Posts
Here's a thought:
Find out how the rich guy made the money. And do the same. Study the wealthy for how they got there, not because they have things you don't. We don't get anywhere by blaming the wealthy for what we don't have.
Honestly, I am not disparaging those who have less than the average bear. And I'm not saying that no one needs a helping hand - for all those people who are out of a job and lost their wealth when the value of their house was cut in half - you really are at a disadvantage. A family can probably lose their equity, a job or their health, but losing more than one is darned difficult to get through and the older you are, the more difficult to overcome. Still, it is not the wealthy person's job to take care of you. There is a difference between a charitable obligation and government confiscation.
I'm just saying that what made America in the past were people who said "I want that and I'm going to find out how to get it," and not "I deserve that and I'm going to find out how to take it."
It used to be that wealth was accumulated through wages, savings, home equity and retirement investments. Not great wealth but comfortable wealth. No more. I don't have the answers, I just can plainly see that what worked in the past is not part of the paradigm we live in now.
Tuesday, July 26, 2011
Sunday, July 24, 2011
The other half...
I was going to post something about this class warfare demagoguery, but then I received this. Which gets to the point so well.
Wednesday, July 13, 2011
First, we can't go back to those happy days
1. Things change. Adaptation is necessary. Pretending that doing the same things will produce the same results doesn't change reality. It wastes time and that limits the options. The population is getting older and sicker and is unemployed for longer. The first two facts are obvious and aren't changing. The last one may change, but not any time soon. Not unless/until we start producing things in this country and stop sending more money overseas than we bring in.
2. It doesn't matter how high we increase taxes. If we take all the money from people making more than $250,000 per year, it still won't be enough. So the middle/working class is going to pay too, directly and indirectly. The idea that we can close loopholes for corporate jets to pay for college scholarships is ludicrous.
3. It doesn't matter how much we cut discretionary spending. Not far short of simply closing the federal government (meaning the good and the bad - cancer research, national parks, border patrol, too), cutting the budget still won't be enough.
4. If we do nothing, medicare will run out of money and everyone loses benefits. The longer we wait to fix it, the more people will be affected. We can preserve benefits as they are for people 55 and older including those who are already getting benefits - if we act now. If we wait for a new congress, it will be people 60 and over. So whether you are over 55 or under, you have no incentive to put this off. The status quo is not an option.
5. If we do nothing, social security payouts will exceed its income - and benefits will be reduced for everyone. The extra money doesn't come out of the general fund that pays for everything else. While the program is required to be self-sustaining, the benefits that are owed in the future are still obligations that the federal government owns. Increasing income taxes and closing loopholes has no impact on this - it is just changing the subject. Changing payroll SS taxes and retirement ages are required. (There is an issue in that the government has to borrow money to pay back the iou's to the SS program, but no one is proposing not paying them back. One does want to keep the interest as low as possible.)
6. Arguing over things like tax breaks for corporate jets take up more oxygen than the loopholes are worth. $300 million is a joke when we are talking about $trillions we don't have. But singling them out is just mean-spirited. Middle class workers are building those jets after all. Without buyers... does the government take over that industry, too? There are consequences. Take gas/oil taxes. Tax increases result in price increases so the tax ends up being paid by the middle class anyway.
7. The biggest budget killer is interest and the more we borrow, the more of the available budget pie gets eaten by interest. The most important thing is to quit borrowing. The second most important thing is to keep interest rates down. Making investors worried is counter-productive.
8. Reducing the amount the federal budget increases from one year to the next is not a cut, sorry. Borrowing doesn't go down until spending goes down. Don't be fooled by those smoke and mirrors.
9. Taxes are going to increase anyway. The Bush tax cuts expire in 2013 and the 2% cut in payroll taxes expire in 2012. In this environment, there is no way either of those are going to be removed by this congress.
10. It doesn't matter what actually happens on August 3, perception rules. The markets are driven by what the marketeers think will happen. The damage will be done 7-10 days before that. And those damages are not "undone" by taking action on the borrowing ceiling on August 1. The real damage will be the increase in interest rates for everyone - take credit cards for example. When businesses are paying more in interest, then the price of goods goes up as well.
