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.

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Economics 101

Liquidity can be More Important than Profitability to a Small Business Owner

Small business owners lose a lot of sleep worrying if they will have enough cash for tomorrow.  For next week.  For next month.  You can increase sales and add new customers but unless this creates cash those new sales and new customers may cause more problems than they help.  For a lot of businesses fail because they run out of cash.  Often times learning they have a cash problem only when they don’t have the cash to pay their bills.  So savvy business owners study their financial statements each quarter.  Even each month.  Looking for signs of trouble BEFORE they don’t have the cash to pay their bills.

Investors poor over corporations’ financial statements to make wise investment decisions.  Crunching a lot of numbers.  Analyzing a myriad of financial ratios.  Gleaning a lot of useful information buried in the raw numbers on the financial statements.  Small business owners analyze their financial statements, too.  But not quite to the extent of these investors.  They may look at some key numbers.  Focusing more on liquidity than profitability.  For profits are nice.  But profits aren’t cash.  As a lot of things have to happen before those profits turn into cash.  If they turn into cash.  The following are some balance sheet and income statement accounts.  Following these accounts are some calculations based on the values of these accounts.  With four quarters of data shown.

So what do these numbers say about this year of business activity?  Well, the business was profitable in all four quarters.  And rather profitable at that.  Which is good.  But what about that all important cash?  With each successive quarter the business had a lower cash balance.  That’s not as good as those profitability numbers.  And what about accounts receivable and inventory?  There seems to be some large changes in these accounts.  Are these changes good or bad?  What about accounts payable?  Accrued expenses?  Current portion of long-term debt?  These all went up.  What does this mean in the grand scheme of things?  Looking at these numbers individually doesn’t provide much information.  But when you do a little math with them you can get a little more information out of them.

In Trend Analysis a Downward sloping Current Ratio indicates a Potential Liquidity Problem

Current assets are cash or things that a business can convert into cash within the next 12 months.  Current liabilities are things a business has to pay within the next 12 months.  Current assets, then, are the resources you have to pay your current liabilities.  The relationship between current assets and current liabilities is a very important one.  Dividing current assets by current liabilities gives you the current ratio.  If it’s greater than one you are solvent.  You can meet your current financial obligations.  If it’s less than one you will simply run out of current resources before you met all of your current liabilities.  In our example this business has been solvent for all 4 quarters of the year.

Days’ sales in receivables is one way to see how your customers are paying their credit purchases.  The smaller this number the faster they are paying their bills.  The larger the number the slower they are paying their bills.  And the slower they pay their bills the longer it takes to convert your sales into cash.  Days’ sales in inventory tells you how many days of inventory you have based on your inventory balance and the cost of that inventory.  The smaller this number the faster things are moving out of inventory in new sales.  The larger this number is the slower things are moving out of inventory to reflect a decline in sales.  These individual numbers by themselves don’t provide a lot of information for the small business owner.  Big corporations can compare these numbers with similar businesses to see how they stack up against the competition.  Something not really available to small businesses.  But they can look at the trend of these numbers in their own business and gain very valuable information.

The above chart shows the 4-quarter trend in three important liquidity numbers.  Days’ sales in receivables increased after the second quarter upward for two consecutive quarters.  Indicating customers have paid their bills slower in each of the last two quarters.  Days’ sales in inventory showed a similar uptick in the last two quarters.  Indicating a slowdown in sales.  Both of these trends are concerning.  For it means accounts receivable are bringing in less cash to the business.  And inventory is consuming more of what cash there is.  Which are both red flags that a business may soon run short of cash.  Something the three quarters of falling current ratio confirm.  This business is in trouble.  Despite the good profitability numbers.  The downward sloping current ratio indicates a potential liquidity problem.  If things continue as they are now in another 2 quarters or so the business will become insolvent.  So a business owner knows to start taking action now to conserve cash before he or she runs out of it in another 2 quarters.

Keynesian Stimulus Spending can give a Business a Current Ratio trending towards Insolvency

In fact, this business was already having cash problems.  The outstanding balance in accounts payable increased over 100% in these four quarters.  Not having the cash to pay the bills the business paid their bills slower and the balance in outstanding accounts payable rose.  Substantially.  As the cash balance fell the business owner began borrowing money.  As indicated by the increasing amounts under current portion of long-term debt and interest expense.  Which would suggest substantial borrowings.  Putting all of these things together and you can get a picture of what happened at this business over the past year.  Which started out well.  Then experienced a burst of growth.  But that growth disappeared by the 3rd quarter.  When sales revenue began a 2-quarter decline.

Something happened to cause a surge in sales in the second quarter.  Something the owner apparently thought would last and made investments to increase production to meet that increased demand.  Perhaps hiring new people.  And/or buying new production equipment.  Explaining all of that borrowing.  And that inventory buildup.  But whatever caused that surge in sales did not last.  Leaving this business owner with excess production filling his or her inventory with unsold goods.  And the rise in days’ sales in receivables indicates that this business is not the only business dealing with a decline in sales.  Suggesting an economic recession as everyone is paying their bills slower.

So what could explain this?  A Keynesian stimulus.  Such as those checks sent out by George W. Bush to stimulate economic activity.  Which they did.  Explaining this sales surge.  But a Keynesian stimulus is only temporary.  Once that money is spent things go right back to where they were before the stimulus.  Unfortunately, this business owner thought the stimulus resulted in real economic activity and invested to expand the business.  Leaving this owner with excess production, bulging inventories, aging accounts receivable and a disappearing cash balance.  And a current ratio trending towards insolvency.  Which is why Keynesian stimulus spending does not work.  Most businesses know it is temporary and don’t hire or expand during this economic ‘pump priming’.  While those that do risk insolvency.  And bankruptcy.

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Economics 101

Christians may not like the Crass Commercialization of Christmas but the Left Loves It

The Left does not have a war on Christmas per se.  For they love the consumer spending part of Christmas.  Which is pure Keynesian.  People go into debt to spend more money at retailers.  They love that part of Christmas.  What they don’t like is the religious stuff.  Especially Jesus.

They don’t like Jesus because He is the God the Christians worship.  Their Lord and Savior.  It’s these Christians that bother the Left.  Because of their opposition to birth control (mostly Catholics), abortion and having fun in general.  The kind of fun adults enjoy.  The kind of things Christians frown on.  Premarital sex.  Gay love.  Drinking and using drugs.  Coarse language and sexual situations on television shows and in the movies.  Things they champion on the Left.  Which makes the Left hate Christianity.  Which they see as nothing but a great killjoy.

It’s the moralizing the Left does not like.  But the one thing Christians don’t like about Christmas, its crass commercialization, they do like.  So the Left will try to band images of Christ from Christmas displays wherever they can.  Despite Christmas being the celebration of Christ’s birth.  But they will gather in Rockefeller Center to party when they light the Christmas tree.  Though they would prefer that we call it the holiday tree.

Retailers often become Profitable for the Year only because of this Temporary Spending Surge at Christmas

So there are two Christmases.  The one where Christians celebrate the birth of Christ.  Wish for peace on earth.  And good will towards man.  And the other Christmas.  The one marked by the orgy of consumer spending.  Much of it funded by one-time Christmas bonuses.  A celebration of demand-side Keynesian economics.  Where people spend their hard earned money instead of saving it.  And when their money runs out they spend even more using their credit cards.

