People seeking Privilege destroyed the City of Detroit

Posted by PITHOCRATES - March 16th, 2014

Week in Review

The history of the world is not pleasant.  It is one where brutal oppression has been the rule.  Where a king or a lord or a chieftain used brute force to establish a leadership position in a tribe.  Then that tribe followed that leader to conquer other people.  To rape and pillage those around them.  As these groups grew larger power concentrated in the few hands at the top.  Who lived very well.  As did the people who protected them.  But the people beyond this inner circle?  They were expendable.   And lived nowhere near as well.  For there just wasn’t enough for everyone to live like that.  Which is why people want power.  So they don’t have to live the miserable lives of the masses.

Times have changed.  But one thing hasn’t.  There is always a group of people that wants to live better than the masses.  Today some use politics to give themselves privilege.  Like the United Auto Workers.  And public sector unions.  Two things that led to the bankruptcy of Detroit.  See how people seeking privilege destroyed one of the greatest cities in the world.  The Motor City.  The city that won World War II.  See how it fell from glorious heights into the shell that it is today in this documentary (see BANKRUPT…. How Cronyism And Corruption Brought Down Detroit by FTR Media in conjunction with Ben Howe and Mister Smith Media posted 2/1/2014 on FTR Radio).

The message is clear.  And a clarion call for the elections this fall.  Detroit is a Democrat city.  And it has been a Democrat city for decades.  Detroit was a model of Democrat Party rule.  And that model failed.  As it is failing—or will fail—in other large Democrat cities.  And, perhaps, a Democrat-controlled United States.  Something we may be able to avoid if we stop voting for the party of privilege.  The Democrat Party.

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Product Pricing

Posted by PITHOCRATES - December 10th, 2012

Economics 101

The First Thing a Business has to do to Determine their Selling Price is Determining their Costs

Did you ever think about how businesses price their products?  Do they just pull numbers out of the air?  Do they just charge as much as they want?  No, they don’t.  Because they can’t.  For if one gas station charges $12 for a gallon of gasoline while the station across the street is only charging $3.50 guess where people are going to buy their gas from.  So free market competition prevents businesses from charging whatever they want.  So how do they determine what to charge?

Well, some look at what their competitors are charging and match it.  Or charge a little less.  To steal customers away from the competition.  Which can work.  But it can also bankrupt a business.  For if a business owner doesn’t know his or her costs selling at the market price could fail to recover all of their costs.  The market price limits what they can charge.  But if their costs are too great to stay in business selling at the prevailing market price they have to do something about reducing their costs.  Which they can’t do if they don’t know their costs.  So the first thing a business has to do to determine their selling price is determining their costs.  Like this.

This is an abbreviated fictional income statement showing last year’s results.  And forecasting next year’s results.  EBT stands for earnings before taxes.  Income taxes for this year are based on the 2011 federal tax tables.  Income taxes for next year are based on the proposed Obama tax rates (increasing the top marginal rate from 33% to 39.6%).  The business is a subchapter-S where the business earnings pass through to the owners’ personal income tax returns.  The owner does not draw a salary but draws $125,000 from retained earnings to support him or herself, his or her stay-at-home spouse and their 3 children. The percentages show each number as a percentage of revenue.

You need to Sell at the Right Price and at the Right Volume to Pay all of the Bills

The difference between this year and next year is the rise in costs.  Obamacare and other business regulations increase the cost of sales (direct labor, benefits, direct supplies, etc.) by 2%.  And they increase fixed overhead (rent, utilities, administrative labor, benefits, etc.) by 2%.  They will have to recover these higher costs in higher prices.  Which will likely reduce unit sales.  But because each unit will sell for more we assume sales revenue remains the same.

The higher costs cause EBT to fall.  A lower EBT means lower federal income taxes.  But it also means less retained earnings to invest back into the business.  The reduction in retained earnings is $36,604.28.  Which limits investments to grow the business.  And leaves a much smaller cash cushion after some of those retained earnings are reinvested into the business.  To pay for the unexpected.  Like a new piece of equipment that fails and halts production.  Things worked well in the current year.  The business owner would like to have things work as well in the following year.  Which means not exposing themselves to such a dangerous cash position.  And how do they do that?  By raising their prices to make next year’s retained earnings as large as this year’s.  By recovering those retained earnings in higher prices.  Like this.

Let’s assume these numbers are for a coffee shop that sells only one type and size of drink (say a large espresso-based drink) to simplify this discussion.  If we subtract this year’s cost of sales from revenue we arrive with the markup on our direct costs.  Dividing this number into cost of sales we get a markup percentage.  For this year it was 72%.  In the current year let’s assume they sold 302,406 cups of coffee.  Which comes to about one cup a minute.  Dividing the costs of sales by the number of cups of coffee sold gives a unit cost of $2.58 for a cup of coffee.  Adding the 72% markup to this cost brings the selling price to $4.45.  Coffee sold at this price and at this volume produced enough revenue to pay all the bills, provided an income for the owner and his or her family while leaving enough left over to invest back into the business.  And provide a cash cushion for the unexpected.  As well as paying state income taxes, city income taxes, etc.

