I was reading comments on an application called stocktwits yesterday. The discussion concerned a specific investment and one person questioned how buying that investment helped the US Economy or was patriotic. The response was that the US Economy and patriotism wasn't their concern and that the Government should take care of those things.
In general, investment decisions normally have very little to do with Patriotism but you do have to wonder if there is any limit to greed. Yesterday Bernie Madoff got sentenced to 150 years in jail because he was greedy and proud. I really do think that he lost control of his Ponzi scheme at some point and it escalated beyond his control. He was too proud to admit that his greed was ruining hundreds of people and continued up until the last minute bilking unsuspecting investors out of their money.
So, consider a situation where a lot of money could be made but it would decimate the economy and cause tremendous hardship to millions of people? Is the fact that one or a small number of investors or speculators could get rich offset any obligation they have to their fellow citizens? I can pretty much guarantee that most active investors would feel that they should grasp the opportunity. Certainly to pass on this opportunity would only work if everyone also passed on it, otherwise you wouldn't make the money and end up as one of the losers.
There is some speculation that when Lehman went bankrupt and hedge funds and active investors sold all the bank stock they had and shorted all the bank stock they didn't have it precipitated the collapse in the stock market that wiped out the retirement funds of millions. There is some current controversy over whether the uptick rule should be re-instated (requires that a short sale must be made after an uptick in price). It certainly would have crimped a lot of the short selling, and it may have provided the retail investor time to adjust. Now, many of the short sales weren't printed because their were no buyers and the price simply plummeted. As usual the most money was made by the quickest.
Now, the collapse in the economy was a national and world disaster. We are still feeling the consequences and I wouldn't suggest that anyone should have been buying bank stocks in that time frame since it wouldn't have done any good. However, is there any limit?
In reading posts on financial networks, there are a group of posters who really seem to want the economy to collapse. They probably see that a lot more money can be made in a sudden collapse than in a slow recovery. Of course the desire for the economy to collapse isn't going to have any impact on what it actually does, but you wonder about those who wish for millions to suffer so they can benefit. Of course they argue that if they own property, or invest in the economy, they should sell everything and save what they can because Armageddon is coming.
There is a difference between preparing for Armageddon and trying to make it happen.
Tuesday, June 30, 2009
Monday, June 29, 2009
Recovery formula
There are two things that need to happen for a real recovery to take place in the US Economy. The first requires that housing prices stabilize and start to increase and the second is that we need to create jobs.
The current stimulus efforts are directed at symptoms and not root causes. Providing people on Social Security a $300 stimulus check adds up to a lot of money in the aggregate, but not very much to each individual. What are they going to spend it on? First the check went into their direct deposits. Second, they live on a monthly budget and the extra $300 or $600 for a couple is probably not going to inspire them to run out and buy a new car and the odds are they aren't that into smart phones. Since the money wasn't enough to do much for them, it simply stayed in the bank to cover potential increases in health costs, taxes and/or any number of rainy day possibilities. The fact that economists were surprised, if they were, that the money was reflected as higher savings vs higher spending for the most part is what surprises me.
Also, instead of focusing on what should be and I believe will be our new growth industry in renewable energy, money is being given to protect a relatively small number of jobs in politically significant but economically neutral legacy industries. We are not going to see significant new job growth in the auto related industries. We may see some, but new plants will make better use of robotics and there is going to be fewer cars sold as Americans will be thriftier in the near term, keeping old cars longer. If we were to invest the same amount of money in either converting coal to oil, increasing wind and solar, increasing use of natural gas and increasing the use of ethanol, it would create new jobs, improve spending and reduce our balance of trade and dependence of foreign oil. This is a cumulative impact since every equivalent barrel of US energy we use means we need one less imported. Further it would start to position the US towards the future. We need to get to a fully carbon neutral renewable energy future and we need to start getting there now, but smartly.
The current bill that wants to use CAP and TRADE is a heavily compromised attempt to move in the right direction but is probably doomed. It is hoped that the bill will lead to increased jobs but we can get to increased jobs simply by providing funding to private industry to build renewable or at least domestic energy infrastructure.
Improvement in the real estate markets has already started. TARP money should be used to buy distressed properties. Valuations for these properties should be close to Market but having a guaranteed buyer would stabilize those prices. The houses should then be returned to the marketplace at a rate that doesn't cause a further collapse in values. I believe that speculators would be found to buy these houses with the hope of increases. I also believe this was the original intent of the Troubled Asset Relief Program. Yes this interferes with the market, but we have had a tremendous economic crisis that requires Government intervention. I think the cost of this type of TARP program may actually turn out to be much less than anticipated as the assets will start to increase in value. However, getting them revalued to appropriate levels and back into the marketplace with stable mortgages returns them to the tax rolls.
The current stimulus efforts are directed at symptoms and not root causes. Providing people on Social Security a $300 stimulus check adds up to a lot of money in the aggregate, but not very much to each individual. What are they going to spend it on? First the check went into their direct deposits. Second, they live on a monthly budget and the extra $300 or $600 for a couple is probably not going to inspire them to run out and buy a new car and the odds are they aren't that into smart phones. Since the money wasn't enough to do much for them, it simply stayed in the bank to cover potential increases in health costs, taxes and/or any number of rainy day possibilities. The fact that economists were surprised, if they were, that the money was reflected as higher savings vs higher spending for the most part is what surprises me.
Also, instead of focusing on what should be and I believe will be our new growth industry in renewable energy, money is being given to protect a relatively small number of jobs in politically significant but economically neutral legacy industries. We are not going to see significant new job growth in the auto related industries. We may see some, but new plants will make better use of robotics and there is going to be fewer cars sold as Americans will be thriftier in the near term, keeping old cars longer. If we were to invest the same amount of money in either converting coal to oil, increasing wind and solar, increasing use of natural gas and increasing the use of ethanol, it would create new jobs, improve spending and reduce our balance of trade and dependence of foreign oil. This is a cumulative impact since every equivalent barrel of US energy we use means we need one less imported. Further it would start to position the US towards the future. We need to get to a fully carbon neutral renewable energy future and we need to start getting there now, but smartly.
The current bill that wants to use CAP and TRADE is a heavily compromised attempt to move in the right direction but is probably doomed. It is hoped that the bill will lead to increased jobs but we can get to increased jobs simply by providing funding to private industry to build renewable or at least domestic energy infrastructure.
Improvement in the real estate markets has already started. TARP money should be used to buy distressed properties. Valuations for these properties should be close to Market but having a guaranteed buyer would stabilize those prices. The houses should then be returned to the marketplace at a rate that doesn't cause a further collapse in values. I believe that speculators would be found to buy these houses with the hope of increases. I also believe this was the original intent of the Troubled Asset Relief Program. Yes this interferes with the market, but we have had a tremendous economic crisis that requires Government intervention. I think the cost of this type of TARP program may actually turn out to be much less than anticipated as the assets will start to increase in value. However, getting them revalued to appropriate levels and back into the marketplace with stable mortgages returns them to the tax rolls.
Sunday, June 28, 2009
Recovery vs Rebound
We all are aware that the economy has had a massive correction in which we had tremendous asset revaluations in housing and the stock market. There are sign that the bottoms have been reached and that we are looking at the end of the recession and the start of the recovery. However, some who hear this act as if the economy was about to rebound back to its former levels. This is extremely unlikely to happen and what we should expect is fairly slow growth.
The primary reason for this is that housing values have shrunk so much. I read a number of economic papers this weekend arguing over whether housing wealth impacted consumer spending. One study said it did not, but briefly acknowledged that while wealth in housing was somewhat locked, it was possible that there was a secondary effect related to borrowing against that wealth. With all due respect to the authors of that study, no one goes out and spends their houses. Spending has been directly related to growth in apparent wealth related to either refinancing, HELOCs or trading up. This money has fueled the consumer driven economy and unless housing prices were to rebound, it is not coming back.
There is another impact, but possibly one that will settle itself down. Some of the areas heavily impacted by the housing crisis were areas in Florida and Arizona, as well as California and Nevada. Now, as far as Florida and Arizona go, there has been a long range trend where retirees sold homes in the north and purchased homes and/or condos in those areas. This has slowed down tremendously because retirement rates are down and people feel that the prices for their northern homes are too low for them to sell. However, clearly the relative value of homes in much of the North has actually increased in comparison to homes in Florida and Arizona and when this gets marketed properly, assuming there are buyers for the Northern homes, we may see a resumption of that trend (retirees fueling home buying in Florida and Arizona).
Let me return to the main point I was making. Real estate values are widely depressed, but as always it has to do with location. However, the wealth lost is simply not coming back quickly. Now, for those who didn't actually lose their homes, this may be worse than it is for those who did.
Suppose you have a house that has been finance at the 80% level in an area that has seen prices drop by about 20%. Well at this point you have no equity but you are not underwater. Even if you go slightly underwater or maintain a small amount of equity, you cannot refinance and it will probably take a rebound in prices to a level above previous ones to be able to "mine" your home for spending or retirement money. Since this is probably unlikely for a number of years, the only available spending is discretionary earnings and other forms of credit. I could develop a mathematical formula for this, but trust me, it is a lot less available for spending.
Now suppose you lost a house or never had one. You, assuming you can get credit and a down payment have the opportunity to buy the same or similar house for a lot less and start off with say 20% in equity. Even a modest increase in price may provide you with a source for home equity loans or refinancing. However, it is not going to match prior spending levels when you consider the slow increase in housing prices and those who have lost their equity positions.
So, if we have lost x amount of housing wealth (equity) and therefore have lost the spending from loans associated with that amount the only way to replace it is by restoring that wealth. Well, I can find no scenario where that is going to happen quickly.
So, our consumer driven economy has no potential to "rebound". It will start to recover meaning that having reached a level of GDP significantly lower than it was, we will see it increase slightly. This growth will require adjustments to a reduced level of economic activity until we fix the energy sector and grow our renewable energy industry.
The primary reason for this is that housing values have shrunk so much. I read a number of economic papers this weekend arguing over whether housing wealth impacted consumer spending. One study said it did not, but briefly acknowledged that while wealth in housing was somewhat locked, it was possible that there was a secondary effect related to borrowing against that wealth. With all due respect to the authors of that study, no one goes out and spends their houses. Spending has been directly related to growth in apparent wealth related to either refinancing, HELOCs or trading up. This money has fueled the consumer driven economy and unless housing prices were to rebound, it is not coming back.
There is another impact, but possibly one that will settle itself down. Some of the areas heavily impacted by the housing crisis were areas in Florida and Arizona, as well as California and Nevada. Now, as far as Florida and Arizona go, there has been a long range trend where retirees sold homes in the north and purchased homes and/or condos in those areas. This has slowed down tremendously because retirement rates are down and people feel that the prices for their northern homes are too low for them to sell. However, clearly the relative value of homes in much of the North has actually increased in comparison to homes in Florida and Arizona and when this gets marketed properly, assuming there are buyers for the Northern homes, we may see a resumption of that trend (retirees fueling home buying in Florida and Arizona).
Let me return to the main point I was making. Real estate values are widely depressed, but as always it has to do with location. However, the wealth lost is simply not coming back quickly. Now, for those who didn't actually lose their homes, this may be worse than it is for those who did.
Suppose you have a house that has been finance at the 80% level in an area that has seen prices drop by about 20%. Well at this point you have no equity but you are not underwater. Even if you go slightly underwater or maintain a small amount of equity, you cannot refinance and it will probably take a rebound in prices to a level above previous ones to be able to "mine" your home for spending or retirement money. Since this is probably unlikely for a number of years, the only available spending is discretionary earnings and other forms of credit. I could develop a mathematical formula for this, but trust me, it is a lot less available for spending.
Now suppose you lost a house or never had one. You, assuming you can get credit and a down payment have the opportunity to buy the same or similar house for a lot less and start off with say 20% in equity. Even a modest increase in price may provide you with a source for home equity loans or refinancing. However, it is not going to match prior spending levels when you consider the slow increase in housing prices and those who have lost their equity positions.
So, if we have lost x amount of housing wealth (equity) and therefore have lost the spending from loans associated with that amount the only way to replace it is by restoring that wealth. Well, I can find no scenario where that is going to happen quickly.
So, our consumer driven economy has no potential to "rebound". It will start to recover meaning that having reached a level of GDP significantly lower than it was, we will see it increase slightly. This growth will require adjustments to a reduced level of economic activity until we fix the energy sector and grow our renewable energy industry.
Saturday, June 27, 2009
Climate bill?
The House today narrowly passed the Climate Bill. This bill is basically an attempt to reduce environmental pollution by putting a cap on hot house gas emissions and taxing anyone who exceeds the limits. Ultimately any costs will be passed on the the American taxpayer although it includes some provisions designed to help lo income consumers.
There is tremendous opposition to this bill and its chances in the Senate are far from certain. The question has to be whether the cost to reduce carbon emissions is less that the cost of buying carbon credits. Effectively, if you can reduce your emissions, you get a cap credit that you can sell. Like everything else some will benefit and some won't. It also raises the question as to whether it will have a net impact of more jobs or less jobs. As constituted it seems to do a number of things that I don't think are beneficial for the economy.
First, it penalizes coal, one of our greatest resources. Now I understand that we would like to reduce hot house gas emissions and coal is potentially the worst offender, but I think the legislation should have been drafted to help reduce reliance on foreign oil to a greater extent. If you really would like a cleaner energy future, the best way to go would be to tax foreign oil and use that money to subsidize conversion of electric plants to natural gas, and using coal to produce synthetic oil. Ultimately we do need to move to renewable energy and the policies should be geared that way, but it is pretty unlikely that wind and solar will ever be at a stage where they do not need a backup generating capacity for, well, cloudy or calm days.
