We are in the Worst Economic Recovery since that following the Great Depression because of Keynesian Economics

Posted by PITHOCRATES - February 15th, 2014

Week in Review

We are in the worst economic recovery since that following the Great Depression.  Why?  Because of Democrats.  Who are all Keynesians.  And that’s a big problem as all of our worst economic times were given to us by those who adhere dogmatically to Keynesian economics.  That school of economics that gave us the Great Depression.  The stagflation of the Seventies.  The dot-com bubble.  The bursting of the dot-com bubble.  And the dot-com recession.  As well as the subprime mortgage crisis and the Great Recession.  In all of these events the Keynesians in power followed Keynesian economic policies to avoid recessions.  And then to pull us out of recessions when their avoidance didn’t work.  Then doubling down on the things that didn’t work previously.  In particular artificially low interest rates.  Which have been around zero for the last 5 years.  And massive federal spending to stimulate the economy when the private sector wasn’t spending.  Two pillars of Keynesian economics.  Neither of which have done anything to help improve the worst economic recovery since that following the Great Depression.

This is the problem with all the ‘noted’ economists the government likes to cite.  They embrace poor economic principles.  Proven wrong over and over again.  They can come up with some impressive looking charts and graphs but their analysis is all wrong.  And the fact that we’re in the worst economic recovery since that following the Great Depression proves it better than any chart and graph.  They’re wrong.  And continue to be wrong.  Yet they provide the economic policies for our country.  Some of the greatest nonsense you will ever hear.  Things you wouldn’t do in your business.  Or in your personal life (see Student Loans Are A Drag On The Economy And Society by Josh Freedman posted 2/11/2014 on Forbes).

While loans are intended to expand college access to a broader population, the nature of risk that they entail also produces the opposite result. Low- and middle-income students worried about the consequences of taking out a loan will be more likely to decide that college attendance is not worth the risk…

Studies have found that high debt levels not only deter access at the beginning, but can also drive students away from completing college once they have already started… students who start college but do not graduate are stuck with loan repayments and no college degree. They still have to repay their loans but do not have the economic boost of a college degree to help them have enough income to cover this cost.

First of all, why is it when it comes to a college education no one ever demands that we lower the cost.  Like we do with greedy oil executives who keep the price of gasoline high.  Why is it no one attacks the greedy people in higher education that keep education so costly?

The problem is too many people are going to college for the wrong reason.  There is a reason why there is a list of the best party colleges every year.  Because a lot of these kids want to go to these schools.  Which explains why colleges in Colorado are seeing a spike in out-of-state applications.  Because these kids want to go to a college where they can party with legal marijuana.  And to make that partying easier they’re majoring in easier degree programs that the college assured these kids would provide them a comfortable living after graduation.  So they can get that profitable tuition out of these kids.  Often times paid for by these kids’ student loan borrowings.  So the colleges are misleading a lot of these kids to make a buck.  Leaving them saddled with a lot of student loan debt if they quit.  Or even more student loan debt if they stay in until graduation.  While getting a degree that can’t get them a job.

A second issue with increasing levels of student loan debt is the effect on the economy… Individuals with more student loan debt were less likely than individuals without student loan debt to purchase homes or cars.

Yes, having too much debt is a bad thing.  It reduces your disposable income.  Preventing you from purchasing a house or a car.  Yet these same economic advisors have no problem with raising taxes and devaluing the currency (i.e., printing money) to pay for all of the government’s stimulus spending.  Higher taxes reduce our paychecks.  And devaluing the currency raises real prices.  Reducing what we can buy with our smaller paychecks.  No, a Keynesian has no problem with debt at the federal level that affects everyone.  But student loan debt is just a terrible thing for those kids who dropped out of college or who didn’t get a degree that an employer could use.

In the wake of the financial crash, households have been trying to deleverage, or pay down their debt so they can have a healthier financial outlook, reduce the amount of their income that they use to service their debt, and begin investing and consuming again…

A look at the data suggests that student loans have slowed down households in the process of paying down debt. Since 2008 — the peak level of household debt — households lowered their levels every type of debt except student loan debt. Student loans have continued to grow throughout this process of deleveraging.

Of course the one thing missing from this analysis is the horrible economy President Obama’s Keynesian policies have given us.  Since he became president he has destroyed some 10,948,000 jobs.  Based on the number that were out of the labor force in the January 2014 BLS jobs report (91,455,000) and how many were out of the labor force when he entered office (80,507,000).  This is why people are struggling with debt levels.  There are no jobs.  If there was a robust economy flush with jobs people wouldn’t worry about taking on debt to invest in the future.  As long as they got a useful college degree in a high-tech economy.  And not something useless like women’s studies or poetry.

But aren’t people facing poor job prospects just taking out more loans to avoid working as baristas at coffee shops that drip the coffee super slowly for no apparent reason? This does not appear to be the case from the debt data. Student loan debt has grown at almost exactly the same rate since the crash as it had been the previous five years — i.e. steadily and without fail.

Student loan credit level has been steadily rising because the cost of a college education has been steadily rising.  Again, where is the outrage at our greedy educators getting rich by loading up these kids with student loan debt for a degree they can’t use in a high-tech economy?

…the loan system allows colleges to raise prices, which causes more students to take out loans. States, facing budget pressures, have also pulled back on investment, putting even more risk on students and further increasing the need for loans.

Again, where is the outrage at our greedy educators who keep raising tuition, forcing these kids to take out more and more student loan debt?

The risk and burdens that come from forcing students to take out debt up front and pay it back later is problematic from head to toe (tassel to hem, one might say). To create a better system of higher education, we need to look at alternatives to the current debt-financed model.