A Business must bring their Cost Structure in Line to be able to Sell at the Prevailing Market Price

To arrive at the new selling price we added the loss of retained earnings to next year’s revenue.  And re-crunched all of these numbers.  Because we are raising the price we can expect a small fall in revenue as customers buy less.  The higher costs and lower unit sales volume raised the unit cost.  The markup percentage is 1 percentage point lower but because the unit cost is higher so is the markup amount in dollars.  Which raises the selling price by $0.32.  Increasing the price of a cup of coffee to $4.77.  But is it enough?  As it turns out, no.  Because the new price raises revenue enough to push the business into a higher tax bracket.  Taking the business owner back to the numbers.

Because of the higher tax bracket, and the higher top marginal tax rate, this higher price still results in a loss of retained earnings.  About another $30,000.  So going through the whole process again brings the selling price up to $4.87.  Adding a total of $0.43 to this year’s price.  As long as the prevailing market price is around $4.87 for a large espresso-based drink this business owner should be able to keep his or her cost structure in place and stay in business.  However, if this exceeds the prevailing market price the business owner will have to make some spending cuts to bring his or her cost structure in line to sell coffee at the prevailing market price.  Make some assumptions.  And some adjustments.  Then crunch these numbers again.  And again.  For getting this price right is very important.  Too high and people will go elsewhere to buy their coffee.  To low and they won’t be able to pay all of their bills.

This may not be how all businesses determine their selling price.  But however they do it they have to bring their cost structure in line to be able to sell at the prevailing market price.   Because if their price is too high no one will buy from them.  If it’s too low everyone will buy from them.  Making them happy.  Until they realize they can’t pay all of their bills because their prices are too low.  The above example was complicated.  And that was with only one product.  Imagine a store full of products to sell.  And trying to calculate new prices on numerous products to cover the costs of new taxes and new regulations.  It’s not easy.  Which is why business owners don’t like big change coming from Washington.  For this change requires important decisions to make.  And if they get these decisions wrong and don’t find out until 6 months or so later they may dig themselves into a hole they won’t be able to get out of.  Putting them out of business.

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Filmmakers don’t like the High Cost of Making Movies in California so they Film Elsewhere

Posted by PITHOCRATES - September 22nd, 2012

Week in Review

California provides a good example of what not to do.  That’s because they are a very liberal/progressive state.  Who like to live in a fantasyland of what could be.  Passing active, interventionist policies to try and change the way people think and act.  Unleashing a wave of unintended consequences.  And chasing filmmakers out from the film capital of the world (see California lost $3 billion in film crew wages from 2004 to 2011, report says by Richard Verrier posted 9/18/2012 on the Los Angeles Times).

California lost $3 billion in wages from 2004 to 2011 because of film and TV production flocking to other states and countries, a new study concludes.

Burbank-based Entertainment Partners, the industry’s largest payroll service company, which specializes in advising companies on how they can take advantage of film tax credits around the world, says its own research has found that California lost 90,000 jobs and saw its share of overall production wages in the U.S. decline 10% during the period as film producers took their business elsewhere.

About half the lost wages went to New York, Louisiana, New Mexico, North Carolina and other U.S. states that offer film tax credits and rebates — states that added 45,000 production jobs during the same period. The other half of the lost $3 billion went to Canada, Britain and other foreign countries, according to the report.

Wow.  They lost 90,000 jobs to states and countries that were more movie-making-friendly than California.  The movie-making capital of the world.  Which has cost the state of California taxes on $3 billion in wages.  No wonder California is going broke.  Their high taxes and high regulatory costs chase their own movie-making people out of their state.  So the very tax rates and regulatory policies that were supposed to increase tax revenue have decreased tax revenue.  Who’d a thunk it?  Well, pretty much everyone but a tax & spend, Keynesian, liberal Democrat.

They call these results unintended consequences despite having the best of intentions.  We simply call it causality.  If you implement anti-business policies you will get less business activity.  And filmmakers will go elsewhere to make their movies.

The findings were recently shared with representatives of the Motion Picture Assn. of America, the state’s finance department and the office of Gov. Jerry Brown, who is weighing whether to approve bills that would extend funding for California’s film program two more years. The state sets aside $100 million annually to qualified productions under a program that is due to expire next year.

Goldstein noted that his company’s research also shows the California tax credit has had some effect in slowing the job losses and migration of film work since it took effect in 2009 and that California would see an increase in employment if the credit was expanded.

“If California does not extend the credit, there will be more lost productions to other states and jurisdictions,” he said.

So some admit that California is not business-friendly.  That if they don’t offer special ways to avoid their punishing taxes and regulatory policies even more film business will leave the state.  Of course, if it’s happening in the film industry it’s happening in other businesses.  Which again explains why California is going bankrupt.  Their anti-business policies are chasing taxpayers (i.e., employees) out of the state.  By chasing business out of the state.

The MPAA, industry groups and labor unions have argued that tax credits should not be judged by short-term revenues alone, and that the state program is necessary to keep California competitive with at least 40 other states that offer incentives.