All this has impact in various ways on jobs - sometimes in unexpected ways.
There is a smidgen of good news. If you move your 401K to treasuries, those bonds are going to be paying out more interest. If you can take a lump sum and retire to South Vietnam before the Treasury has to pay out, you might just make out. If you can survive inflation until then.
2. It doesn't matter how high we increase taxes. If we take all the money from people making more than $250,000 per year, it still won't be enough. So the middle/working class is going to pay too, directly and indirectly. The idea that we can close loopholes for corporate jets to pay for college scholarships is ludicrous.
3. It doesn't matter how much we cut discretionary spending. Not far short of simply closing the federal government (meaning the good and the bad - cancer research, national parks, border patrol, too), cutting the budget still won't be enough.
4. If we do nothing, medicare will run out of money and everyone loses benefits. The longer we wait to fix it, the more people will be affected. We can preserve benefits as they are for people 55 and older including those who are already getting benefits - if we act now. If we wait for a new congress, it will be people 60 and over. So whether you are over 55 or under, you have no incentive to put this off. The status quo is not an option.
5. If we do nothing, social security payouts will exceed its income - and benefits will be reduced for everyone. The extra money doesn't come out of the general fund that pays for everything else. While the program is required to be self-sustaining, the benefits that are owed in the future are still obligations that the federal government owns. Increasing income taxes and closing loopholes has no impact on this - it is just changing the subject. Changing payroll SS taxes and retirement ages are required. (There is an issue in that the government has to borrow money to pay back the iou's to the SS program, but no one is proposing not paying them back. One does want to keep the interest as low as possible.)
6. Arguing over things like tax breaks for corporate jets take up more oxygen than the loopholes are worth. $300 million is a joke when we are talking about $trillions we don't have. But singling them out is just mean-spirited. Middle class workers are building those jets after all. Without buyers... does the government take over that industry, too? There are consequences. Take gas/oil taxes. Tax increases result in price increases so the tax ends up being paid by the middle class anyway.
7. The biggest budget killer is interest and the more we borrow, the more of the available budget pie gets eaten by interest. The most important thing is to quit borrowing. The second most important thing is to keep interest rates down. Making investors worried is counter-productive.
8. Reducing the amount the federal budget increases from one year to the next is not a cut, sorry. Borrowing doesn't go down until spending goes down. Don't be fooled by those smoke and mirrors.
9. Taxes are going to increase anyway. The Bush tax cuts expire in 2013 and the 2% cut in payroll taxes expire in 2012. In this environment, there is no way either of those are going to be removed by this congress.
10. It doesn't matter what actually happens on August 3, perception rules. The markets are driven by what the marketeers think will happen. The damage will be done 7-10 days before that. And those damages are not "undone" by taking action on the borrowing ceiling on August 1. The real damage will be the increase in interest rates for everyone - take credit cards for example. When businesses are paying more in interest, then the price of goods goes up as well.
All this has impact in various ways on jobs - sometimes in unexpected ways.
There is a smidgen of good news. If you move your 401K to treasuries, those bonds are going to be paying out more interest. If you can take a lump sum and retire to South Vietnam before the Treasury has to pay out, you might just make out. If you can survive inflation until then.
Thursday, June 23, 2011
medicare: Is doing nothing an option?
So, according to the 2011 Social Security and Medicare Trustees annual report, medicare is projected to pay out more than it collects in every future year (including 2011 and since 2008). But there is a reserve (read IOUs) in the fund cover the difference. The reserve is projected to be exhausted in 2024 (despite that currently, the reserves are being used up at better than 10% each year, which means more like 2019). Where does the money come from to pay out on those IOUs? The general fund, meaning the bank account that pays for everything from corn subsidies to military pay. Currently, the general fund pays about 45% of all medicare expenditures, which triggers a warning, which the President is required by law to address within 15 days.
That's all the background. When the reserve runs out, the program must reduce expenditures, meaning that the benefits will be cut. And if you look at how much it can't pay for out of revenue now, we are talking about a cut of around 50%.