Keynesians have a bunch of charts and graphs showing how great a stimulus this Christmas spending is to the economy.  And mathematical formulas.  They can tell you about the velocity of money. How fast money travels through the economy when it goes from consumer to seller.  The seller then becomes consumer.  And spends the money they just received.  Then the person who receives this money in a sales transaction goes out and spends it as a consumer.  And on and on it goes.  Flying through though the economy at breakneck speed.  Generating a whole lot of economic activity.

Retailers often become profitable for the year only because of this spending surge at Christmas.  In fact, to handle this surge in business they hire a lot of people at Christmas time.  Part-time people.  Proving again that pumping money into the economy creates jobs.  The main tenet of Keynesian monetary policy.  Pump cash into the economy and people will spend it.  Something the Keynesians have been doing since Richard Nixon decoupled the dollar from gold in 1971.  Ending any semblance of responsible monetary policy.  And recessions forever.  At least, that was the plan.

Keynesian Stimulus is nothing more than an Orgy of Temporary Consumer Spending just like at Christmas Time

When the economy slows down and people stop buying stuff businesses have to lay off workers.  So they won’t build stuff that no one will buy.  Laid off workers no longer have money to buy things.  Which causes other business to lay off workers.  So THEY won’t build stuff that no one will buy.  It’s a vicious cycle.  In fact, we call it the business cycle.  The boom-bust cycle.  From expansion to contraction.  From an economy hiring people to an economy laying off people.

Keynesian economics was supposed to remove the contraction side of the business cycle.  By picking up the spending slack.  When consumers stopped spending money the government would step in and replace their spending.  We call it stimulus spending.  Often spending money the government doesn’t have.  So they run a deficit (i.e., borrow money).  Or simply print money.  Which they did a lot of in the Seventies.  Unfortunately, as it turns out, you just can’t do that.  For when you print money you devalue it.  Which raises prices.  As it takes more of these devalued dollars to buy what they once did.

And this is why Keynesian economics doesn’t work.  Because a Keynesian stimulus is nothing more than an orgy of consumer spending.  Just like at Christmas time.  Which happens only for a limited time.  Businesses hire temporary part-time workers at Christmas because this spending does not last.  As it does not last during a Keynesian stimulus.  It doesn’t create any full-time jobs.  Because employers know it is only temporary.  And they know that higher prices will soon follow.  As they do after Christmas when the discounting ends.  Which will reduce future economic activity.  As it does after Christmas.  Once the deals end so too ends the orgy of consumer spending.  Leaving people to deal with the aftermath.  Depleted bank accounts.  A lot of credit card debt.  And a little buyer’s remorse.

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Week in Review

Hurricane Sandy left a swathe of destruction in its path.  But it turns out there is a silver lining to this death and destruction.  It’s providing an economic stimulus.  A regular Keynesian stimulus bill.  Only without the messiness of having to get a majority vote in Congress.  Something the politicians can really get behind.  If only they could get a hurricane generating machine (see Sandy Seen Boosting U.S. With as Much as $240 Billion Rebuilding by Jeff Kearns, Susanna Pak and Noah Buhayar posted 11/23/2012 on Bloomberg).

John Cataneo is working his 20 employees overtime and still can’t keep up with demand from customers who need plumbing repaired after superstorm Sandy. He says he’s hired two new workers and may need more…

Cataneo’s experience shows how the storm is giving the U.S. Northeast — and the rest of the country — an economic boost that may eventually surpass the loss of business it caused. Reconstruction and related purchases and hiring may range from $140 billion to $240 billion and increase U.S. economic growth by 0.5 percentage point next year, assuming $50 billion in losses, according to Economic Outlook Group LLC, a Princeton, New Jersey-based forecasting firm.

Well, that’s good news, isn’t it?  Up to $240 billion in new economic activity.  Wow.  Guess hurricanes are good things.  A blessing.  Providing new jobs.  Injecting new money into the local economy.  Why, there hardly is a downside.  Except for this (see After Sandy damage, insurance adjusters may bring more bad news by Ben Berkowitz, Michelle Conlin and Jonathan Allen posted 11/23/2012 on Reuters).

After another day of pumping out their swampy, moldy houses, neighbors in Breezy Point in New York City huddled at the quaint generator-powered firehouse Wednesday night, stamping their feet to stay warm. Neighbors picked at food from tin cans and sipped soups from Styrofoam cups as they lamented the growing holes in a safety net they thought they had: homeowner’s insurance.

“They’re covering five shingles and a piece of gutter, and that’s it,” says Kathleen Valentine, a fire alarm dispatcher who spent the night of Superstorm Sandy working while her house filled with water and dead fish. Her insurance agent from Narragansett Bay Insurance Company said her policy would pay only for wind damage. She is still waiting for someone from the federal flood insurance program to show up…

The trouble is, many homeowners don’t read those policies closely enough to realize that most don’t cover flooding. They don’t always get both homeowner’s insurance, usually provided by a private company, and flood insurance provided through the U.S. government’s National Flood Insurance Program.

Only 14 percent of homeowners in the Northeast hold flood insurance policies, according to the Insurance Information Institute.

Federal law requires flood insurance to mortgage any home in a designated high-risk floodplain. But once the initial policy, usually for a year term, expires, no law says you have to renew it, and many people don’t because banks don’t make them.

In New Jersey, only 231,000 of the homes in the 20 coastal counties had flood insurance, according to FEMA.

There’s a reason why private insurance companies don’t sell flood insurance to people living in high-risk floodplains.  The cost of the policies would be so high to cover the losses in the event of a flood (pretty much rebuilding all houses in the area) that no one would buy the insurance.  So why bother?  Which is why the federal government provides flood insurance.  So they can spread the cost of flood claims to people who don’t live in high-risk floodplains.  Something insurance companies can’t do.  Because they don’t have the power to tax or print money.  But even the policies the government sells are too expensive for 86% of the people living in high-risk floodplains.  So they don’t buy them.  And suffer the consequences when the flood comes.

So that blessing of Keynesian-like economic stimulus?  The money to pay for it comes from in part insurance companies who can’t invest that money elsewhere.  In part from the federal government, further increasing the federal deficit which is ultimately paid by the taxpayers.  But mostly from the people who lost everything and have to pay out of pocket to rebuild their lives.  This is the blessing of that economic activity.  The destruction of lives so other people can prosper.

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Economics 101

Prices match Supply to Demand letting Suppliers know when to bring more Goods and Services to Market

There is a natural ebb and flow to the economy.  Through good times and bad.  And you can tell which way the economy is heading by prices in the market place.  When prices are rising times are typically good.  As people are gainfully employed with money to spend.  As they compete with each other for the goods and services in the market place demand rises.  Growing greater than the supply of goods and services.  So prices rise.  Because when there are fewer goods and services they are worth more money.  For those who have them to sell.  Because demand is so great people are willing to pay top dollar for them.  To get them while supplies last.  This attracts the attention of other suppliers.  Who want to cash in on those high prices.  So they bring more goods and services to market.

In time supply catches up to demand.  And passes it.  Suddenly the market has more goods and services than people are buying.  As inventories grow retailers stop buying so much from their wholesale suppliers.  Who in turn stop buying so much from their manufacturers.  Who in turn stop buying so much from their raw material suppliers.  And manufacturers and their raw material suppliers begin laying off workers.  So there are fewer people gainfully employed with money to spend.  The fewer gainfully employed buy less than the more gainfully employed.  Causing inventories to grow larger as more goods are going into them than are coming out of them.  So they start cutting prices.  To unload these inventories before people start buying even less.  Because they spent a lot of money to build those inventories.  And it costs to hold these items in warehouses and stockrooms.