Vans Stevenson, senior vice president for state legislative affairs for the Motion Picture Assn. of America, said Entertainment Partners’ findings underscored the need for preserving California’s film incentive.

“Entertainment Partners’ data shows definitively that the production tax incentives have helped to stem the flow of jobs and wages out of California, and that the incentives are vital to California’s competitiveness,” he said.

Apparently it’s just not just the high taxes and high cost of regulatory policies chasing business out of the state.  It’s also the high cost of union labor.  For the unions are admitting that they make the state of California uncompetitive in the film industry.  And want tax credits to offset their high costs to bring the film business back.  That is, they want the taxpayers to subsidize that portion of their pay and benefits that chases business out of the state.  So they can keep their jobs.  They want taxpayers to take a pay cut (by paying higher taxes) so they don’t have to.  That’s fair, right?

California is a liberal state.  They like to run and regulate business the way they want to.  Not how business would like.  And when these policies chase business away they want higher taxes to subsidize the high cost of their anti-business policies.  To help business escape their punishing policies.  And bring that business back.  Which further raises taxes.  And chases more business away.  In effect killing the golden goose that pays for their generous public sector pay and benefits.  Which are currently bankrupting the state of California.

We need to learn from California even if California cannot learn from their own mistakes.  Anti-business policies are bad.  And will encourage businesses to leave the state.  Businesses hire people.  Who become taxpayers.  Taxpayers pay all the government’s bills.  Governments need to understand this connection between businesses and paying the bills.  For there is no other way to pay the bills without businesses and their private sector jobs.

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FT106: “You can’t have high paying jobs with generous benefits and low consumer prices.” -Old Pithy

Posted by PITHOCRATES - February 24th, 2012

Fundamental Truth

To give Workers High Wages and Generous Benefits a Business has to sell their Goods at High Prices 

The problem with politics is that voters don’t understand economics.  And they demonstrate this by demanding mutually exclusive things all of the time.  Where having one thing makes it impossible to have the other thing.  Like that old saying that goes like this.  You can’t have your cake and eat it, too.   You can have cake.  Or you can eat cake.  But you can’t have cake after eating it.  Because once you eat your cake it is gone.  And there is nothing to have.  These things, then, are mutually exclusive.  You can have one or the other.  But you can’t have both.

Now let’s transfer this train of thought to economics.  And to its most fundamental element.  The demand curve.  Which represents people in the economy.  Consumers.  And the stuff that they buy.  And at what prices they will buy the stuff that they buy.  Let’s take large flat-screen televisions.  The big ones.  Over 60 inches in size.  If they cost the price of a luxury car few consumers will buy them.  But if they only cost the price of a pack of gum consumers will buy them until they have one for every room in their house.  And consumers will buy various amounts at the prices in between.  But in general this one truth holds true.  People will buy more televisions as their prices fall.  And they will buy fewer televisions as their prices rise.  When we show this graphically by plotting how many televisions they sell at various prices we get a demand curve.

Well, you think, why can’t we just sell televisions at the price of a pack of gum?  More people will have televisions.  That’s good.  Because people just love watching television.  And television makers will make more televisions.  Creating more jobs.  And jobs are good.  Everyone says so.  So why not just sell televisions for the price of a pack of gum.  Well, I suppose if we pay the people who make these televisions a wage and benefit package closer to the price of a pack of gum, we could.  But who wants to work for a paycheck that can only buy a pack of gum?  Which brings us back to wanting mutually exclusive things.  To give workers high wages and generous benefits we have to sell goods at high prices.  Which is mutually exclusive to the low prices consumers demand.

Big Oil’s Exxon Mobil was not as profitable as GE and Apple in 2010

Yes, you can’t have low consumer prices and high pay and generous benefits.  Because, per the demand curve, higher prices mean fewer things sold.   And fewer things sold mean lower sales revenue.  And sales revenue pays for everything in a business.  Including wages and benefits.  Which means lower sales revenue means less money available to pay wages and benefits.  And any company that tries to pay high wages and provide generous benefits has to do one of two things.  Have a product they can sell a lot of at high prices.  Or go bankrupt.  Two of the Big Three Detroit automakers tried to do the former and failed.  So they went bankrupt.  And the government bailed them out.

So to pay employees well these companies need to be profitable.  Unlike the Big Three.  And to be profitable you have to have sales revenue large enough AND prices high enough to generate profits.  Profits so large that they can provide high wages and generous benefits.  Unlike the Big Three.  Because they couldn’t sell enough cars at high enough prices to pay those high union wages and generous union benefits.  But some companies have been profitable.  Including one corporation liberal Democrats love to hate.  Exxon Mobil (a member of a group liberal Democrats derisively call Big Oil).  One company that the current liberal Democrat administration loves and partners with in green energy technology.  General Electric.  And one corporation liberal Democrats just love period.  Until Steve Jobs died, at least.  Apple. 