Therefore, doing nothing will result in serious reductions in medicare benefits for everyone. As more people become eligible and also claim benefits, the benefits will be reduced even more. So much for keeping the promise. Look at it this way: The government has $100. It has to pass out the benefits equally to everyone who shows up. If 10 people show up, they get 10%. If 100 people show up they each get 1%. Regardless how many people are eligible for the benefits, once the reserves run out, the program can only pay out as much as it brings in. And that is only about 50% of what it pays out now.
Here are the options:
Do nothing, which will cut benefits by 50% for everyone including people in the program and even more for people entering the program in the future.
Change the program so that current beneficiaries can continue to rely on the program - because they do not have any alternatives. They don't, there just isn't medical insurance for retired people over 60. But the more benefits you give people now, the less you have available later. Who is in a better position to adjust their retirement plans around these realities, people retired now or people retiring in 10 years?
Stop the program. I don't think you can cancel it for people who are already using it. And even if you cancel it for future beneficiaries, you still need to tax them in order to cover the current costs.
Take the revenue and give it to beneficiaries so they can get their own program (insurance, HMO, PPO) hopefully from an exchange of some sort. People will have to pay the difference, but they are going to have to pay the difference in costs anyway. At least if they have to budget for premiums, that is more predictable. You would know that you have to budget $500 a month for your medical care, instead of guessing where between $10 and $1 million you will have to pay any given month.
Some combination.
The law says the President must propose something besides do nothing and congress must act on that recommendation with some haste.
Here is the trustee's report. Read it and weep.
Sure people have been paying into this program all their working lives. You paid for a benefit that isn't going to be there. Sorry about that. Sure, it isn't their fault at least individually. If blissful ignorance is a valid excuse, neither is anyone at fault for Bernie Maddolf. But as a nation, we are responsible for our debts and this just happens to be a really really big one. We could have addressed the issue years ago. No, the (un)affordable health care act doesn't offer any help or relief. All it does is take $500 billion out of the program every year and give it to other people for their healthcare. And then they call it a savings. Yeah, right.
All I can say is cowboy up and deal with it. Whining about how much we paid, and how awful it is to get screwed is just wasting oxygen.
That's all the background. When the reserve runs out, the program must reduce expenditures, meaning that the benefits will be cut. And if you look at how much it can't pay for out of revenue now, we are talking about a cut of around 50%.
Therefore, doing nothing will result in serious reductions in medicare benefits for everyone. As more people become eligible and also claim benefits, the benefits will be reduced even more. So much for keeping the promise. Look at it this way: The government has $100. It has to pass out the benefits equally to everyone who shows up. If 10 people show up, they get 10%. If 100 people show up they each get 1%. Regardless how many people are eligible for the benefits, once the reserves run out, the program can only pay out as much as it brings in. And that is only about 50% of what it pays out now.
Here are the options:
Do nothing, which will cut benefits by 50% for everyone including people in the program and even more for people entering the program in the future.
Change the program so that current beneficiaries can continue to rely on the program - because they do not have any alternatives. They don't, there just isn't medical insurance for retired people over 60. But the more benefits you give people now, the less you have available later. Who is in a better position to adjust their retirement plans around these realities, people retired now or people retiring in 10 years?
Stop the program. I don't think you can cancel it for people who are already using it. And even if you cancel it for future beneficiaries, you still need to tax them in order to cover the current costs.
Take the revenue and give it to beneficiaries so they can get their own program (insurance, HMO, PPO) hopefully from an exchange of some sort. People will have to pay the difference, but they are going to have to pay the difference in costs anyway. At least if they have to budget for premiums, that is more predictable. You would know that you have to budget $500 a month for your medical care, instead of guessing where between $10 and $1 million you will have to pay any given month.
Some combination.
The law says the President must propose something besides do nothing and congress must act on that recommendation with some haste.
Here is the trustee's report. Read it and weep.
Sure people have been paying into this program all their working lives. You paid for a benefit that isn't going to be there. Sorry about that. Sure, it isn't their fault at least individually. If blissful ignorance is a valid excuse, neither is anyone at fault for Bernie Maddolf. But as a nation, we are responsible for our debts and this just happens to be a really really big one. We could have addressed the issue years ago. No, the (un)affordable health care act doesn't offer any help or relief. All it does is take $500 billion out of the program every year and give it to other people for their healthcare. And then they call it a savings. Yeah, right.
