The Keynesian Abenomics is Raising Prices in Japan

Posted by PITHOCRATES - April 14th, 2014

Week in Review

Money is a temporary storage of value.  We created money to make trade easier.  We once bartered.  We looked for people to trade with.  But trying to find someone with something you wanted (say, a bottle of wine) that wanted what you had (say olive oil) could take a lot of time.  Time that could be better spent making wine or olive oil.  So the longer it took to search to find someone to trade with the more it cost in lost wine and olive oil production.  Which is why we call this looking for people to trade goods with ‘search costs’.

Money changed that.  Winemakers could sell their wine for money.  And take that money to the supermarket and buy olive oil.  And the olive oil maker could do likewise.  Greatly increasing the efficiency of the market.  There is a very important point here.  Money facilitated trade between people who created value.  Creating something of value is key.  Because if people were just given money without producing anything of value they couldn’t trade that money for anything.  For if people didn’t create things of value to buy what good was that money?

Today, thanks to Keynesian economics, governments everywhere believe they can create economic activity with money.  And use their monetary powers to try and manipulate things in the economy to favor them.  And one of their favorite things to do is to devalue their money.  Make it worth less.  So governments that borrow a lot of money can repay that money later with devalued money.  Money that is worth less.  So they are in effect paying back less than they borrowed.  And governments love doing that.  Of course, people who loan money are none too keen with this.  Because they are getting less back than they loaned out originally.  And there is another reason why governments love to devalue their money.  Especially if they have a large export economy.

Before anyone can buy from another country they have to exchange their money first.  And the more money they get in exchange the more they can buy from the exporting country.  This is the same reason why you can enjoy a five-star vacation in a tropical resort in some foreign country for about $25.  I’m exaggerating here but the point is that if you vacation in a country with a very devalued currency your money will buy a lot there.  But the problem with making your exports cheap by devaluing your currency is that it has a down side.  For a country to buy imports they, too, first have to exchange their currency.  And when they exchange it for a much stronger currency it takes a lot more of it to buy those imports.  Which is why when you devalue your currency you raise prices.  Because it takes more of a devalued currency to buy things that a stronger currency can buy.  Something the good people in Japan are currently experiencing under Abenomics (see Japan Risks Public Souring on Abenomics as Prices Surge by Toru Fujioka and Masahiro Hidaka posted 4/14/2014 on Bloomberg).

Prime Minister Shinzo Abe’s bid to vault Japan out of 15 years of deflation risks losing public support by spurring too much inflation too quickly as companies add extra price increases to this month’s sales-tax bump.

Businesses from Suntory Beverage and Food Ltd. to beef bowl chain Yoshinoya Holdings Co. have raised costs more than the 3 percentage point levy increase. This month’s inflation rate could be 3.5 percent, the fastest since 1982, according to Yoshiki Shinke, the most accurate forecaster of Japan’s economy for two years running in data compiled by Bloomberg…

“Households are already seeing their real incomes eroding and it will get worse with faster inflation,” said Taro Saito, director of economic research at NLI Research Institute, who says he’s seen prices of Chinese food and coffee rising more than the sales levy. “Consumer spending will weaken and a rebound in the economy will lack strength, putting Abe in a difficult position…”

Abe’s attack on deflation — spearheaded by unprecedented easing by the central bank — has helped weaken the yen by 23 percent against the dollar over the past year and a half, boosting the cost of imported goods and energy for Japanese companies.

Japan is an island nation with few raw materials.  They have to import a lot.  Including much of their energy.  Especially since shutting down their nuclear reactors.  Japan has a lot of manufacturing.  But that manufacturing needs raw materials.  And energy.  Which are more costly with a devalued yen.  Increasing their costs.  Which they, of course, have to pay for when they sell their products.  So their higher costs increase the prices their customers pay.  Leaving the people of Japan with less money to buy their other household goods that are also rising in price.  Which is why economies with high rates of inflation go into recession.  As the recession will correct those high prices.  With, of course, deflation.

Keynesians all think they can manipulate the market place to their favor by playing with monetary policy.  But they are losing sight of a fundamental concept in a free market economy.  Money doesn’t have value.  It only holds value temporarily.  It’s the things the factories produce that have value.  And whenever you make it more difficult (i.e., raise their costs by devaluing the currency) for them to create value they will create less value.  And the economy as a whole will suffer.


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Keynesian Economists are Narcissists who don’t know the First Thing about Economics

Posted by PITHOCRATES - March 2nd, 2014

Week in Review

There was a sketch on the Benny Hill Show that reminds me of Keynesian economists.  Benny was singing a song and they were showing the unrequited love around him.  They showed one woman who loved a man.  But that man loved another woman.  Who loved Benny.  And who did Benny love?  The camera remained on Benny.  Because that’s who he loved.

Keynesian economists are a lot like that.  They like to sound erudite.  They like to write things with impressive economic jargon in it.  The layman can’t understand a thing they say or write.  But that’s okay.  As they are writing to impress their peers.  People who are as narcissistic as they are.  And they tell each other how brilliant they are with all of their demand-side pontificating.  Pinching each other’s cheeks and saying, “Who’s a good economist?  You are.  You’re a good economist.  Yes you are.”  Even though they are always wrong.  Reminding me of another television show.  Hogan’s Heroes.  Where Colonel Hogan and Colonel Klink were disarming a bomb in the compound.  They’re down to two wires.  One disarms the bomb.  The other detonates it.  Colonel Hogan asks Colonel Klink which wire to cut.  He picks one.  And just as he’s about to cut it Colonel Hogan changes his mind and cuts the other wire.  Disarming the bomb.  Colonel Klink asks him if he knew which wire to cut why did he ask him.  And he replied that he wasn’t sure but he knew for sure that Colonel Klink would pick the wrong wire.

This is just like a Keynesian economist.  Ask them what to do to help the economy and you can be sure they’ll pick the wrong thing to do.  Because they love their demand-side economics with all their charts and graphs and equations.  For it feeds into their superiority complex.  As they can baffle people with their bull s***.  Well, the truth is that the economic data doesn’t support demand-side economics.  For all of the stimulus spending Keynesians have encouraged governments to do have never pulled an economy out of a recession.  It has only extended a recession.  And made it more painful.  For if you want to help the economy you have to work on the supply side.  Make it easier for people to be creative and bring things to market.  Things people will buy.  Even if they had no idea that they existed before seeing them in the market (see How Taco Bell’s Lead Innovator Created The Most Successful Menu Item Of All Time by Ashley Lutz posted 2/26/2014 on Business Insider).

The Doritos Locos Taco is one of the most successful fast food innovations of all time.

