and quality - and maybe that's unfair.

After all, GM couldn't compete that way and so it closed Oldsmobile, Pontiac, most of Buick, etc. They were forced to try to compete and continue with 1930's unions and union labor practices. What did it get them? A wipeout of their investors and a loss of jobs and capital plant and equipment. I'd blame that failure directly on the UAW.

And, the added benefits the government is going to be mandating all sound nice, but with higher taxes it means that for every 300 dollars business could have paid a worker, they'll only have maybe 75 dollars left after allowing for all the extra costs (recall that up and down the business pipeline, money that could go to labor and labor productivity and jobs is being siphoned off for government benefits to those not working).

Pelosi, the Cheshire Cat

The Worst Bill Ever
Epic new spending and taxes, pricier insurance, rationed care, dishonest accounting: The Pelosi health bill has it all.

http://online.wsj.com/article/SB10001424052748703399204574505423751140690.html#articleTabs%3Dcomments

Pelosiland is like the world of the Cheshire Cat - a world of make believe - except of course for unemployment.

Clearly Congress was oblivious to the housing bubble because they fought so hard to turn a blind eye to Fannie and Freddie's role in all of it, etc.

And, from the reports on companies listing (or, one should say "not" listing) on American stock exchanges, and of course the well-noted planned high taxes on business owners, it just perplexes one where the Democrats expect jobs to come from?

Maybe they are confident the US will be happy with the French model of overstaffed government-owned enterprises? And, maybe their actions with respect to GM and Chrysler give a clear indication of this - although Obama foreswears the opposite? Are these really puzzles?

It sure feels good to have low or no cost healthcare! Just like retirement at age 50, etc.

I know lots of people who retired in the last ten years who are beginning to have concerns about the next 20 to 40.

Even though consumer sentiment is weak, my guess would be that most people are like members of the UAW - they are in for the immediate grabbing of benefits with apparent total ignorance of the long-term impact of such taking.

Maybe money can be endlessly bestowed on the US economy by the Federal Reserve and foreign central banks trying to preserve the relative value of their currency, but nothing goes on forever.

There was a rude wakeup call to housing prices not having only one direction. But that was only part of the economy. Now, we're dealing with the dollar itself. Can we say - let's hope not Zimbabwe.

A Tale of Two Families

* NOVEMBER 2, 2009

Jittery Companies Stash Cash
After Crisis, Big Businesses Hoard Most Bucks in 40 Years; Google's $22 Billion Cache

http://online.wsj.com/article/SB125712303877521763.html?mod=djemITP#articleTabs%3Dcomments


With respect to companies not investing right now, they are not the culprit you portend, it is government and government policies that are a clear cause of these problems (along with unions).

Think of two families with similar incomes and similar job prospects.

When the economy turns down, one cuts back and builds resources (read: companies).

The other family not only continues its previous level of spending on anything and everything, but ups its consumption of non-essentials and takes on debt (read: business).

Now, which of these families do you think has a better future?

Sadly, the second spendthrift family has the right to tax the savings of the first family. So, one can only image that the first family is thinking of moving out of their grasp.

The New York Stock Exchange, God and Social Justice

Is the Stock Exchange Obsolete?
The CEO of the NYSE says the future of New York as a financial center will largely be determined by Washington.

http://online.wsj.com/article/SB10001424052748704500604574483632628966424.html?mod=djemTEW#articleTabs%3Dcomments

It would be nice if this was at least a modest wakeup call to the socially conscious challenged, but I'm sure it won't be.

Everyone in the Obama administration seems far more concerned that they haven't extended adequate benefits to all the disadvantaged. They forget or never learned to story of the goose laying the golden eggs.

And, even more sadly, the Republicans are hidebound by their religious party members who feel their god (note: no capital 'G') is speaking to them and his/her demands are paramount! (Can we say 'Iran'?)

Is there a Mystery

The Dollar as the Common Denominator

Stocks, Currency See Close Relationship; 'The Sheep Effect'
http://online.wsj.com/article/SB125710221903421357.html?mod=djemTEW#articleTabs%3Dcomments

Let's take the three basic forces - (1) people tend to extrapolate from the recent past; (2) the US gov't is running an outsized take of US GDP and this in the past has always portended a slowdown of the real economy; (3) there is an outsize effort to try to obfuscate the overindeptedness of the consumer and the economy, and the overspending of government; (4) there are lots of specific governmental policies that militate against employment, etc.

Thus, while Shiller was on CNN saying that the human factor made economics difficult, the above factors all lead in one direction.