All I can say is cowboy up and deal with it. Whining about how much we paid, and how awful it is to get screwed is just wasting oxygen.
Friday, May 6, 2011
Gross domestic Product or gross domestic Spending?
There a few other interesting items this week and I hope I can get this all captured.
First, this is an interesting analysis of our economy over the last 13 years. As the author points out, we tend to think that the nineties were good and then 2001 and then we got good again, then 2008. Starting with the premise that GPD is actually a measure of spending more than making, and pointing out that real GDP growth has been at a lame 2.2% since 1998, whereas public and private debt has risen by over 3 times that rate. Meaning that the illusionary GDP growth above 2.2 percent is just us spending borrowed money. And Rob Arnott of Research Associates of California states: "GDP that stems from new debt — mainly deficit spending — is phony: it is debt-financed consumption, not prosperity," Take the debt part out and our prosperity is nearly unchanged from 1998.
GDP is our estimator of wealth. In other words, we produce more, we exchange more, therefore we make more and we increase our assets. This faux wealth was spent, not invested. Had we successfully invested it, there would be better returns than 2.2%
This like is borrowing the assets in your retirement account and then expecting the money to be in there later when you retire. Not! If you have $100,000 in your 401K but you borrow $350,000 and go buy stuff, your 401K isn't worth more because of that big IOU to yourself. The money in your pocket isn't earning anything. Spending it isn't earning anything, either. Instead, when you square up accounts, you are in the hole, massively. The $350,000 you borrowed wasn't working for you and neither was any return on that investment likewise increasing your wealth. And the amount your $100,000 earned you isn't going to make the monthly payments, let alone pay it off.
You can't unring the bell and you can't unspend the buck. And if the last 13 years are any indication, we can't grow out of this, either. Instead, we need to turn our attention to how we build real wealth. Not how we transfer it from high income earners to the government, or from Exxon to the government. Because really, after this payment comes due (the space between the blue line and the red line below), there isn't enough to go around anymore. Thoughts on how to do that later.
Ack! forgot the reference: CNN
First, this is an interesting analysis of our economy over the last 13 years. As the author points out, we tend to think that the nineties were good and then 2001 and then we got good again, then 2008. Starting with the premise that GPD is actually a measure of spending more than making, and pointing out that real GDP growth has been at a lame 2.2% since 1998, whereas public and private debt has risen by over 3 times that rate. Meaning that the illusionary GDP growth above 2.2 percent is just us spending borrowed money. And Rob Arnott of Research Associates of California states: "GDP that stems from new debt — mainly deficit spending — is phony: it is debt-financed consumption, not prosperity," Take the debt part out and our prosperity is nearly unchanged from 1998.
GDP is our estimator of wealth. In other words, we produce more, we exchange more, therefore we make more and we increase our assets. This faux wealth was spent, not invested. Had we successfully invested it, there would be better returns than 2.2%
This like is borrowing the assets in your retirement account and then expecting the money to be in there later when you retire. Not! If you have $100,000 in your 401K but you borrow $350,000 and go buy stuff, your 401K isn't worth more because of that big IOU to yourself. The money in your pocket isn't earning anything. Spending it isn't earning anything, either. Instead, when you square up accounts, you are in the hole, massively. The $350,000 you borrowed wasn't working for you and neither was any return on that investment likewise increasing your wealth. And the amount your $100,000 earned you isn't going to make the monthly payments, let alone pay it off.
You can't unring the bell and you can't unspend the buck. And if the last 13 years are any indication, we can't grow out of this, either. Instead, we need to turn our attention to how we build real wealth. Not how we transfer it from high income earners to the government, or from Exxon to the government. Because really, after this payment comes due (the space between the blue line and the red line below), there isn't enough to go around anymore. Thoughts on how to do that later.
Ack! forgot the reference: CNN
Monday, April 25, 2011
More news to brighten April
I love spring. It's a season of renewal, awakening (allergies). But this spring is feeling more and more ominous. I expect thunderstorms in spring. I wish I wasn't expecting the coming economic storm.
So, here's part 1: The IMF has declared that the "Age of America" will end in approximately 2016, when the economy of China surpasses us.