So the solution is for the taxpayer to foot the bill for these useless college degrees at these party colleges?  How is that going to solve any problem?  All that will do is allow more people to go to a college in Denver where they can get high for 4 years.  And then go to work as a barista at a coffee shop that requires no 4-year degree.  How does that make anything better?  Other than get more young people to vote Democrat.  Then again, perhaps that is the only objective of Keynesian economics.  Which is why those on the left embrace these failed policies with a religious fervor.  Because it helps them win elections.  Even while they’re destroying the economy.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , ,

Rising Debt and Higher Net Worth portend a Housing Bubble in Canada

Posted by PITHOCRATES - December 15th, 2013

Week in Review

The Canadians like to think of themselves as kinder and gentler than their neighbors south of the border.  For they have a generous welfare state.  Including single-payer health care.  Unlike those Americans who put profits before people.  But it comes at a price.  High taxes.  And they do pay a lot.  But they get a lot.  Those high taxes, though, lower take-home pay.  Giving Canadians less disposable income than their neighbors south of the border.  Which means they have to borrow more to make up for that smaller disposable income (see Personal debt ratio hits record high of 163.7% posted 12/13/2013 on CBC News).

Statistics Canada reported Friday that the level of household credit market debt to disposable income increased to 163.7 per cent in the third quarter from 163.1 per cent in the second quarter.

That means Canadians owe nearly $1.64 for every $1 in disposable income they earn in a year.

Policymakers are fixated on the debt ratio in part because it was at above 160 per cent that households in the United States and Britain ran into trouble about five years ago, contributing to defaults and the financial crisis that triggered the 2008-09 recession…

Indeed, while they are borrowing more, Canadians are also worth more as their assets increase by a similar amount. The national net worth increased to $7.5 trillion in the third quarter, up 2.1 per cent from the previous quarter.

On a per capita basis, that works out to $212,700 for every Canadian. The previous quarter, that figure was $208,300.

Rising net worth and rising debt?  Gee, what could that mean?  Well, most people’s wealth is determined by the price of their home.  As the value of their homes rise so does their net worth.  That is, their net worth rises as the price of their home (if they were to sell) rises.  And as their home price rises so do other home prices.  Which increases mortgage amounts.  As people borrow more to buy these more expensive homes.  And the lower the interest rates the more they will borrow and the bigger the house they will buy.  And this creates a what?  That’s right.  A housing bubble (see Is There a Canadian Housing Bubble? by Carrie Rossenfeld posted 11/13/2013 on GlobeSt.com).

GlobeSt.com: What factors lead experts to think there may be a Canadian housing bubble?

Muoio: For us, the biggest sign there is a housing bubble is how far prices have appreciated without a corresponding rise in income. This means housing affordability is falling rapidly and will eventually reach a tipping point. Additionally, if lenders are underwriting against an expectation of rising prices, this could result in loosening standards and too much leverage in the system.

GlobeSt.com: How similar are these factors to what happened to the US housing market before the recession?

C.M.: Very similar. US home prices kept appreciating while incomes saw only modest growth in the final years before the bubble burst. This led to a situation where eventually housing just became entirely unaffordable and the market’s liquidity completely dried up. With people over-levered due to the loose lending standards (which were enabled by the expectation of rising prices), this led to a massive unwind and foreclosure mess we are still working through. Additionally, Canada, just like us at the time, is building an extreme amount of homes that could lead to oversupply issues.

A rising debt level and higher net worth probably is more bad news than good.  For it is likely a sign of a housing bubble.  Just like these very things were a sign of a housing bubble in the U.S. just before the subprime mortgage crisis.  Or is it a sign that Canadians are just taxed too much leaving them with less disposable income?  Forcing them to borrow more as they cannot save enough for a sizeable down payment to reduce the amount they have to finance?   Or is it both?

It appears the Canadians can’t learn from the Americans.  And when the Canadian bubble bursts the Americans won’t learn anything from the Canadians.  For governments today want to keep interest rates low to encourage home ownership.  Which they do.  Taking us from bubble to bubble.  And from recession to recession.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , ,

High Taxes and Inflation reduce Disposable Income and our Music Purchases

Posted by PITHOCRATES - December 14th, 2013

Week in Review

If you’re old you remember going to a record store.  Putting a flat piece of vinyl on a spinning disc.  Lowering a needle on it.  And listening to that song through a pair of headphones.  If the music was awesome you bought that piece of vinyl.  If it wasn’t you listened to other songs until you found the one you wanted to buy.

Then came the audio cassette.  Where people would borrow their friend’s records and record them.  So you could enjoy the ones you paid for.  And the ones your friends paid for.  But the audio cassette did not put the music industry out of business.  For people still bought music.  In fact, some people may have bought even more as they could record the one song or two they liked onto a ‘mix’ tape.  Creating a ‘mix’ for each mood.  Hard rock.  Soft Rock.  And the more records you owned the more mix tapes you could create.

But since those days taxes and inflation have sucked away our disposable income.  And we’re not buying as much music as we once did (see Why It’s Hard to Charge for Music by Matthew Yglesias posted 12/13/2013 on Slate).

The problem here is one of supply and demand. It’s not that people won’t pay for Pandora because they don’t see any value in Pandora’s service. It’s that Pandora’s paid service has to compete with Pandora’s ad-supported service. Pandora could solve that problem by eliminating its ad-supported service, but it’s pretty clear that there’s a robust market for an ad-supported music-streaming service so then Pandora would need to compete with a new player. Personally, I really do enjoy an ad-free music streaming experience so I have a paid Rdio subscription which works on my computer, on my mobile phone, and on my home Sonos setup.

So good for me. But if I was a teenager with no money or ran into financial difficulty as an adult and needed to cut back, this would be an easy call to chop. Not because music isn’t valuable but because the margin of convenience offered by a paid service versus a free one just isn’t that big.