Taco Bell released the product in 2012 and sold more than a billion units in the first year. The fast food company had to hire an estimated 15,000 workers to keep up with demand…

The team went through more than 40 recipes, and Gomez told Business Insider he sometimes felt like the idea would never come to fruition.

“Execution was so difficult,” he said.

Gomez was eventually able to perfect the shell by using the same corn masa found in Doritos. He also discovered a process that would evenly distribute the seasoning on the shells. And the company found a way to contain the cheese dust in the production process.

Even after Gomez created the ultimate shell, he still had to design production facilities that would make millions of them.

But for Gomez, the years of effort was worth it.

“When we shared the idea with our consumers, they loved it,” Gomez said. “I was blown away with how immediately popular Doritos Locos Tacos became.”

The taco is the most popular menu item in the fast food chain’s 50-year history.

This wasn’t demand-driven.  As Keynesians believe everything is.  Get more money into the hands of consumers and they will demand things.  Thus increasing economic activity.  But not a single consumer was demanding the Doritos Locos Taco.  As there was no such thing to demand.  And giving them more money wasn’t going to bring it to market.  Only creative people with an idea and an indefatigable passion brought this to market.  Spending a lot of years and lots of money to bring to market something people weren’t demanding.  And might not even like.  But they did.  And it was a big success.  This is how you create economic activity.  On the supply side.  Cut tax rates and costly regulations.  Like Obamacare.  So other people are encouraged to be creative and use their indefatigable passion to bring other things to market.  Creating a whole lot more economic activity than just giving people a stimulus check and telling them to go out and create economic activity.  Because once that Keynesian stimulus is spent it cannot create any more economic activity.  Unlike all of the economic activity it takes to sell a billion or more Doritos Locos Tacos a year.


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Henry Ford, Bill Hewlett & Dave Packard, Steve Jobs & Steve Wozniak, Howard Schultz, Ray Kroc and Richard Branson

Posted by PITHOCRATES - February 25th, 2014

 History 101

(Originally published May 8th, 2012)

Capitalism allows Entrepreneurs to bring their Great Ideas to Life

Entrepreneurs start with an idea.  Of how to do something better.  Or to create something we must have that we don’t yet know about.  They think.  They create.  They have boundless creative energies.  And the economic system that best taps that energy is capitalism.  The efficient use of capital.  Using capital to make profits.  And then using those profits to make capital.  So these ideas of genius that flicker in someone’s head can take root.  And grow.  Creating jobs.  And taxable economic activity.  Creating wealth for investors and workers.  Improving the general economy.  Pulling us out of recessions.  Improving our standard of living.  And making the world a better place.  Because of an idea.  That capitalism brought to life.

Entrepreneurs Risked Capital to bring Great Things to Market and to Create Jobs

Henry Ford established the Detroit Automobile Company in 1899.  Which failed.  He reorganized it into the Henry Ford Company in 1901.  Ford had a fight with his financial backers.  And quit.  Taking the Ford name with him.  And $900.  The Henry Ford Company was renamed Cadillac and went on to great success.  Ford tried again and partnered with Alexander Malcomson.  After running short of funds they reorganized and incorporated Ford Motor Company in 1903 with 12 investors.  The company was successful.  Some internal friction and an unexpected death of the president put Ford in charge.  Ford Motor built the Model A, the Model K and the Model S.  Then came the Model T.  And the moving assembly line.  Mass production greatly increased the number of cars he could build.  But it was monotonous work for the assembly line worker.  Turnover was high.  So to keep good workers he doubled pay in 1914 and reduced the 9-hour shift to 8 hours.  This increased productivity and lowered the cost per Model T.  Allowing those who built the cars to buy what they built.  In 2011 the Ford Motor Company employed approximately 164,000 people worldwide.

Bill Hewlett and Dave Packard established Hewlett-Packard (HP) in 1939.  In a garage.  They raised $538 in start-up capital.  In that garage they created their first successful commercial product.  A precision audio oscillator.  Used in electronic testing.  It was better and cheaper than the competition.  Walt Disney Productions bought this oscillator to certify Fantasound surround sound systems in theaters playing the Disney movie Fantasia.  From this garage HP grew and gave us calculators, desktop and laptop computers, inkjet and laser printers, all-in-one multifunction printer/scanner/faxes, digital cameras, etc.  In 2010 HP employed approximately 324,600 employees worldwide.  (Steve Wozniak was working for HP when he designed the Apple I.  Which he helped fund by selling his HP calculator.  Wozniak offered his design to HP.  They passed.)

Steve Jobs had an idea to sell a computer.  He convinced his friend since high school, Steve Wozniak, to join him.  They sold some of their things to raise some capital.  Jobs sold his Volkswagen van.  Wozniak sold his HP scientific calculator.  They raised about $1,300.  And formed Apple.  They created the Apple I home computer in 1976 in Steve Jobs’ garage.  From these humble beginnings Apple gave us the iPad, iPhone, iPod, iMac, MacBook, Mac Pro and iTunes.  In 2011 Apple had approximately 60,400 full time employees.

Jerry Baldwin, Zev Siegl, and Gordon Bowker opened the first Starbucks in 1971 in Seattle, Washington.  About 10 years later Howard Schultz drank his first cup of Starbucks coffee.  And he liked it.  Within a year he joined Starbucks.  Within another year while traveling in Italy he experienced the Italian coffeehouse.  He loved it.  And had an idea.  Bring the Italian coffeehouse to America.  A place to meet people in the community and converse.  Sort of like a bar.  Only where the people stayed sober.  Soon millions of people were enjoying these tasty and expensive coffee beverages at Starbucks throughout the world.  In 2011 Starbucks employed approximately 149,000 people.

Ray Kroc sold Prince Castle Multi-Mixer milk shakes mixers to a couple of brothers who owned a restaurant.  Who made hamburgers fast.  Richard and Maurice McDonald had implemented the Speedee Service System.  It was the dawn of fast food.  Kroc was impressed.  Facing tough competition in the mixer business he opened a McDonald’s franchise in 1955.  Bringing the grand total of McDonald’s restaurants to 9.  He would go on to buy out the McDonald brothers (some would say unscrupulously).  Today there are over 30,000 stores worldwide.  In 2010 McDonald’s employed approximately 400,000 people.

Richard Branson started a magazine at 16.  He then sold records out of a church crypt at discount prices.  The beginning of Virgin Records.  In 1971 he opened a record store.  He launched a record label in 1972.  And a recording studio.  Signing the Sex Pistols.  And Culture Club.  In 1984 he formed an airline.  Virgin Atlantic Airways.  In 1999 he went into the cellular phone business.  Virgin Mobile.  In 2004 he founded Virgin Galactic.  To enter the space tourism business.  His Virgin Group now totals some 400 companies.  And employs about 50,000 people.