And that’s the natural ebb and flow of the economy.  What economists call the business cycle.  That goes from an expanding economy to a contracting economy.  From boom to bust.  From inflation to recession.  Something normal.  And natural.  Though it could be unpleasant for those who lose their jobs.  But it’s something that must happen.  To correct prices.  You see, prices make all of this work automatically.  They match supply to demand.  Letting suppliers know when to bring more goods and services to market.  And when they’ve brought too much.  When the economy goes into recession prices fall.  Which tells suppliers that supply exceeds demand.  And that anything additional they bring to market will not sell.  As they incur costs to bring things to market this is very good information to have.  So they don’t waste money.  Leaving their businesses short of cash.  Possibly causing their businesses to fail.

Whenever we Devalue the Dollar with Inflationary Monetary Policy Prices Rise

No one likes losing their job.  Because they need income to pay their bills.  And the government doesn’t like people losing their jobs.  Because they tax those incomes to pay the government’s bills.  And unemployed people pay no income taxes.  So the government tries to tweak the economy.  At the federal level.  To extend the inflationary periods of the business cycle.  And they do that with inflationary monetary policy.  Using their monetary powers to keep interest rates below the true market interest rate.  Hoping it will encourage suppliers and consumers to keep borrowing and spending money.  Even though supply had already caught up to and passed demand.  Such that everyone that wanted to buy something could.  While every supplier that wanted to sell something couldn’t.

Some people take advantage of these lower interest rates.  Some people will remortgage their homes to lower their monthly payment.  Which will give them a little more disposable cash each month.  Which they may use to buy more stuff.  But other people will take this opportunity to buy a large house just because of the low interest rate.  As some businesses may borrow to expand their business just because of the low interest rate.  Not for unmet demand.  These actions may not help the economy.  In fact they may hurt the economy in the long-term.  When the inevitable recession comes along and they are so overextended they may not be able to pay their bills.  They may lose their house.  Or their business.  For the worst thing to have whenever you suffer a reduction in revenue or income is debt.

But there is an even worse effect of that inflationary monetary policy.  When you increase the money supply you increase the total amount of dollars in the economy.  But they’re chasing the same amount of goods and services.  Which makes each dollar worth less.  Requiring more of them to buy the same things they once did.  Which is why whenever we devalue the dollar with inflationary monetary policy prices rise.  So, yes, there may be an initial expansion of economic activity.  But some people will have inflationary expectations.  That is, they know prices will go up in the very near future.  So they won’t increase production.  Why?  While an initial burst of economic activity may draw down those bloated inventories those coming higher prices will increase business costs.  Which businesses will have to pass on in the prices of their goods.  And how do higher prices affect consumers?  They buy less.  So manufacturers are not going to expand production when price inflation is going to reduce their sales in the long run.

Cutting Taxes and Reducing Costly Regulations have Stimulated Economic Activity every time they’ve been Tried

Perhaps the worst effect of inflation is the false information those higher prices give.  When consumer demand rises so do prices.  And it’s a signal to suppliers to bring more goods and services to market.  But when prices rise because of a depreciated dollar and NOT due to higher consumer demand, some may bring more goods and services to market when there is no demand for it.  So you have rising prices.  And expanding production.  Producing more goods than the market is demanding.  Creating a bubble.  Adding a lot of stuff to the market place at very inflated prices.  That no one is buying.  Then the bubble bursts.  And recession sets in.  As businesses lay off workers to adjust supply to meet actual demand.  And those inflated prices fall back to market values.  The higher inflationary monetary policy pushed those prices up the farther they have to fall.  And the more painful the recession will be.

You see, inflationary monetary policy interferes with the natural ebb and flow of the economy.  And the automatic price mechanism that matches supply to demand.  By trying to expand the inflationary side of the business cycle, and contract the recessionary side, governments make recessions longer.  And more painful.  Which is why Keynesian stimulus policies (lowering interests rates and deficit spending) don’t stimulate long-term economic activity.  Yet it is what most governments turn to whenever the economy slows. While there is another way to stimulate economic activity.  One that is not so popular with most governments.  Across the board tax cuts on business and personal incomes.  And reducing costly regulations on businesses.  These make a more business-friendly environment.  Encouraging businesses to expand and hire people.  Because these actions will have a positive impact on a business’ long-term outlook.  And with consumers having more disposable income (thanks to the cuts in personal income tax rates) businesses know there will be a market of any increase in production.

So there you have two ways to stimulate economic activity.  One way that works (tax cuts and reducing costly business regulations).  And one that doesn’t (lowering interest rates and deficit spending).  So why is the one that doesn’t work chosen by most governments over the one that does?  Because governments like to spend money.  It’s how they build constituencies.  By giving generous benefits to voters.  But to do that they need tax revenue.  Lots of tax revenue.  Produced by increasing tax rates as often as they can.  So they cannot stand the thought of cutting taxes.  Ever.  Which is why they always choose inflationary policies over tax cuts.   Even though those policies fail to stimulate economic activity.  As proven throughout the era of Keynesian economics.  While cutting taxes and reducing costly regulations have stimulated economic activity every time they’ve been tried.

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Week in Review

Back when the Congress and the White House were battling it out to raise the debt limit the final compromise to raise the limit caused Standard and Poor’s to lower the U.S. sovereign debt rating for the first time in history.  The Left blamed the Republicans for refusing to raise taxes.  As if the excessive spending had nothing to do with it.  Well, another credit agency is downgrading the U.S. sovereign debt rating.  And this happened after the Fed announced QE3.  And nothing else (see Egan-Jones downgrades U.S. rating on QE3 move by Wallace Witkowski posted 9/14/2012 on Market Watch).

Egan-Jones Ratings Co. said Friday it downgraded its U.S. sovereign rating to AA- from AA on concerns that the Fed’s new round of quantitative easing, or QE3, will hurt the U.S. economy. The ratings agency said the Fed’s plan of buying $40 billion in mortgage-backed securities a month and keeping interest rates near zero does little to raise GDP, reduces the value of the dollar, and raises the price of commodities.

QE3 is Keynesian stimulus.  Printing money.  Which according to Egan-Jones won’t help the economy.  Apparently the people at Egan-Jones aren’t Keynesians.  Like in the Obama administration.  And at the Fed.  QE3 will devalue the dollar and raise prices.  While it may cause some short-term stimulus it will only make things worse in the long run.  Because of that inflation.  And it doesn’t address the real drag on the economy.  The anti-business policies of the Obama administration.  The biggest one being Obamacare.  With Taxmageddon right up there with it.  It’s the high taxes and costly regulatory policies that are holding back economic growth.  And devaluing the dollar doesn’t help these problems.  It only compounds them.  By raising prices.