It’s the loss of disposable income that is hurting the music industry.  As well as paid subscription services.  In today’s world it is not uncommon for someone to pay for cable television AND a broadband Internet connection AND satellite radio in your car AND a mobile device contract with a monthly payment as large as a car payment.  People have never spent more money on entertainment.  And paying for live-streaming music on top of all this is just one paid subscription too many.  That’s why people aren’t paying for music if they can get it for free.  They love and value their music.  But they love and value so much other stuff as well that they don’t have any disposable income left to pay for music.  Thanks to higher taxes and inflation shrinking everyone’s take-home pay.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , ,

Black Friday

Posted by PITHOCRATES - December 2nd, 2013

Economics 101

Black Friday kicks off the Retailer Sprint at the Homestretch of the Retailing Year

The Thanksgiving weekend is over.  As is Black Friday.  It came.  We shopped.  And now it’s gone.  But have you ever wondered why we call it Black Friday?  Why do we call something so many people look forward to and enjoy ‘black’.  A color more associated with death and mourning?  Because of accounting.  That’s why.  Or so goes the myth.

Retailers survive on razor thin margins.  And many are lucky to break even through most of the year.  While occasionally their costs exceed their revenue.  And when that happens a business is in the ‘red’.  Which is a bad thing.  For if a business is in the ‘red’ too long it can go out of business.  Enter Black Friday.  Which kicks off the retailer sprint at the homestretch of the retailing year.  And the day retailers finally get well out of the red.  And comfortably into the black.

Retailers get most profitable in the last month of the year.  Because of Christmas.  As we celebrate the birth of Jesus of Nazareth by buying Christmas presents for our loved ones.  A bit off message for the true meaning of Christmas.  But it’s now part of the American tradition.  Because we love giving and receiving presents.  Something retailers are grateful for.  For it allows them to become profitable (or much more profitable) based on one month’s worth of sales.  After treading water for the first 11 months.

Accessories and Impulse Buying make for a Successful Black Friday

So what is the secret for a successful Black Friday?  It’s a two-prong strategy.  Get people into the stores with deep discounting.  Things stores break even on or even lose money.  And try to get them to buy other things once they are in the stores.  Things that have little discounting.  And higher markups.  They accomplish this through two tactics.  Accessories.  And impulse buying.

Impulse buying is getting people to buy things they did NOT come into the store to buy.  Retailers will space the discounted items strategically throughout the store.  And place items with higher markups on the pathway to the discounted items.  Things that are so good that people say, “That looks like something I want.  And I’m in such good spirits because of the huge savings on that other thing I’ve always wanted that I’ll throw this into the cart, too.  Why not?  After all, ’tis the season to be jolly.”

Unlike impulse buying accessories are not things that we fall in love with when we see them.  Accessories are the things that allow us to enjoy those discounted things more.  Things that are a pretty good bet that we will buy them.  So they mark these items up a lot.  You may buy a discounted television and home theatre system but the cables that connect the pieces together are typically not included.  A laptop needs a bag to carry it in.  Electronic toys need batteries.  Video game systems need video games.  Smart phones need service contracts.  Printers need paper and extra ink cartridges.  Etc.  Things few people rush excitedly to the store to buy.  But often buy them because they increase the enjoyment of those steep discounted items.

It’s a Good Time to Buy and Sell Stocks but a Bad Time to buy Groceries and Christmas Presents

There is one other element needed for a successful Black Friday.  People must have disposable income.  Or they must be confident in their employment.  Such that they are willing to run up their credit cards because they are relatively certain that they’ll have a paycheck for the indefinite future.  If people don’t have this then all the discounting in the world won’t help make Black Friday a success.  So the prevailing economy matters.  As does the economic outlook.  In fact, the success of Black Friday can tell us the true state of the economy.  And how people feel about the economic outlook.

So what has this Black Friday told us about the state of the economy?  That it’s bad (see Black Friday Weekend Spending Drop Pressures U.S. Stores by Matt Townsend posted 12/2/2013 on Bloomberg).

The first spending decline on a Black Friday weekend since 2009 reinforced projections for a lackluster holiday, increasing chances retailers will extend the deep discounts already hurting their profit margins.

Purchases at stores and websites fell 2.9 percent to $57.4 billion during the four days beginning with the Nov. 28 Thanksgiving holiday, according to a survey commissioned by the National Retail Federation. While 141 million people shopped, about 2 million more than last year, the average consumer’s spending dropped 3.9 percent to $407.02, the survey showed…

For the fourth year in a row, disposable incomes in 2013 have only inched up and job growth remains inconsistent. As a result, low-income Americans will again have a less-merry season than affluent consumers, who are more flush thanks in part to surging U.S. stock markets, which have attained all-time highs. Consumer confidence declined in November to a seven-month low, according to the Conference Board.

“Consumers are generally not in a great mood, feeling very uneasy about the economy and their jobs, and are looking for value this year,” Stephen Stanley, chief economist at Pierpont Securities LLC in Stamford, Connecticut, wrote today in a note to clients. “They have their list and will check it twice, but they are not going to the mall and grabbing a bunch of random stuff because it is on sale or looks nice…”

This kind of so-called mission shopping, where a consumer buys one bargain-priced item and then leaves, will hurt profit margins, Goyal said. It may also explain why the number of shoppers increased and their spending fell, she said…

While traffic at the Mall of America was higher than last year, shoppers planned ahead of time where they were going and what they were buying, said Maureen Bausch, the mall’s executive vice president. There was “a lot of mission shopping, and you don’t normally see that until later in the season,” she said.

That’s bad news for retailers, who normally get about 20 percent of their holiday sales from impulse purchases, said Marshal Cohen, chief retail analyst for NPD Group Inc.

More people shopped but each shopper spent less.  Resulting in an overall spending decline.  The first since 2009.  The last year of the Great Recession.  The worst recession since the Great Depression.  So these numbers are not good numbers.  And they’re not good because of the economy.  Disposable incomes are flat.  People are worried about the economy.  And worried about losing their jobs.  If they haven’t already.  So there is no impulse buying.  Only mission shopping.  Getting the one thing they came in for.  And then leaving the store without buying anything else.  Because they haven’t a dime to spare.  The economy and economic outlook are that bad.