The Decline of Capitalism and the Rise of the Welfare State caused the European Sovereign Debt Crisis

And we could go on.  For every big corporation out there will have a similar beginning.  Corporations that use capital efficiently.  Bringing great things to market.  Introducing us to new things.  Always making our lives better.  And more comfortable.  One thing you will not find is a great success story like this starting in the Soviet Union.  The People’s Republic of China (back in the days of Mao Zedong).  East Germany (before the Berlin Wall fell).  North Korea.  Or Cuba.  No.  The command economies of communist countries basically froze in time.  Where there was no innovation.  No ideas brought to life.  Because the government kind of frowned on that sort of thing.

There is a reason why the West won the Cold War.  And why we won that war without the Warsaw Pack and NATO forces fighting World War III.  And why was this?  Because we didn’t need to.  For the communist world simply could not withstand the forces of living well in the West.  Whenever they could their people escaped to the West.  To escape their nasty, short and brutish lives.  In the command economies of their communist states.  Where the state planners failed to provide for their people.  Even failing to feed their people.  The Soviet Union, the People’s Republic of China and North Korea all suffered population reducing famines.  But not in the West.  Where we are not only well fed.  But our poor suffer from obesity.  Which is not a good thing.  But it sure beats dying in a famine.

Sadly, though, the West is moving towards the state planning of their one time communist foes.  Social democracies are pushing nations in the European Union to bankruptcy.  Japan’s generous welfare state is about to implode as an aging population begins to retire.  Even in the United States there has been a growth of government into the private sector economy like never before.  Which is causing the Great Recession to linger on.  As it caused Japan’s lost decade to become two decades.  And counting.  As it is prolonging the European sovereign debt crisis.  With no end in sight.  The cause of all their problems?  The decline of capitalism.  And the rise of the welfare state.  Which just kills the entrepreneurial spirit.  And the creation of jobs.  Which is one cure for all that ails these countries.  And the only one.  For only robust economic activity can pull a country out of recession.  And for that you need new jobs.  And the entrepreneurial spirit.  In short, you need capitalism.


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Obama Job Approval has Fallen over the Last Year

Posted by PITHOCRATES - January 23rd, 2014

Politics 101

Ten Different Obama Job Approval Polls show Higher Disapproves than Approves

President Obama did not have a good 2013.  Especially near the end.  Because of the Obamacare rollout.  With the website being a disaster.  The enrollment numbers weren’t as projected.  Or needed.  And then all the cancellations in the individual market.  As people learned they couldn’t keep the policies and doctors they liked.  Which gave President Obama the recognition for being the best in at least one thing.  As PolitiFact named “if you like your health care plan, you can keep it” as the lie of the year.

The bad news continued into 2014.  The Obamacare enrollee numbers didn’t improve.  Most of the enrollees are the old and sick.  Not the young and healthy the Obama administration told the health insurers would be enrolling.  Which is breaking the economic model.  Guaranteeing not only that health insurance premiums will rise.  But some health care providers are actually requiring payment up front before providing services.  As they are not sure what the insurers will pay.  Making Obamacare an even bigger disaster.  Which is a big factor in driving President Obama’s job approval rating down (see President Obama Job Approval posted on Real Clear Politics).

President Obama Job Approval R1

The ten polls included in the RCP Average all share one thing in common.  They all have larger disapproval numbers than approval numbers.  With the average disapproval number being 8.4 points greater than the average approval number.  However you look at these numbers they are not good for President Obama.  For they say President Obama has not been good for the United States.

People don’t Trust President Obama and are beginning to Doubt his Past Claims of Accomplishment

Growing numbers of people don’t trust the president anymore.  Including those who were Obama supporters.  Who because of the ‘lie of the year’ don’t look at those other scandals as opposition propaganda anymore.  These scandals (Benghazi, IRS targeting conservatives, spying on journalists, spying on Americans, Fast and Furious, Solyndra, ‘recess’ appointments, executive orders to bypass the will of the people/Congress, etc.) are now just other things not to trust the president about.  The president has been less than honest to get what he wants (power).  While the American people don’t get what they want (jobs, affordable health care, etc.).  And it’s because of this that his job approval has entered a steady decline.

President Obama Job Approval Graph R1

Following a bump during the 2012 election Obama’s job approval has trended down.  The Obama administration lied about what happened in Benghazi to help their reelection chances.  Where the campaign message was that al Qaeda was on the run.  Which is apparently why the State Department under Secretary Clinton denied Ambassador Steven’s request for additional security to combat the resurgent al Qaeda in Libya.  As the recent bipartisan Senate report stated that the killing of four Americans in Benghazi on the anniversary of 9/11 could have been prevented.

Benghazi, the NSA spying on us, the ‘lie of the year’ and the other scandals have had their affect on the American people.  And after the Target point-of-sale credit card hack people are very suspect of the Obamacare website.  Especially when a security consulting firm says there is no security on the Obamacare website yet the Obama administration keeps telling us to trust them.  They’ll keep our data safe.  Even though Target couldn’t.  And they have functioning security systems in place.  Unlike Obamacare.  That has none.  So people don’t trust President Obama.  And they’re beginning to doubt his past claims of accomplishment.  As well as those rosy jobs reports from the Bureau of Labor Statistics.

The Lie of the Year appears to have Broken the Spell Obama held over some of his Admirers

The Democrat’s Keynesian economic policies created yet another housing bubble.  By keeping interest rates artificially low and relaxing credit standards they stimulated the housing market.  And housing prices soared.  But buyers didn’t seem to care.  Because they were borrowing the money to buy these overpriced houses.  Because of those low interest rates.  Even people who couldn’t afford to buy a house were buying a house. Thanks to subprime lending like the adjustable rate mortgage (ARM).  But when interest rates rose so did those monthly payments on those ARMs.  People couldn’t afford their mortgage payments anymore.  And defaulted.  Giving us the subprime mortgage crisis.  Which turned into the Great Recession.