Admiittedly the timing and the resiliency of the existing economy are questionable; but, the direction is clear.

The US doesn't want to address spending too much on social spending and the economy can't ever recover with the government taking the amount of it that it is - that is, until a very sorry bottom or policy change takes place.

Thus, the value of a few US assets may be sustainable; but, otherwise, the US is at the top of the pyramid and the value of its assets and currency will be falling.

It's as simple as the farmer who can save and plant 10% of his/her past crop vs. the farmer that can save only 6-8% or the farmer that can plant 12%. Thus US is the 6-8%. 10% is needed for equilibrium and over 10% there's growth.

Sadly, the Obama admnistration (not unlike the UAW and other unions) believe current consumption trumps all. So they take from what needs to be saved and reinvested. Perhaps this is wrong. But, the situation with GM and the current healthcare proposals would say the opposite! Who knows, maybe there's a fairy who can wave its magic wand and produce abundance out of squandering?

Land Mines Pockmark Road to Recovery

(comments on an article by Tom Petruno in the LA Times in September)

What's missing from all these scenarios is a practical evaluation and analysis of the rudiments that drive the economy. In other words - why did we miss the meltdown and consequences of the housing bubble and subprime? Below are some things to consider:

A. What is going on with the average citizen (as in housing, prices can't exceed income growth forever)? How many people have lost their homes, their savings and have no job? What is the impact of both the reduction in the number of potential consumers and the mindset of those that are still capable?

B. What is the tax structure suggesting (i.e. with the hugely expanding debt, the stated objective of having the rich (read: more successful, business owner and risk takers) make up any shortfalls in revenue - along with vastly expanded and costly social programs - another big negative totally different from 1982!

C. What is suggested by the investment climate? In other words what happens when the existing structure of the protection of investor rights is undermined by government actions, as in the case of the Chrysler deal? Will support for unions at the expense of bondholders have an impact? -

D. What happens to the existing level of government expenditures that were already too high? (here one might consider the possible offset to the above of reducing government benefits, pensions and big savings from getting rid of the drug war, etc.). Here one would have an offset to a lot of negatives by getting government out of the way and big cost savings.

Under the Just Right Scenario:
"In such a sluggish recovery, the Fed can keep short-term interest rates low for longer without fearing inflation, even as commodity prices continue to rise."

Here the question begging for an answer is "where's the money" coming from to fund the US Government's huge borrowing needs?

> There's the US Savings rate (recall the numbers from the 1980's when the term "crowding out" was popular and the printing press at the Fed was an 'unused' last resort.

> Aren't there a lot more countries borrowing now than in earlier periods of heavy Gov't borrowing? And, weren't we worried a couple of years back about a 400 B deficit?

> If this was our own corporate budget or family budget, with our income down we'd be looking to cut back and save. But, here's the government spending like it just got a bunch of free credit cards (sort of like our recent housing bubble and consumer spending bubble.).

> And, it's not like the government is "investing this money". It's running up huge debts for consumption. Take a look at the Chrysler settlement. Is the funding going into product development or payments to UAW union retirees? It scares the bejesus out of me!

Too Hot Scenario:

"We're not inflating assets because of sound economic policy. We're inflating them by printing money," says David Joy, chief market strategist at RiverSource Investments in Minneapolis. "To some extent, it's an appropriate response because the private sector is flat on its back. But it's a dangerous path."

This would appear to be exactly right.

We are encouraging uneconomic jobs - look at the UAW agreement again. Due to union favoritism, the idea of retiring at age 50 and all the other UAW's uneconomic, counter-productive work rules are still there. And, who's paying for this - the remaining productive parts of the economy that are competing with Chinese and other workers not having these benefits or cost burdens on production.

The UAW was so afraid they might not get the last bit of milk out of the deal, they stopped GM from being able to import cars from China. Meanwhile, since auto dealers aren't UAW members, they get screwed. As always, the UAW (and the government) is trying to REDUCE competition and support high cost production. Does this read like inflation?

Meanwhile, its a money push job from Washington. The latest numbers in last week's papers showed analyses saying the government will be lucky to get $30 billion of the $50 billion its spending to save some UAW jobs. Again, it has to get this money from somewhere and it's likely the Fed's printing press.

Will the UAW bailout be an isolated incident or will the printing press have to keep printing.


Too Cold

"This pessimistic scenario is a recipe for retesting the stock market's March lows. In the longer run, it could also lead to deflation, in which prices tumble as consumers keep delaying purchases. Deflation can be long-lasting and have a chilling effect on stock markets."