Second, it has a ton of concessions designed to win votes that twist the bill into a bit of a political nightmare. Some of these aren't even fully disclosed right now. All bills like this have compromises but the desire to pass this was so intense and its chances so slim that the concessions reached epic proportions.
It is a sad thing in this country that we can't achieve a meeting of the minds on what seem fairly clear and common issues. The great majority of Americans would like to reduce environmental contamination and would like to reduce reliance on foreign oil. I don't have confidence that this bill does either of those things very well and is therefore flawed from the outset. However, instead of taking the time to craft a bill that accomplishes those two objectives, with a clear additional objective of creating a renewable energy growth industry in this country, politicians tie themselves up a belief that if they don't accomplish something right now, they may never be able to.
When some of our leading environmental groups oppose the bill, you have to believe it has real problems, lets hope it fails and we rethink the approach.
There is tremendous opposition to this bill and its chances in the Senate are far from certain. The question has to be whether the cost to reduce carbon emissions is less that the cost of buying carbon credits. Effectively, if you can reduce your emissions, you get a cap credit that you can sell. Like everything else some will benefit and some won't. It also raises the question as to whether it will have a net impact of more jobs or less jobs. As constituted it seems to do a number of things that I don't think are beneficial for the economy.
First, it penalizes coal, one of our greatest resources. Now I understand that we would like to reduce hot house gas emissions and coal is potentially the worst offender, but I think the legislation should have been drafted to help reduce reliance on foreign oil to a greater extent. If you really would like a cleaner energy future, the best way to go would be to tax foreign oil and use that money to subsidize conversion of electric plants to natural gas, and using coal to produce synthetic oil. Ultimately we do need to move to renewable energy and the policies should be geared that way, but it is pretty unlikely that wind and solar will ever be at a stage where they do not need a backup generating capacity for, well, cloudy or calm days.
Second, it has a ton of concessions designed to win votes that twist the bill into a bit of a political nightmare. Some of these aren't even fully disclosed right now. All bills like this have compromises but the desire to pass this was so intense and its chances so slim that the concessions reached epic proportions.
It is a sad thing in this country that we can't achieve a meeting of the minds on what seem fairly clear and common issues. The great majority of Americans would like to reduce environmental contamination and would like to reduce reliance on foreign oil. I don't have confidence that this bill does either of those things very well and is therefore flawed from the outset. However, instead of taking the time to craft a bill that accomplishes those two objectives, with a clear additional objective of creating a renewable energy growth industry in this country, politicians tie themselves up a belief that if they don't accomplish something right now, they may never be able to.
When some of our leading environmental groups oppose the bill, you have to believe it has real problems, lets hope it fails and we rethink the approach.
Friday, June 26, 2009
Fed circus?
One of the great benefits of living in a country like the United States is the great entertainment value that political maneuvering can provide. Yesterday, we watched an oversight committee attempt to get Fed Chairman Ben Bernanke to admit to some sort of wrong doing in regard to the Bank of American takeover of Merrill Lynch.
I didn't intend to watch the whole thing, but it was so silly and amusing that I couldn't help myself, although I did leave from time to time to do some yard work. Luckily, the proceedings were so limited and redundant that I never felt I missed much.
What did we find out? Well since most of us already know that most politicians are secretly clowns, not much. Apparently they are surprised by the following.
1. People who work for Bernanke or the Fed write e-mail that express opinions.
2. People trying to negotiate high level deals use all sorts of tactics.
3. There is reason to question the competence of Bank of America business executives (and in fact most of the banking industry).
4. Just because you blurt out a stupid question doesn't mean you will get a stupid answer.
5. When all else fails ask for every document that might have ever existed about the deal.
6. If you are hoping to get any press or TV time from a silly hearing like this, make sure you don't conflict with the death of a Pop Superstar.
7. If you are going to make allegations based on old e-mails, have your staff check to see if the author has written or said anything more recently that contradicts your point.
8. The hearings may have contributed to the stock market and bond rally that were going on at the same time, so from that perspective they may have had some value.
9. Since it is generally accepted that the deal ended up being a good thing, diving into the process that led to it has little to no benefit if you can't demonstrate some law was broken.
10. Clueless people aren't even very good at 20-20 hindsight.
I didn't intend to watch the whole thing, but it was so silly and amusing that I couldn't help myself, although I did leave from time to time to do some yard work. Luckily, the proceedings were so limited and redundant that I never felt I missed much.
What did we find out? Well since most of us already know that most politicians are secretly clowns, not much. Apparently they are surprised by the following.
1. People who work for Bernanke or the Fed write e-mail that express opinions.
2. People trying to negotiate high level deals use all sorts of tactics.
3. There is reason to question the competence of Bank of America business executives (and in fact most of the banking industry).
4. Just because you blurt out a stupid question doesn't mean you will get a stupid answer.
5. When all else fails ask for every document that might have ever existed about the deal.
6. If you are hoping to get any press or TV time from a silly hearing like this, make sure you don't conflict with the death of a Pop Superstar.
7. If you are going to make allegations based on old e-mails, have your staff check to see if the author has written or said anything more recently that contradicts your point.
8. The hearings may have contributed to the stock market and bond rally that were going on at the same time, so from that perspective they may have had some value.
9. Since it is generally accepted that the deal ended up being a good thing, diving into the process that led to it has little to no benefit if you can't demonstrate some law was broken.
10. Clueless people aren't even very good at 20-20 hindsight.
Thursday, June 25, 2009
Financial Salary Bubble?
Today we are going to get a display of political outrage over something that may or may not have happened when Bernanke will get grilled and apparently accused of acting inappropriately during discussions with Bank of America over the Merrill Lynch takeover.
This really seems like a non-event, because the "outrage" over the fact that implicit or implied threats were levied to make the deal happen is clearly part of any difficult negotiation. Now, one can argue if this was the only or even the best solution to the financial crisis that was happening at the time but considering the seriousness of the situation when some were predicting financial Armageddon, strong words were probably to be expected.
Watching the republican congressman talk last night, he is trying to make the point that the Government's involvement was somehow inappropriate, since we should have let the free markets handle the crisis. How ludicrous that argument is. The reason for the crisis was the unbridled greed culture of the "free markets" and the lax regulations that allowed extremely high risk instruments to be created and traded so widely since they generated tremendous apparent profits.
It really is hard to believe that these financial professionals could have been as clueless as they now claim about the real risks of these instruments. They probably didn't really care as long as they had "big" profits and "big" bonuses in the immediate year. I doubt they expected the house of cards to come tumbling down the way it did, but really were these people all that much different than Bernie Madoff? OK, Madoff actually knew what he was doing was illegal but I bet he hoped for a financial miracle that would allow him to set things right. The people generating and peddling these credit instruments had to know they depending on asset valuations continuing up forever. Everyone was going to make more and more money because everything was going to get more and more valuable? Did they really believe that?
One of the things you see discussed on some financial shows is how they have to pay high salaries and bonuses in order to keep talent. I don't want to say that many of the people working in the financial markets aren't bright talented people. I'm just not sure they are any brighter or more talented than the people in any other profession. They may be a lot greedier, I think that has been demonstrated. However, they think they are entitled to big salaries for the same reasons professional athletes think they are, it has become the norm. The big difference is that professional athletes have demonstrable skills that most of us don't. I haven't seen that in the financial professionals. Maybe its time to burst that salary bubble?
This really seems like a non-event, because the "outrage" over the fact that implicit or implied threats were levied to make the deal happen is clearly part of any difficult negotiation. Now, one can argue if this was the only or even the best solution to the financial crisis that was happening at the time but considering the seriousness of the situation when some were predicting financial Armageddon, strong words were probably to be expected.
Watching the republican congressman talk last night, he is trying to make the point that the Government's involvement was somehow inappropriate, since we should have let the free markets handle the crisis. How ludicrous that argument is. The reason for the crisis was the unbridled greed culture of the "free markets" and the lax regulations that allowed extremely high risk instruments to be created and traded so widely since they generated tremendous apparent profits.
It really is hard to believe that these financial professionals could have been as clueless as they now claim about the real risks of these instruments. They probably didn't really care as long as they had "big" profits and "big" bonuses in the immediate year. I doubt they expected the house of cards to come tumbling down the way it did, but really were these people all that much different than Bernie Madoff? OK, Madoff actually knew what he was doing was illegal but I bet he hoped for a financial miracle that would allow him to set things right. The people generating and peddling these credit instruments had to know they depending on asset valuations continuing up forever. Everyone was going to make more and more money because everything was going to get more and more valuable? Did they really believe that?
One of the things you see discussed on some financial shows is how they have to pay high salaries and bonuses in order to keep talent. I don't want to say that many of the people working in the financial markets aren't bright talented people. I'm just not sure they are any brighter or more talented than the people in any other profession. They may be a lot greedier, I think that has been demonstrated. However, they think they are entitled to big salaries for the same reasons professional athletes think they are, it has become the norm. The big difference is that professional athletes have demonstrable skills that most of us don't. I haven't seen that in the financial professionals. Maybe its time to burst that salary bubble?
Wednesday, June 24, 2009
Trends
In order to have a trend you need a number of data points. If you only have a single data point, you don't have a trend. Now, every trend has to start somewhere and if you have reason to believe a trend is about to start, you can take a chance that the single point is the start, but that is akin to gambling.
If you look at the stock market over time, you can certainly see broad trends. However, during each of those trends there are short periods where the trend is reversed for one or more sessions. So every bull market has short periods of correction and every bear market has short rallies.
Since March we have had a clear upward trend based on expectations that a recovery will be coming. Over the last week there has been either a reversal or a correction, or is this a period where we will tread water until there is better economic data?
I believe that there are enough indications of a recovery that the market will resume its upward movement. I do think that this summer may be one where we have some upward and downward movement because of low volume and therefore somewhat exaggerated movement when it is fairly easy to have more buyers than sellers or vice versa on any given day. Also, it gives the economic data time to mature.
Only time will tell.
If you look at the stock market over time, you can certainly see broad trends. However, during each of those trends there are short periods where the trend is reversed for one or more sessions. So every bull market has short periods of correction and every bear market has short rallies.
Since March we have had a clear upward trend based on expectations that a recovery will be coming. Over the last week there has been either a reversal or a correction, or is this a period where we will tread water until there is better economic data?
I believe that there are enough indications of a recovery that the market will resume its upward movement. I do think that this summer may be one where we have some upward and downward movement because of low volume and therefore somewhat exaggerated movement when it is fairly easy to have more buyers than sellers or vice versa on any given day. Also, it gives the economic data time to mature.
Only time will tell.
Tuesday, June 23, 2009
Deflation
Two years ago if you wanted to buy a house the amount you would have paid would certainly be higher than the price you would pay today. If you wanted to put gas in your car, you would have paid as much as $2 more than today. In most retail stores, while there were items on sale, the sales were neither as broad nor as deep as they would be today. It is also likely that the salary or starting pay you could get would be higher than you could get today, however there are a lot of variables there.
So have we experienced Deflation? One of the things that is worrisome about deflation is that since the currency is worth more, debts become more expensive. Also, since prices are declining there is a disincentive to buy since there is an expectation that whatever it is you want to buy will be cheaper tomorrow.
This may sound sort of like the situation facing us today, yet you hear a lot of talk about the return of inflation because the Government is creating money. Is it really? When the bank reserve requirements increase, you are taking money off the street. If you don't replace this money somehow, you have less money, not more. So is more money being created than has disappeared?
When you consider the idea that the Government is creating money, some seem to think they just turn on the presses and print a bunch. They actually create money by borrowing with a promise to repay. The money created this way can be considered as a "dilution" of the money supply but that is only true if the amount of money in use is greater than it was before the borrowing. It should also be noted that when banks use assets to loan money at multiples of those assets, they also either create or remove money from circulation. So is the value of those assets go down and therefore less loans can be made, there is less money. In fact, as we move more and more to electronic transactions, the need for money to ever get printed diminishes.
So, if we have had trillions of assets lost because of falling valuations in housing, stocks, inventory and commodities, isn't that a whole lot of money that went out of circulation since the banks had to reduce loans and replace the lost assets used as the basis for future loans. Has the Government borrowed enough to replace all this lost money? One problem in measuring this is that the money supply measurement that would be meaningful here includes the value of the assets on the banks books. While it looks like it has increased, that depends on whether the bank assets are properly valued. Since we dropped the "mark to market' rule it is more likely these assets are valued at hopeful amounts. This is of course why the reserve requirements have been increased, and is assets recover value, the hopeful valuations may end up being correct, but it is doubtful to me that there is really more money available.
I think worrying about inflation right now is a bit premature, we should be worried about deflation.
So have we experienced Deflation? One of the things that is worrisome about deflation is that since the currency is worth more, debts become more expensive. Also, since prices are declining there is a disincentive to buy since there is an expectation that whatever it is you want to buy will be cheaper tomorrow.
This may sound sort of like the situation facing us today, yet you hear a lot of talk about the return of inflation because the Government is creating money. Is it really? When the bank reserve requirements increase, you are taking money off the street. If you don't replace this money somehow, you have less money, not more. So is more money being created than has disappeared?
When you consider the idea that the Government is creating money, some seem to think they just turn on the presses and print a bunch. They actually create money by borrowing with a promise to repay. The money created this way can be considered as a "dilution" of the money supply but that is only true if the amount of money in use is greater than it was before the borrowing. It should also be noted that when banks use assets to loan money at multiples of those assets, they also either create or remove money from circulation. So is the value of those assets go down and therefore less loans can be made, there is less money. In fact, as we move more and more to electronic transactions, the need for money to ever get printed diminishes.