In the fourth quarter of 2010, the profits for Exxon Mobil, GE and Apple were, respectively, $9.25 billion, $4.46 billion and $4.31 billion.  The first thing that jumps out at you is that Big Oil is making twice as much money as the corporations liberal Democrats love.  Which is why they hate them.  And why they love to bitch about high prices at the gas pump.  While at the same time they are rejoicing about those high prices.  Because those high gasoline prices help push their green energy agenda.  But these profit numbers are misleading.  Because they don’t factor in the cost of producing those profits.  And the most common way we do that is by dividing these profits by the sales revenue that generated them.  Giving us net profit margin.  When we do this for Exxon Mobil, GE and Apple we find their net profit margins on those profits were, respectively, 8.79%, 10.8% and 21.2%.  Of the three Big Oil is the least profitable.  And Apple is the most profitable.  In fact, nearly 2.5 times more profitable than Exxon Mobil.  But no one is demanding that the government step in and lower the price of Apple’s products.  Unlike they do with Big Oil.

The Government’s Regulatory and Compliance Costs increase the Price of Gasoline at the Pump

So why is Big Oil less profitable than those other businesses?  Well, for one, you can’t drill for American oil in China.  Like GE and Apple can build products in China.  And by working in the United States Big Oil is subject to massive regulatory and compliance costs.  And government regulates few things more than the oil industry.  The permitting process alone just to drill an exploratory well can take years for approval.  And millions of dollars.  It wasn’t like this when gas was cheap in America.  Before all of this regulation.  In the days when John D. Rockefeller was refining petroleum no one was complaining about high prices.  In fact, his competition complained about his low prices.  Prices they couldn’t match.  Asking for the government to investigate them for antitrust violations.  Which they did.  And busted up Standard Oil.  So they could sell their products at higher prices.  But when you can manufacture goods in China you can escape all of these regulatory and compliance costs.  And governmental insanity of protecting consumers by raising consumer prices.

Some may counter that the net profit percentage isn’t the important number.  But the dollar amount of their profits.  The same people who say we shouldn’t look at the dollar amount rich people pay in taxes.  But what they pay as a percentage of their income.  Which is an example of a double standard.  Determining how much profit is too much by one standard for Big Oil (dollars).  But determining by another standard how much rich people should pay in taxes (percentage).  It doesn’t make good sense.  But it makes good politics.  Especially when you have nothing but class warfare to rely on to win an election.

The attack on Big Oil is also irrational.  For Big Oil can do one thing that even GE and Apple can’t do.  Provide high wages and generous benefits to American workers.  Because American oil deposits can only be extracted in America.  By American workers.  If only government will cease their attack on Big Oil.  And allow people to drive gas guzzlers if they want to.  Let them fill up those tanks.  Increase the demand for gasoline.  If they did and we got rid of the anti-gasoline policies Big Oil will go after that oil and bring it to market to meet that demand.  Making it inexpensive and plentiful just like John D. Rockefeller did.  Before government stepped in to ‘protect’ consumers.  And added so many regulatory and compliance costs that has since jacked up the price at the pump so much that it is eating away an ever larger share of a family’s budget.  And ultimately reducing their standard of living.  Without even getting any high paying jobs with generous benefits in the bargain.  And if you ask me that’s a pretty sad job of protecting consumers.

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FT101: “Unlike government a business tries to fix bad policy before it bankrupts them.” -Old Pithy

Posted by PITHOCRATES - January 20th, 2012

Fundamental Truth

If Businesses give their Employees Overly Generous Pay and Benefits they will not be able to Stay in Business

A lot of people say businesses are greedy.  That they are always trying to go on the cheap when it comes to their employees.  The fatal flaw of capitalism some even say.  That need to make a profit.  And because of the profit-incentive businesses try to use as few employees as possible.  While paying them as little in pay and benefits as possible.  Which they, of course, do.  Because that’s the only way they can stay in business when their customers are doing the same.  When we go to the store looking for the maximum value at the lowest price.

You see, a business has to earn enough sales revenue to cover all their costs.  And their sales prices include these costs.  If these costs are too high people won’t buy from them.  So this is the reason why they pay their employees as little in pay and benefits as possible.  Because of us.  And our greed.  To keep as much of our money as possible when shopping.

So businesses can’t be overly generous to their employees.  For if they are they are then faced with two choices.  Raise prices to pay for this generosity.  Thus dissuading consumers from buying from them.  Which reduces their sales revenue.  Or they can choose not to raise their prices.  Which will increase their costs greater than their sales revenue.  Either way it’s bad for business.  For if they give their employees overly generous pay and benefits they will lose money.  And not be able to stay in business.

Businesses must make these Difficult Choices if they wish to Survive in the Real World

In free market capitalism businesses have real constraints.  They can’t be overly generous.  Because they won’t be able to earn enough revenue to cover their costs.  But neither can they be too miserly with their employees.  Because they have to be generous enough to entice them to work for them.  It’s this balancing act between generosity and being too cheap that causes a business problems.  Because in good economic times employees like to demand more.  And if they don’t get it where they currently work they will leave and work for someone else.  So employers are generous.  Sometimes too generous.  Which they usually learn when the good times end and they can no longer cover their costs at the new levels of revenue during those bad economic times.