The Democrats blamed the banks for the Great Recession.  Not their Keynesian policies.  Or President Clinton’s heavy hand on lenders to qualify the unqualified for mortgages (see Bill Clinton created the Subprime Mortgage Crisis with his Policy Statement on Discrimination in Lending posted 11/6/2011 on PITHOCRATES).  Not only did they deflect blame for the crisis they used the crisis to implement further Keynesian policies.  A near-trillion dollar stimulus bill.  Much of which went to Obama’s ‘friends’ in the green energy industry.  And to their friends in unions.  The government spent a lot of money.  They kept interest rates artificially low.  And when that didn’t work they used quantitative easing.  Basically printing money.  The Obama administration said their policies were working.  And declared the summer of 2010 ‘Recovery Summer’.  The recession was over.  Since then they highlighted the new jobs created with every jobs report.  While ignoring the number of people who have left the labor force.  Greatly skewing the numbers.  And grossly understating the real unemployment rate (see Wall Street adviser: Actual unemployment is 37.2%, ‘misery index’ worst in 40 years by Paul Bedard posted 1/21/2014 on the Washington Examiner).

Don’t believe the happy talk coming out of the White House, Federal Reserve and Treasury Department when it comes to the real unemployment rate and the true “Misery Index.” Because, according to an influential Wall Street advisor, the figures are a fraud…

…the Misery Index, which is a calculation based in inflation and unemployment, both numbers the duo say are underscored by the government. He said that the Index doesn’t properly calculate how Uncle Sam is propping up the economy with bond purchases and other actions.

“These tricks, along with a host of other dubious accounting schemes, underreport inflation by about 3 percent,” they wrote, adding that the official inflation rate is just 1.24 percent.

“Today, the Misery Index would be 7.54 using official numbers,” they wrote. But if calculations tabulating the full national unemployment including discouraged workers, which is 10.2 percent, and the historical method of calculating inflation, which is now 4.5 percent, ‘the current misery index is closer to 14.7, worse even than during the Ford administration.”

The 1970s were the heyday of Keynesian economics.  With spending out of control Richard Nixon did something that Keynesians longed for.  He decoupled the dollar from gold.  Allowing the Fed to print money like there was no tomorrow.  Igniting inflation.  And when the inflation rate was added to the unemployment rate it gave us a record Misery Index.  Until now, that is.  If you use the real data.  And not the ‘massaged’ data that makes their Keynesian policies appear to be working.  Telling us the recession ended in 2010.  When many feel the Great Recession has never ended.  Which is yet another reason not to trust the Obama administration.  Or not approve of the job President Obama is doing.  As the polls have been showing this past year.  And it’s not just because of Obamacare.  But the ‘lie of the year’ appears to have broken the spell he held over some of his admirers.  Who can now see the king is wearing no clothes.  No matter what his administration and those in the mainstream media say.


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The Obama Recovery is Good for Wall Street but Bad for Main Street

Posted by PITHOCRATES - January 18th, 2014

Week in Review

The December jobs report was pretty bleak.  It showed that the unemployment rate fell to 6.7% and that the economy added 74,000 jobs.  Not great but good enough for some who say that President Obama’s policies are finally working after 5 some years of trying.  Which is ridiculous.  Because that unemployment rate doesn’t tell you how many people lost their jobs.  And how many people disappeared from the civilian labor force as they gave up trying to find work that just isn’t there.  Which hides the number of people who lost their jobs.  Because the Bureau of Labor Statistics doesn’t count anyone as unemployed if they are no longer looking for work.  But if you dig down into the jobs report you’ll find this data.  And see that for every person that entered the labor force about seven people left it in December (see The BLS Employment Situation Summary for December 2013 posted January 13th, 2014 on PITHOCRATES).  Which is anything but an economic recovery.

All during the Obama presidency the Federal Reserve has been stimulating the economy.  Right out of the Keynesian handbook.  By keeping interest rates near zero to encourage people to borrow money to buy things they don’t need.  But few have.  No.  The only people borrowing that money are rich investors.  Who are borrowing this ‘free’ money to spend in the stock market.  Helping Wall Street to do very well during the worst economic recovery since that following the Great Depression.  While Main Street sees their median family income fall.  Still the chairman of the Federal Reserve, Ben Bernanke, thinks he did a heck of a job (see Bernanke Says QE Effective While Posing No Immediate Bubble Risk by Jeff Kearns and Joshua Zumbrun posted 1/16/2014 on Bloomberg).

Bernanke is seeking to define his legacy before stepping down on Jan. 31. During his eight-year tenure as leader of the Fed he piloted the economy through a financial crisis that led to the longest recession since the 1930s. He has tried to bolster growth by holding the target interest rate near zero and pushing forward with unprecedented bond buying known as QE.

“Those who have been saying for the last five years that we’re just on the brink of hyperinflation, I think I would just point them to this morning’s CPI number and suggest that inflation is not really a significant risk of this policy,” Bernanke said, referring to a Labor Department report showing the consumer price index rose 1.5 percent in the past year. The Fed has set an inflation target of 2 percent…

The Federal Open Market Committee (FDTR) announced plans last month to reduce monthly purchases to $75 billion from $85 billion, citing improvement in the labor market. The jobless rate last month fell to 6.7 percent, a five-year low.

The only reason why we don’t have hyperinflation is that everyone has depreciated their currency so much to boost exports and pay for bloated welfare states that all currencies are losing value.  And of all these bad currencies the American currency is the least bad of the lot.  Which is why some foreign nationals will pay to park their money in American banks.  Because the risk of it losing its value is so much greater in their home country.

But that doesn’t mean inflation hasn’t reared its ugly head in the US economy.  Just go to a grocery store and look at a bag of chips.  Or a box of cookies.  Or any packaged item that didn’t seem to get overly expensive during the Obama recession. A bag of chips may be the same $3-4 it was before the recession.  But notice the size of the bag.  It’s gotten smaller.  So, yes, consumer prices have not shown great inflation.  But packaging has gotten smaller.  So instead of paying more for the same quantity we are paying the same price for a lesser quantity.  Which means we may be buying 4 of something in a month instead of 3 of something.  It adds up.  Which is why there are so many more people on food stamps.  The Bernanke inflation is taking more of our paycheck to buy what it once did.

The economy is horrible.  Fewer people are in the labor force with each jobs report.  Our grocery packaging is shrinking.  And once the Fed stops its bond buying the stock market is going to fall.  A lot.  For every time rich investors think the economic data will show solid economic activity what do they do?  They sell their stocks.  Causing a stock market fall.  Why?  Why would investors leave the stock market when the data say the economy is getting stronger?  Which seems to go against common sense?  Because they know there’s been only one thing helping them get rich during the Obama presidency.  That ‘free’ money.  Once that source of cheap money goes away they will sell before those inflated stock prices fall back to earth.

The Obama recovery.  Good for Wall Street.  Bad for Main Street.