So, if we have had trillions of assets lost because of falling valuations in housing, stocks, inventory and commodities, isn't that a whole lot of money that went out of circulation since the banks had to reduce loans and replace the lost assets used as the basis for future loans. Has the Government borrowed enough to replace all this lost money? One problem in measuring this is that the money supply measurement that would be meaningful here includes the value of the assets on the banks books. While it looks like it has increased, that depends on whether the bank assets are properly valued. Since we dropped the "mark to market' rule it is more likely these assets are valued at hopeful amounts. This is of course why the reserve requirements have been increased, and is assets recover value, the hopeful valuations may end up being correct, but it is doubtful to me that there is really more money available.
I think worrying about inflation right now is a bit premature, we should be worried about deflation.
Monday, June 22, 2009
Economy vs Stock Market
One of the things I see over and over again is confusion about the relationship between the stock market and the economy. The stock market is an instrument that attempts to predict what is happening with individual companies. We have indices that lump groups of these companies under a single umbrella and these indices to some extent reflect the broader economy, but investing in the stock market is not the same thing as investing in the economy per se.
There is general consensus for example that unemployment is going to rise further before the number of jobs created overtakes the number of jobs being lost. This seems like a negative economic indicator and it certainly is. However, if companies cut costs and increase profitability while shedding jobs, they may very well become an excellent investment even as total current revenue falls. Being more productive can only lead to significant profit growth when revenue does increase.
So any individual company may become a good investment despite poor economic conditions. In fact the one thing that is true of economic corrections is that inefficient and marginal companies are forced out of business.
Now, clearly, there is a relationship between the economy and the stock market, however it is an indirect one and if you wait for the economy to be clearly better you may very well have missed the best investment opportunity.
Back in March the stock market reflected the possibility that this country was headed to another great depression. As that fear eased, it has moved to a more reasonable level and is still trying to determine the timing of the recovery. However, individual companies will reflect the prospects facing them. Yes, there are broad market trends when most stocks go up or go down, but if you look for those stocks that will benefit from the recovery earlier, or that can benefit during the current economic slowdown, you will outperform the broad market.
There is general consensus for example that unemployment is going to rise further before the number of jobs created overtakes the number of jobs being lost. This seems like a negative economic indicator and it certainly is. However, if companies cut costs and increase profitability while shedding jobs, they may very well become an excellent investment even as total current revenue falls. Being more productive can only lead to significant profit growth when revenue does increase.
So any individual company may become a good investment despite poor economic conditions. In fact the one thing that is true of economic corrections is that inefficient and marginal companies are forced out of business.
Now, clearly, there is a relationship between the economy and the stock market, however it is an indirect one and if you wait for the economy to be clearly better you may very well have missed the best investment opportunity.
Back in March the stock market reflected the possibility that this country was headed to another great depression. As that fear eased, it has moved to a more reasonable level and is still trying to determine the timing of the recovery. However, individual companies will reflect the prospects facing them. Yes, there are broad market trends when most stocks go up or go down, but if you look for those stocks that will benefit from the recovery earlier, or that can benefit during the current economic slowdown, you will outperform the broad market.
Sunday, June 21, 2009
Stimulating growth
Right now the economy is faced with a significant conflict. In general demand for most products is down, a deflationary factor while the amount of money in circulation is greatly increased, an inflationary factor.
If you focus on the demand aspect you may very well predict negative growth, deflation and massive unemployment.
If you focus on the money supply you may very well predict high inflation.
Of course you can't have both deflation and inflation, so should we average the two and come out just about right? Would seem unlikely but it does seem that the weak economy will resist the inflationary pressures for a while.
However, the only real way to eventually avoid economic collapse is to grow the economy. There are, and have been a number of challenges facing the economy that have been developing. Perhaps the most serious is the aging of the population. If we assume that the baby boomer generation is going to start, or has already started, to leave the workforce in great numbers, then the demographics tell us that less and less workers will have to support more and more retirees.
This demographic to a large extent drives the medicare finance problem. it also drives the social security problem. These systems were designed as pay-as-you-go systems meaning that the amount collected each year pays for the benefits of the folks collecting benefits. Now if you have more and more people collecting benefits and less people paying into the system, it is pretty obvious that the burden will at some point become untenable.
Of course the recent loss in value of baby boomer assets in real estate and many retirement accounts may slow the number of retirements, and the added stress may reduce the numbers somewhat, but it isn't a long term solution.
The best solution to this problem would be to somehow create massive growth followed by a increase in jobs. Additional jobs would be filled either by these very boomers, immigrants or by exporting the jobs. Recently the last of these options has been the more common, and that creates the big issue related to taxation. We rely on income and corporate taxes in this country and if we export jobs, we lose the income tax portion. Now it is unlikely we are going to start imposing income taxes on workers in other countries, so if we are going to continue this practice we really need to consider switching from an income tax to a consumption tax. Then every product sold in this country would pick up a fair share of the tax burden, no matter where the workers were.
Now without going off on a tax discussion, where is this growth going to come from. Generally, a single growth industry is enough to drive the economy if it is indeed robust enough. As that industry creates jobs, those people increase demand in other areas, driving an upward spiral of growth.
It would seem that a massive effort to switch to renewable resources in this country has the most potential. It would create jobs in this country, inspire new technology and construction and improve the balance of payments.
If you look at the recent economic crisis, it had a lot of fundamental reasons, massive debt and inflated asset values, but perhaps the most critical and the one that actually drove the start of the collapse was our dependence on foreign energy and the massive balance of trade issue that creates. You never really can solve a problem if you don't address the root cause and I firmly believe the root cause is fairly obvious and its time we solved it.
If you focus on the demand aspect you may very well predict negative growth, deflation and massive unemployment.
If you focus on the money supply you may very well predict high inflation.
Of course you can't have both deflation and inflation, so should we average the two and come out just about right? Would seem unlikely but it does seem that the weak economy will resist the inflationary pressures for a while.
However, the only real way to eventually avoid economic collapse is to grow the economy. There are, and have been a number of challenges facing the economy that have been developing. Perhaps the most serious is the aging of the population. If we assume that the baby boomer generation is going to start, or has already started, to leave the workforce in great numbers, then the demographics tell us that less and less workers will have to support more and more retirees.
This demographic to a large extent drives the medicare finance problem. it also drives the social security problem. These systems were designed as pay-as-you-go systems meaning that the amount collected each year pays for the benefits of the folks collecting benefits. Now if you have more and more people collecting benefits and less people paying into the system, it is pretty obvious that the burden will at some point become untenable.
Of course the recent loss in value of baby boomer assets in real estate and many retirement accounts may slow the number of retirements, and the added stress may reduce the numbers somewhat, but it isn't a long term solution.
The best solution to this problem would be to somehow create massive growth followed by a increase in jobs. Additional jobs would be filled either by these very boomers, immigrants or by exporting the jobs. Recently the last of these options has been the more common, and that creates the big issue related to taxation. We rely on income and corporate taxes in this country and if we export jobs, we lose the income tax portion. Now it is unlikely we are going to start imposing income taxes on workers in other countries, so if we are going to continue this practice we really need to consider switching from an income tax to a consumption tax. Then every product sold in this country would pick up a fair share of the tax burden, no matter where the workers were.
Now without going off on a tax discussion, where is this growth going to come from. Generally, a single growth industry is enough to drive the economy if it is indeed robust enough. As that industry creates jobs, those people increase demand in other areas, driving an upward spiral of growth.
It would seem that a massive effort to switch to renewable resources in this country has the most potential. It would create jobs in this country, inspire new technology and construction and improve the balance of payments.
If you look at the recent economic crisis, it had a lot of fundamental reasons, massive debt and inflated asset values, but perhaps the most critical and the one that actually drove the start of the collapse was our dependence on foreign energy and the massive balance of trade issue that creates. You never really can solve a problem if you don't address the root cause and I firmly believe the root cause is fairly obvious and its time we solved it.
Saturday, June 20, 2009
Bear rally, Bull correction?
If you look at the S&P 500 over the last 50 years, there is a interesting comparison between the period starting in 1969 to the period starting in 2000. In 1969 we reached a record high of 108.37 only to collapse to 72.25 in 1970-1971. We then achieved a new record high in 1973 of 119.87 only to colapse even lower to 62.34. This second drop erased about 10 years worth of stock market gains. The S&P then climbed to around 100, around a 66% gain where it stagnated for about 6 years.
In 2000 we reached a record high of 1527.46 only to fall to the 800 level by 2002. We then climbed to another record high of 1560 in 2007 only to fall to about 670 in 2009. We are now climbing up from that number.
So, in the first period we had record high followed by a 33% drop followed by a record high and then a 47% decline in the early 1970s with a rally that regained 2/3rds of the drop before stalling. In the recent period weh had a 47 % decline followed by a 57% decline in the 2000-2009 time frame. We are now up about 40% from the lows so it may auger that we still have some upside on this rally.
In the 1970s the period following the final rally to near 100 was when we had stagflation, a slow growth economy but because the money supply had been increased so much significant inflation.
So, what does this say about the current rally? It of course doesn't necessarily mean anything, but if you like charts and think they tend to repeat themselves, it may mean the current rally still has a ways to go before it stalls. If you were to use it to predict, it would indicate we may end up at about 1200 on the S&P followed by years pivoting around that level.
One thing that seems fairly certain is that wint all the extra stimulus money, the market won't retest the lows, but growth may be slow, real estate prices may stay low but we may still have some significant inflation as prices strive to achieve equilibrium with the money supply. In that scenario, while we will have price increases as raw materials increase, the buying power of the consumer will not grow as fast.
The prior period of stagflation continued until inflation caught prices up to the money supply. Since growth remained slow, the Government continued with some stimulus efforts but growth simply did not get robust until we had re-established an equilibrium between the money supply and prices. Once this happened we had two of the greatest bull rallies ever.
So, would the similarities indicate that we are going to repeat the second half of the 70s? I would hesitate to predict that, but we do seem to have some eerie similarities.
In 2000 we reached a record high of 1527.46 only to fall to the 800 level by 2002. We then climbed to another record high of 1560 in 2007 only to fall to about 670 in 2009. We are now climbing up from that number.
So, in the first period we had record high followed by a 33% drop followed by a record high and then a 47% decline in the early 1970s with a rally that regained 2/3rds of the drop before stalling. In the recent period weh had a 47 % decline followed by a 57% decline in the 2000-2009 time frame. We are now up about 40% from the lows so it may auger that we still have some upside on this rally.
In the 1970s the period following the final rally to near 100 was when we had stagflation, a slow growth economy but because the money supply had been increased so much significant inflation.
So, what does this say about the current rally? It of course doesn't necessarily mean anything, but if you like charts and think they tend to repeat themselves, it may mean the current rally still has a ways to go before it stalls. If you were to use it to predict, it would indicate we may end up at about 1200 on the S&P followed by years pivoting around that level.
One thing that seems fairly certain is that wint all the extra stimulus money, the market won't retest the lows, but growth may be slow, real estate prices may stay low but we may still have some significant inflation as prices strive to achieve equilibrium with the money supply. In that scenario, while we will have price increases as raw materials increase, the buying power of the consumer will not grow as fast.
The prior period of stagflation continued until inflation caught prices up to the money supply. Since growth remained slow, the Government continued with some stimulus efforts but growth simply did not get robust until we had re-established an equilibrium between the money supply and prices. Once this happened we had two of the greatest bull rallies ever.
So, would the similarities indicate that we are going to repeat the second half of the 70s? I would hesitate to predict that, but we do seem to have some eerie similarities.
Friday, June 19, 2009
Recession limits
If you think about the economy, we seem to have gotten past the panic level. There was a time when there was significant uncertainty related to whether the economy was going to enter a new depression and we would recreate the 1930s. Most people do not think this is true anymore, although of course there are those who believe the recent improvements are not real and that we should expect another downturn.
It should be noted that while our unemployment rate has grown, there are factors in the current economy that simply did not exist in the 1930s. First, the society back then was much more dependant on immediate earnings. There were no unemployment benefits or social security and even private pensions were relatively rare. So when we see an increase in unemployment, the buying power of that individual does not go to zero, or only what they have saved, but is going to be supplemented by unemployment insurance as well as other forms of assistance available.
Our population has been aging and living longer. Yes, many of the retired individuals lost income due to reduction in asset valuation, but those living on traditional pensions, annuities or just making do with social security had no real reduction. This is nothing like the situation that existed in the 1930s.
In the 1930s, there was effectively no public safety net. If the breadwinner lost their job, well that was the end of bread for awhile. Millions of people were forced to eke out survival by any means possible, relying to some extent on charity but certainly not collecting unemployment, disability or other public assistance.
Yes, there was a tremendous loss of wealth in this country as real estate returned to levels from the early part of this century, but even those people who lost their homes and their jobs, they are not as bad off as they would have been during the depression.
This is simply no longer an all or nothing economy.
It should be noted that while our unemployment rate has grown, there are factors in the current economy that simply did not exist in the 1930s. First, the society back then was much more dependant on immediate earnings. There were no unemployment benefits or social security and even private pensions were relatively rare. So when we see an increase in unemployment, the buying power of that individual does not go to zero, or only what they have saved, but is going to be supplemented by unemployment insurance as well as other forms of assistance available.
Our population has been aging and living longer. Yes, many of the retired individuals lost income due to reduction in asset valuation, but those living on traditional pensions, annuities or just making do with social security had no real reduction. This is nothing like the situation that existed in the 1930s.
In the 1930s, there was effectively no public safety net. If the breadwinner lost their job, well that was the end of bread for awhile. Millions of people were forced to eke out survival by any means possible, relying to some extent on charity but certainly not collecting unemployment, disability or other public assistance.
Yes, there was a tremendous loss of wealth in this country as real estate returned to levels from the early part of this century, but even those people who lost their homes and their jobs, they are not as bad off as they would have been during the depression.
This is simply no longer an all or nothing economy.