QE3 will take a bad economy and make it worse.  Making the recession longer.  And the eventual recovery more painful.  Just like every recovery after a long period of inflation.  Just like after the Seventies.  Just like after the Nineties after the dot-com bubble burst.  Just like now after the subprime mortgage crisis.  There is a pattern here.  Easy money leads to irrational exuberance.  (Reckless spending encouraged by cheap money.)  And very unpleasant recoveries.  We got out of the early Eighties recession by cutting taxes.  Not with inflationary monetary policies.  We got out of the early 2000s recession by cutting taxes.  Along with some inflationary monetary policy.  The recovery wasn’t as long lasting as it was following the Eighties.  Now they are only proposing inflationary monetary policy without any tax cuts.  Which is why the Great Recession lingers still.  Proving tax cuts stimulate.  Not inflationary monetary policy.

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Week in Review

Railroads are expensive to build.  And to operate.  Especially high-speed railroads.  Why?  Because unlike airplanes that fly in the air between cities trains have to travel on track between cities.  And that’s a whole lot of railroad infrastructure.  That’s why railroads don’t suffer as much during times of escalating fuel costs as trucking and aviation.  Because fuel isn’t their greatest cost.  As it is for trucks and planes.  It’s that massive infrastructure that they have to build.  And maintain.

To build a railroad you need lots of money.  And lots of labor.  Preferably cheap labor.  And that usually means government money.  And immigrant labor.  That’s how they built the first transcontinental railroad in America.  Along with a lot of inefficiencies.  And corruption.  Typical when you put government and big piles of money together.

That first transcontinental railroad needed a lot of ‘fixing up’ before it was safe for use.  They had to move some track from ice to terra firma.  Rebuild some bridges that weren’t disposable after a few uses.  That kind of thing.  Because that’s the kind of craftsmanship you get when government is in charge of the money.  What we call crony capitalism.  Government rewarding their friends.  Picking winners and losers.  And helping those who will help them.  That is, return the favor of government contracts with campaign contributions.

Governments all around the world are in favor of building more high-speed rail.  Because it will ‘put people to work’.  And ‘save the planet’.  By moving people out of gasoline-powered cars into electricity-powered trains.  Electricity that is generated from even more polluting coal-fired power plants.

The Americans have been trying.  Obama’s stimulus included billions for high-speed rail.  That did nothing.  Meanwhile the Chinese have been doing it.  By making money for the banks to lend.  And using cheap ‘second-class’ migrant labor from China’s countryside to build their high-speed rail.  And how has that been working?  Not so good (see Can’t pay, won’t pay posted 10/29/2011 on The Economist).

EFFORTS to curb inflation in China are having some painful side-effects. A squeeze on bank lending has prompted some businesses short of cash to stop paying wages to blue-collar workers. Even the much-vaunted state sector is feeling the pinch. Work has all but ground to a halt on thousands of kilometres of railway track, and many of the network’s 6m construction workers have been complaining about not being paid for weeks or sometimes months…

The government touted building railways as a great way to keep the economy buoyant during global financial trouble, and boost employment. But the $600 billion stimulus launched in 2008 is all but spent. Indeed, the central government has urged state banks to cut back on lending in order to curb inflation, which in the year to July reached a three-year high of 6.5%, before dropping to 6.1% in September.

Yet another example of why Keynesian economic stimulus stimulates only economic bubbles and inflation.  Which are always corrected by recessions.  And the greater the stimulus/bubble the greater the recession.  Of course Keynesian government economists everywhere will all come to the same conclusion.  That China isn’t spending enough.  And that governments everywhere should follow the Chinese example.  But without the one flaw of turning off the easy credit spigot.  Because Keynesians always say that any inflation created by government stimulus is minor and negligible in comparison to all the good that it does.

Similar problems have also been reported in road building and property construction, prompting a growing number of demonstrations and violent incidents, including clashes with employers and suicides. Such difficulties are likely to get worse towards the end of the year, when companies traditionally try to settle accounts with employees. Wage inflation is adding to employers’ woes. Minimum wages have risen by an average of nearly 22% in the two-thirds of China’s provinces which have adjusted them this year. Nice if you can get it, but not much use if you are not being paid at all.

But the Keynesians couldn’t be more wrong.  Once inflation starts it ripples through the economy.  Costs go up.  Wages go up.  Increasing consumer prices everywhere.  There’ll be some economic prosperity for a little while.  But soon inflation will eat away at the standard of living.  People will be making more money everywhere.  But that money will buy less and less.  It will buy less of a house.  Fewer toys.  And even less food.  This is the endgame of Keynesian stimulus.  And we’re seeing it played out on a grand scale in China.  Like we saw in Japan during their Lost Decade.  Where the Japanese suffered a deflationary spiral that just never ended.  To correct all that damage caused by their Keynesian bubble.

This could prove to have a devastating effect on the American economy.  For the Americans will have no one left to finance their debt.  And yet President Obama, the Democrats and all those mainstream Keynesian economists are all clamoring for one thing.  Can you guess what that is?  That’s right.  More Keynesian stimulus.

Some people just never learn.

www.PITHOCRATES.com

The Obama Jobs Speech was the Same Old Same Old with the Angry turned up to Eleven

The big speech was last night.  President Obama‘s Jobs speech.  After waiting with bated breath.  For him to come back from vacation.  On Martha’s Vineyard.  Where no one wants for a job.  Or anything.

What you thought of it depends on your party affiliation.  If you’re a Big Government liberal Democrat that wants to stick it to the rich, I’m sure you liked it.  If you were looking for substance, I’m sure you were disappointed.  It was just the same old same old.  With the angry turned up to eleven.

Here are some selections from the transcript with commentary (see Obama jobs speech transcript: Full text (as delivered) posted 9/8/2011 on Politico).

These men and women grew up with faith in an America where hard work and responsibility paid off. They believed in a country where everyone gets a fair shake and does their fair share — where if you stepped up, did your job, and were loyal to your company, that loyalty would be rewarded with a decent salary and good benefits; maybe a raise once in a while. If you did the right thing, you could make it. Anybody could make it in America.

For decades now, Americans have watched that compact erode. They have seen the decks too often stacked against them. And they know that Washington has not always put their interests first.

Yeah, it used to be like that.  Until greed set in.  Government greed.  Their insatiable want of private sector wealth.  And power over our lives.  High taxes.  And punishing regulations.  These have hurt American businesses that once provided those fair shakes.  It’s President Obama and his party that have been making this a business unfriendly nation.  Giving American businesses an unpleasant choice who struggle to compete.  Either close.  Or conduct business in a country that lets them compete.

Just look at the effect of Obamacare.  All hiring is frozen.  And those who can get Obamacare waivers are.  The communist Chinese don’t have these problems.

The question is whether, in the face of an ongoing national crisis, we can stop the political circus and actually do something to help the economy.

He says as he scolds the American people.  And our Republican representatives.  Yelling at us.  Scowling at us.  Fed up with us.  Because he is not getting his way.

Ultimately, our recovery will be driven not by Washington, but by our businesses and our workers.

Absolutely right.  And the best thing Washington can to is to stop helping.  Their tax and regulatory policies are smothering economic growth.  You want to help?  Then get out of the way.  And let business do what business does best.  Grow.  And create jobs.  To meet demand.  That the market is demanding.  Not building what the government thinks is best.

I am sending this Congress a plan that you should pass right away. It’s called the American Jobs Act. There should be nothing controversial about this piece of legislation. Everything in here is the kind of proposal that’s been supported by both Democrats and Republicans — including many who sit here tonight. And everything in this bill will be paid for.

That urgent is it?  Urgent.  But not so urgent to cancel your luxurious vacation on the exclusive Martha’s Vineyard?  Where the rich and famous vacation to get away from people like us.  You know, if it could wait until after Martha’s Vineyard, it can’t be that important.