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The BLS Employment Situation Summary for December 2013

Posted by PITHOCRATES - January 13th, 2014

Economics 101

The Labor Force Participation Rate has Fallen Steadily since President Obama became President

Ever since the recovery summer of 2010 the Obama administration has told us the recession was over.  And his policies were creating one heck of an economic recovery.  Backed up by all those glowing monthly jobs reports. Like the December 2013 jobs report (see Employment Situation Summary posted 1/10/2014 on the Bureau of Labor Statistics).

The unemployment rate declined from 7.0 percent to 6.7 percent in December, while total nonfarm payroll employment edged up (+74,000), the U.S. Bureau of Labor Statistics reported today.

The unemployment rate is down.  And new jobs were created.  Again.  Jobs report after jobs report it’s the same thing.  The administration touts the falling unemployment rate and new job creation as confirmation that their economic policies are working.  Even though it’s been 5 years.  And the economy is still in the toilet.  Despite that falling unemployment rate.  For there is a reason why the unemployment rate is falling.  And it has nothing to do with an economic activity.

The civilian labor force participation rate declined by 0.2 percentage point to 62.8 percent in December… The labor force participation rate declined by 0.8 percentage point over the year…

In fact, the labor force participation rate has fallen steadily since President Obama became president.  This is not good.  In fact, it’s very bad.  Because it means that under President Obama’s economic policies more people have left the labor force than entered or remained in it.  Meaning that his economic policies have caused a net loss of jobs throughout his presidency.

The U-6 Unemployment Rate is Closer to the Bitter Sentiment of Job Seekers in the Current Economic Climate

In January of 2009 when President Obama began his presidency there were 80,507,000 people not in the labor force.  At the end of December 2013 that number grew to 91,808,000.  Subtracting one from the other and you get 11,301,000 people that have left the labor force since President Obama entered office.  Because his policies destroyed 11,301,000 jobs.  And because these people couldn’t find new jobs they just gave up looking.  Which is why the unemployment rate keeps falling.

So you can talk of new jobs created.  And a falling unemployment rate.  But those numbers don’t reflect the 11,301,000 jobs President Obama destroyed with his policies.  Which comes to 260,200 jobs lost per year.  Or 188,350 each month.  Which is a lot more than the 74,000 new jobs.  In fact, if you look at the change in the number of people not in the labor force from November to December of 2013 you’ll see that 525,000 people left the labor force.  So the December jobs lost is about 2.8 times the average jobs lost during the Obama presidency.  And giving a ratio of about 7 jobs lost for every new job created in December.  Making December a horrible month for jobs.  Much worse than the 6.7% unemployment rate would have us believe.

The funny thing about the official unemployment rate is that the Bureau of Labor Statistics (BLS) doesn’t count people who quit looking for a job.  Or who are working part-time because they can’t find a full-time job.  If we want an alternative measure of labor underutilization (that counts more people who can’t find a full-time job) we should look at the U-6 unemployment rate.  We can find this number in the same BLS jobs report (in Table A-15).  Which was 13.1% for December 2013.  An unemployment rate much closer to the bitter sentiment of job seekers in the current economic climate.

We will have to Wait through many more Bad Jobs Reports before we can Enjoy a Healthy Economy Again

The Employment Situation Summary confirms the horrible economy.  Though misleading with these falling unemployment rates the real economic picture is still in these reports.  All you have to do is look for them.  And understand what they mean.  For example:

In December, job gains occurred in retail trade and wholesale trade…

Employment in retail trade rose by 55,000 in December. Within the industry, job gains occurred in food and beverage stores (+12,000), clothing and accessories stores (+12,000), general merchandise stores (+8,000), and motor vehicle and parts dealers (+7,000)…

In December, wholesale trade added 15,000 jobs. Most of the job growth occurred in electronic markets and agents and brokers (+9,000).

Note that of the 74,000 new jobs 70,000 (94.6%) of them were in retail and wholesale trade.  Which is not surprising when you consider what’s in December.  Christmas.  (While near-zero interest rates sold cars to people who would otherwise not buy them.)  The final sprint of retailers for the year.  And when many of them go firmly into the black.  But while the Christmas surge on employment was underway other sectors did not fare as well.

Within the [professional and business services] industry, temporary help services added 40,000 jobs in December, while employment in accounting and bookkeeping services declined by 25,000.

Businesses add temporary workers when they have a surge in sales they believe won’t last.  And don’t want to have more permanent workers on their payroll when that surge in sales ends.  For it is easier to let temps go than full-time workers.  And less costly.  Accounting and bookkeeping services aren’t the most glamorous of services.  When the economy is growing businesses have more accounting and bookkeeping work.  But when the economy is contracting businesses have less accounting and bookkeeping work.  So a decline here could indicate an economic contraction.

The December 2013 jobs report is bleak.  Just as the oncoming winter looks in December.  Knowing we’ll have to wait through a long and cold winter before we can enjoy the warmth of summer again.  Just as we know we will have to wait through many more bad jobs reports before we can enjoy a healthy economy again.  Thanks to the horrific economic policies of the Obama administration that have failed to work these past 5 years.


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Panic of 1907, Federal Reserve Act and Depression of 1920

Posted by PITHOCRATES - December 17th, 2013

History 101

In 1907 the Heinze Brothers thought Investors were Shorting the Stock of their United Copper Company

Buying and selling stocks is one way to get rich.  Typically by buying low and selling high.  But you can also get rich if the stock price falls.  How you ask?  By short-selling the stock.  You borrow shares of a stock that you think will fall in price.  You sell them at the current price.  Then when the stock price falls you buy the same number of shares you borrowed at the lower price.  And use these to return the shares you borrowed.  You subtract the price you pay to buy the cheaper shares from the proceeds of selling the costlier shares for your profit.  And if the price difference/number of shares is great enough you can get rich.

In 1907 the Heinze brothers thought investors were shorting the stock of their United Copper Company.  So they tried to turn the tables on them and get rich.  They already owned a lot of the stock.  They then went on a buying spree with the intention of raising the price of the stock.  If they successfully cornered the market on United Copper Company stock then the investors shorting the stock would have no choice but to buy from them to repay their borrowed shares.  Causing the short sellers to incur a great loss.  While reaping a huge profit for themselves.

Well, that was the plan.  But it didn’t quite go as planned.  For they did not control as much of the stock as they thought they did.  So when the short-sellers had to buy new shares to replace their borrowed shares they could buy them elsewhere.  And did.  When other investors saw they weren’t going to get rich on the cornering scheme the price of the stock plummeted.  For the stock was only worth that inflated price if the short-sellers had to buy it at the price the Heinze brothers dictated.  When the cornering scheme failed the stock they paid so much to corner was worth nowhere near what they paid for it.  And they took a huge financial loss.  But it got worse.