Thursday, June 18, 2009
Investing and speculation
It is pretty obvious that in order to undertake a venture, capital is needed. One can use one's own capital to fund the venture but since many ventures are far too expensive and/or risky for this, you can borrow capital.
Depending on the type of venture, the capital may be offered as a gift, or more commonly with a promise of repayment with some sort of reward (interest or a share in the profits). Clearly in either case the money is normally only ventured if the risk associated with the venture is by comparison less than the potential reward.
Now it would clearly be impractical in most cases for the people setting up the venture to go out and ask random individuals for money, so we have set up various banks and markets for the orderly use of capital either via stocks (promising a share of the profits) and bonds (promising to pay interest).
Now it is safe to say that when you either buy stock, or a bond, there is a degree of speculation involved. However, it should be noted that the speculative issue revolves around the success or failure of a particular venture or in the case of mortgages, the ability of the mortgagee to repay.
Now, humans being quite clever, it was fairly easy to add more speculation to the process. You can buy rights to invest at a future time, call options. Obviously someone is selling you that right. You can do the same thing to guarantee a specific selling price for an investment in the future. These types of investments are called derivatives because you are no longer investing in a business venture, but speculating about how the investment instruments will do. This is a situation which effectively is equivalent to gambling.
The situations related to options is in fact a quite primitive form of derivative speculation, and one that is fairly well regulated. There are other ingenious methods of packaging investments in such a way that one can place a highly leveraged bet with really almost no real idea of the risk involved. Most folks are aware that the drop in real estate prices and subsequent financial crisis was caused to some extent by the easy credit provided to sub-prime mortgagees, but why was this credit so readily available? Because you could issue these high risk loans, backed by housing that wouldn't have been built under normal circumstances, since their wouldn't have been buyers, and then take that high risk mortgage, bundle it up with many others and sell it at a profit, giving you more money to lend.
Effectively we had a real estate pyramid scheme in which buyer/speculators were buying with the expectation that real estate would increase in value and they could sell at a profit and settle their mortgage. Of course the basic problem with all pyramid schemes is that the number of new people eventually drys up.
The fact that a certain number of gamblers lost on their bets is normally not a matter of public concern, but, because the Government had eased banking restrictions during our anti Government period, some of our largest institutions were effectively placing bets on instruments that were really riskier that a slot machine. Many banks would not have lent money directly to these high risk individuals, but they were happy to buy second or third derivative instruments that were backed by loans they wouldn't have issued.
So now the President has issued some regulatory guidelines designed to prevent this from happening in the future. It is like the police just broke up a crap game in a back alley the way these gamblers are scrambling. These regulations are going to make the banks less profitable? Didn't most of them almost go bankrupt? We need our banks and large financial organizations that are trusted by the American public and where we guarantee deposits, to act responsibly. If you believe they can do that without oversight, do I have a financial crisis for you!
Depending on the type of venture, the capital may be offered as a gift, or more commonly with a promise of repayment with some sort of reward (interest or a share in the profits). Clearly in either case the money is normally only ventured if the risk associated with the venture is by comparison less than the potential reward.
Now it would clearly be impractical in most cases for the people setting up the venture to go out and ask random individuals for money, so we have set up various banks and markets for the orderly use of capital either via stocks (promising a share of the profits) and bonds (promising to pay interest).
Now it is safe to say that when you either buy stock, or a bond, there is a degree of speculation involved. However, it should be noted that the speculative issue revolves around the success or failure of a particular venture or in the case of mortgages, the ability of the mortgagee to repay.
Now, humans being quite clever, it was fairly easy to add more speculation to the process. You can buy rights to invest at a future time, call options. Obviously someone is selling you that right. You can do the same thing to guarantee a specific selling price for an investment in the future. These types of investments are called derivatives because you are no longer investing in a business venture, but speculating about how the investment instruments will do. This is a situation which effectively is equivalent to gambling.
The situations related to options is in fact a quite primitive form of derivative speculation, and one that is fairly well regulated. There are other ingenious methods of packaging investments in such a way that one can place a highly leveraged bet with really almost no real idea of the risk involved. Most folks are aware that the drop in real estate prices and subsequent financial crisis was caused to some extent by the easy credit provided to sub-prime mortgagees, but why was this credit so readily available? Because you could issue these high risk loans, backed by housing that wouldn't have been built under normal circumstances, since their wouldn't have been buyers, and then take that high risk mortgage, bundle it up with many others and sell it at a profit, giving you more money to lend.
Effectively we had a real estate pyramid scheme in which buyer/speculators were buying with the expectation that real estate would increase in value and they could sell at a profit and settle their mortgage. Of course the basic problem with all pyramid schemes is that the number of new people eventually drys up.
The fact that a certain number of gamblers lost on their bets is normally not a matter of public concern, but, because the Government had eased banking restrictions during our anti Government period, some of our largest institutions were effectively placing bets on instruments that were really riskier that a slot machine. Many banks would not have lent money directly to these high risk individuals, but they were happy to buy second or third derivative instruments that were backed by loans they wouldn't have issued.
So now the President has issued some regulatory guidelines designed to prevent this from happening in the future. It is like the police just broke up a crap game in a back alley the way these gamblers are scrambling. These regulations are going to make the banks less profitable? Didn't most of them almost go bankrupt? We need our banks and large financial organizations that are trusted by the American public and where we guarantee deposits, to act responsibly. If you believe they can do that without oversight, do I have a financial crisis for you!
Wednesday, June 17, 2009
Government intervention
It remains a common belief among a certain number of people, especially people who managed to make a good amount of money, that Government is generally inefficient and ineffective and that anytime Government gets involved in an enterprise it is bound to make it worse.
There are examples, such as the state controlled economies of the Soviet Block that seem to support this, but like many people, they only use arguments that support their particular position.
The simple fact is that a fair number of these people like the idea that they can basically use their knowledge of the financial markets to make money even when this at times is at the cost of the average American citizen.
It wasn't the Government that ran the banks and the auto companies into the situation they now find themselves in. Further, there are any number of Government enterprises, i.e. the US Military, that do just fine.
In fact, if you look at what I would argue are the worst trends of the last 50 years in America, they were almost universally caused by a lack of Government involvement. Every one of our investment bubbles, the increased disparity in wealth, the exporting of jobs overseas, the elimination of traditional pensions, the increase in health costs, the tremendous waste of energy and rampant consumerism that has led to a society that is deeply in debt and in general overweight were all caused by private industry.
The people who argue Government is the problem will try to say that it was underlying Government policies that caused private enterprise to act this way, but this argument is contradicted by the very clear and very real removal of Government involvement in many of these areas.
Interestingly, when some of the worst offenders found themselves near bankruptcy because they as private industry, failed to act prudently and lived in a greed culture that paid ridiculous salaries and bonuses for what in many cases were fictional profits, they came to the Government hat in hand. Now, after accepting enough support to survive, the idea that the American Public, as represented by the Government may have an interest in how they do things is repugnant.
I get a kick out of the argument that if there were to be some restriction on the amounts paid to some of these individuals they would leave and pursue other interests. First, it is unlikely that there are too many other opportunities that would pay these types of salaries to what in many cases are good old boys. What is this unique talent that they bring to the table that couldn't be easily replaced? Is it the ability to manipulate financial instruments so that they can inflate values and make it seem that there are large profits when in reality it is a house of cards? Do we want to reward that skill? If we increase visibility and accountability, will the skill even be worth anything?
I say that if they want to go, good riddance, they need a wake up call anyways.
There are examples, such as the state controlled economies of the Soviet Block that seem to support this, but like many people, they only use arguments that support their particular position.
The simple fact is that a fair number of these people like the idea that they can basically use their knowledge of the financial markets to make money even when this at times is at the cost of the average American citizen.
It wasn't the Government that ran the banks and the auto companies into the situation they now find themselves in. Further, there are any number of Government enterprises, i.e. the US Military, that do just fine.
In fact, if you look at what I would argue are the worst trends of the last 50 years in America, they were almost universally caused by a lack of Government involvement. Every one of our investment bubbles, the increased disparity in wealth, the exporting of jobs overseas, the elimination of traditional pensions, the increase in health costs, the tremendous waste of energy and rampant consumerism that has led to a society that is deeply in debt and in general overweight were all caused by private industry.
The people who argue Government is the problem will try to say that it was underlying Government policies that caused private enterprise to act this way, but this argument is contradicted by the very clear and very real removal of Government involvement in many of these areas.
Interestingly, when some of the worst offenders found themselves near bankruptcy because they as private industry, failed to act prudently and lived in a greed culture that paid ridiculous salaries and bonuses for what in many cases were fictional profits, they came to the Government hat in hand. Now, after accepting enough support to survive, the idea that the American Public, as represented by the Government may have an interest in how they do things is repugnant.
I get a kick out of the argument that if there were to be some restriction on the amounts paid to some of these individuals they would leave and pursue other interests. First, it is unlikely that there are too many other opportunities that would pay these types of salaries to what in many cases are good old boys. What is this unique talent that they bring to the table that couldn't be easily replaced? Is it the ability to manipulate financial instruments so that they can inflate values and make it seem that there are large profits when in reality it is a house of cards? Do we want to reward that skill? If we increase visibility and accountability, will the skill even be worth anything?
I say that if they want to go, good riddance, they need a wake up call anyways.
Tuesday, June 16, 2009
Economic thoughts
Ultimately, the net value of all goods and services created by a country in any given year is the fundamental economic indicator. If we ignore that and focus on consumer spending a potential balance of payment problem is created. On a very fundamental basis the amount available to spend in a country consists of the wealth created that particular period, amounts saved from prior periods, and credit. Some of the wealth created may be saved reducing the total amount available.
There needs to be a balance between credit and savings in an ideal economy so that any credit extended can be repaid. However, each year the new wealth that is created increases the total available. Now, if more of the wealth created or credit is spent on products from outside the country, the amount available for the internal economy is decreased. This is obviously offset by products exported where wealth is returned to this country. However, if you have a constant negative imbalance in those numbers you will have less wealth to spend on internal products and services and by definition that amount is not being offset by exports.
So effectively each year a certain percentage of your wealth is being exported each year. This can go on for a period of time, but in a simple example, one country accumulates the wealth of another country. China is a good current example of this when you realize that they export so much more than they import that they have accumulated a ton of US Debt. You have to wonder at what point the balance of payments between China and the US will change to the point that this debt will be reduced? In order for that to happen the Chinese would have to develop a need for American goods and services that exceed the tremendous amount of manufacturing goods we currently import.
Since the wealth being exported has to be paid it has to come either out of savings or credit. The problem with credit is of course that it has to be available. At some point, if a lender doubts your ability to repay, they will stop lending you money. Now in a situation where the number of lenders and borrowers are limited this can create a different problem. If there is only one buyer of your products and that buyer can only buy if you lend them money, you have a difficult choice. If you stop lending them money, they will stop buying your product causing you into a recession. Further if you demand your money back, you may very well find that it can't be repaid and you are now holding a lot of worthless paper.
So what do you do? If there is an expectation that at some point the borrower will become more financially secure, it is probably in your best interest to continue to lend. If there is no expectation, you simply have to decide whether to endure the pain now or endure the pain later. Since the eventual pain only gets worse year after year, logically it should be addressed now. However, much like people who put off going to a dentist, many times human nature ends up postponing pain.
There is another solution which is simply to revalue the held wealth. If the wealth is measured in the US Dollar and the US Dollar loses value, the net debt becomes less. So, can the problem be solved by revaluing the dollar?
In one respect such a revaluation will eventually fix the balance of trade issue. Exports will increase in cost and exports will get cheaper. This solution has its own drawbacks. However, as the debt increases there will be inevitable dollar devaluation that will have an impact.
The current situation is simply untenable and will eventually resolve itself. How it gets resolved is the only question.
There needs to be a balance between credit and savings in an ideal economy so that any credit extended can be repaid. However, each year the new wealth that is created increases the total available. Now, if more of the wealth created or credit is spent on products from outside the country, the amount available for the internal economy is decreased. This is obviously offset by products exported where wealth is returned to this country. However, if you have a constant negative imbalance in those numbers you will have less wealth to spend on internal products and services and by definition that amount is not being offset by exports.
So effectively each year a certain percentage of your wealth is being exported each year. This can go on for a period of time, but in a simple example, one country accumulates the wealth of another country. China is a good current example of this when you realize that they export so much more than they import that they have accumulated a ton of US Debt. You have to wonder at what point the balance of payments between China and the US will change to the point that this debt will be reduced? In order for that to happen the Chinese would have to develop a need for American goods and services that exceed the tremendous amount of manufacturing goods we currently import.
Since the wealth being exported has to be paid it has to come either out of savings or credit. The problem with credit is of course that it has to be available. At some point, if a lender doubts your ability to repay, they will stop lending you money. Now in a situation where the number of lenders and borrowers are limited this can create a different problem. If there is only one buyer of your products and that buyer can only buy if you lend them money, you have a difficult choice. If you stop lending them money, they will stop buying your product causing you into a recession. Further if you demand your money back, you may very well find that it can't be repaid and you are now holding a lot of worthless paper.
So what do you do? If there is an expectation that at some point the borrower will become more financially secure, it is probably in your best interest to continue to lend. If there is no expectation, you simply have to decide whether to endure the pain now or endure the pain later. Since the eventual pain only gets worse year after year, logically it should be addressed now. However, much like people who put off going to a dentist, many times human nature ends up postponing pain.
There is another solution which is simply to revalue the held wealth. If the wealth is measured in the US Dollar and the US Dollar loses value, the net debt becomes less. So, can the problem be solved by revaluing the dollar?
In one respect such a revaluation will eventually fix the balance of trade issue. Exports will increase in cost and exports will get cheaper. This solution has its own drawbacks. However, as the debt increases there will be inevitable dollar devaluation that will have an impact.
The current situation is simply untenable and will eventually resolve itself. How it gets resolved is the only question.