A business cannot raise revenue by simply saying ‘raise revenue’.  For it is not up to them.  It’s up to the consumer.  And during bad economic times they’re just not buying like they once were.  Which leaves a business only one choice.  They must cut costs.  Either by cutting back on pay and benefits.  Or by really cutting back on pay and benefits.  By laying off employees.  It’s either that or they will bankrupt themselves out of business.

All businesses must make these difficult choices.  If they wish to survive.  Because they live in the real world.  Capitalism.  Where there are winners and losers.  And where businesses fail because they don’t make the difficult choices when they have to.  We’ve all seen a favorite store go out of business.  It may not always be because of the cost of their employees.  But it is always because they’re not earning enough revenue to cover their costs.

Difficult Choices are Rarely Politically Expedient and don’t bring in Many Votes

Health care costs and pensions have been the biggest costs businesses have struggled with.  That’s why defined benefit pension plans are a thing of the past.  Unless you’re in a union.  Or in government.  And employees are contributing more to the cost of their health care benefits.  Why?  Because of our aging population.  People are having fewer babies and are living longer.  And consuming more health care and pension benefits in their retirement than the actuaries ever dreamed possible when they created the health care benefit and defined benefit pension plans.

It’s no different in the public sector.  In fact, it’s worse.  Government grew.  And taxes grew to pay for that growing government.  It became more expensive to have babies.  So people had fewer.  Made possible by birth control and abortion.  Now there are fewer and fewer young people entering the work force to pay the taxes to pay for the ever growing number of seniors in their retirement.  Again, something the actuaries never calculated.  And there’s no way to fix it.  It’s a failed model.  But government won’t give up on this bad policy.  Unlike businesses have.  Because government doesn’t operate in the real world.  Like those businesses.

Government can do things businesses can’t.  They can tax.  They can run deficits.  Paid by massive borrowings.  And they can print money.  So they don’t have to make the difficult choices.  And chose not to.  Because those difficult choices are rarely politically expedient.  And don’t bring in many votes.

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Stocks and Bonds

Posted by PITHOCRATES - January 9th, 2012

Economics 101

When Companies grow their Capital Requirements grow beyond a Bank’s Lending Ability

We note a civilization as being modern when it has vigorous economic activity.  Advanced economies around the world all have the same things.  Grocery stores.  Clothing stores.  Electronic stores.  Appliance stores.  Coffee shops and restaurants.  Factories and manufacturing plants.  And lots and lots of jobs.  Where people are trading their human capital for a paycheck.  So they can take their earnings and engage in economic activity at these stores, coffee shops and restaurants.

To buy things off of shelves in these stores things have to be on those shelves first.  Which means selling things requires spending money before you earn money.  Businesses use trade credit.  Such as accounts payable.  Where a supplier will give them supplies and send them an invoice typically payable in 30-90 days.  They will establish a credit line at their bank.  Where they will borrow from when they need cash.  And will repay as they collect cash (such as when their customers pay their accounts payable).  And take out loans to finance specific things such as a delivery van or restaurant equipment.

Businesses depend on their bank for most of their credit needs.  But when companies grow so do their capital requirements.  Where capital is large amounts of money pooled together to purchase property, buildings, machinery, etc.  Amounts so great that it exceeds a bank’s ability to loan.  So these businesses have to turn to other types of financing.  To the equity and debt markets.

Investors Invest in Corporations by Buying their Stocks and Bonds

Equity and debt markets mean stocks and bonds.  Where we use stocks for equity financing.  And bonds for debt financing.  Stocks and bonds allow a corporation to spread their large financing needs over numerous people.  Investors.  Who invest in corporations by buying their stocks and bonds.

When a business ‘goes public’ they are selling stock in their company for the first time.  We call this the initial public offering (IPO).  If the company has a very promising future this will bring in a windfall of capital.  As investors are anxious to get in on the ground floor of the next big thing.  To be a part of the next Microsoft.  Or Apple.  This is when a lot of entrepreneurs get rich.  When they are in fact the next big thing.  And if they are, then people who bought stock in their IPO can sell it on the secondary market.  Where investors trade stocks with other investors.  By buying low and selling high.  Hopefully.  If they do they get rich.  Because the greater a company’s profits the greater its value and the higher its stock price.  And when a company takes off they can sell their stock at a much higher price than they paid for it in the IPO.

When a corporation needs to borrow more than their bank can loan and doesn’t want to issue new stock they can sell bonds.  Which breaks up a very large amount into smaller amounts that investors can buy.  Typically each individual corporate bond has a face value of $1000.  (So a ten million dollar ‘loan’ would consist of selling ten thousand $1,000 bonds).  Like a loan a corporation pays interest on their bonds.  But not to a bank.  They pay interest to the investors who purchased their bonds.  Who can hold the bonds to maturity and collect interest.  Or they can trade them like stock shares.  (Changes in the interest rates and/or corporate financial strength can change the market value of these bonds.)  When a bond reaches maturity (say in 20 years) the company redeems their bonds from the current bondholders.  Hopefully with the new profits the bond issue helped to bring into the corporation.  Or they just issue new bonds to raise the money to redeem the older bonds.