The Panic of 1907 led to the Federal Reserve Act of 1913

After getting rich in the copper business in Montana they moved east to New York City.  And entered the world of high finance.  And owned part of 6 national banks, 10 state banks, 5 trusts (kind of like a bank) and 4 insurance companies.  When the cornering scheme failed the Heinze brothers lost a lot of money.  Which spooked people with money in their banks and trusts.  As these helped finance their scheme.  So the people rushed to their banks and pulled their money out.  Causing a panic.  First their banks.  Then their trusts.  Including the Knickerbocker Trust Company.  Which collapsed.  As the contagion spread to other banks the banking system was in risk of collapsing.  Causing a stock market crash.  Resulting in the Panic of 1907.

Thankfully, a rich guy, J.P. Morgan, stepped in and saved the banking system.  By using his own money.  And getting other rich guys to use theirs.  To restore liquidity in the banking system.  To avoid another liquidity crisis like this Congress passed the Federal Reserve Act (1913).  Giving America a central bank.  And the progressives the tool to take over the American economy.  Monetary policy.  By tinkering with interest rates.  And breaking away from the classical economic policies of the past that made America the number one economic power in the world.  Built on a foundation of thrift, savings, investment, free trade, the gold standard, etc.  Where people saved for the future.  The greater their savings the more investment capital there was.  And the lower interest rates were.

The Federal Reserve (the Fed) changed all of that.  By printing money to keep interest rates artificially low.  Giving us boom and bust cycles as people over invest and over build because of cheap credit.  Leading to bubbles (the boom) in asset prices that painful recessions (the bust) correct.  Instead of the genuine growth that we got when our savings determined interest rates.  Where there is no over-investing or over-building.  Because the limited investment capital did not permit it.  Guaranteeing the efficient flows of capital to generate real economic activity.

Warren Harding’s Tax Cuts ignited Economic Activity and gave us the Modern World

Thanks to the Fed there was a great monetary expansion to fund World War I.  The Fed cut the reserve requirements in half for banks.  Meaning they could loan more of their deposits.  And they did.  Thanks to fractional reserve banking these banks then furthered the monetary expansion.  And the Fed kept the discount rate low to let banks borrow even more money to lend.  The credit expansion was vast.  Creating a huge bubble in asset prices.  Creating a lot of bad investments.  Or malinvestments.  Economist Ludwig von Mises had a nice analogy to explain this.  Imagine a builder constructing a house only he doesn’t realize he doesn’t have enough materials to finish the job.  The longer it takes for the builder to realize this the more time and resources he will waste.  For it will be less costly to abandon the project before he starts than waiting until he’s built as much as he can only to discover he will be unable to sell the house.  And without selling the house the builder will be unable to recover any of his expenses.  Giving him a loss on his investment.

The bigger those bubbles get the farther those artificially high prices have to fall.  And they will fall sooner or later.  And fall they did in 1920.  Giving us the Depression of 1920.  And it was bad.  Unemployment rose to 12%.  And GDP fell by 17%.  Interestingly, though, this depression was not a great depression.  Why?  Because the progressives were out of power.  Instead of the usual Keynesian solution to a recession Warren Harding (and then Calvin Coolidge after Harding died in office) did the opposite.  There was no stimulus deficit-spending.  There was no playing with interest rates.  Instead, Harding cut government spending.  Nearly in half.  And he cut tax rates.  These actions led to a reduction of the national debt (that’s DEBT—not deficit) by one third.  And ignited economic activity.  Ushering in the modern world (automobiles, electric power, radio, telephone, aviation, motion pictures, etc.).  Building the modern world generated real economic activity.  Not a credit-driven bubble.  Giving us one of the greatest economic expansions of all time.  The Roaring Twenties.  Ending the Depression of 1920 in only 18 months.  Without any Fed action or Keynesian stimulus spending.

By contrast FDR used almost every Keynesian tool available to him to end the Great Depression.  But his massive New Deal spending simply failed to end it.  After a decade or so of trying.  Proving that government spending cannot spend an economy out of recession.  But cuts in government spending and cuts in tax rates can.  Which is why the Great Recession lingers on still.  Some 6 years after the collapse of one of the greatest housing bubbles ever.  Created by one of the greatest credit expansions ever.  For President Obama is a Keynesian.  And Keynesian policies only lead to boom-bust cycles.  Not real economic growth.  The kind we got from classical economic policies.  Built on a foundation of thrift, savings, investment, free trade, the gold standard, etc.  The economic policies that made America the number economic power in the world.


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The Minimum Wage Debate

Posted by PITHOCRATES - December 16th, 2013

Economics 101

A Fall in Economic Activity follows a Surge in Keynesian Stimulus Spending

The minimum wage argument is a political argument.  Because it’s a partisan one.  Not one based on sound economics.  Such as the classical school of economics that made America the number one economic power in the world.  Thrift.  Savings. Investment.  Free trade.  And a gold standard.  Then you have the politicized school of economics that replaced it.  The Keynesian school.  Which nations around the world accept as sacrosanct.  Because it is the school of economics that says governments should manage the economy.  Thus sanctioning and enabling Big Government.

Keynesian economics is all about consumption.  Consumer spending.  That’s all that matters to them.  And it’s the only thing they look at.  They completely ignore the higher stages of production.  Above the retail level.  They ignore the wholesale level.  The manufacturing level.  The industrial processing level.  And the raw material extraction level.  Which is why Keynesian stimulus fails.  Just putting more money into consumers’ pockets doesn’t affect them.  For they see the other side of that stimulus.  Inflation.  And recession.  And they’re not going to expand or hire more people just because there is a temporary spike in consumer spending.  Because they know once the consumers run through this money they will revert back to their previous purchasing habits.  Well, almost.

Keynesian stimulus is typically created with an expansion of the money supply.  As more dollars chase the same amount of goods prices rise.  And people lose purchasing power.  So they buy less.  Which means following a surge in Keynesian stimulus spending there follows a fall in economic activity.  Which is why the higher stages of production don’t expand or hire people.  Because they know that for them the economy gets worse—not better—after stimulus spending.

A Stronger Economy would help Minimum Wage Workers more than Raising the Minimum Wage

Increasing the minimum wage shares the Keynesian goal of putting more money into consumers’ pockets.  And many of the arguments for increasing the minimum wage mirror those arguments for Keynesian stimulus.  Even to reverse the consequences of previous Keynesian policies (see Everything You Ever Needed to Know About the Minimum Wage by Jordan Weissmann posted 12/16/2013 on The Atlantic).