Monday, June 15, 2009
State economies
This weekend I was reading a number of articles discussing the current housing situation. While we tend to discuss the housing crisis as a nationwide issue, much of the nation was impacted by the credit restrictions more than anything else. A few areas of the countries were hit either by the loss of industry (Michigan and a few other rust belt areas) or because speculation led to extreme price escalation and overbuilding (California, Florida, Nevada, Arizona).
So what about the rest of the country? Housing has in many areas become more affordable than it has been in years. Unemployment rates are also varied by region with four states having rates below 5% and more than half of the states at rates less than 8%. Eight state have unemployment over 10%, led by Michigan but including California.
These rates are higher than they were two years ago, but for most states they don't approach crisis levels. So, with fairly reasonable levels of employment and lower housing prices, one would expect housing in those states to be stabilized or stabilizing with prices starting to recover. This is exactly what the statistics indicate but because of the tremendous issues in the worst states, the nationwide numbers are not reflective of the improvement in housing.
So, depending on what State you live in, the status of the economy can be very different. This has always been true. However, it seems, when the old Rust Belt States who were losing population and industry were in trouble, while noted in the media it did not garner the same level of attention as when California and Florida saw major hits. Unfortunately, to a large extent both of those States are going to need years to get over the overbuilt housing problem they have, although even within the States, some areas will be better off.
So what about the rest of the country? Housing has in many areas become more affordable than it has been in years. Unemployment rates are also varied by region with four states having rates below 5% and more than half of the states at rates less than 8%. Eight state have unemployment over 10%, led by Michigan but including California.
These rates are higher than they were two years ago, but for most states they don't approach crisis levels. So, with fairly reasonable levels of employment and lower housing prices, one would expect housing in those states to be stabilized or stabilizing with prices starting to recover. This is exactly what the statistics indicate but because of the tremendous issues in the worst states, the nationwide numbers are not reflective of the improvement in housing.
So, depending on what State you live in, the status of the economy can be very different. This has always been true. However, it seems, when the old Rust Belt States who were losing population and industry were in trouble, while noted in the media it did not garner the same level of attention as when California and Florida saw major hits. Unfortunately, to a large extent both of those States are going to need years to get over the overbuilt housing problem they have, although even within the States, some areas will be better off.
Sunday, June 14, 2009
Health Care
Does each person have a basic entitlement to good health care or not?
The answer to that question is in effect being debated right now. I believe their can only be one answer to that question, and if we agree that everyone should get good health care, than the only question is how to provide it.
Currently a certain percentage of Americans lack health care coverage. Others who think they have it, often find out that in the event of a serious illness, the coverage is not as good as they think. There are numerous examples of people who have been lost coverage or been forced to reduce themselves to a poverty level because the health care coverage they believed they had was seriously deficient for long term illness.
I'm not sure if anyone would argue against the right to health care for all, but what they do argue against is Government involvement. This argument is effectively an argument against health care for all since it is obvious that our current system does not provide universal health care.
I see successful people argue against Government involvement, stating they have been able to get health care coverage and imply that everyone else can also. Of course if you have enough money you can, assuming that you don't have a condition that disqualifies you in the first place. It is interesting that you do see people who were in similar positions to the current arguers against Government involvement, who subsequently became victims of our health care system. Of course the experience changed their viewpoint but by then it was too late.
There is another argument for Government involvement that is in my opinion almost as persuasive as the moral one. It is a way to improve the competitiveness of American business. Currently our inefficient health care system costs everyone more than it should. If Government effectively provided a level of health insurance to everyone, it would become a tax cost, but no longer a business cost. I assume that certain companies might offer supplemental type plans to entice employees, but that would not drive benefit costs.
If we would also change from our current tax structure to one that taxed consumption, American products would not be burdened with extra cost. Everything sold in this country would be taxed equally. Using a consumption tax would have many beneficial consequences. It wouldn't result in a smaller tax burden, but it would ensure that American industry was not unduly burdened supporting our social programs.
The answer to that question is in effect being debated right now. I believe their can only be one answer to that question, and if we agree that everyone should get good health care, than the only question is how to provide it.
Currently a certain percentage of Americans lack health care coverage. Others who think they have it, often find out that in the event of a serious illness, the coverage is not as good as they think. There are numerous examples of people who have been lost coverage or been forced to reduce themselves to a poverty level because the health care coverage they believed they had was seriously deficient for long term illness.
I'm not sure if anyone would argue against the right to health care for all, but what they do argue against is Government involvement. This argument is effectively an argument against health care for all since it is obvious that our current system does not provide universal health care.
I see successful people argue against Government involvement, stating they have been able to get health care coverage and imply that everyone else can also. Of course if you have enough money you can, assuming that you don't have a condition that disqualifies you in the first place. It is interesting that you do see people who were in similar positions to the current arguers against Government involvement, who subsequently became victims of our health care system. Of course the experience changed their viewpoint but by then it was too late.
There is another argument for Government involvement that is in my opinion almost as persuasive as the moral one. It is a way to improve the competitiveness of American business. Currently our inefficient health care system costs everyone more than it should. If Government effectively provided a level of health insurance to everyone, it would become a tax cost, but no longer a business cost. I assume that certain companies might offer supplemental type plans to entice employees, but that would not drive benefit costs.
If we would also change from our current tax structure to one that taxed consumption, American products would not be burdened with extra cost. Everything sold in this country would be taxed equally. Using a consumption tax would have many beneficial consequences. It wouldn't result in a smaller tax burden, but it would ensure that American industry was not unduly burdened supporting our social programs.
Saturday, June 13, 2009
Democratic Platform Part 2
The Democratic platform envisions a fairly massive public works program. The following extract tells us the policy.
Creating New Jobs by Rebuilding American Infrastructure
A century ago, Teddy Roosevelt called together leaders from business and government to
develop a plan for the next century’s infrastructure. It falls to us to do the same. Right now, we are spending less than at any time in recent history and far less than our international competitors on this critical component of our nation’s strength. We will start a National Infrastructure Reinvestment Bank that can leverage private investment in infrastructure improvements, and create nearly two million new good jobs. We will undertake projects that maximize our safety and security and ability to compete, which we will fund as we bring the war in Iraq to a responsible close. We will modernize our power grid, which will help conservation and spur the development and distribution of clean energy. We need a national transportation policy, including high-speed rail and light rail. We can invest in our bridges, roads, and public transportation so that people have choices in how they get to work. We will ensure every American has access to highspeed broadband and we will take on special interests in order to unleash the power of the wireless spectrum.
Now, we all know the stimulus money is just about ready to kick into gear. Many people feel that if the jobs we create are Government jobs as opposed to private industry jobs, it calls into question the nature of any recovery. Clearly, if unemployed people are provided with jobs that provide decent pay and benefits, it will increase demand in the economy. The only question has to be "Is it affordable?" The paragraph discusses paying for this with money from the Iraq war. Either way, there is a formula that I used to be familiar with that talks about the leverage provided by each $1 put into circulation. The person who earns $1 pays some percentage of taxes and saves some percentage and the rest is spent, say 75%. This 75 cents gets recirculated at 75% of that amount and so forth. Depending on the amount of taxes and spending each dollar ends up representing some multiple, at my 25% reduction rate, each dollar ends up generating about $4 of spending. It doesn't really matter what the source of the initial dollar is. So by providing say the stimulus money this way it will have a significant impact on consumer spending, since it is logical that the people getting these jobs are in fairly low tax rates.
So, it does seem that the creation of "2 million good new jobs" will have a significant impact. If you consider jobs in the same way as the circulation of the money, you have a jobs multiplier impact as well.
It should be noted that the money collected as taxes in the equation, while split between the States and the Federal governments, mitigates the deficit increase to some extent.
Now the same impact is created when the money put into circulation is provided either as unemployment insurance or other forms of public assistance. However, by actually improving the infrastructure, the money further improves competitiveness and services within the country, so using it to create jobs is extremely beneficial.
Creating New Jobs by Rebuilding American Infrastructure
A century ago, Teddy Roosevelt called together leaders from business and government to
develop a plan for the next century’s infrastructure. It falls to us to do the same. Right now, we are spending less than at any time in recent history and far less than our international competitors on this critical component of our nation’s strength. We will start a National Infrastructure Reinvestment Bank that can leverage private investment in infrastructure improvements, and create nearly two million new good jobs. We will undertake projects that maximize our safety and security and ability to compete, which we will fund as we bring the war in Iraq to a responsible close. We will modernize our power grid, which will help conservation and spur the development and distribution of clean energy. We need a national transportation policy, including high-speed rail and light rail. We can invest in our bridges, roads, and public transportation so that people have choices in how they get to work. We will ensure every American has access to highspeed broadband and we will take on special interests in order to unleash the power of the wireless spectrum.
Now, we all know the stimulus money is just about ready to kick into gear. Many people feel that if the jobs we create are Government jobs as opposed to private industry jobs, it calls into question the nature of any recovery. Clearly, if unemployed people are provided with jobs that provide decent pay and benefits, it will increase demand in the economy. The only question has to be "Is it affordable?" The paragraph discusses paying for this with money from the Iraq war. Either way, there is a formula that I used to be familiar with that talks about the leverage provided by each $1 put into circulation. The person who earns $1 pays some percentage of taxes and saves some percentage and the rest is spent, say 75%. This 75 cents gets recirculated at 75% of that amount and so forth. Depending on the amount of taxes and spending each dollar ends up representing some multiple, at my 25% reduction rate, each dollar ends up generating about $4 of spending. It doesn't really matter what the source of the initial dollar is. So by providing say the stimulus money this way it will have a significant impact on consumer spending, since it is logical that the people getting these jobs are in fairly low tax rates.
So, it does seem that the creation of "2 million good new jobs" will have a significant impact. If you consider jobs in the same way as the circulation of the money, you have a jobs multiplier impact as well.
It should be noted that the money collected as taxes in the equation, while split between the States and the Federal governments, mitigates the deficit increase to some extent.
Now the same impact is created when the money put into circulation is provided either as unemployment insurance or other forms of public assistance. However, by actually improving the infrastructure, the money further improves competitiveness and services within the country, so using it to create jobs is extremely beneficial.
Friday, June 12, 2009
Democratic Platform Part 1
Last year elections confirmed Democratic Party control over both the Congress and the Presidency. One of the things about American Democracy is that many elections turn more on the personalities of the candidates than on the actual issues. However, I think it is important to re-explore the actual platform of the party we elected to see what they and the American public see as the blueprint for the future. The overall platform theme was "Renewing America's Promise and it had four sub goals, listed below.
Renewing America’s Promise
I. Renewing the American Dream
II. Renewing American Leadership
III. Renewing the American Community
IV. Renewing American Democracy
Of course each of these have sub goals but to repeat them all here would be impractical. The most common theme involves the idea that while individual accomplishment has its place, America needs to work as a community to assure the following:
We Democrats want–and we hereby pledge–a government led by Barack Obama that looks out for families in the new economy with health care, retirement security, and help, especially in bad times. Investment in our country–in energy, education, infrastructure, science. A ladder of opportunity for all. Democrats see these as the pillars of a more competitive and fair economy that will allow all Americans to take advantage of the opportunities of our new era.
The first item in the platform involved stimulating the economy. Of course much of this started during the prior administration, but it does seem to some extent that the stimulus has had some positive impact. Further, a lot of the stimulus has still not really been distributed so the full impact is going to be larger. The unanswered question concerns the state of the economy after the stimulus runs out. The economic cycle is going to have periods of growth and periods of recession. We went through a period of growth in the 1990s that morphed in the first part of this century into a series of bubbles as increased apparent wealth led to rampant speculation. If you eliminate the bubbles, there is a real level of economic activity that is sustainable and from which we can grow. The sudden contraction of the last quarter of 2008 and first quarter of 2009 was probably an overreaction to the panic. This is the normal reaction and that contraction has to be absorbed. However, we see signs that housing is starting to move and that job losses have slowed. It is going to take quite a while if we expect the traditional industries to reabsorb the current unemployed and the best hope for reduction of unemployment has to be a new growth industry. I believe this industry has to be the conversion to renewable resources in all aspects of our economy. Without a tremendous increase in that effort, I see unemployment continuing at high levels for years.
Renewing America’s Promise
I. Renewing the American Dream
II. Renewing American Leadership
III. Renewing the American Community
IV. Renewing American Democracy
Of course each of these have sub goals but to repeat them all here would be impractical. The most common theme involves the idea that while individual accomplishment has its place, America needs to work as a community to assure the following:
We Democrats want–and we hereby pledge–a government led by Barack Obama that looks out for families in the new economy with health care, retirement security, and help, especially in bad times. Investment in our country–in energy, education, infrastructure, science. A ladder of opportunity for all. Democrats see these as the pillars of a more competitive and fair economy that will allow all Americans to take advantage of the opportunities of our new era.
The first item in the platform involved stimulating the economy. Of course much of this started during the prior administration, but it does seem to some extent that the stimulus has had some positive impact. Further, a lot of the stimulus has still not really been distributed so the full impact is going to be larger. The unanswered question concerns the state of the economy after the stimulus runs out. The economic cycle is going to have periods of growth and periods of recession. We went through a period of growth in the 1990s that morphed in the first part of this century into a series of bubbles as increased apparent wealth led to rampant speculation. If you eliminate the bubbles, there is a real level of economic activity that is sustainable and from which we can grow. The sudden contraction of the last quarter of 2008 and first quarter of 2009 was probably an overreaction to the panic. This is the normal reaction and that contraction has to be absorbed. However, we see signs that housing is starting to move and that job losses have slowed. It is going to take quite a while if we expect the traditional industries to reabsorb the current unemployed and the best hope for reduction of unemployment has to be a new growth industry. I believe this industry has to be the conversion to renewable resources in all aspects of our economy. Without a tremendous increase in that effort, I see unemployment continuing at high levels for years.