A Company Usually has a Mix of Equity and Debt Financing that Balances all the Pros and Cons of Each

There are pros and cons to both equity and debt financing.  Selling stock transfers ownership of the company.  Sell enough so that someone can own more than 50% and that someone can replace the board of directors.  Who in turn can replace the CEO and the other corporate officers.  Even the business founder.  This is the big drawback of going public.  Founders can lose control of their company.

Stocks don’t pay interest.  So they are less threatening during bad economic times.  As business owners, stock shareholders are there for the long haul.  During the good times they may expect to collect dividends (like an interest payment).  During bad times they will wait it out while the company suspends dividend payments.  Or, if they lose confidence, they’ll try and sell their stock.  Even at a loss.  To prevent a future greater loss.  Especially if the corporation goes bankrupt.  Because stockholders are last in line during any bankruptcy proceedings.  And usually by the time they pay off creditors there is nothing left for the shareholders.  This is the price for the chance to earn big profits.  The possibility to lose everything they’ve invested.

Bonds are different.  First of all, there is no transfer of ownership.  But there is a contractual obligation to make scheduled interest payments.  And if they fail to make these payments the bondholders can force the company into bankruptcy proceedings.  Where a corporation’s assets can be liquidated to pay their creditors.  Including their bondholders.  Which, of course, often means the end of the corporation.  Or a major restructuring that few in management enjoy.

Stockholders don’t like seeing their share value diluted from issuing too many shares.  Bondholders don’t like to see excessive debt that threatens the corporation’s ability to service their debt.  So a company usually has a mix of equity and debt financing that balances the pros and cons of each.  A financing strategy that has been working for centuries.  That allows the advanced civilized world we take all too much for granted today.  From jetliners.  To smartphones.  To that new car smell.  For none of these would be possible without the capital that only the equity and debt markets can raise.

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FUNDAMENTAL TRUTH #80: “A nation’s government spends too much when its spending increases at a rate greater than its population growth.” – Old Pithy

Posted by PITHOCRATES - August 23rd, 2011

Parents do what they can to Live within their Means 

People don’t have as many children as before.  Why?  Cost.  It’s expensive to have children.  And to raise a family.  Those who decide to raise children make serious changes in their lives.  Because of the costs.

Before kids these people may drive a new car.  Have nice toys.  A boat.  A motorcycle.  Electronic gadgets.  They may go out to eat a lot.  Eat steak at home a couple times a week.  Go to the movies.  Take some exotic vacations.  After kids?  Used car.  Fewer toys.  More hamburger-based dishes at home.  No more movies.  And vacations are closer to home and less exotic and more mundane.

Parents do what they can to live within their means.  And it’s not easy.  Because they typically start families when they are starting their careers.  So their incomes aren’t very large.  And kids are expensive.  Put the two together and you have some serious austerity living in these early years of starting a family.  But they do what they must do to raise their family.

Personal Responsibility is a very Effective System

So let’s take a look at these costs.  The Center of Nutrition Policy and Promotion’s 2010 annual report shows annual costs for different income groups for different ranges of children from babies up to age 17.  Let’s focus on the low set of income numbers (average annual income of $36,840).  To reflect a new family starting at the same time as the income-earner’s career.  And average the two groups of children that cover ages 0-5.  Crunching these numbers to see the impact of adding one additional child on remaining monthly income looks something like this:

(Source:  Center of Nutrition Policy and Promotion’s 2010 annual report, page 26.)

This is only a crude estimate.  But the numbers are telling.  Kids are expensive.  The more you have the less you have.  Money, that is.  That’s why married men raising a family are such better employees than single men with no kids.  That kind of financial responsibility keeps you in on a Friday night instead of drinking with the boys.  It makes you a punctual employee.  And a hard worker.  Eager to advance to higher pay levels.  Because if you don’t, things are going to get pretty difficult when that third child comes along.

It’s a very effective system.  Personal responsibility.  Especially when it’s your income paying your expenses.

We have Social Safety Nets to Help People in their Time of Need

Now suppose this worker doesn’t advance his or her income before having 4 children.  Which will leave only $141.67 a month to live on.  That won’t pay for much rent.  Or food.  In fact, this person will probably be evicted from their home.  And file personal bankruptcy.  Unless family and/or friends offer to help with their finances.  Or they become a ward of the state.

Sadly, things like this happen far too often.  A plant closes.  A husband has a debilitating injury.  There’s a catastrophic health crisis in the family.  So we have social safety nets in place for these people.  To help them in their time of need.  Due to circumstances beyond their control.

But what about those who willfully spend more than their income can support?  People who live on credit?  Refusing to ever live within their means?  Often blaming others for their insufficient income that won’t support the level of spending they want to maintain?  What about them and their irresponsible ways?  Should they force others to pay more to support their irresponsible spending?  Just because they have the power to tax.  And can run deficits?

The Social Safety Nets are becoming more like European Socialism

The federal government has the power to tax.  When they can’t tax anymore they can run deficits.  Financed by borrowing.  Or by simply printing money.  When spending beyond your means is that easy, you can see why the government continually spends beyond its means.