Here one should consider Robert Mugabe's track record in Zimbabwe. In this case, the government kept taking assets (like maybe GM and Chrysler) and there was less and less production being chased by more and more dollars (Zim dollars for Mugabe). Thus, inflation rather than deflation.

Chancellor Merkle and Obama's Nirvanaland

Merkle was kind not to refer to the Obama crowd as the "fairy tale shall continue" crowd.

It's clear that most in the US would like to believe that the US can enjoy an outsize standard of living (as it has enjoyed). But, the world is changing and the US is of the "live for today" philosophy.

We had the housing and other bubbles because it was easy and no one wanted the public to be denied. What should have been a wake up call with the housing bubble, both Bush and Obama are hoping to continue to obfuscate with massive government spending.

(As an example, an interview on KNYC radio with the chief economist of Moodys (yes, that Moody's) was exculpating the rating agency by saying "well, if the rating agency had only not believed the every rising prices of real estate might end...." Like on what planet can prices rise indefinitely for something which, after all is said and done, is based on incomes? Incomes weren't rising, just housing prices.

And here, Moody's "current" (yes, he said current) economist is letting his company and himself off the hook for being blind and stupid to basic economic principles.

In light of such reasoning, is it any wonder that some people are concerned about the attempt by governments to continue to let their citizens believe their is a consumer nirvana in the type of big government environment that Brown was expanding even today (with added payments to retirees and higher taxes) and well Obama, he's taking this to yet another higher level.

Farmer Seed Corn Example:

How do we get sustainable growth?

Think of it as the simple case of a farmer growing his own corn. He knows he needs to save 10% of his crop so he has enough seed to plant for the next season.

One farmer (say China) wants to increase production each year, so he saves 15% of his corn crop. Thus, each year his harvest grows. Another farmer (read: US, unions like the UAW) just gets hungry and can't control himself. He had a big farm so a little less production isn't such a big deal. So he starts to only save 8% of his corn each year.

As obvious (read: capitalism), the first farmer (read: China) sees his production growing every year. But it may still be less than the other farmer (read: US) because he started with much less.

But, you can see where this is going. And, bingo, this is just what you read about everyday.

And, Obama and the Dems (it was the Republicans too when they were in charge) don't want to tell various constituencies (read: special interest groups) that they are taking too much seed corn. And, the best way to mask it is to have people believe things are good (read: credit bubble, housing bubble. Now read: huge social expenditure deficits and union payoffs in the car industry).

Good Parenting – Supply and Demand

The question is the response - i.e. good parenting. This is what is missing right now. If one thinks of the economy as an endless balancing act of things we want and others want and things we can produce and others can produce, we have to throw in the degree to which some higher authority (read: both government and, in America, etc. - religion) can shift goods or demand (read: social payments and laws against sin, etc.).

Thus, what we have is disequilibrium. And "capitalism" says we let the individual optimize their own choices (i.e. produce and consume based on production); Socialism (communism) says we don't put too much pressure on the individual to produce and whatever is produced, we spread that around fairly evenly.

So, it's really not a matter of trust. We have countries like China where people were poor and were willing to work hard. Other countries like the US were rich and people (read: UAW and unions) don't want to work hard (read: retire after 30 years - can we say, Age 50). So, here's the disequilibrium.

Labor and Returns and Income to Labor

You are correct that returns are going to capital but ask yourself about labor. It is one of three typical inputs to production - along with capital and raw materials.

When one of these three components is 'mis-priced' or 'overpriced' they are substituted for.

With respect to Obama, he is further mispricing labor. As such, while he might want labor to get more, he is taking from labor for his extravagant health plan and all his other social benefits, further mispricing it.

If you approach it from a labor side, you feel you are not being paid enough. That is even clearer here in Europe where the distortions are worse. But the reality is that socialist transfer programs take a great deal of labor's production and use it for ostensible benefits. As these benefits are broadly distributed and highly wanted, labor isn't particularly conscious of what they've given up, they just are aware of what they don't have.

So you get the labor conundrum - which is one of the major issues afflicting our economy. The worker say produces a net available to labor contribution of 2,000. Out of that 2,000 government and benefits take 1,200. Thus labor is left with 800. (I'm not arguing for the exact numbers, the above is just an example).

Jobs in October

Ah, the Obama hiring mantra: less capital to fund your job, higher benefits due to your wonderful union, early retirement, expanded healthcare - oh yes, forget about the competitive price of what you make. After all, if you screw up on the job, you can't be fired.

Sure sounds like a winning recipe for????? Maybe it's not a close shop with union work rules and benefits everywhere. After all, why not buy something for less - i.e. 14% growth in imports.