Thursday, June 11, 2009
Deficit reduction
Yesterday I discussed in a somewhat rambling way my thoughts on the current economic situation. One area that is probably the most important is the overall capacity of this country to generate wealth.
We still have tremendous natural resources in this country. However there are currently two drains on the economy. The first of these is the cost of imported oil. I believe it has to be a major national priority to change from oil to renewable resources. There are also potential interim energy sources including natural gas, coal, and nuclear that can get us off oil quicker and stop the drain of resources. While there are pitfalls associated with the use of all three of these, they are no worse than those associated with imported oil and reduce our trade deficit.
The second drain is the cost of foreign adventures in Iraq and Afghanistan. It is a strange state of affairs when we need to spend billions of dollars, first to destroy a country's infrastructure and then to rebuild it. We do have some legitimate interests in those areas but so does most of the world and it is time we simply realized that unless it is truly a matter of significant and immediate danger the country simply can't afford to be spending these billions.
The government's sole purpose is to promote the greatest good for the majority of citizens. The amount of good associated with these foreign adventures is difficult to measure, because it is unlikely that any exists. Any benefit gained by the elimination of the Baathists in Iraq is probably more than offset by the increase in Iran's influence. We are propping up the regime in Afghanistan in order to keep the Taliban from regaining power. I realize the Taliban are fundamentalists who have no love for this country and allowed terrorists to operate training camps in the country. However, if the Afghans do not support the current regime enough to prevent their return, I think our engagement is simply costly and ineffective. It is time to rethink that entire strategy and find a more effective way to promote our ideals in the area. An America with a financial and economic crisis, that has come close to leading the world to the brink of economic ruin is hardly going to win many converts to democracy and capitalism. Let's get our own house in order and lead by example. We are starting to look like a colonial power with all the problems and none of the benefits.
We still have tremendous natural resources in this country. However there are currently two drains on the economy. The first of these is the cost of imported oil. I believe it has to be a major national priority to change from oil to renewable resources. There are also potential interim energy sources including natural gas, coal, and nuclear that can get us off oil quicker and stop the drain of resources. While there are pitfalls associated with the use of all three of these, they are no worse than those associated with imported oil and reduce our trade deficit.
The second drain is the cost of foreign adventures in Iraq and Afghanistan. It is a strange state of affairs when we need to spend billions of dollars, first to destroy a country's infrastructure and then to rebuild it. We do have some legitimate interests in those areas but so does most of the world and it is time we simply realized that unless it is truly a matter of significant and immediate danger the country simply can't afford to be spending these billions.
The government's sole purpose is to promote the greatest good for the majority of citizens. The amount of good associated with these foreign adventures is difficult to measure, because it is unlikely that any exists. Any benefit gained by the elimination of the Baathists in Iraq is probably more than offset by the increase in Iran's influence. We are propping up the regime in Afghanistan in order to keep the Taliban from regaining power. I realize the Taliban are fundamentalists who have no love for this country and allowed terrorists to operate training camps in the country. However, if the Afghans do not support the current regime enough to prevent their return, I think our engagement is simply costly and ineffective. It is time to rethink that entire strategy and find a more effective way to promote our ideals in the area. An America with a financial and economic crisis, that has come close to leading the world to the brink of economic ruin is hardly going to win many converts to democracy and capitalism. Let's get our own house in order and lead by example. We are starting to look like a colonial power with all the problems and none of the benefits.
Wednesday, June 10, 2009
Economic thoughts
One shouldn't forget that despite the stock market move since March, that by all measures the economy isn't out of the recession yet. There are a few signs that indicate it may emerge, weakly, in the coming quarter but while the stock market looks like a V, you can't expect the recovery to look like that.
Housing prices, demand for cars, and in general consumer spending are all going to be somewhat dampened by tighter credit. It is likely that all three will start to increase leading to some growth, but at best this growth will be slow. I would like to address some posts that talk about a shadow inventory of housing. Banks may not have put all the homes they took possession of on the market. This is actually a bullish indicator since it tells me they expect prices to increase and they think it is cheaper to maintain the house for a period of time and sell it on the rebound. Controlling one's inventory, whether it is in oil, houses or canned goods, is simply good business. I'm not aware of any requirement that every foreclosed house be dumped on the market without considering timing.
The stock market rebound that occurred after March was more likely a correction from an oversold situation,rather than the start of a rally based on economic factors. The Market's collapse over the first couple of months of this year probably pushed everything lower than it should have been and presented any number of buyers with an opportunity to get in at low prices. It is arguable whether that was the ultimate bottom, and the possibility does exist that we may see another sell off.
This idea of the Market going even lower was quite popular among those who thought we were going to recreate the great depression over the next 10 years. The difference between the great depression and this recession, is that there are areas of the world that are still growing economically. India, China and much of Asia have so much upside potential that it is unlikely that the world economy will collapse. Further, there was a major mistake made in the depression that we did not make this time. In order to try to protect jobs, onerous tariffs were enacted that in effect killed any germs of recovery since trade diminished tremendously.
It is difficult to predict how the Market is going to react but as we allow the dollar to fluctuate, keep the avenues of trade open, and protect the financial system, we probably are going to avoid panic and create the seeds of a healthy recovery.
We are starting to see companies posting profits due to great reductions in capacity and improved efficiencies, rather than increases in overall revenue. This is a very bullish indicator for the economy, although not necessarily for jobs. It is quite possible that the levels of consumer demand will not return to the levels of 2007 for quite a while. However, we can have a healthy economy at levels below that. Currently GM is gearing the company to be profitable if the demand for cars reaches 10 million. This is significantly less than the market highs, but clearly companies can be profitable at almost every level if they are geared up for them. Suppose the economy operates at levels of about 90% of bubble levels. This would be perfectly sustainable but it would mean a reduction in employment. We may need to live with higher levels of unemployment for quite a while.
Generally this should prevent any tremendous inflation, although we may very well see increases in commodity prices from the low levels they fell to. Once again, this is more of a correction than anything else.
The real question concerns whether there will some economic or political event that causes the economy to collapse. There are areas of concern, but it is hard to see any that would have the impact of the housing collapse. In fact, I would like to reiterate from an earlier post, that people who lost their homes because of onerous mortgage payments, no longer have those payments and have more disposable income. They should actually help the economy from that respect.
We have a large supply of cheaper housing than we have had in years. Yes, there was a great collapse in valuations, but we are seeing people buying these houses and buying at an affordable level with good mortgages.
There needs to be a growth industry to create jobs. I believe the conversion to renewable resources has great potential to absorb many of our unemployed. It has had false starts in the past, but let's hope this time it will actually take off.
It will be a while, but it does seem to me that we are building a basis for a sustained economic structure.
Housing prices, demand for cars, and in general consumer spending are all going to be somewhat dampened by tighter credit. It is likely that all three will start to increase leading to some growth, but at best this growth will be slow. I would like to address some posts that talk about a shadow inventory of housing. Banks may not have put all the homes they took possession of on the market. This is actually a bullish indicator since it tells me they expect prices to increase and they think it is cheaper to maintain the house for a period of time and sell it on the rebound. Controlling one's inventory, whether it is in oil, houses or canned goods, is simply good business. I'm not aware of any requirement that every foreclosed house be dumped on the market without considering timing.
The stock market rebound that occurred after March was more likely a correction from an oversold situation,rather than the start of a rally based on economic factors. The Market's collapse over the first couple of months of this year probably pushed everything lower than it should have been and presented any number of buyers with an opportunity to get in at low prices. It is arguable whether that was the ultimate bottom, and the possibility does exist that we may see another sell off.
This idea of the Market going even lower was quite popular among those who thought we were going to recreate the great depression over the next 10 years. The difference between the great depression and this recession, is that there are areas of the world that are still growing economically. India, China and much of Asia have so much upside potential that it is unlikely that the world economy will collapse. Further, there was a major mistake made in the depression that we did not make this time. In order to try to protect jobs, onerous tariffs were enacted that in effect killed any germs of recovery since trade diminished tremendously.
It is difficult to predict how the Market is going to react but as we allow the dollar to fluctuate, keep the avenues of trade open, and protect the financial system, we probably are going to avoid panic and create the seeds of a healthy recovery.
We are starting to see companies posting profits due to great reductions in capacity and improved efficiencies, rather than increases in overall revenue. This is a very bullish indicator for the economy, although not necessarily for jobs. It is quite possible that the levels of consumer demand will not return to the levels of 2007 for quite a while. However, we can have a healthy economy at levels below that. Currently GM is gearing the company to be profitable if the demand for cars reaches 10 million. This is significantly less than the market highs, but clearly companies can be profitable at almost every level if they are geared up for them. Suppose the economy operates at levels of about 90% of bubble levels. This would be perfectly sustainable but it would mean a reduction in employment. We may need to live with higher levels of unemployment for quite a while.
Generally this should prevent any tremendous inflation, although we may very well see increases in commodity prices from the low levels they fell to. Once again, this is more of a correction than anything else.
The real question concerns whether there will some economic or political event that causes the economy to collapse. There are areas of concern, but it is hard to see any that would have the impact of the housing collapse. In fact, I would like to reiterate from an earlier post, that people who lost their homes because of onerous mortgage payments, no longer have those payments and have more disposable income. They should actually help the economy from that respect.
We have a large supply of cheaper housing than we have had in years. Yes, there was a great collapse in valuations, but we are seeing people buying these houses and buying at an affordable level with good mortgages.
There needs to be a growth industry to create jobs. I believe the conversion to renewable resources has great potential to absorb many of our unemployed. It has had false starts in the past, but let's hope this time it will actually take off.
It will be a while, but it does seem to me that we are building a basis for a sustained economic structure.
Tuesday, June 9, 2009
Change?
I think most people generally have similar wants and desires in life. One saying that I believe is very true is that "all politics are local". I also believe that people for the most part are very much more pre-occupied with the events that impact them on a day-to-day basis rather than broad social and economic issues.
We live in an age when the level of information available to the average person has increase both in quantity and availability thanks to the Internet. The response to that has been that social websites such as Facebook, Myspace and others have grown exponentially. These networks allow people to connect with old and new friends, share photos, and engage in any number of on-line surveys, games, and polls, most of which impart very little knowledge (unless knowing what member of the Brady's you most resemble is important to you).
Yes, the sites also offer opportunities to join various causes but it seems pretty unlikely that we are going to solve any great social or political issue because of Facebook.
When you consider the current economic crisis, it has impacted millions of Americans. Generally, everybody is aware of it and it creates a certain general buzz. However, outside of those who have lost a job and/or gone through a foreclosure, a large number of the general public is actually fairly unimpressed.
Most people are rightfully more concerned about things that impact them on a personal basis. A stuffed up toilet constitutes a real crisis while the economy is just "one of those things". If you ask most people, they really just want someone to tell them what they need to do to help fix the problem, not the fact that the dollar may be getting weaker, or that the banks are issuing secondary stock offerings. Those are more of those things that they talk about in the papers.
These things come and go and I think many peoples views can be expressed quite succinctly, "the more things change the more they stay the same".
We live in an age when the level of information available to the average person has increase both in quantity and availability thanks to the Internet. The response to that has been that social websites such as Facebook, Myspace and others have grown exponentially. These networks allow people to connect with old and new friends, share photos, and engage in any number of on-line surveys, games, and polls, most of which impart very little knowledge (unless knowing what member of the Brady's you most resemble is important to you).
Yes, the sites also offer opportunities to join various causes but it seems pretty unlikely that we are going to solve any great social or political issue because of Facebook.
When you consider the current economic crisis, it has impacted millions of Americans. Generally, everybody is aware of it and it creates a certain general buzz. However, outside of those who have lost a job and/or gone through a foreclosure, a large number of the general public is actually fairly unimpressed.
Most people are rightfully more concerned about things that impact them on a personal basis. A stuffed up toilet constitutes a real crisis while the economy is just "one of those things". If you ask most people, they really just want someone to tell them what they need to do to help fix the problem, not the fact that the dollar may be getting weaker, or that the banks are issuing secondary stock offerings. Those are more of those things that they talk about in the papers.
These things come and go and I think many peoples views can be expressed quite succinctly, "the more things change the more they stay the same".
Monday, June 8, 2009
Steadfastness
In any plan there is a need to periodically reevaluate whether the strategy being pursued is working. Most failure is the result of giving up. If you consider success stories, almost all of them involve overcoming adversity. It is those people who when faced with adversity fail to adjust or to accept the need for change who are probably doomed to failure.
Things change and you must change with events.
Things change and you must change with events.
Sunday, June 7, 2009
Modifying mortgages
One of the issues facing a large number of homeowners today is the fact that the value of their homes have fallen to a point where they are "underwater". This means they owe more than the house is actually worth. People in this situation have two choices, continue paying because, after all it is your home, and ignore the market, or, walk away from the mortgage and let the bank foreclose while you find housing that cost you less in rental or otherwise.
Faced with the high cost of foreclosures, especially in a time when the house is, in fact worth less than the mortgage and the market is glutted with foreclosures, there have been some suggestions that banks modify these mortgages downward. There is only one benefit in this for banks, the avoidance of foreclosure. While this may be a significant benefit, the unanswered question for bankers is, what if the mortgage gets written down and a loss recognized and then the value returns to previous levels? At this point the bank would have effectively provided a gift to the homeowner, the difference in equity between the reduced valuation and the value of the initial mortgage.