Over 10 million people have left the labor force since President Obama assumed office.  Making for a bleak Christmas on Main Street.  But Wall Street is doing well under the Obama recovery.  While quantitative easing has raised grocery prices (or reduced portion sizes) that perpetual inflation has inflated stock prices.  And real estate prices.  Making it a good time to make money buying and selling expensive assets.  But a terrible time to buy groceries.  And Christmas presents.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , ,

Housing Boom, Bubble and Bust

Posted by PITHOCRATES - April 15th, 2013

Economics 101

Building and Furnishing Houses creates Great Economic Activity

Central to any booming economy are healthy home sales.  For home sales unleash great economic activity.  From the first surveys of a new subdivision.  To the new sewers and water systems.  Gas and telephone.  Cable television and broadband Internet.  Concrete for basements, driveways and sidewalks.  Structural steel (that beam in the basement and steel poles holding up the house).  Rough carpentry.  Electrical work and plumbing.  Drywall, windows and roofing.  Painting, flooring, doors and hardware.  Heating and air conditioning.  Lighting and plumbing fixtures.  Brick, siding and landscaping.  Etc.

All of this takes manufacturing to make these construction products.  All these manufacturers need raw materials.  And raw material extraction needs heavy equipment and energy.  At all of these stages of production are jobs.  Extracting raw materials.  Processing raw materials.  Manufacturing products out of these raw materials.  Building this production equipment.  Interconnecting these stages of production is every form of transportation.  Rail, Great Lake freighter, river barge and truck.  Requiring even more jobs to build locomotives, rolling stock, ships and trucks.  And jobs to operate and maintain them.  And build their infrastructure.  Filling all of these jobs are people.  Earning a paycheck that will let them buy a house one day.

Then even more economic activity follows.  As people buy these homes and furnish them.  Washers and dryers.  Refrigerators, stoves, microwaves, food processors and coffee makers.  Furniture and beds.  Light fixtures and ceiling fans.  Rugs, carpeting and vacuum cleaners.  Telephones, televisions, music systems, modems and computers.  Curtains, drapes, blinds and shades.  Shower curtains, bath mats, towels and clothes hampers.  Mops, buckets, cleaning supplies and waste baskets.  Lawnmowers, fertilizers, hoses and sprinklers.  Snow shovels and snow blowers.  Cribs, highchairs, diapers and baby food.  Etc.  All of these require manufacturers.  And all of these manufacturers require raw materials.  As well as transportation to move material and product between the stages of production.  And to our wholesalers and retailers.  More jobs.  More people earning a paycheck.  Who will one day buy their own home.  And create even more economic activity.

Bill Clinton pressured Lenders to Lower their Requirements and Subprime Lending took Off

This is why governments love housing.  And try to do everything within their power to increase home ownership.  Which is why they changed the path to home ownership.  After World War II when the building of subdivisions took off there was the 3-6-3 savings and loan.  Where savings and loan paid 3% interest on savings accounts.  Loaned money to home buyers at 6%.  And were on the golf course by 3 PM.  And the mortgage was the 30-year conventional mortgage with a 20% down payment.

The conventional mortgage was the mortgage of our parents.  Who had no problem putting off their wants to save money for that 20% down payment.  They prioritized.  And planned for the future.  But the conventional mortgage has an obvious drawback.  It limits home ownership to those who can save up a 20% down payment.  Pushing home ownership further out for some.  Or just taking that option away from a large percentage of the population.  So the government stepped in.  To help those who couldn’t save 20% of the house’s price.

Mortgage Qualification Decreasing Down Payment

As we lowered the down payment amount it allowed lower-income people the opportunity of home ownership.  But it didn’t get them a lot of house.  That is, those who could afford a 20% down payment could buy more house for the same monthly payment than those who couldn’t afford it.  And a house in a better neighborhood.  Which some said was unfair.  Some in government even called it discriminatory.  As Bill Clinton did.  Who pressured lenders to lower their lending requirements to qualify the unqualified.  His Policy Statement on Discrimination in Lending helped to fix that alleged problem.  And kicked off subprime lending in earnest.  Leading to the subprime mortgage crisis.  And the Great Recession.

Conventional Wisdom was to Pay the Most you could Possibly Afford when Buying a House

But lowering the down payment wasn’t enough.  Even eliminating it all together.  The people needed something else to help them into home ownership. And to generate all of that economic activity.  And this was something the government could fix, too.  By printing a lot of money.  So banks had a lot of it to lend.  Thus keeping interest rates artificially low.  And we can see the effect this had on home ownership combined with a zero down payment.  It allowed people to buy more house for the same given monthly payment.  Even more than those buying with the 3-6-3 conventional mortgage.

Mortgage Qualification Decreasing Mortgage Rate

Falling interest rates bring in a lot more people into the housing market.  Which is good for sellers.  And good for the economy.  A lot more people than just those who could afford a 20% down payment can now buy your house.  As people bid against each other to buy your house they bid up your price.  Raising home prices everywhere.  Increasing the demand for new housing.  Which builders responded to.  Creating a housing boom.  As builders flood the market with more houses.  At higher prices.  That new homeowners move into.  And max out their credit cards to furnish.  Creating a lot of debt people are servicing at these artificially low interest rates.  But then the economy begins to overheat.  And other prices begin to rise.  Leaving people with less disposable income.  The housing boom turns into a housing bubble.  House prices are overvalued.  Those artificially low interest rates created a lot of artificial demand.  Bringing people into the market who weren’t planning on buying a house.  But decided to buy only to take advantage of those low interest rates.

Conventional wisdom was to pay the most you could possibly afford when buying a house.  For all houses gained value.  You may struggle in the beginning and have to make some sacrifices.  Say cut out steak night each week.  But in time you will earn more money.  That house payment will become more affordable.  And your house will become more valuable.  Which will let you sell it for more at a later date letting you buy an even bigger house in an even nicer neighborhood.  But when it’s cheap interest rates driving all of this activity there is another problem.  For printing money creates inflation.  And inflation raises prices.  Gasoline is more expensive.  Groceries are more expensive.  As prices rise households have less disposable income.  And have to cut out things like vacations.  And any discretionary spending on things they like but don’t need.  Which destroys a lot of economic activity.  The very thing the government was trying to create more of by printing money.  So there is a limit to the good economic times you create by printing money.  And when the bad consequences of printing money start filtering through the rest of economy the government has no choice but to contract the money supply to limit the economic damage.  And steer the economy into what they call a soft landing.  Which means a recession that isn’t that painful or long.