Democrats and Republicans support everything in this plan?  If so why isn’t this already law?  If not important before, why is it now?  Some two and a half years into your presidency?  And some two and a half years after applying your laser-like focus on job creation?

It will create more jobs for construction workers, more jobs for teachers, more jobs for veterans, and more jobs for long-term unemployed.

Jobs for teachers?  There’s nothing stimulative about that.  They don’t hire workers.  And the kids they teach aren’t going to hire any workers for a very long time.  This is just more money for teachers’ unions.  Which will be funneled back to the Democrat Party via union dues.

We pay teachers with tax dollars.  Paid by the taxpayers.  This is money the government transfers from the private sector economy to the public sector teachers.  So before teachers can stimulate with this money the private sector has to lose it first.  They take a large sum of money from the private sector.  And give it to the teachers.  Less administration costs to make this all happen.  To stimulate the private sector economy.  Which means the teachers spend less money than the private sector would have if they were able to keep their money.  This is a net loss of economic activity.  And is not stimulative.

Teachers are like government.  They provide an important service.  But they are taxpayer financed.  And like anything taxpayer financed, they are a drag on the economy.

More shovel-ready construction projects?  You told us yourself there is no such thing as a shovel-ready project.  This won’t be stimulative either.  Construction projects just don’t happen overnight.  Even if you get rid of all the regulatory red tape.  Projects take months to engineer.  If you cut that short there will be cost overruns to correct all the things missed in the engineering process.  Then there’s the asbestos abatement study.  Lead abatement.  Environmental impact studies.  At best these will start hiring in time for the 2012 election campaign.  Which no doubt is the goal.

It will provide — it will provide a tax break for companies who hire new workers, and it will cut payroll taxes in half for every working American and every small business. (Applause.) It will provide a jolt to an economy that has stalled, and give companies confidence that if they invest and if they hire, there will be customers for their products and services. You should pass this jobs plan right away. (Applause.)

If tax breaks are good for businesses then just cut tax rates.  A tax rate cut is more stimulative than a onetime tax credit.  A tax credit does not instill business confidence.  Because hiring a new employee is far more costly than any onetime tax credit.  Especially with Obamacare bearing down on small businesses.  It’s these permanent costs of current tax and regulatory policies.  These are what are keeping business skittish about expanding and hiring.  And a onetime tax credit won’t change that.  A repeal of Obamacare would probably spark some business growth.  But not a targeted tax credit.

Pass this jobs bill — pass this jobs bill, and starting tomorrow, small businesses will get a tax cut if they hire new workers or if they raise workers’ wages.

Wishful thinking.  Whoever came up with this is an economic simpleton.  He might as well have asked everyone to voluntary pay more for their groceries.  So the stores will hire more people with all that additional profit.  Employees are another cost of doing business.  Voluntarily increasing these costs above the market cost will only make these businesses less competitive in the market place.  Threatening their business.  And all the jobs they currently provide.

It’s not just Democrats who have supported this kind of proposal. Fifty House Republicans have proposed the same payroll tax cut that’s in this plan. You should pass it right away. (Applause.)

Yes, payroll tax cuts are good.  They reduce the cost of doing business.  And let employees keep more of their earnings.  So cutting Social Security and Medicare taxes will help.  But this will only set up higher taxes down the road.  Because these programs are going broke.  Businesses understand this.  They know it will only be temporary.  And illusionary.  For they will pay more in the future.  So they aren’t going to hire more now.

Building a world-class transportation system is part of what made us a economic superpower. And now we’re going to sit back and watch China build newer airports and faster railroads? At a time when millions of unemployed construction workers could build them right here in America? (Applause.)

No.  It didn’t.  We took over the title of economic superpower from the British before the federal highway bill.  And private industry built the railroads.  And robber barons.  Sure, government helped.  But it didn’t lead the way.

China?  Really?  Why is China building so much infrastructure?  Because they have cheap labor.  They couldn’t do what they’re doing if their labor costs were the same as ours.  And that high-speed rail system?  They’re now questioning quality and safety.

And there are schools throughout this country that desperately need renovating.

According to my calendar it’s September.  And I’m pretty sure it’s September throughout the country.  Which means what?  That’s right.  The kids just went back to school.  Which means the next round of school renovation projects will take place starting next June.  When the kids get out of school.  Not very stimulative if you ask me.  Unless you just want a lot of people working on these school renovations during the 2012 election campaign.

And to make sure the money is properly spent, we’re building on reforms we’ve already put in place. No more earmarks. No more boondoggles.

Just like you promised your $800 billion stimulus wouldn’t contain any pork or earmarks?  When it was mostly pork and earmarks?  Fool us once shame on you.  Fool us twice shame on us.

And we’ll set up an independent fund to attract private dollars and issue loans based on two criteria: how badly a construction project is needed and how much good it will do for the economy. (Applause.)

Great.  Nothing guarantees to speed things up like making it go through a new government bureaucracy.  Which can better send money to friends of the administration.  Just like that $800 billion stimulus.

Pass this jobs bill, and companies will get a $4,000 tax credit if they hire anyone who has spent more than six months looking for a job.

Let’s crunch some numbers.  Say you hire someone.  Pay them $30,000.  Your half of Social Security and Medicare taxes come to $2,295 for the year.  Now factor in your other costs.  State and federal unemployment insurance.  Workers’ compensation insurance.  Health care.  Etc.  Not to mention their salary.  It adds up to a lot of money.  Far more than that $4,000 tax credit.  For hiring someone they don’t need to support their current level of business.  And you know what?  A smart business owner isn’t going to do this.

The plan also extends unemployment insurance for another year. (Applause.) If the millions of unemployed Americans stopped getting this insurance, and stopped using that money for basic necessities, it would be a devastating blow to this economy.

The government has to take that money out of the private sector economy first.  Before it can pay unemployment benefits.  Someone is still spending that money.  Just a different someone.  By the time you add in the cost of administering those benefits, there is a net loss in economic activity. 

Unemployment benefits help the unemployed while they look for another job.  They don’t stimulate the economy.

The agreement we passed in July will cut government spending by about $1 trillion over the next 10 years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I am asking you to increase that amount so that it covers the full cost of the American Jobs Act. And a week from Monday, I’ll be releasing a more ambitious deficit plan — a plan that will not only cover the cost of this jobs bill, but stabilize our debt in the long run. (Applause.)

Standard and Poor’s wanted to see $4 trillion in real spending cuts.  Not cuts in the out-years that will disappear in the next budget deal.  Real cuts.  If not they said they would downgrade the U.S. sovereign debt rating.  They couldn’t do it.  The best they could do was a $1 trillion tax cut over the next 10 years.  And by golly if S&P didn’t downgrade our credit rating.

And the special commission is to find another half trillion in spending cuts?  On top of the $1.5 trillion they were already looking for?  That Congress was unable to find?  And now they have to find $2 trillion?  Yeah, like that’s going to happen.  That’s a plan with but one goal.  Failure. 

With this kind of spending, a deficit reduction plan can only mean one thing.  More taxes.  Just what the economy needs.  Not.

While most people in this country struggle to make ends meet, a few of the most affluent citizens and most profitable corporations enjoy tax breaks and loopholes that nobody else gets. Right now, Warren Buffett pays a lower tax rate than his secretary — an outrage he has asked us to fix. (Laughter.) We need a tax code where everyone gets a fair shake and where everybody pays their fair share.