One solution that may or may not have been considered would be to put the written down amount plus accrued interest into a account to be recovered upon sale of the property. For example say there is an existing $400,000 mortgage on a property currently worth $300,000. Assuming the homeowner is a reasonable credit risk, the current payments are reduced to reflect a $300,000 mortgage. The remaining $100,000 is then put into a balloon payment amount that is due when the property is transferred. It occurs to me that the risk of loss could be shared at a some ratio, so for example, if the house eventually transferred for $350,000, the bank and homeowner could both benefit (perhaps and 80-20 split) so if the house valuation increased by $20,000 the homeowners share of this would be $$4,000. This would provide some motivation to the homeowner to maintain the property and share in price appreciation.
I see a large number of potential benefits to something like this, reduction of foreclosures, more cash available to consumers, and while income to the banks is reduced, the cash stream becomes more certain and they maintain the lost valuation as an asset.
Just a thought.
Faced with the high cost of foreclosures, especially in a time when the house is, in fact worth less than the mortgage and the market is glutted with foreclosures, there have been some suggestions that banks modify these mortgages downward. There is only one benefit in this for banks, the avoidance of foreclosure. While this may be a significant benefit, the unanswered question for bankers is, what if the mortgage gets written down and a loss recognized and then the value returns to previous levels? At this point the bank would have effectively provided a gift to the homeowner, the difference in equity between the reduced valuation and the value of the initial mortgage.
One solution that may or may not have been considered would be to put the written down amount plus accrued interest into a account to be recovered upon sale of the property. For example say there is an existing $400,000 mortgage on a property currently worth $300,000. Assuming the homeowner is a reasonable credit risk, the current payments are reduced to reflect a $300,000 mortgage. The remaining $100,000 is then put into a balloon payment amount that is due when the property is transferred. It occurs to me that the risk of loss could be shared at a some ratio, so for example, if the house eventually transferred for $350,000, the bank and homeowner could both benefit (perhaps and 80-20 split) so if the house valuation increased by $20,000 the homeowners share of this would be $$4,000. This would provide some motivation to the homeowner to maintain the property and share in price appreciation.
I see a large number of potential benefits to something like this, reduction of foreclosures, more cash available to consumers, and while income to the banks is reduced, the cash stream becomes more certain and they maintain the lost valuation as an asset.
Just a thought.
Saturday, June 6, 2009
Shape of the recovery
On Friday there was a general reaction to the jobs report by most of the talking heads on television that the numbers indicated that the worst part of the recession (the decline) was over and we were either at the bottom, near the bottom, or already on the way up. In fact the most optimistic of the the analysts started talking about a V shaped recovery.
While I do believe that it is possible that the worst is over, I think that caution is appropriate. There were two major sources of wealth for Americans that were severely battered.
The first of these, but not the most important, was the stock market. This is of course a very significant source for many Americans but the majority of the Americans who participate in the market do so passively via 401ks and other retirement plans. It is a very small number of people who actively invest. It is probably fairly safe to say that many of the losses to these individuals impacted their retirement plans and many likely moved assets from the stock market into low yielding cash investment funds where they could. The upturn in the market most likely is not a major source of spending power and many of these individuals are diverting more money into savings to try to repair their retirement funds.
The second source of wealth for most Americans and this was the one that was most significant, was housing. As housing prices increased, many Americans were able to tap those funds to pay for purchases. They did this via refinancing or equity loans and bought all sorts of consumer items that effectively drove the economy. Further, knowing they had a pent up source of wealth, they felt more comfortable in using credit cards and in fact credit card companies were very comfortable if offering home owners more and more credit. This source of wealth has for the most part not recovered and is unlikely to recover any time soon. Without it, consumer spending is not going to return to prior levels. It can't, the money and credit simply don't exist.
So what does this mean for the recovery? The recovery will have to be built on a more fundamental and lower level than we had in the past. Without a surge in consumer spending, and such a surge is effectively impossible, economic activity will improve but only very slowly. People who do buy housing at the new lows will probably start to see some modest price appreciation, but the majority of American homes are still owned by the same people who owned them a few years ago. They may already be heavily mortgaged and if not, the owners have less equity in them then they did previously and are much less likely to tap that equity after seeing the recent economic meltdown. Banks are also not going to provide credit as easily as they did.
So without a surge in consumer spending, hiring will continue at modest levels. This will create market pressures that keep wage increases low and continue a drain of social services for the unemployed. To a large extent many baby boomers, who would potentially have left the labor force and lived on their investments and equity increases, will stay in the labor force and reduce opportunities for new employment.
The good news is that inflation is extremely unlikely since demand is simply not going to return to prior levels. Many of the forecasts I heard yesterday were simply ill informed at best. Discretionary income for Americans has not had a dramatic reduction. More of it has been diverted to savings but the recession and demand reduction is driven by the loss of wealth and credit, not a reduction in income. Yes, there are many unemployed, but the benefits they receive and in many cases the reduction in expenses, such as mortgage payments, leave them with nearly the same discretionary income they had previously. However, they have no source with which to pay for major items, i.e. home improvements, cars, boats, vacations, etc.
I saw an article in one of the publications I read about how young families, who had lost jobs and homes, were coping with the crisis by moving in with their parents. The article highlighted a specific family, but let's consider the impacts of this trend. The young folks would most likely want to save where possible so they could eventually buy a house again. Of course, they also need to find employment. Household expenses for a larger group do go up, but they don't go up to the levels that two households generate. So both before and after they find employment they are most likely going to spend much less than previously. Of course they will have to increase spending when they get employment but if hiring is going to be as slow as I believe it will be, this may take quite a while.
The central point I am making with the example above is that Americans will find a way to cope by reducing expenses, doubling up on housing and being more prudent. These are good changes from a long range perspective but they will not produce a rapid rebound in the economy. We should be prepared for a significant period of slow growth based on a more sustainable economy. However, the slow growth will mean that we will have more unemployment, less opportunities for new entrants and people working longer than they expected to a few years ago. At least that part may reduce some demand on our Social Security System.
While I do believe that it is possible that the worst is over, I think that caution is appropriate. There were two major sources of wealth for Americans that were severely battered.
The first of these, but not the most important, was the stock market. This is of course a very significant source for many Americans but the majority of the Americans who participate in the market do so passively via 401ks and other retirement plans. It is a very small number of people who actively invest. It is probably fairly safe to say that many of the losses to these individuals impacted their retirement plans and many likely moved assets from the stock market into low yielding cash investment funds where they could. The upturn in the market most likely is not a major source of spending power and many of these individuals are diverting more money into savings to try to repair their retirement funds.
The second source of wealth for most Americans and this was the one that was most significant, was housing. As housing prices increased, many Americans were able to tap those funds to pay for purchases. They did this via refinancing or equity loans and bought all sorts of consumer items that effectively drove the economy. Further, knowing they had a pent up source of wealth, they felt more comfortable in using credit cards and in fact credit card companies were very comfortable if offering home owners more and more credit. This source of wealth has for the most part not recovered and is unlikely to recover any time soon. Without it, consumer spending is not going to return to prior levels. It can't, the money and credit simply don't exist.
So what does this mean for the recovery? The recovery will have to be built on a more fundamental and lower level than we had in the past. Without a surge in consumer spending, and such a surge is effectively impossible, economic activity will improve but only very slowly. People who do buy housing at the new lows will probably start to see some modest price appreciation, but the majority of American homes are still owned by the same people who owned them a few years ago. They may already be heavily mortgaged and if not, the owners have less equity in them then they did previously and are much less likely to tap that equity after seeing the recent economic meltdown. Banks are also not going to provide credit as easily as they did.
So without a surge in consumer spending, hiring will continue at modest levels. This will create market pressures that keep wage increases low and continue a drain of social services for the unemployed. To a large extent many baby boomers, who would potentially have left the labor force and lived on their investments and equity increases, will stay in the labor force and reduce opportunities for new employment.
The good news is that inflation is extremely unlikely since demand is simply not going to return to prior levels. Many of the forecasts I heard yesterday were simply ill informed at best. Discretionary income for Americans has not had a dramatic reduction. More of it has been diverted to savings but the recession and demand reduction is driven by the loss of wealth and credit, not a reduction in income. Yes, there are many unemployed, but the benefits they receive and in many cases the reduction in expenses, such as mortgage payments, leave them with nearly the same discretionary income they had previously. However, they have no source with which to pay for major items, i.e. home improvements, cars, boats, vacations, etc.
I saw an article in one of the publications I read about how young families, who had lost jobs and homes, were coping with the crisis by moving in with their parents. The article highlighted a specific family, but let's consider the impacts of this trend. The young folks would most likely want to save where possible so they could eventually buy a house again. Of course, they also need to find employment. Household expenses for a larger group do go up, but they don't go up to the levels that two households generate. So both before and after they find employment they are most likely going to spend much less than previously. Of course they will have to increase spending when they get employment but if hiring is going to be as slow as I believe it will be, this may take quite a while.
The central point I am making with the example above is that Americans will find a way to cope by reducing expenses, doubling up on housing and being more prudent. These are good changes from a long range perspective but they will not produce a rapid rebound in the economy. We should be prepared for a significant period of slow growth based on a more sustainable economy. However, the slow growth will mean that we will have more unemployment, less opportunities for new entrants and people working longer than they expected to a few years ago. At least that part may reduce some demand on our Social Security System.
Friday, June 5, 2009
Potential
There comes a point when you have to consider what the potential is of this economy. If you think about potential energy in a spring, you greatly increase potential if you contract it. Once the force creating the contraction is released, the spring will, well, spring back.
On the other hand, if the spring is stretched you also build up potential energy and as long as the spring is not stretched beyond its fatigue point it will return to its normal position after oscillating. However, there is a danger that the spring can be stretch beyond its fatigue point after which it loses its potential.
So in 2007 and early 2008 the economy was stretched like a spring and the force that was stretching it was the great amount of credit and apparent real estate and stock market wealth. This force was removed and the economy contracted. The only real question is was the initial force so great that the economy has lost its ability to spring back?
Some think it has. They argue that the apparent recovery is deceptive and that the economy is not going to behave in a "normal" fashion because the financial crisis was so much greater than normal. Generally, people who make this argument argue the conditions of the last 10 years were so different from prior periods that effectively the economy was stretched beyond its "fatigue" point and the contraction is not the normal sort of contraction but more in the way of a collapse. Any minor oscillations, such as the one we are in now will ultimately fail because the economy no longer produces value. This argument generally is related to the exportation of manufacturing and the creation in this country of a service economy.
There is a fundamental element to this argument that has validity, but I believe it is overstated. After the two world wars the United States effectively entered what may aptly be considered a golden age where our prior industrial rivals were crippled and the third world was a supplier of cheap commodities. This led to a higher standard of living in this country than anywhere else in the world. This situation has changed and the great force acting on us today is the spread of wealth to the third world. The world has only so many resources and we don't have any intrinsic right to consume so much more of them per capita than anywhere else. It will equalize over time. This equalization has to result in slower or negative growth here while the rest of the world catches up. However, slower growth is still growth and it clearly is preferable to negative growth. However, this scenario does not lead to a collapse of our national economy and while we would have less potential than countries that have to grow more to catch up to us, we would still have potential.
What should be considered is what is actually the new normal? There are still significant avenues of potential growth in changing this country from overuse of non-renewable resources to renewable resources. If you really look at national fundamentals, you create wealth by extracting or creating resources or by increasing the value of those resources. Every year a certain amount of wealth is created in this country. A large amount of that wealth is used to purchase commodities with oil being the biggest drain. Of course, cheap manufactured goods and services also drain wealth to countries like China and India. Over time this will reduce the standard of living in this country because the dollar will lose value and imported goods will increase in cost until the new normal is achieved. I'm convinced that for this normal to be near the level most Americans have been used to, we need to greatly reduce our reliance on foreign oil and develop clean renewable energy sources.
Perhaps the current economic crisis is a recognition that the wealth accumulated in this country over its existence is moving from surplus to deficit? I don't think we are there yet, but you can't keep spending more than you earn (create) for ever without having to pay the bill at some point.
On the other hand, if the spring is stretched you also build up potential energy and as long as the spring is not stretched beyond its fatigue point it will return to its normal position after oscillating. However, there is a danger that the spring can be stretch beyond its fatigue point after which it loses its potential.
So in 2007 and early 2008 the economy was stretched like a spring and the force that was stretching it was the great amount of credit and apparent real estate and stock market wealth. This force was removed and the economy contracted. The only real question is was the initial force so great that the economy has lost its ability to spring back?
Some think it has. They argue that the apparent recovery is deceptive and that the economy is not going to behave in a "normal" fashion because the financial crisis was so much greater than normal. Generally, people who make this argument argue the conditions of the last 10 years were so different from prior periods that effectively the economy was stretched beyond its "fatigue" point and the contraction is not the normal sort of contraction but more in the way of a collapse. Any minor oscillations, such as the one we are in now will ultimately fail because the economy no longer produces value. This argument generally is related to the exportation of manufacturing and the creation in this country of a service economy.
There is a fundamental element to this argument that has validity, but I believe it is overstated. After the two world wars the United States effectively entered what may aptly be considered a golden age where our prior industrial rivals were crippled and the third world was a supplier of cheap commodities. This led to a higher standard of living in this country than anywhere else in the world. This situation has changed and the great force acting on us today is the spread of wealth to the third world. The world has only so many resources and we don't have any intrinsic right to consume so much more of them per capita than anywhere else. It will equalize over time. This equalization has to result in slower or negative growth here while the rest of the world catches up. However, slower growth is still growth and it clearly is preferable to negative growth. However, this scenario does not lead to a collapse of our national economy and while we would have less potential than countries that have to grow more to catch up to us, we would still have potential.