This assessment is based on "purchasing power parities," not exchange rates (which as we can see, are gross indicators affected by numerous factors, speculation not being the least). This actually compares what people can earn and spend. China has a prospering middle class, while the US has a dwindling one - and not because our population is getting richer. The age of Chinese hegemony will be quite different. One reason not cited in the source article is this contrast. Our national wealth is tied up in raw resources (property and the rights to exploit them), multinational corporations (GE) and a few very wealthy individuals who have "capitalized" on the world market changes of the last 40 years or so. Chinese wealth is in their manufacturing capabilities, equity markets to an extent and mostly in their sovereign funds. Meaning China itself can pretty much buy whatever it wants to accomplish whatever purposes it wants. And it has the capacity to make and sell things the world needs to maintain this path.
Source: Marketwatch
The second item of bad news is that China looks like it will be "diversifying" about $2 trillion in sovereign wealth it currently has wrapped up in US treasuries. That is a whopping 2/3 of their dollar reserves which they propose to use to invest in their own industries and markets, strategic resources (to feed those), and (other) foreign investments. Well, duh, why would they want to keep holding those $turkeys? It's not like they are earning much interest.
Source: Xinhuanet but this news has been on any number of sources during 2011.
No, it probably won't happen next month or even be completed this year. But if China decides to just quit adding dollars to the reserve (+$197 billion in Q1 2011), we will need to find other buyers and that means we will need to pay more interest. And there you have the wicked combination of rising interest and rising inflation (leading to rising interest and more inflation).
Which brings me back to the weak dollar. According to this article on CNBC. "If things were to somehow go into freefall (see below) or there were disorderly markets (see above), or if it is associated with a rise in interest rates (necessitated by above), there could be some concerns there," said Josh Feinman, chief global economist at Deutsche Bank Advisors. "But that's not happening at all. Rates in the US are still very, very low. At the margin, (a weak dollar) is a slight easing in financial conditions." Meanwhile, "Panic dollar selling is setting in," according to Dennis Gartman, a hedge fund manager and author of "The Gartman Letter."
How low can it go? Well if a 2/3 divestiture of dollar reserves by China and no market for US debt because of the free-falling dollar, and the kinds of inflation and interest we have not seen in decades is not cause for concern, I don't know what is. With just exactly what are we going to grow this economy back into some sort of stability, let alone hegemony? Selling off our assets is about all we have left.
So, here's part 1: The IMF has declared that the "Age of America" will end in approximately 2016, when the economy of China surpasses us.
This assessment is based on "purchasing power parities," not exchange rates (which as we can see, are gross indicators affected by numerous factors, speculation not being the least). This actually compares what people can earn and spend. China has a prospering middle class, while the US has a dwindling one - and not because our population is getting richer. The age of Chinese hegemony will be quite different. One reason not cited in the source article is this contrast. Our national wealth is tied up in raw resources (property and the rights to exploit them), multinational corporations (GE) and a few very wealthy individuals who have "capitalized" on the world market changes of the last 40 years or so. Chinese wealth is in their manufacturing capabilities, equity markets to an extent and mostly in their sovereign funds. Meaning China itself can pretty much buy whatever it wants to accomplish whatever purposes it wants. And it has the capacity to make and sell things the world needs to maintain this path.
Source: Marketwatch
The second item of bad news is that China looks like it will be "diversifying" about $2 trillion in sovereign wealth it currently has wrapped up in US treasuries. That is a whopping 2/3 of their dollar reserves which they propose to use to invest in their own industries and markets, strategic resources (to feed those), and (other) foreign investments. Well, duh, why would they want to keep holding those $turkeys? It's not like they are earning much interest.
Source: Xinhuanet but this news has been on any number of sources during 2011.
No, it probably won't happen next month or even be completed this year. But if China decides to just quit adding dollars to the reserve (+$197 billion in Q1 2011), we will need to find other buyers and that means we will need to pay more interest. And there you have the wicked combination of rising interest and rising inflation (leading to rising interest and more inflation).