And they are spending ever more.  And the social safety nets have grown.  Social Security.  MedicareMedicaid.  And now Obamacare.  Which are no longer social safety nets.  But more like European socialism.  Like the social democracies of Europe.  That are currently imploding in the Eurozone financial crisis.

Why?  Because the Europeans are no longer treating their people as citizens.  But as children.  Children that never leave the nest.  Cared for from the cradle to the grave.  The responsible parent can understand the problem.  They are trying to raise more children than they can afford.  Just like a few extra children can bankrupt a family of modest income, this ever expanding social welfare will bankrupt the state.  It’s just a matter of time.

Government could take a Lesson from the Average American Family

The problem with generous benefits is that they cost.  And as populations grow so do these benefits.  So they have to pay these ever increasing costs with ever increasing revenue.  Which becomes a problem.  In the private sector.  As well as the public sector.

As GM lost market share, their health care costs increased greater than their sales growth.  They went bankrupt.  Social Security and Medicare costs are growing faster than the population growth.  Which means fewer taxpayers will be available to pay a growing number of benefit recipients.  Both programs are projected to go bankrupt.

Families have to live within their means.  That’s why a family with an annual income of $36,840 doesn’t raise a family of ten children.  They wait until they can afford to.  If that’s what they want.  They make sure they work hard to earn the income necessary to raise a large family.  Government could take a lesson from the average American family.

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LESSONS LEARNED #58: “Presidents with aggressive domestic agendas tend to have inept and naïve foreign policy.” -Old Pithy

Posted by PITHOCRATES - March 24th, 2011

Social Security:  A Fiscal Disaster just Waiting to Happen

FDR’s New Deal programs were an abject failure.  Nothing he tried ended the Great Depression.  Proof positive that Keynesian Economics doesn’t work.  But this Britain infatuated the world.  Many still cling to the teachings of Keynes.  Because he empowered Big Government.  And people in government love that.  But government is pretty inefficient.  And not very good at doing things.  Take Social Security, for example. 

It started as a payroll tax of 1%.  They argued it was a paltry price to pay to help the disabled and retired.  Of course, the actuaries never saw birth control and abortion coming.  So as the population aged, the birthrate declined.  With the boomers starting to retire, the great pyramid inverted.  More people are collecting than paying in.  Today the tax rate is 6.2%.  That’s 6.2 times the FDR rate.  Which is an increase of 520%.  The federal government has increased the rate 20 times to save the program from bankruptcy.  And, guess what?  It’s STILL going bankrupt.  It’s one fifth of the federal budget.  And it keeps getting bigger.  And it’s such a political third-rail that no one will touch it.  Taxpayers will have to pay so much in taxes that they will have to live a very austere life to pay for people they don’t even know who are collecting far more than they ever paid in.  Because, according to the actuaries, people were just living too long.  That’s another thing they never saw coming. 

In 1937, the average lifespan was 60 years.  The retirement age was 65.  So, in other words, the average social security beneficiary would be dead for approximately 5 years before they were eligible to collect Social Security.  Now that’s how you keep a program solvent.  Make sure that most of the people paying into it die before they have a chance to receive benefits.  Today the average lifespan is about 78 years.  The retirement age is 67.  So the average retiree will collect benefits for approximately 11 years BEFORE he or she dies.  The actuaries NEVER envisioned this.  Damn the American health care system and their miracle drugs.  We’ve never lived longer.  Or burdened the government more.

FDR was a domestic policy disaster.  He ruined this country.  Any objective analyst would agree.  But we still love him for getting us through the dark years of World War II.  Of course, much of the world doesn’t for his gift of the Cold War to these oppressed people.

FDR loved Joe Stalin, Joe Stalin walked all over FDR

In the 1930s, there was some serious government tinkering going on with economies.  FDR in the USA.  Hitler in Germany.  Mussolini in Italy.  And Joseph Stalin in the Soviet Union.  FDR was on the same page, especially with Mussolini and his beloved Joseph Stalin.  He loved these guys.  Until they went rogue.  FDR had no problem hating Germany.  He was never a fan of the country.  But when Germany and the Soviet Union entered into a nonaggression pact to divide and conquer Poland, thus launching World War II, it broke his heart.  He and all his New Dealers were devastated.  Uncle Joe was the model they wanted to copy.  They loved this man.  And what he was doing in the Soviet Union.  Acting bold without a pesky Congress hindering him.  They loved him so much that they didn’t try all that hard to hunt down the Soviet spies within the FDR administration.  And there were plenty of them to hunt down.

But then God answered FDR’s prayers.  Hitler launched Operation Barbarossa, a massive invasion of the Soviet Union.  This part of the war became hell on earth.  The Eastern Front.  There cruelty knew no bounds.  Scorched earth policies.  And genocide.  Hitler’s SS did most of these acts of barbarism.  And the dreaded Einsatzgruppen took systematic murder to new heights.  The Eastern Front saw the worst cruelty of man.  But there was a bright spot.  For FDR.  He could welcome Uncle Joe back into the fold.  And did. 