An executive secretary probably earns something north of $60,000 a year.  That puts her in a top marginal tax bracket of 25%.  Crunching the numbers and this executive secretary will pay $11,125 in federal taxes.  Now let’s assume Warren Buffet has a half billion dollars in investments that pay a return of 8%.  That’s a capital gain of about $40 million.  Taxed at a paltry 15% capital gains tax that’s a measly $6 million in federal taxes.  Funny.  His secretary has a higher tax rate.  But Buffet pays approximately 53,833% more in tax dollars.  I don’t know how you can say one person paying $40 million in taxes isn’t paying his fair share.

Should we keep tax loopholes for oil companies? Or should we use that money to give small business owners a tax credit when they hire new workers? Because we can’t afford to do both. Should we keep tax breaks for millionaires and billionaires? Or should we put teachers back to work so our kids can graduate ready for college and good jobs? (Applause.) Right now, we can’t afford to do both.

This isn’t political grandstanding. This isn’t class warfare. This is simple math. (Laughter.)

This is nothing but political grandstanding and class warfare.  And rather Orwellian.  In Nineteen Eighty Four, they just changed the meaning of words to control the people.  Such as slavery is freedom.  But changing the meaning of words doesn’t change what slavery is.  It’s still slavery.  No matter what you call it.  And political grandstanding and class warfare is political grandstanding and class warfare.  Even if you say it isn’t.

Now it’s time to clear the way for a series of trade agreements that would make it easier for American companies to sell their products in Panama and Colombia and South Korea -– while also helping the workers whose jobs have been affected by global competition.

America can’t compete with China because Chinese labor is cheaper.  So to make American products more competitive the president wants to subsidize our high cost of labor.  With American tax dollars.  Spread the higher cost of U.S. goods throughout the American economy.  Leaving everyone with less money for their own personal needs.  So we can keep Big Union working.  And supporting the Democrat Party.  Which will only increase government spending.  Our deficit.  And our debt.

To subsidize Big Labor they’ll have to pill that money out of the private sector economy first.  So you subtract X from the private sector economy.  And give X to Big Union.  Less an administration fee, of course.  Meaning that there will be a net loss of economic activity.

If we provide the right incentives, the right support — and if we make sure our trading partners play by the rules — we can be the ones to build everything from fuel-efficient cars to advanced biofuels to semiconductors that we sell all around the world.

The free market doesn’t need government incentives and support.  They did fine and dandy in the old days without any government help.  And making our trading partners play by the rules?  If you could do that they would be playing by the rules already.  There’s nothing you can do to make China stop undervaluing the yuan.  Unless you want to throw up protective tariffs on Chinese goods.  Of course they’ll retaliate.  Which will only make everything more expensive for the American consumer.  Besides, we already tried this.  Just before the Great Depression.

You really want to talk about the government picking winners and losers (i.e., incentives and support)?  Really?  After the Solyndra bankruptcy?  And the FBI raid on their executive homes?

Well, I agree that we can’t afford wasteful spending, and I’ll work with you, with Congress, to root it out. And I agree that there are some rules and regulations that do put an unnecessary burden on businesses at a time when they can least afford it. (Applause.) That’s why I ordered a review of all government regulations.

Didn’t Al Gore already reinvent government?  To root out wasteful spending and regulations?  Yeah, he did.  Or tried.  Turns out that’s a lot easier said than done.  Especially when you don’t really mean it.  I mean, come on, the Left lives and dies for these costly regulations.  They’re not just going to sit idly by and let them get repealed.  Not when they fund Democrat candidates in elections.

But what we can’t do — what I will not do — is let this economic crisis be used as an excuse to wipe out the basic protections that Americans have counted on for decades.

Really?  So you’re not going to let anyone do what you did?  Like Rahm Emanuel said, “You never want a serious crisis to go to waste.”  When you used the worst recession since the Great Depression to pass your stimulus?

Basic protections are one thing.  But your regulatory zeal has shut down this economy.  Just ask the Gulf oil workers.  If you can find any.  Because they aren’t working on rigs in the Gulf anymore.  Thanks to you.

We all remember Abraham Lincoln as the leader who saved our Union. Founder of the Republican Party. But in the middle of a civil war, he was also a leader who looked to the future — a Republican President who mobilized government to build the Transcontinental Railroad — (applause) — launch the National Academy of Sciences, set up the first land grant colleges. (Applause.) And leaders of both parties have followed the example he set.

The seeds of the first transcontinental railroad were sowed back in the 1830s.  Lincoln became president in 1861.  The NAS was established by an Act of Congress.  Land grant colleges came into being in with the Morrill Acts of 1862 and 1890.  First introduced in 1857.  Abraham Lincoln wrote the Emancipation Proclamation.  But he did not create these other acts of Congress.  Congress did. 

And the transcontinental railroad?  That was Congress, too.  And one of the most corrupt Congresses in history.  The incentives and support Congress gave encouraged them to build track on ice.  Zigzag to cover as much land as possible to claim the mineral rights beneath. And when east and west finally met, they kept building track.  Parallel to each other.  To keep collecting money for track mileage laid.  And the cost overruns made a lot of Congressmen wealthy.  No, this railroad was not America’s finest hour.

How many jobs would it have cost us if past Congresses decided not to support the basic research that led to the Internet and the computer chip?

The government Internet (DARPA) was nothing more than file sharing and email for scientists.  If private enterprise and entrepreneurs didn’t step in that’s what the Internet would still be. 

The computer chip?  Funny. I thought that was Texas Instruments and Fairchild Semiconductor.  Which was ultimately based on the transistor.  Invented in 1947 by John Bardeen, Walter H. Brattain, and William B. Shockley of Bell Labs.  Who replaced vacuum tubes with semiconductors everywhere.  Except in high-end audio amplifiers.

What kind of country would this be if this chamber had voted down Social Security or Medicare just because it violated some rigid idea about what government could or could not do? (Applause.) How many Americans would have suffered as a result?

Actually they’d probably be a lot better off.  As far as a return on investment, Social Security is one of the worst retirement investments out there.  Why?  Because it’s not an investment.  Your money goes into the Social Security trust fund.  Where it ‘waits’ for your retirement.  But before you do, the government takes that money and spends it.  Leaving an IOU in the trust fund.  This is no IRA.  No 401(k).  No mutual fund.  It’s not even a savings bond.  In fact, if you die before you collect, all that money you paid in is kept by the government.  It doesn’t go to your heirs with the rest of your estate.  Like an IRA, a 401(k) or a mutual fund would.

But Social Security has been a real success.  For the government.  Because it has made generations of people dependent on government in their retirement.  Who live in fear of losing their benefits.  And will do anything to keep those benefits coming.  Even if it means screwing their own children.  And their grandchildren.  They’re so frightened by the Democrats that they will vote Democrat.  No matter how much the Democrats steal from future generations.

I don’t pretend that this plan will solve all our problems. It should not be, nor will it be, the last plan of action we propose.

That’s right.  You never want a serious crisis to go to waste.  And they will milk this for all it’s worth.  Stimulus.  Bailing out the UAW pension funds (i.e., the auto bailout).  Financial reform.  Obamacare.  Everything they’ve always wanted.  But could never get through the normal legislative process.