The Price of Artificially Low Interest Rates is Inflationary Booms, Bubbles and Great Recessions

As interest rates rise home buying falls.  Leaving a lot of newly built homes unsold on the market.  And that housing bubble bursts.  Causing home values to fall back down from the stratosphere.  Leaving a lot of people owing more on their mortgage than their houses are now worth.  What we call being ‘underwater’.  And as interest rates rise so do the APRs on their credit cards.  As well as their monthly payments.  And those people who paid the most they could possible afford for a house with an adjustable rate mortgage saw their mortgage interest rates rise.  As well as their monthly payment.  By a lot.  So much that these people could no longer afford to pay their mortgage payment anymore.  As a half-point increase could raise a mortgage payment by about $50.  A full-point could raise it close to $100.  And so on.

Increasing Monthly Payment dur to Increasing Mortgage Rate

With the fall in economic activity unemployment rises.  So a lot of people who have crushing credit card debt and a house payment they can no longer afford lost their job as well.  Causing a rash of mortgage foreclosures.  And the subprime mortgage crisis.  As well as a great many personal bankruptcies.  Causing the banking system to struggle under the weight of all this bad debt.  Add all of this together and you get the Great Recession.

This is the price of artificially low interest rates.  You get inflationary booms.  And bubbles.  That burst into recessions.  That are often deep and long.  Something that didn’t happen during the days of 3-6-3 mortgage lending.  And the primary reason for that was that the U.S. was still on a quasi gold standard.  Which prevented the government from printing money at will.  The inflationary booms and busts that come with printing money.  And Great Recessions.

 www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

More of the Same from the Fed means more Housing Bubbles and Great Recessions

Posted by PITHOCRATES - April 14th, 2013

Week in Review

Those who wanted to get away from the United States’ limited government past and grow government had to do away with the gold standard.  Those who favored a large and expansive federal government needed fiat money.  They needed the power to print money at will.  To fund deficits when they continually spend more than they have.  Despite continuously raising taxes.  When Nixon decoupled the dollar from gold in 1971 the fiat money people got their way.  Now the Keynesians could tax, borrow, print and spend to their heart’s content.  With the federal government in the driver’s seat of the U.S. economy.  With their Keynesian economists advising them.  Who said government spending was just as good as private spending.  So go ahead and tax, borrow and print.  Because all you need to create economic activity is to print money.

Of course they couldn’t have been more wrong.  As the Seventies proved.  Printing money just created inflation.  Higher prices.  And asset bubbles.  With no corresponding economic activity.  Instead there was stagflation.  And a high misery index (the inflation rate added to the unemployment rate).  Because there is more to economic activity than monetary policy.  Tax rates and regulations matter a whole heck of a lot, too.  As well as a stable currency.  Not one being depreciated away with double-digit inflation.  Rich people may get richer buying and selling real estate and stocks during periods of high inflation but working class people just see both their paycheck and savings lose purchasing power.

It was these Keynesian policies that caused the S&L Crisis.  The dot-com bubble.  And the subprime mortgage crisis.  Giving is the Great Recession.  The worst recession since the Great Depression.  But have we learned anything from these failed policies of the past?  Apparently not (see Blind Faith In The Fed Is Not Enough by Comstock Partners posted 4/12/2013 on Business Insider).

The move of the S&P 500 into new all-time highs is based on neither the economy, nor earnings, nor value, but almost completely on the blind faith that the Fed can single-handedly flood the market with enough funds to keep the illusion going.  In this sense the similarity of the current stock market to the dot-com bubble of the late 1990s or the housing bubble ending in 2007 is glaring…

Real consumer spending has been growing at a mediocre 2% rate over the past year despite growth of only 0.9% in real disposable income over the same period.  This was accomplished mainly by decreasing the savings rate to only 2.6% in February, compared to rates of 7%-to-11% in more prosperous times.  With employment growth diminishing and the negative effects of the January tax increases and the sequester yet to kick in, consumer spending is likely to slow markedly in the period ahead.  While March year-over-year comparisons may benefit from an earlier Easter, the reverse will probably be true in April.  Keep in mind, too, our over-riding theme that consumers, still burdened with most of the debt built up in the housing boom, are in no shape to jump-start their spending…

In sum, the lack of support from the economy, earnings or valuation leaves the Fed as the only game in town.  Although the old adage says “Don’t fight the Fed”, it did pay to fight the Fed in 2001 and 2002 and again from late 2007 to early 2009.  In our view, the Fed can only try to offset the tightness coming from the fiscal side, but cannot get the economy growing on a sustainable basis.

The only real growth we had was from a tax cut.  Surprise, surprise.  Of course that cut in the tax rate of the Social Security payroll tax decreased the Social Security surplus.  Moving the Social Security funding crisis up in time.  That along with Medicare and whatever Obamacare will do will cause a financial crisis this country has yet to see.  Which will cause great suffering.  Particularly because people are saving less because they have less.  Which is the only way they can compensate for the horrible economy President Obama and his Keynesian advisors are giving us.  So they won’t have private savings to replace their Social Security benefits that the government will spend long before they retire.

And what does the government do?  Why, spend more, of course.  Because of the sweet nothings their Keynesian advisors are whispering into their ears.  Saying the things big government types want to hear.  Spend more.  It’s good for the economy.  If you wonder what got Greece into the mess they’re in this is it.  Spending.  And anti-business policies to pull more wealth out of the private sector so the government can spend it.