The federal minimum wage is $7.25 an hour, which means that depending on the city you’re in, 60 minutes of work will just about buy you a Chipoltle burrito (without guac). By historical standards, it’s fairly low. Thanks to inflation, the minimum wage is worth about $3.26 less, in today’s dollars, than when its real value peaked in 1968.

It’s a Keynesian argument that says putting more money into people’s pockets will increase economic activity.  That’s the rebuttal to the argument that a higher minimum wage will reduce economic activity (by raising prices with higher labor costs).  For they will take those higher wages and spend them in the economy.  More than offsetting the loss in sales due to those higher prices.

The whole concept of Keynesian stimulus is predicated on giving consumers more money to spend.  Like raising the minimum wage.  Either with stimulus money raised by taxes.  From borrowing.  Or printing.  Their favorite.  Which they have done a lot of.  To keep interest rates low to spur housing sales in particular.  But with this monetary expansion comes inflation.  And a loss of purchasing power.  So the Keynesian policies of putting more money into consumers’ pockets to stimulate economic activity has reduced the purchasing power of that money.  Which is why the minimum wage in real dollars keeps falling.

According to the Bureau of Labor Statistics, 1.57 million Americans, or 2.1 percent of the hourly workforce, earned the minimum wage in 2012. More than 60 percent of them either worked in retail or in leisure and hospitality, which is to say hotels and restaurants, including fast-food chains.

…Almost a third of minimum-wage workers are teenagers, according to the Bureau of Labor Statistics.

Some in retail sales get a commission added on to their hourly wage.  Many in the food and leisure industry earn tips in addition to their hourly wage.  So some of those who earn the minimum wage get more than the minimum wage.  Those who don’t are either unskilled entry level workers.  Such as students who are working towards a degree that will get them a higher-paying job.  Those working part-time for an additional paycheck.  Those who work because of the convenience (hours, location, etc.).  Those who have no skills that can get them into a higher-paying job.  Or because these entry-level jobs are the only jobs they can find in a bad economy.

A stronger economy could create better jobs.  And higher wages.  For it is during good economic times that people leave one job for a better job.  And employers pay people more to prevent good employees they’ve already trained from leaving.  So they don’t have to start all over again with a new unskilled worker.  This would be the better approach.  Creating a stronger economy to allow unskilled workers to move up into higher skilled—and higher paying—jobs.  For you can’t have upward mobility if there are no better jobs to move up into.

On one side of the debate, you mostly have traditionalists who believe that increasing the minimum wage kills some jobs for unskilled workers, like teens…

On the other side, you have researchers who believe that increasing the minimum wage doesn’t kill jobs at all and may even give the economy a boost by channeling more pay to low-income workers who are likely to spend it.

The Automotive industry has long fought for tariff protection.  For the high cost of their union labor made their cars costlier than their imported competition.  The legacy costs of an aging workforce (health care for retirees and pensions) required a government bailout to keep General Motors and Chrysler from going belly-up.  And it was this high cost of union labor that caused the Big Three to lose market share.  Shedding jobs—and employees—as they couldn’t sell the cars they were making.

So higher wages raise prices.  And reduce sales.  Leading to layoffs.  And reduced economic activity.  The unions believe this.  That’s why they fight so hard for legislation to protect themselves from lower-priced competition.  You would have to believe that the economic forces that affect one part of the economy would affect another.  And those economic forces say that higher wages kill jobs.  They don’t increase economic activity.  They just help the lucky few who have those high-paying jobs.  While many of their one-time coworkers found themselves out of a job.

When the minimum wage goes up, the theory says, businesses shape up. Managers find ways to make their employees more productive. Turnover slows down, since people are happier with their paychecks, and the unemployed snap up jobs elsewhere in town. Meanwhile, Burger King and McDonald’s can raise their prices a little bit without scaring off customers.

Managers finding ways to make their employees more productive?  Do you know what that means?  It means how they can get more work out of fewer employees.  No worker wants to hear management talk about productivity gains.  For that usually means someone will lose their job.  As the remaining workers can do more with less because of those productivity gains.  So that’s a horrible argument for a higher minimum wage.  Because fewer people will have those bigger paychecks.  Made possible by reducing costs elsewhere.  As in laying off some of their coworkers.

Based on data from 80s and early 90s, Daniel Aaronson estimated that a 10 percent increase in the minimum wage drove up the price of McDonald’s burgers, KFC chicken, and Pizza Hut’s pizza-like product by as much as 10 percent. Assuming that holds true today, it means that bringing the minimum wage to $10.10 would tack $1.60 onto the cost of your Big Mac.

McDonald’s will never win the award for having the healthiest food.  And that’s fine.  People don’t go there to eat healthy.  They go there for the value.  As it is one of the few places you can take a family of four out for about $25.  Adding another $1.60 per burger could add another $6.40 to that dinner out.  For a family living paycheck to paycheck that may be just too much for the weekly budget.  Especially with inflation raising the cost of groceries and gasoline.  Thanks to those Keynesian economic policies.

Raising the Minimum Wage will not Result in any of the Lofty Goals the Economic Planners Envision

There is a lot of anger at these minimum wage companies paying their employees so little.  Some of their minimum workers have gone on strike recently to protest their low pay.  As they are apparently not working at these companies because they love the work.  So suffice it to say that no one is yearning to work at these companies.  And that some may outright hate these jobs.  So why in the world would we want to punish them by paying them more?  Removing all ambition to leave the jobs they hate?

If you raise the minimum wage what happens to other jobs that pay what becomes the new higher minimum wage?  Putting their earnings on par with unskilled entry-level jobs?  Jobs that require greater skills than entry-level minimum wage jobs?  Will they continue to work harder for the same wage as unskilled workers?  Will they leave their more difficult jobs for an easier entry-level job?  Will they demand a raise from their employer?  Keynesians would say this is a good thing.  As it will drive wages up.  It may.  But to pay these higher labor costs will require cost cuts elsewhere.  Perhaps by shedding an employee or two.

Raising the minimum wage will not result in any of the lofty goals the economic planners envision.  For if putting more money into consumers’ pockets is all we need to create economic activity then we wouldn’t have had the Great Recession.  The stagflation of the Seventies.  Or the Great Depression.  Keynesian stimulus spending didn’t create new economic activity to prevent any of these.  So why would a rise in the minimum wage be any different?


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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 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. 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.