Roosevelt was a master diplomat.  He could charm the pants off of anyone.  He had a gift.  And it filled him with great pomposity and reckless arrogance.  People warned him about Stalin.  And Soviet Communism.  But FDR poo pooed them.  He said he could talk to Uncle Joe.  Reason with him.  Give a lot and ask for nothing.  And he did.  FDR thought Stalin would then ask for nothing more and work with him in establishing world peace.  Just like a typical progressive/liberal.  And how did that work out?  Not only did the Red Army NOT pull out of occupied countries, they tried to occupy more.  Soviet Communism took Eastern Europe, tried to take Turkey and Greece and pushed into Iran.  We pushed some of these pushes back.  But the Cold War was on.  FDR had given so much that the Soviets had control over huge populations, condemning them to the misery of life behind the Iron Curtain.  And suffer they would for 44 long years.

Despite the fiscal carnage and world misery FDR left in his wake, he is still loved and adored by those on the Left.  People as pompous, arrogant and naïve as he.  Who still want to do things the Roosevelt way.  Despite the unmitigated disaster the FDR way turned out to be. 

Mismanaging Medicare/Medicaid and the Vietnam War

We can best describe LBJ‘s Great Society as doubling down on FDR’s New Deal.  And it was as big a disaster as the New Deal was.  LBJ was going to end poverty and racial injustice.  And pour federal money into education to make it better.  He failed.  Based on the Left’s attacks on the Right, we’re still beset by poverty and racial injustice.  (Even though we elected a black president.  Go figure.)  And that the teacher unions are constantly going on strike to get more money.  For the kids, of course.  And if we still have these problems it can only mean one thing.  The Great Society failed.

Included in the Great Society were Medicare and Medicaid.  Health insurance for the elderly and the poor, respectfully.  Currently, this is another 1/5 of the total federal budget.  And it has the same problems as Social Security has.  A declining birthrate and a growing elderly population that is living longer.  The actuaries crunched their numbers before the explosion of birth control and abortion.  So their projections are just as bad as FDR’s were.  The tax rate went from 0.35% to 1.45%, and increase of 314%.  Unlike Social Security, the death rate never ran in the black for Medicare/Medicaid.  From the get-go people were living 3 years beyond the average retirement age, consuming health care benefits.  Now the average American is living 11 years into retirement.  And a lot of them aren’t doing that by a healthy diet and exercise.  They’re doing it by consuming vast amounts of health care benefits.   LBJ took the problems of the New Deal and multiplied them by ten.  The cumulative effect of these two programs crashed the economy into stagflation and misery in the 1970s.  And if that wasn’t bad enough, he pushed the nation close to civil war by his mismanagement of the Vietnam War.

JFK got us into Vietnam.  But Johnson expanded our involvement.  And tried to manage it from Washington.  With the Whiz Kids left over from JFK.  A bunch of poindexters who tried to run a war by looking at numbers in columns.  Body counts.  And restrictions on the rules of engagement.  It was a horrible way to run a war.  It just prolonged it.  Created more American casualties.  And empowered our enemy.  Can’t bomb the North.  Can’t bomb their supply routes (i.e., the Ho Chi Minh Trail).  We did everything we could to help the enemy by giving them safe sanctuaries up the ying-yang.  And when we had a chance to deliver a knockout punch after the failed Tet Offensive, we did NOTHING.  Partly because Walter Cronkite said the war was lost.  Partly because of the hippies protesting on our college campuses.  And, of course, the race riots.  LBJ couldn’t understand it.  He had given so much with his Great Society and yet people didn’t love him.  All because of that damn war in Vietnam.  JFK’s war.  How he wished they never went there.  It was a distraction to his beloved Great Society.  And it was a bitch to pay for. 

Bad Domestic Agendas, Bad Foreign Policy

Unlike FDR, LBJ could not win his war.  Of course, FDR didn’t have hippies who hated their country protesting against him.  Just a bunch of communists in his administration who were simpatico with his Big Government view.  Because of Vietnam, though, the Left would never have the same fond feelings for LBJ as they do for FDR. 

Their foreign policy has made the world a less safe place.  FDR gave us 44 years of Cold War.  And LBJ weakened the United States by his failure in Vietnam.  Made us a paper tiger.  Made our enemies not fear us anymore.  They started taking chances.   Doubting our will to respond to their aggression.  Or, if we did, they figured we would just cut and run after a few casualties.  And that has been their strategy since.  Not to win.  But to make us quit.  By making us bleed.

Following World War II we had great prosperity.  Peace.  And happiness.  The 1950s.  Following Vietnam, we had stagflation and misery.  High crime rates.  Drug infestation and abject poverty in our big cities.  Abortion and birth control.  The 1970s.  All this despite the programs of LBJ’s Great Society that were to end all those woes.  And with the declining birthrate, the fiscal problems would only get worse.

Their domestic programs are pushing the nation ever closer to bankruptcy.  There appears to be no solution to the damage they’ve done.  Or will do.  Social Security and Medicare/Medicaid will either bankrupt the country.  Or ignite civil unrest as benefits are slashed.  Neither will be good for the country.  But this is what we get from presidents with aggressive domestic agendas.  Fiscal crises.  Domestic unrest.  And an unsafe world.

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