All the countries reeling in the Eurozone sovereign debt crisis are there for the same reason.  None of them got into the mess they’re in because they had low taxes and low regulatory costs.  Because countries with business-friendly environments create private sector jobs.  And private sector jobs don’t cost the government anything.  So they don’t have to tax, borrow, print and spend like they do when they listen to their Keynesian advisors.  Because that is what causes chronic deficits to fund.  And growing national debts.  Things that don’t happen when you leave the economy in the private sector.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , ,

China is Restructuring their Economy to make them less Dependent on their Export Economy

Posted by PITHOCRATES - April 6th, 2013

Week in Review

Those who support more government regulation of business nod approvingly to the way China does business.  The Chinese government manages the economy.  They pick the winners and losers.  They decide where investment capital goes.  And their economy is surging because of it.  Something many in the United States see.  And want to emulate.  Only if the U.S. government had the same power over business the Chinese have they lament.  Then we would see great things in the U.S.  Or so they say.  But would we?

It should be noted that the only booming part of the Chinese economy is their export economy.  That is, it’s not ordinary Chinese enjoying this economic boom.  It’s those in other countries getting those cheap export goods.  And why are they so cheap?  Some will say because of unfair trade practices.  And because of cheap labor.  Which is why the same people who want the U.S. economy to be more like the Chinese economy, more government control, also want to limit the import of those cheap Chinese goods.  For they’re destroying American jobs with their cheap labor and unfair trade practices.  Yet they want the U.S. economy to be more like the Chinese economy.  Even though it is only that cheap labor that makes it all possible (see China issues plan to rejuvenate old industrial base by Aileen Wang and Nick Edwards posted 4/2/2013 on Reuters).

China will expand an urban regeneration plan for ageing industrial cities as part of efforts to restructure the economy and promote more sustainable growth, the National Development and Reform Commission said on Tuesday.

The plan, to run from 2013 to 2020, covers 95 prefecture-level cities and 25 municipalities and capital cities that were once the core of China’s heavy industrial base. A blueprint issued in November 2011 covered 62 cities.

The NDRC said in a statement on its website that investments would be made to help former industrial centres upgrade technology while also providing financing support and encouraging financial innovation – including bond issuance – to raise capital for the program…

Annual personal disposable income for those cities is targeted at 29,900 yuan ($4,822) by 2017 and 13 million new jobs will be created during the same period.

Obviously the Chinese way isn’t working.  If it were there would be no need for such a mammoth restructuring of the national economy.  But they apparently need this restructuring.  As the export economy did make the Chinese government rich.  And those connected to the government rich.  But the ordinary Chinese worker earning those cheap wages sure didn’t get rich.  Which is why they are not helping to sustain the economy.  Making China totally dependent on their export economy.

They are targeting $4,822 in annual disposable income.  This is NOT the disposable income they have now.  It’s what the government hopes they will one day have.  Which really isn’t a lot of money.  For that comes to $401.83 each month.  Or $92.73 each week.  And only $13.21 a day.  So if this was your disposable income in the U.S. you may be able to afford a house or a car payment.  But not both.  Or much else.  Such as that smartphone with those expensive monthly charges.

Of course people will say that it is different in China.  Where the cost of living is less than in America.  So they will be able to buy more with their lower disposable income.  But, again, the reason why their cost of living is less in China is because of their cheap labor.  For that’s how the Chinese system works.  They can underprice the goods of most nations because they don’t pay their people much.  For there are no powerful labor unions negotiating better pay and benefit packages in China.  No.  In China they use the power of their communist government to keep labor cheap.  So they can pick winners and losers.  And get rich in the process.  While the average Chinese worker does not.

www.PITHOCRATES.com

Share

Tags: , , , , , , , ,

France’s New Socialist Policies are pushing France back into Recession

Posted by PITHOCRATES - March 24th, 2013

Week in Review

The French brought back the Socialists to power in France with their election of Francois Hollande.  And they voted for him because he was going to stick it to the rich.  Raising the top marginal tax rate to 75%.  All the Keynesian economists said this would solve all of France’s problems.  It would reduce the deficit.  And increase confidence in the business sector.  Boosting the economy.  When critics of the move said this would drive the wealthy and their money out of France they said pish tosh.  They are patriots.  And will simply whistle a happy tune and pay this new high tax rate.  Time has passed.  And now we can see the economic results of the new Socialist policies (see Recession stalks France as business slump hits crisis levels by Leigh Thomas posted 3/21/2013 on Reuters).

French business activity shrank in March at the fastest pace in four years, defying expectations for an improvement and probably plunging the euro zone’s second-biggest economy into a recession, a survey showed on Thursday…

Separate figures for the services and manufacturing sectors showed that business activity was retreating even faster than economists polled by Reuters had forecast…

That would mean that France, which has already abandoned its 2013 deficit target due to the lack of growth, has entered its third recession since the financial crisis…

The increasingly dire state of French business is all the more alarming as consumers, traditionally a major driver of the economy, are in no place to pick up the slack.

Unemployment is above 10 percent and there is no sign that it will fall any time soon, which is weighing on consumer spending.

It also explains in large measure why President Francois Hollande’s approval ratings are at record lows less than a year into his term in office, which he won on promises to revive growth and boost jobs.

Apparently the Socialists and the Keynesian economists were wrong.

You don’t create economic activity by increasing the cost of business.  And lower the rate of return on investment.  You create economic activity by lowering the cost of business to making it attractive to expand business.  You increase the rate of return on investment capital to encourage investors to take more chances on new startup companies.  It’s not rocket science.  If you increase the price of groceries people buy less groceries.  If you increase the cost of gasoline people by less gasoline.  Because people have limited disposable income.  And the higher the prices are the less that disposable income can buy.