The Problem with Barack Obama is that he’s a Keynesian who wants to Grow the Government

Once again the professor scolds those who don’t agree with him.  And offers more of the same.  Which has already failed to reverse the worst recession since the Great Depression.  And it’s not going to work this time.  How do we know this?  Because if this stuff worked it would have worked the first time.

And it would be nice to see the plan before our representatives pass the plan.  For as CBO said before, you just can’t score a speech.  We need to see the numbers.  And the leaps of faith.  But I guess it’s hard to quantify soaring rhetoric.  Especially when you’re offering the same thing.  That you’re trying to make sound different this time.

The problem with Barack Obama is that he’s a Keynesian.  With one slight difference.  Keynesian stimulus is supposed to be temporary.  Whereas Obama’s stimulus gets added into the baseline budget.  Making his stimulus spending permanent.  His number one goal isn’t growing the economy.  It’s growing the government.  That’s why his polices don’t help the economy.  But they sure have grown the government.  And in Obama’s book that’s mission accomplished. 

But he sure would like a second term to continue the fun.  But I just don’t see that happening.  For I can’t see how he can fool that many people into believing that they’re better off after four years of his policies.

www.PITHOCRATES.com

Keynesian Economists’ Poor Forecasts suggests their Keynesian Economics doesn’t Work

More bad news for the housing market.  Not that this is a surprise.  That was a pretty big housing bubble that the Fed created.  With their stimulative low interest rates.  And the bigger they are the harder they fall.  Or pop, as it were.  And as the market corrected the Fed’s damage, it threw a slew of people out of work (see Early Mortgage Delinquencies Rise to Highest in Year as U.S. Economy Slows by Kathleen M. Howley posted 8/22/2011 on Bloomberg). 

The percentage of U.S. mortgages overdue by one month rose to the highest level in a year in the second quarter as homeowners who lost jobs were unable to make their payments…

The gain in early delinquencies signals a slowing economy may increase foreclosures, said Jay Brinkmann, chief economist of the trade group. The unemployment rate in the three months ended June 30 rose to 9.1 percent from 8.9 percent, the first quarterly increase since 2009, according to the Labor Department. Jobless claims jumped to an eight-month high in late April, government data show.

For the quarter ending June 30 unemployment was at 9.1 percent.  Ouch.  Remember why it was so urgent to pass the Obama Keynesian stimulus?  To keep the unemployment rate under 8%.  That was in February of 2009.  That’s two years ago.  Guess Keynesian economics doesn’t work.

The world’s largest economy grew at a 1.3 percent annual rate in the second quarter, the Commerce Department said on July 29. That was less than the increase of 1.8 percent forecast by economists surveyed by Bloomberg. A Federal Reserve report last week showed manufacturing in the Philadelphia region contracted in August by the most in more than two years as orders fell and factories fired workers.

Goldman Sachs Group Inc. and JPMorgan Chase & Co. lowered their forecasts for U.S. gross domestic product last week. The U.S. will expand 1.5 percent this year, down from a previous forecast of 1.7 percent, according to Goldman economists in New York. JPMorgan predicts 1 percent growth in U.S. GDP in the fourth quarter, down from an earlier projection of 2.5 percent, the bank said last week.

And the news just keeps getting better.  And by better I mean worse.  Again another record.  This one for manufacturing.  And actual GDP numbers are coming in under economists’ estimates.  The numbers are so bad these economists are revising their future projections down.  It should be noted that the vast majority of mainstream economists are Keynesian economists.  Which suggests their Keynesian economics doesn’t work very well.

Inflation Growing at a Greater Rate than Wages equals Real Pay Cuts

These mainstream economists said the Great Recession ended by July 2009.  Said that the Obama administration followed their Keynesian advice.  Kicked that recession in the behind.  And launched the recovery with a Recovery Summer.  Yay said the Keynesians.  Everything was going to be all right.  And yet two years later here we are.  Where things are still not right (see Survey: US companies say they’re planning another year of small raises for workers in 2012 by the Associated Press posted 8/22/2011 on The Washington Post). 

After increasing salaries by 2.6 percent this year and last year, companies are planning a 2.8 percent bump in 2012, benefits and human resources consultancy Towers Watson reported Monday.

That’s somewhat smaller than raises in the last decade. From 2000 to 2006, the year before the Great Recession began, salaries rose an average 3.9 percent for workers who were not executives.

And the modest bump may not help add much buying power for shoppers. In the 12 months through July, prices for consumers have risen 3.6 percent, according to the government’s latest calculations.

Those lucky enough to have a job are taking real pay cuts to keep those jobs.  Inflation is growing at a greater rate than their wages.  Which means as prices go up their pay checks will buy less.  Despite those raises.  High unemployment.  And rising inflation.  The last time the economy saw numbers this bad was during the Seventies.  When we called it stagflation.  And blamed Jimmy Carter.  Who became a one-term president because of it.

Obama Cares enough about the People to Hide from them on the Golf Course

President Obama is aware of the nation’s woes.  He is even thinking about them while on vacation.  On Martha’s Vineyard.  Playground for the uber rich (see President keeps low profile on Martha’s Vineyard by Mark Shanahan & Meredith Goldstein posted 8/20/2011 on the boston.com).   

But it was later, at the Vineyard Golf Course in Edgartown, where the president’s recalcitrance was most evident. Approaching the eighth tee in a golf cart with friend and frequent golfing buddy Eric Whitaker, the president noticed three TV cameras and a Globe photographer across the street. Rather than stop and be photographed teeing off, the president skipped the hole.

That’s how much he cares.  He’ll skip a hole during a round of golf just so we don’t see him living well during these bad economic times.  Talk about sacrifice.  He’s just not playing 17 holes instead of 18.  Skipping that hole may have an adverse affect on his handicap.  He called for fair-share sacrifice.  And he, too, is sacrificing.  Walking it like he talks it.  So think about this noble act before you start bitching about another tax hike.  He skipped a hole of golf.

Obama bailed out General Motors and Chrysler and put Detroit back to Work

But it’s back to work after Martha’s Vineyards.  Just like the rest of us after our vacations.  Though our vacations are a bit more Spartan these days.  And rarely venture farther than our own backyards (see Obama to join unions’ Labor Day festivities in Detroit by Aaron Kessler posted 8/22/2011 on the Detroit Free Press). 

WASHINGTON – President Barack Obama will join thousands of union members at Labor Day festivities in Detroit, the Free Press has learned,

Obama will deliver remarks at a Labor Day event sponsored by the Metro Detroit Labor Council, according to a White House official with knowledge of the trip.

While no other details were immediately available, it is likely he would again use the opportunity to tout his administration’s role in the rescues in 2009 of General Motors and Chrysler.

So the president is going to Detroit to celebrate Labor Day.  It makes sense.  I mean, he bailed out General Motors and Chrysler, didn’t he?  And put the good people of Detroit back to work.

With 13.7% Unemployment where’s the Summer Recovery in Detroit?

Then again, looking at the U.S. Bureau of Labor Statistics, it would appear that he has not put the good people of Detroit back to work (see Metropolitan Area Employment and Unemployment Summary posted 8/3/2011 on the U.S. Bureau of Labor Statistics). 