Ah well, the writings on the wall; but, after all, most people probably had union teachers and can't read very well. Happy days....

Output Gap and Inflation

Your 'output' gap issue reminds me of California's deregulated electricity market and how pricing works.

With demand either low or supplied from overseas at lower prices, inflation can be kept low.

But, consider what the 'output gap' in the US represents? I'm not sure what the costs of bringing it onboard would be. Clearly, Obamanomics is raising the cost of labor (healthcare, union support, etc), reducing the returns to capital (higher taxes), etc.

So, if current cost are say $1.00 for a basket of goods; and, by bringing on additional supply (one tried not to think of the healthcare costs and supply issue), let's say the same basket of goods only goes to $1.25. Isn't that substantial inflation?

Not to say, as in the oil market, people don't still sell oil below its clearing price; but, most don't. The cost of that last barrel is what determines the cost of all the lesser barrels.

We've also seen that the scrapping of what would have been sound used cars before cash-for-clunkers is driving up the cost of those used cars that are available. Of course, this was the goal too - try to get demand up for new cars to try and keep bailing out GM and Chrysler.

But, let's see. You can't find a used car for $10,000, so you opt for a new one for $25,000. Could this be inflationary?

The Apostasy of a Different Point of View

As we hope to learn and teach our children, watch what they do, not what they say and use a little common sense.

Perhaps in economics its beyond people to do this; but, if you get to keep less of what you earn and government takes more of it and hands it out to either those not working or who get paid extra by being unionized, then you work less, you invest less, etc.

If one compares the anti-business, anti-capitalist policies of Obama with past recessions, one sees that the burden to come out of this is much greater - perhaps amplified rather than helped by the addiitonal government spending of the 'stimulus' plan.

So, if the math is right, then there will be fewer jobs, a slower economy, the risk of high inflation, high interest rates and - can one be surprised.

We all know social liberals or environmental activists or religious zealots who are so focused on their own agendas that, as the saying goes, they don't see the forest for the trees. To give everyone a free chance to be themselves and enjoy life as they will is apostasy.

Obama and Geitner on the Economy and Jobs

Obama:

President Obama sounds like the president of the UAW announcing all the jobs saved at GM (what with extra factory closings, etc.).

Perhaps I'm wrong and higher taxes and labor costs do actually inspire job creation; but, I don't think so.

Somehow the lesson of high taxes and social benefits leading to job losses is either a mirage or there is a touchy-feely reality to the economic condition of Michigan, California, etc.

Too bad the president doesn't know or can't get a grip on reality!

I'd sure prefer a situation where I really felt the economy was going to get better and be better for solid reasons such as - you get what you pay for and you get to keep more of what you earn and produce!

Geitner and Obama:
Sorry, but the mortgaging has not been to the banks but to pay benefits to the poor, disadvantaged and old that are unaffordable.

Take a look at what the UAW and its contracts did to GM. Then see how the government (both state and federal) is and has implemented similar plans and is pushing for more (this is particularly evident in those states with the highest tax rates and most lavish benefits, including those to public employees). Then ask yourself if you really believe that this was an anachronism or a logical result and outcome of these policies?

I'd say it's far more likely that the economy operates just like each individual. You give the individual a fair reward and proper payment for something, they'll sell it and do the work. You try and take too much from them (some consider this stealing or cheating, but let's just say I owe you $100 but only pay you $35).

You know from experience in all liklihood how you'd feel. You wouldn't feel good and want to do more work for the party that stiffed you.

Well, this is the larger economy!

People get to keep less of what they make; and, more of what they make is taken by government and given to those who didn't work or save for it.

And, comparable to the above example is what the government is doing to savers. They don't quite know it yet; but, the debasement of the currency so the government can keep borrowing in the short term, is also a hammer that some see.

The net result is a lack of hope for a better future - whether as a busienss person or a consumer or a job seeker. It could be turned around; but, this would start by letting people keep more of the fruits of their labor and having people pay more or take less of what is being offered for free (social services) or at a discount (medicare, etc.).

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Recall the impact of the share of GDP taken by government. When government takes more than 19%, we had stagflation in the 70's. Has something magically changed so we can have economic growth with the government taking over 25%?

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Sadly, you're buying exactly the mid-direction the administration would like you to buy into. Instead, look at the fiscal policies of the government.

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No, there is a clear plan of action! And, that is to bring the spending of governments down to a level that is sustainable; and, let the business community know that jobs come first and the government's first objective is to support those who want to work and invest and not those who want to retire at age 50 and not perform (which I read as unions).