If you increase the cost of business it raises the prices on the goods and services they sell.  The higher prices cause people to buy less.  And if you raise the cost of investment capital by taxing rich people more that will increase the cost of financing for businesses.  Which they will pass on to the consumer in higher prices.  Somehow Keynesian economists just don’t understand this.  But people living under their bad economic policies do.  Because they are always getting by on less because of these rising tax rates.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , ,

The Poor and Middle Class see their Incomes Still Falling in the Obama Recovery

Posted by PITHOCRATES - March 3rd, 2013

Week in Review

If you listen to the president, his press secretary, the mainstream media and just about anyone on the political left the economy is doing super.  Sure, we can make improvements.  But over all everything is just swell.  If you’re rich, that is. People with money are doing very well in the Obama recovery.  Those who aren’t as rich aren’t.  No.  All they see is high unemployment, rising prices and falling incomes (see Americans see biggest monthly income drop in 20 years by Annalyn Kurtz posted 3/1/2013 on CNNMoney).

Personal income decreased by $505.5 billion in January, or 3.6%, compared to December (on a seasonally adjusted and annualized basis). That’s the most dramatic decline since January 1993, according to the Commerce Department.

It’s something of a combination of one-time events, though.

Monthly income was unusually high in December because companies paid out early dividends to avoid upcoming tax hikes.

Further proof that people change their behavior when the government increases taxes.  The surge in December that made January look so bad was due to one-time distributions of profits to avoid higher taxes.  So December wasn’t that good, either.  Just an aberration as people tried to avoid the higher taxes coming their way.

The payroll tax cut’s expiration also played a role in January’s drop, because most workers have to pay 2 percentage points more in taxes this year…

Meanwhile, economists are closely watching consumer spending, which accounts for about two-thirds of the U.S. economy…

Economists think that rising gas prices in February could cut into consumer spending temporarily. Gas prices rose 10% in February, according to AAA, but are expected to fall in coming weeks…

The Social Security tax break helped consumers at the 2012 election.  Allowing them more disposable income in the year before the election.  And helping them feel things weren’t that bad.  Of course this Social Security tax holiday drew down the Social Security surplus to a dangerous low.  Something they will have to make up for with even higher taxes than the 2% temporary cut used to help the president’s reelection.

Regulatory costs, environmental policies that have shut down oil drilling on public lands and inflation (the incessant quantitative easing of the Fed putting more and more dollars into circulation) are keeping gas prices high.  For you can hide inflation in some consumer goods by reducing package sizes but you can’t do that with gasoline.  Because you sell gas by the gallon.  So the full cost of the Fed’s inflationary policies hit gas prices hard.  And, of course, high gas prices increases prices for everything else that uses fuel.  A large factor in the rise in our grocery bills.  Taking a bigger bite out of family budgets.  Leaving little for other consumer spending.

All of that said, consumers are benefiting from a housing recovery and rising stock prices…

They’re not able to save much, though. On average, people saved about 2.4% of their disposable income in January, down from 6.4% in December. That marks the smallest saving rate since November 2007.

Rich people are benefitting from the housing ‘recovery’ and stock prices.  Those who have a lot of money left over after meeting the living expenses.  Who can save a lot of money.  And invest it into housing.  Or stocks.  In fact, that’s why the stock market does well on news of the Fed continuing their quantitative easing.  For the rich are taking advantage of that cheap money to borrow it.  So they can invest it.  Trading on the interest.  Borrowing at low interest rates.  And investing in something that earns a higher rate of return.  People struggling to make their paycheck buy everything it once did as prices rise everywhere aren’t enjoying any benefits from that cheap money.  As they have no money left over to even save up a down payment on a house.  So they can take advantage of those low housing prices.  No.  The poor and middle class are not reaping anything in the current economic ‘recovery’.  Only the rich are.

Under President Obama the rich are getting richer.  And the poor are getting poorer.  Because of his economic policies.  Especially the Keynesian policies.  Keynesians look at personal savings as leaks out of the economy.  For if people aren’t spending money they are wasting money.  Which is the point of low interest rates.  To get people to borrow money to buy things.  Thus stimulating economic activity.  And generating more consumer spending.  But all that quantitative easing has raised prices so much that consumers are left with less and less money to spend.  The poor and middle class aren’t borrowing money to buy new houses.  They’re just trying to get by on what little they have.  Hoping for good economic times to return when their personal incomes rise once again.

Keynesian economics don’t work.  Just as Keynesian stimulus does not stimulate.  If it did we wouldn’t still have fewer jobs in the U.S. economy than when President Obama took office.  And he spent about $8000 billion on a stimulus bill.  The American Recovery and Reinvestment Act of 2009.  Some critics said it failed as an $8000 billion stimulus wasn’t big enough.  Even though the Obama administration declared the summer of 2010 the Recovery Summer.  Proof that the American Recovery and Reinvestment Act of 2009 restored economic prosperity.  Even though it didn’t.  For things still haven’t returned to where they were under George W. Bush.  Despite 4 years of Keynesian policies.  That haven’t raised personal incomes.  The true measure of any economic recovery.  And when personal incomes are the lowest they’ve been in 20 years, there hasn’t been any economic recovery.  Despite $800 billion in stimulus.  And 4 years of President Obama’s Keynesian economic policies.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , ,

Disposable Income, Federal Taxes, Federal Debt and our Spending Problem 1940-2012

Posted by PITHOCRATES - February 27th, 2013

History 101

Excessive Federal Taxes reduce Disposable Income which reduces New Economic Activity

The key to economic growth is disposable income.  The more disposable income people have the more economic activity they will create.  So the key to a healthy economy is maximizing disposable income.  And we can do that in a few ways.  First of all we need jobs.  And we can create more jobs with fewer costly regulations.  And lower taxes.  If we make it less costly to hire people businesses will hire more people.  Which they aren’t doing right now.  Primarily because of Obamacare.  Which is so costly to businesses that they’ve frozen new hiring.  And are pushing some full time employees to part-time.  As well as investing in capital equipment wherever they can.  Replacing people with machines.  Because machines don’t incur Obamacare costs, taxes or penalties.

For those lucky few who haven’t been replaced by machines they can earn some disposable income.  Depending on their skill level.  A low-skilled person who never graduated from high school cannot earn as much disposable income as a thoracic surgeon.  So if you want stuff.  And you want to stimulate the economy.  Become a thoracic surgeon.  Or something else that takes years of college and years of on the job training.  And hundreds of thousands of dollars of student loan debt.