Which brings me back to the weak dollar. According to this article on CNBC. "If things were to somehow go into freefall (see below) or there were disorderly markets (see above), or if it is associated with a rise in interest rates (necessitated by above), there could be some concerns there," said Josh Feinman, chief global economist at Deutsche Bank Advisors. "But that's not happening at all. Rates in the US are still very, very low. At the margin, (a weak dollar) is a slight easing in financial conditions." Meanwhile, "Panic dollar selling is setting in," according to Dennis Gartman, a hedge fund manager and author of "The Gartman Letter."
How low can it go? Well if a 2/3 divestiture of dollar reserves by China and no market for US debt because of the free-falling dollar, and the kinds of inflation and interest we have not seen in decades is not cause for concern, I don't know what is. With just exactly what are we going to grow this economy back into some sort of stability, let alone hegemony? Selling off our assets is about all we have left.
Friday, April 22, 2011
Energy as a factor in recession
I offer this interesting chart to back up my assertion that the last crash and therefore the next crash are driven by the cost of energy.
Perhaps historically, the price of food contributed. Today, the price of food is inexorably connected to the price of energy. Beyond getting food to market, agribusiness relies heavily on energy for current productivity levels. Energy is the force magnifier. The difference between an ox-driven plow and John Deer-driven plow - the power of the internal combustion engine. They both do the same thing. Food prices have increased 6.5% since January, which if you do the math, is over 25% a year.
So why is the price of gas going up? According to a SME on C-SPAN (sorry, don't have that reference it was morning edition either Monday or Tuesday), American refineries (or I should say refineries located in the U.S.) purchase oil on the spot market, not the futures market, so WTF.
April is the month that refineries change from the winter formula to the boutique summer formulas (driven by state regulation). So, refining capacity is down and the supply of gasoline is broken up into smaller "buckets." None-the-less, sooner or later the spot market catches up with futures (like in the inevitable future). Therefore, don't expect that May or June are going to provide any relief. These are two components driving the supply and demand side of the equation.
The other component that is driving both futures and spot markets is the value of the dollar. Today (April 22) it hit a 15 month low. Last time we saw this was (no surprise) Q2 2008. If the dollar is worth less, then it requires more of them to buy a barrel. Doesn't matter which market.
And the value of the dollar affects the cost of other goods imported by this country. On the other hand, it makes goods that we export more affordable in those markets. Which brings more valuable currency here. From those countries that we export to. Which are..... ummmmm.... what exactly are we making anymore?
CNBC source for chart 1
FX Street source for chart 2
IC Mark source for 2008
Update: Another source to back up my analysis - Financial Times which claims we are at a 2.5 year low against the dollar index - lowest since (drum roll please) August 2008.
Perhaps historically, the price of food contributed. Today, the price of food is inexorably connected to the price of energy. Beyond getting food to market, agribusiness relies heavily on energy for current productivity levels. Energy is the force magnifier. The difference between an ox-driven plow and John Deer-driven plow - the power of the internal combustion engine. They both do the same thing. Food prices have increased 6.5% since January, which if you do the math, is over 25% a year.
So why is the price of gas going up? According to a SME on C-SPAN (sorry, don't have that reference it was morning edition either Monday or Tuesday), American refineries (or I should say refineries located in the U.S.) purchase oil on the spot market, not the futures market, so WTF.
April is the month that refineries change from the winter formula to the boutique summer formulas (driven by state regulation). So, refining capacity is down and the supply of gasoline is broken up into smaller "buckets." None-the-less, sooner or later the spot market catches up with futures (like in the inevitable future). Therefore, don't expect that May or June are going to provide any relief. These are two components driving the supply and demand side of the equation.
The other component that is driving both futures and spot markets is the value of the dollar. Today (April 22) it hit a 15 month low. Last time we saw this was (no surprise) Q2 2008. If the dollar is worth less, then it requires more of them to buy a barrel. Doesn't matter which market.
And the value of the dollar affects the cost of other goods imported by this country. On the other hand, it makes goods that we export more affordable in those markets. Which brings more valuable currency here. From those countries that we export to. Which are..... ummmmm.... what exactly are we making anymore?
CNBC source for chart 1
FX Street source for chart 2
IC Mark source for 2008
Update: Another source to back up my analysis - Financial Times which claims we are at a 2.5 year low against the dollar index - lowest since (drum roll please) August 2008.
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