Eleven of the most populous metropolitan areas are made up of 34 metropolitan divisions, which are essentially separately identifiable employment centers. In June 2011, Miami-Miami Beach-Kendall, Fla., and Detroit-Livonia-Dearborn, Mich., registered the highest jobless rates among the divisions, 13.9 and 13.7 percent, respectively. Nashua, N.H.-Mass., reported the lowest division rate, 5.4 percent, followed by Bethesda-Rockville-Frederick, Md., 5.8 percent. (See table 2.)

No wonder Maxine Waters is so angry.  He skips Detroit on his ‘listening’ bus tour.  And vacations on the very exclusive Martha’s Vineyards.  While the Detroit area is suffering double-digit unemployment.  If he was listening anywhere, it should have been in Detroit.

The Detroit area unemployment rate is 13.7%.  While the national rate is only 9.1% for the same period.  Yes, the national rate is bad.  But it’s not Detroit bad.  And this after the automotive bailouts.  That put the good people of Detroit back to work.  On top of the Obama stimulus.  So where’s the Summer Recovery in Detroit?  What’s happened to the Motor City? 

So this is what a Second Jimmy Carter Term would have been Like 

In a word, Obamanomics.  His Keynesian policies that were supposed to save jobs have killed jobs.  In Detroit.  And across the nation.  Worse, on top of high unemployment these policies have ignited inflation.  Unemployment plus inflation equals stagnation.  Misery.  And malaise. 

So this is what a second Jimmy Carter term would have been like.  Makes one want to say, “Welcome back Carter.”  But not in that warm nostalgic way like in that Seventies sitcom (Welcome Back Kotter).  Of course you never saw Jimmy Carter living it up like Obama.  So there are some differences.

This economy will not help Obama in 2012.  Worse, the American people will get no relief until after 2012.  For it’s like Ronald Reagan said in his campaign against Jimmy Carter (see President Ronald Reagan – Liberty State Park [Pt. 1] at 5:26).  A recession is when your neighbor loses his job.  A depression is when you lose yours.  And recovery is when Barack Obama loses his.

I’m paraphrasing, of course.

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Are you Better Off than you were 4 Years Ago?

People who live in economic houses made of cards shouldn’t blow too hard.  Or boast about future successes (see Obama: Judge me on economic progress by Richard Wolf posted 8/21/2011 on USA TODAY).

“Things would have been much worse has we not made those decisions, (but) that’s not that satisfying if you don’t have a job right now. And I understand that, and I expect to be judged a year from now on whether or not things have continued to get better.”

You shouldn’t boast about a successful track record before you have one.  That could come back to haunt you at the next election.  I mean, when your last three years or so in office haven’t been successful economically, why would you think year 4 would be any better?  In fact, the odds are good that someone will Ronald Reagan you if current trends continue.  When that candidate will ask the people, “Are you better off than you were 4 years ago?”

Businesses never, ever hire New Employees while the Economic Outlook is so Dismal

If the judges are American businesses their verdict is already in (see Moody’s chief economist: Lawmakers need to ‘get it together’ to save economy by Meghashyam Mali posted 8/21/2011 on The Hill).

Zandi pointed to positive signs for American businesses. They are “getting their cost structures down, getting their profitability up, getting their balance sheets in order,” he said.

While businesses are still reluctant to start hiring new workers, they had little reason to layoff employees, a sign we would avoid a second recession according to Zandi.

They’re doing things now that a business does during bad economic times.  Cut costs.  Increase productivity.  Avoid new debt.  Stockpile cash.  And never, ever hire new employees while the economic outlook is so dismal.

The Nice Thing about Bonuses is that you can pay your People Less 

And the bad jobs outlook isn’t just on Main Street America.  It goes all the way up to the fat cats on Wall Street (see Layoffs sweep Wall Street, along with low morale by Lauren Tara LaCapra posted 8/21/2011 on Reuters).

The planned cuts at Bank of America have pushed the number of financial sector layoffs this year to 18,252 — 6 percent higher than in the comparable period in 2010, according to Challenger, Gray & Christmas, an outplacement firm that keeps a daily tab on layoff announcements.

Some companies began the culling earlier this year — HSBC has already axed about 5,000 employees, with 25,000 more set to get pink slips by the end of 2012 — and others, such as Goldman Sachs, said that cuts will come by year’s end.

Even the Wall Street bailouts couldn’t save Wall Street.  Or all that quantitative easing.  The economy is tanking some three years later despite all of Obama‘s best efforts to stimulate a recovery.  In fact, it turns out that their best efforts are complicit in these Wall Street purges.

Changes in pay structures mandated in part by the Dodd-Frank financial reform laws have exacerbated the problem.

Banks that used to pay modest base salaries supplemented by opulent stock-and-option packages that encouraged meeting short-term performance goals now are weighting compensation toward base salary…

The shift erodes Wall Street’s former flexibility to lower end-of-year bonuses in bad times and forces a heavier reliance on layoffs.

The nice thing about bonuses is that you can pay your people less.  If you have a bad year, you don’t have to lay off your employees.  You just cut year-end bonuses.  Their base salaries are more than enough to live on.  And they are tickled pink to still have a job after a bad year.  Of course, when you remove bonuses from the picture that only leaves one way to cut costs to reflect declining business.  You have to cut people.  Which is never a good thing in a ‘relationship’ business.

It’s hard to build a level of trust and confidence in a relationship.  And the higher the dollar amounts the harder it is to build that trust and confidence.  It’s scary letting other people into your balance sheet.  Once you do you don’t want to see that person leave.  Because you don’t deal with a bank.  You deal with a person.  That person.  And when they leave there’s nothing but more uncertainty in an already uncertain economic climate.

Keynesian Economics was always about the Growth of Government

So it looks like the chances are good President Obama may get that question next year.  Because indications are that it won’t be better than when he took office in 2009 (see Mises on the Business Cycle by Dennis Sperduto posted 8/21/2011 on Ludwig von Mises Institute).

The economic and financial events of the last few weeks indicate that the economies of the United States and most of Europe remain quite weak, if not in outright recession. This situation comes after unprecedented fiscal and monetary “stimuli” by many governments that were strongly supported and recommended by the large majority of the economics profession, media commentators, and politicians. And of course, with economic conditions showing renewed weakness, the mainstream calls for additional stimuli of even larger magnitudes. The mainstream is unable or unwilling to abandon its Keynesian foundation, a system of thought that has been shown by many individuals associated with the Austrian School to be one of the great retrogressions in scientific economic thought in modern times.

Obama is a Keynesian.  His administration has adopted Keynesian policies.  And all of their Keynesian policies have failed thus far.  No matter how they try, try and try again, they will always fail, fail and fail again.  For Keynesian economics was never about economics.  Not to those in government.  For them it was always about the growth of government. 

Recessions never End because of Keynesian Stimulus, they End Despite Keynesian Stimulus

But the one flaw in their grand design is that the private sector funds everything.  Economic activity.  And government.  So the more government grows, the more wealth is transferred from the private sector to fund it.  Meaning that if the government grows the private sector must shrink.  For here it is simple zero-sum.  Which is why recessions never end because of Keynesian stimulus.  They end despite Keynesian stimulus.

So if the Obama administration moves forward with more of the same it should make the 2012 election come down to a simple question.  Are you better off than you were 4 years ago?  Even Obama is admitting that if things don’t improve over the next year he will be a one-term president.  And right now there’s nothing in the economic forecast that bodes well for a second term.  If he’s judged for his economic performance.  Which he is telling the voters to do in 2012.  As I’m sure they will be more than happy to oblige.

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