But earning a good income isn’t enough.  Because from that income we must pay an enormous amount of taxes.  Greatly reducing our disposable income.  Some of the taxes we can see.  Such as those itemized on our paycheck stubs.  Federal and state income taxes.  And Social Security and Medicare taxes.  But there are a lot of taxes we don’t see.  Such as excise taxes on the things we buy from gasoline to liquor to cigarettes.  And then there are property taxes.  Sales taxes.  And the list goes on.  All of which take a bite out of our disposable income.  Siphoning away real economic activity over the years as the federal government added new taxes.  And increased the tax rates of the old taxes.

The Federal Government came up with the Withholding Tax to Prevent an all out Tax Revolt

When the Founding Fathers ratified the Constitution there weren’t many taxes.  Mostly custom duties and tariffs.  Which was enough to fund the limited government they created.  But ever since the Founding some in the federal government have been trying to destroy what the Founding Fathers created.  And replace it with what they fought so long to get rid of.  A very large government that reaches into all parts of our life.  Like a monarchy.  Where those in the federal government belong to a new aristocracy.  Who are more equal than everyone else.  And live a far, far better life.  If you don’t believe this just check out property values around Washington DC.

With the American Civil War killing a generation of fathers a lot of boys grew up with over protective and doting mothers.  When these boys came of age and entered politics they weren’t as manly as their father’s generation was.  Because they grew up without fathers to teach them to hunt and fight.  Instead, they grew up with mothers who taught them to be more nurturing.  Giving us the progressive movement.  Woodrow Wilson gave us a permanent federal income tax.  And tried to expand the federal government to be more of a monarchy with a powerful executive that can govern against the will of Congress.  And the people.  After World War I we returned to normalcy.  And Warren Harding and Calvin Coolidge gave us the Roaring Twenties.  And the modern world.  Then Herbert Hoover and other progressives caused the Great Depression.  With a crisis too good to let go to waste FDR picked up where Woodrow Wilson left off.  Exploding the size and reach of the federal government.  And the great surge in federal taxes began.  Over the years they added more and more.  Such as these (see Table 2.1—RECEIPTS BY SOURCE: 1934–2017).

Income Payroll Excise and Other Taxes Key

Some of these you are no doubt familiar with.  The biggest bite is the individual income tax.  Something most of us have received our W-2s for and have just prepared our federal income tax returns.  Or are about to.  Dreading it.  Unless we’re getting a refund.  Those who owe money will probably take their sweet time.  As they hate writing a check to the federal government.  Which is why the federal government came up with the withholding tax.  For if people had to write a check for the full amount of their federal income taxes each year there would be an all out tax revolt.  And probably a lot more imprisonment for people not paying their federal taxes.  For no one has that kind of money sitting around.  Which is why the government takes it from you before you can spend it yourself.

Excessive Federal Spending requires ever Higher Taxation and ever more Borrowing to Feed

The big debate in Washington now is the sequester.  And the automatic cuts of the sequester.  Which were proposed by President Obama.  Which Congress wrote into a bill.  And the president signed into law.  In hopes that Republicans and Democrats would come together and find a way to reduce the record high deficit.  The Republicans want to do the obvious.  Cut the spending that caused the record deficit.  Democrats want to do what they always want to do.  Raise taxes.  Saying that we don’t have a spending problem.  That the four years of trillion dollar deficits isn’t because we’re spending too much.  It’s because we’re not taxing enough to pay for that spending.   That rich people aren’t paying their fair share.  But that’s not what you see when you look at the numbers.

Income Payroll Excise and Other Taxes

These taxes are identified in the above table.  As government spending grew so did taxes.  In particular personal income taxes which provide the majority of federal tax revenues.  Which exploded after LBJ’s Great Society added a lot of new federal spending.  And after President Nixon decoupled the dollar from gold in 1971.  Unleashing inflation.  Note that personal income taxes are greater than corporate income taxes.  That’s because there are more people than corporations.  For example, Siemens AG is an international corporation that employs about 360,000 people.  Who all pay personal income taxes.  After personal income taxes comes old-age and survivors insurance.  Otherwise known as Social Security.  And all of these taxes have continued to grow.  Taking a bigger and bigger bite out of disposable incomes.  Putting a drag on new economic activity.  Note that the only falls in federal tax revenue were due to two Democrat-caused recessions.  Bill Clinton’s dot-com bubble burst causing a bad recession in 2000.  And his subprime mortgage lending bubble he started with his Policy Statement on Discrimination in Lending burst causing a bad recession in 2007.  Apart from these, though, the pattern has been more spending.  Not less.  Which would suggest that we do have a spending problem.

Also included on this chart is the federal debt.  Note how it spiked up during World War II.  Then settled down at a constant rate for about 30 years.  Until LBJ’s Great Society spending increased federal spending.  But these massive new taxes weren’t enough.  For that’s when the big deficits started.  Adding on to a growing federal debt.  With the only decline in this growth coming during President Clinton’s presidency.  President Clinton’s dot-com boom (before the bubble burst), the peace dividend from President Reagan winning the Cold War, the Asian financial crisis and Japan’s Lost Decade all helped the American economy shower the treasury with cash.  Putting the nation into a surplus for a year or so.  But that didn’t last.  As federal spending continued to outpace tax revenue.  Culminating with President Obama’s trillion dollar deficits.  With federal tax revenue at the highest since President Bush’s record high just before Clinton’s subprime mortgage bubble burst into the subprime mortgage crisis.  And the Great Recession.

So yes, Virginia, we have a spending problem.  A spending that requires ever higher taxation and ever more borrowing to feed.  Taking an ever bigger chunk out of disposable incomes.  Leaving less and less for new economic growth.  Explaining why the economy has never recovered from the Great Recession.  For President Obama’s policies only increase taxes and the cost of doing business.  And do nothing to create disposable income.

www.PITHOCRATES.com

Share

Tags: , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , , ,

« Previous Entries