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Inventory to Sales Ratio and Labor Force Participation Rate (1992-2013)

Posted by PITHOCRATES - November 12th, 2013

History 101

Just-in-Time Delivery lowers Inventory Costs but risks Manufacturing Interruptions

Carrying a large inventory is costly.  And risky.  First of all you have to warehouse it.  In a secured heated (and sometimes cooled) building.  With a fire alarm system.  A fire suppression (i.e., sprinkler) system.  A security alarm system.  You need lighting.  And people.  Safety training.  Safety equipment.  Forklifts.  Loading docks.  Delivery trucks.  Insurances.  Property taxes (real and personal).  Utilities.  Telephone and Internet.  A computer inventory system.  Etc.  It adds up.  And the larger the inventory the larger the cost.

Then there are the risks.  Fire damage.  Theft.  Water damage (say from a fire suppression line that freezes during the winter because some kid broke a window to let freezing air in that froze the water inside the sprinkler line with the expanding ice breaking the pipe and allowing water to flow out of the pipe onto your inventory).  Shrinkage (things that disappear but weren’t sold).  Damaged goods (say a forklift operator accidentally backed into a shelve full of plasma displays).  Shifts in consumer demand (what was once hot may not be hot anymore which is a costly problem when you have a warehouse full of that stuff).  Etc.  And the larger the inventory the greater the risks.

In the latter half of the 20th century a new term entered the business lexicon.  Just-in-time delivery.  Or JIT for short.  Instead of warehousing material needed for manufacturing manufacturers turned to JIT.  And tight schedules.  They bought what they needed as they needed it.  Having it arrive just as it was needed in the manufacturing process.  JIT greatly cut costs.  But it allowed any interruption in those just-in-time deliveries shut down manufacturing.  As there was no inventory to feed manufacturing if a delivery did not arrive just in time.

A Rising Inventory to Sales Ratio means Inventory is Growing Larger or Sales are Falling

There are many financial ratios we use to judge how well a business is performing.  One of them is the inventory to sales ratio.  Which is the inventory on hand divided by the sales that inventory generated.  If this number equals ‘1’ then the inventory on hand for a given period is sold before that period is up.  Which would be very efficient inventory management.  Unless a lot of sales were lost because some things were out of stock because so few of them were in inventory.

Ideally managers would like this number to be ‘1’.  For that would have the lowest cost of carrying inventory.  If you sold one item 4 times a month you could add one to inventory each week to replace the one sold that week.  That would be very efficient.  Unless four people want to buy this item in the same week.  Which means instead of selling 4 of these items you will probably only sell one.  For the other three people may just go to a different store that does have it in stock.  So it is a judgment call.  You have to carry more than you may sell because people don’t come in at evenly spaced intervals to buy things.

We can look at the inventory to sales ratio for the general economy over time to note trends.  A falling ratio is generally good.  For it shows inventories growing as a lesser rate than sales.  Meaning that businesses are getting more sales out of reduced inventory levels.  Which means more profits.  A flat trend could mean that businesses are operating at peak efficiency.  Or they are treading water due to uncertainty in the business climate. Doing the minimum to meet their current demand.  But not growing because there is too much uncertainty in the air.  A rising ratio is not good.  For the only way for that to happen is if inventory is growing larger.  Sales are falling.  Or both.

The Labor Force Participation Rate has been in a Freefall since President Obama took Office

When inventories start rising it is typically because sales are falling.  Businesses are making their usually buys to restock inventory.  Only people aren’t buying as much as they once were.  So with people buying less sales fall and inventories grow.  Rising inventories are often an indicator of a recession.  As unemployment rises there are fewer people going to stores to buy things.  So sales fall.  After a period or two of this when businesses see that falling sales was not just an aberration for one period but a sign of worse economic times to come they cut back their buying.  Draw down their inventories.  And lay off some workers to adjust for the weaker demand.  As they do their suppliers see a fall in their sales and do likewise.  All the way up the stages of production to raw material extraction. 

Retailers typically carry larger inventories than wholesalers or manufacturers.  To try and accommodate their diverse customer base.  So when their sales fall and their inventories rise they are left with bulging inventories that are costly to store in a warehouse.  They may start cutting prices to move this inventory.  Or pray for some government help.  Such as low interest rates to get people to buy things even when it may not be in their best interest (for people tend to get laid off in a recession and having a new car payment while unemployed takes a lot of joy out of having a new car).  Or a government stimulus program.  Make-work for the unemployed.  Or even cash benefits the unemployed can spend.  Which will provide a surge in economic activity at the consumer level as retailers and wholesalers unload backed up inventory.  But it rarely creates any new jobs.  Because government stimulus eventually runs out.  And once it does the people will leave the stores again.  So retailers may benefit and to a certain degree wholesalers as they can clear out their inventories.  But manufacturers and raw material extractors adjust to the new reality.  As retail sales fall retailers and wholesalers will need less inventory.  Which means manufacturers and raw material extractors ramp down to adjust to the lower demand.  Cutting their costs so their reduced revenue can cover them.  Which means laying off workers.  We can see this when we look at inventory to sales ratio and the labor force participation rate over time.

(There appears to be a problem with the latest version of this blogging software that is preventing the insertion of this chart into this post.  Please click on this link to see the chart.)

(Sources: Inventories/Sales Ratio, Archived News Releases

Cheap money gave us irrational exuberance and the dot-com bubble in the Nineties.  And a recession in the early 2000s.   Note that the trend during the Nineties was a falling inventory to sales ratio as advanced computer inventory systems tied in over the Internet took inventory management to new heights.  But as the dot-com irrational exuberance came to a head we had a huge dot-com economy that had yet to start selling anything.  As their start-up capital ran out the dot-coms began to go belly-up.  And all those programmers who flooded our colleges in the Nineties to get their computer degrees lost their high paying jobs.  Stock prices fell out of the sky as companies went bankrupt.  Resulting in a bad recession.  The fall in spending can be seen in the uptick in the inventory to sales ratio.  This fall in spending (and rise in inventories) led to a lot of people losing their jobs.  As we can see in the falling labor force participation rate.  The ensuing recession was compounded by the terrorist attacks on 9/11.

Things eventually stabilized but there was more irrational exuberance in the air.  Thanks to a housing policy that put people into houses they couldn’t afford with subprime mortgages.  Which lenders did under threat from the Clinton administration (see Bill Clinton created the Subprime Mortgage Crisis with his Policy Statement on Discrimination in Lending posted 11/6/2011 on Pithocrates).  Note the huge spike in the inventory to sales ratio.  And the free-fall of the labor force participation rate.  Which hasn’t stopped falling since President Obama took office.  Even though the inventory to sales ratio returned to pre-Great Recession levels.  But there is so much uncertainty in the economic outlook that no one is hiring.  They’re just shedding jobs.  Making the Obama economic recovery the worst since that following the Great Depression.


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