What should be considered is what is actually the new normal? There are still significant avenues of potential growth in changing this country from overuse of non-renewable resources to renewable resources. If you really look at national fundamentals, you create wealth by extracting or creating resources or by increasing the value of those resources. Every year a certain amount of wealth is created in this country. A large amount of that wealth is used to purchase commodities with oil being the biggest drain. Of course, cheap manufactured goods and services also drain wealth to countries like China and India. Over time this will reduce the standard of living in this country because the dollar will lose value and imported goods will increase in cost until the new normal is achieved. I'm convinced that for this normal to be near the level most Americans have been used to, we need to greatly reduce our reliance on foreign oil and develop clean renewable energy sources.
Perhaps the current economic crisis is a recognition that the wealth accumulated in this country over its existence is moving from surplus to deficit? I don't think we are there yet, but you can't keep spending more than you earn (create) for ever without having to pay the bill at some point.
Thursday, June 4, 2009
Renewable resources
Resources come in two varieties, renewable and non-renewable. Non-renewable resources have a limit, i.e. amount of oil that actually exists. Renewable resources on the other hand can continue to support us for an indefinite period if not destroyed in some way.
If you accept that basic premise, then you should also accept that moving from non-renewable resources to renewable resources is ultimately inevitable. So, power generated via oil, gas and coal will have to be replaced at some time in the future by solar, wind and hydro. The only real question is the time frame.
As long as non-renewable sources of energy are cheap it does not make economic sense to convert. Of course as the cost of non-renewable energy increases and the cost of renewable energy decreases, there will come a point when it does make economic sense.
The Government can, as a matter of social policy, influence that outcome. By increasing taxes on non-renewable resources and providing tax credits for renewable ones, the economic balance can be changed. This could potentially be revenue neutral if the credits were financed by the taxes on non-renewable energy, but the current infrastructure is heavily reliant on non-renewable energy and it would drive that cost up.
So, lets say the Government increased taxes on gasoline to a level such as $4 a gallon and utilized that revenue to provide tax credits for electric car usage. Would this be effective? I think it would be, but a bigger question may be what would be the impact on the economy?
The increased cost would be experienced almost immediately and the conversion process would take time. So using another example, if the price of home heating oil was increased but tax credits were made available for solar alternatives, it would increase cost to the average consumer. Of course the money generated would create jobs and as the renewable energy industry became more efficient costs should come down, and as an added bonus, the trade deficit could very well be reduced.
So the real question is, would the increased economic activity based on conversion from non-renewable to renewable outweigh the decrease in economic activity based on increased cost for energy in the short term?
I think it can be demonstrated that at some point the increased economic activity would more than offset the cost impact, especially as the cost of renewable energy decreased and the use of non-renewable energy decreased. How long would it take?
When you consider the slack in our current economy, in almost all sectors, the increased employment in something as simple as installing solar panels on houses would likely have a fairly immediate impact. Manufacture and installation would be a growth industry for a long time. Similarly, if the car manufacturers can retool quickly, the demand for electric and/or hybrid cars will boost the auto industry. Other areas may very well take a longer time. Many solar and wind projects get delayed by local issues. It may very well take a significant public affairs campaign to overcome some of this, but I do believe that most Americans will get on board if there is a consistent public message about how this reduces dependency on foreign oil and is good for the environment.
Generally, I believe the downward impact would be quickly offset by the increase economic activity.
Just something to think about.
If you accept that basic premise, then you should also accept that moving from non-renewable resources to renewable resources is ultimately inevitable. So, power generated via oil, gas and coal will have to be replaced at some time in the future by solar, wind and hydro. The only real question is the time frame.
As long as non-renewable sources of energy are cheap it does not make economic sense to convert. Of course as the cost of non-renewable energy increases and the cost of renewable energy decreases, there will come a point when it does make economic sense.
The Government can, as a matter of social policy, influence that outcome. By increasing taxes on non-renewable resources and providing tax credits for renewable ones, the economic balance can be changed. This could potentially be revenue neutral if the credits were financed by the taxes on non-renewable energy, but the current infrastructure is heavily reliant on non-renewable energy and it would drive that cost up.
So, lets say the Government increased taxes on gasoline to a level such as $4 a gallon and utilized that revenue to provide tax credits for electric car usage. Would this be effective? I think it would be, but a bigger question may be what would be the impact on the economy?
The increased cost would be experienced almost immediately and the conversion process would take time. So using another example, if the price of home heating oil was increased but tax credits were made available for solar alternatives, it would increase cost to the average consumer. Of course the money generated would create jobs and as the renewable energy industry became more efficient costs should come down, and as an added bonus, the trade deficit could very well be reduced.
So the real question is, would the increased economic activity based on conversion from non-renewable to renewable outweigh the decrease in economic activity based on increased cost for energy in the short term?
I think it can be demonstrated that at some point the increased economic activity would more than offset the cost impact, especially as the cost of renewable energy decreased and the use of non-renewable energy decreased. How long would it take?
When you consider the slack in our current economy, in almost all sectors, the increased employment in something as simple as installing solar panels on houses would likely have a fairly immediate impact. Manufacture and installation would be a growth industry for a long time. Similarly, if the car manufacturers can retool quickly, the demand for electric and/or hybrid cars will boost the auto industry. Other areas may very well take a longer time. Many solar and wind projects get delayed by local issues. It may very well take a significant public affairs campaign to overcome some of this, but I do believe that most Americans will get on board if there is a consistent public message about how this reduces dependency on foreign oil and is good for the environment.
Generally, I believe the downward impact would be quickly offset by the increase economic activity.
Just something to think about.
Wednesday, June 3, 2009
Fair Tax Proposal
One of the things Americans should think about is the tax system. The current system is complex and has created an entire cottage industry related to federal income tax. It also is used as a instrument of social policy using various tax credits and exemptions to encourage certain activities, i.e. home ownership.
One proposal that has at least some momentum is the Fair Tax Organization. Without going into a tremendous amount of detail here (if you want detail visit the web site at www.fairtax.org ), it proposes to replace all or at least most federal taxes with a single consumption tax (either 23% or 30% depending on how you calculate it.) It includes prebates for low income Americans to assure they don't get a disproportionate impact.
If you assume that the system would be enforceable and not subject to rampant evasion, it would have the one great advantage of making sure all products whether foreign or domestic sold in this country paid the same tax. Actually, if foreign products were taxed in their home countries, it would actually provide an advantage to American products. Also, American products being exported would not carry a tax burden and potentially it might make production in this country more competitive.
It is difficult to find a downside, except of course it would make it difficult to use the tax system for social policy. I suppose certain items could be taxed at a lower rate (i.e. fuel efficient cars or energy saving home improvements) to implement desirable social behavior. The other question is the potential shock of higher prices. If cars, houses and other big ticket items suddenly seemed 23% more expensive, it would take a while for many to adjust. The fact that whatever tax is built into the current prices should disappear but it could have a major negative impact on housing since currently taxes are not a significant factor, especially on existing home resales.
One advantage could be in the visibility of tax increases and/or decreases. If you wanted to fund a new program, such as health care, it could easily be calculated as an increase of x cents over current rates. This is very understandable to most Americans as opposed to somewhat cryptic changes in income tax rates that get reflected as payroll taxes.
To be honest, I'm not expert enough on the Fair Tax proposal to really evaluate it. It is very seductive form the aspects of business competitiveness and simplification of tax collection. I would be concerned on evasion. Also, it would probably have a negative impact on things like tourist purchasing, since they might be able to get American products cheaper at home. Not sure that is very much of a factor.
It is fairly certain that since things like this can't be passed without going through the congress, that even if it was to become law, it would become more complex than currently proposed.
One proposal that has at least some momentum is the Fair Tax Organization. Without going into a tremendous amount of detail here (if you want detail visit the web site at www.fairtax.org ), it proposes to replace all or at least most federal taxes with a single consumption tax (either 23% or 30% depending on how you calculate it.) It includes prebates for low income Americans to assure they don't get a disproportionate impact.
If you assume that the system would be enforceable and not subject to rampant evasion, it would have the one great advantage of making sure all products whether foreign or domestic sold in this country paid the same tax. Actually, if foreign products were taxed in their home countries, it would actually provide an advantage to American products. Also, American products being exported would not carry a tax burden and potentially it might make production in this country more competitive.
It is difficult to find a downside, except of course it would make it difficult to use the tax system for social policy. I suppose certain items could be taxed at a lower rate (i.e. fuel efficient cars or energy saving home improvements) to implement desirable social behavior. The other question is the potential shock of higher prices. If cars, houses and other big ticket items suddenly seemed 23% more expensive, it would take a while for many to adjust. The fact that whatever tax is built into the current prices should disappear but it could have a major negative impact on housing since currently taxes are not a significant factor, especially on existing home resales.
One advantage could be in the visibility of tax increases and/or decreases. If you wanted to fund a new program, such as health care, it could easily be calculated as an increase of x cents over current rates. This is very understandable to most Americans as opposed to somewhat cryptic changes in income tax rates that get reflected as payroll taxes.
To be honest, I'm not expert enough on the Fair Tax proposal to really evaluate it. It is very seductive form the aspects of business competitiveness and simplification of tax collection. I would be concerned on evasion. Also, it would probably have a negative impact on things like tourist purchasing, since they might be able to get American products cheaper at home. Not sure that is very much of a factor.
It is fairly certain that since things like this can't be passed without going through the congress, that even if it was to become law, it would become more complex than currently proposed.
Tuesday, June 2, 2009
Demand
As we enter the summer of 2009 there are numerous signs around the world that the economy is improving. Of course, having gone down as far as we did, signs of recovery don't mean we are going to return to a booming economy instantly. They simply indicate that we have probably reached the bottom of the down cycle and have corrected those areas of the economy that were overheated, in this case primarily the real estate market.
Since the real estate market was the prime cause of the downturn many think it has to be the area that leads the recovery. I do think that stabilization of home prices is an important component, but I don't think that anyone should expect real estate to return to prior levels anytime soon. There has been a rather dramatic shift in the view of real estate by many people and it is no longer viewed as a "safe" investment. I would think we may see a rather long term if not permanent decline in home ownership. This will mean that the current inventory of housing may be adequate to meet demand for a good many years.
So lets consider what that means. People who will continue to own real estate will for the most part be those who either already own, or people with very good credit considering the new attitudes among lenders. However, many of the houses on the market may very well be purchased by speculators or investors and turned into rental units. In the later case, they of course will have to assure that the rental income provides enough of a return to justify the investment. They will be buying housing therefore at the cheapest possible price, including foreclosures, potential foreclosures and fix me ups in order to maximise returns. Regardless, they will have to fix up housing to make it rentable, with subsequent contractor employment.
So if you follow this logic, many marginal prior homeowners will become renters. I see two consequences of this. In many cases they will no longer have the increasing equity to tap that much of America has relied on. This will mean that they will have to use traditional credit or buy things with savings. In fact the biggest consequence I see for the economy of the next few years is this lack of equity, both for renters, obviously, but also for existing home owners. I don't see houses increasing in value nearly as rapidly as they did during the bubble. This may very well be a fairly permanent loss of demand in the economy that we need to consider. It is very hard for most people to obtain the same levels of credit they used to be able to when housing was higher priced, if they even want to. Without those levels of credit, they will not be able to return to prior levels of consumption.
Once again, if you accept this, it will be years before consumer demand returns to anything like the prior levels. A while ago, I posted some information about discretionary income. It has been very stable over the period we are discussing with increases related to stimulus payments and decreases right after to return to normal levels. However, the tremendous decrease in available credit, related to equity and stricter credit requirements has had the devastating impact we see. So unless there is a new sudden source of ready credit, we are going to see a fairly long term decrease in demand, although it should rise over time. So companies need to gear up for a long term decrease in domestic demand and see potential increases in demand in developing countries.
Since the real estate market was the prime cause of the downturn many think it has to be the area that leads the recovery. I do think that stabilization of home prices is an important component, but I don't think that anyone should expect real estate to return to prior levels anytime soon. There has been a rather dramatic shift in the view of real estate by many people and it is no longer viewed as a "safe" investment. I would think we may see a rather long term if not permanent decline in home ownership. This will mean that the current inventory of housing may be adequate to meet demand for a good many years.
So lets consider what that means. People who will continue to own real estate will for the most part be those who either already own, or people with very good credit considering the new attitudes among lenders. However, many of the houses on the market may very well be purchased by speculators or investors and turned into rental units. In the later case, they of course will have to assure that the rental income provides enough of a return to justify the investment. They will be buying housing therefore at the cheapest possible price, including foreclosures, potential foreclosures and fix me ups in order to maximise returns. Regardless, they will have to fix up housing to make it rentable, with subsequent contractor employment.
So if you follow this logic, many marginal prior homeowners will become renters. I see two consequences of this. In many cases they will no longer have the increasing equity to tap that much of America has relied on. This will mean that they will have to use traditional credit or buy things with savings. In fact the biggest consequence I see for the economy of the next few years is this lack of equity, both for renters, obviously, but also for existing home owners. I don't see houses increasing in value nearly as rapidly as they did during the bubble. This may very well be a fairly permanent loss of demand in the economy that we need to consider. It is very hard for most people to obtain the same levels of credit they used to be able to when housing was higher priced, if they even want to. Without those levels of credit, they will not be able to return to prior levels of consumption.
Once again, if you accept this, it will be years before consumer demand returns to anything like the prior levels. A while ago, I posted some information about discretionary income. It has been very stable over the period we are discussing with increases related to stimulus payments and decreases right after to return to normal levels. However, the tremendous decrease in available credit, related to equity and stricter credit requirements has had the devastating impact we see. So unless there is a new sudden source of ready credit, we are going to see a fairly long term decrease in demand, although it should rise over time. So companies need to gear up for a long term decrease in domestic demand and see potential increases in demand in developing countries.
Monday, June 1, 2009
The Dollar
Recently the dollar has been falling against many major world currencies. This may be due to any number of factors, the rising deficit perhaps being the major factor. What has to be considered is the consequence of a dollar that is losing value internationally.
The primary impact is that imports get more expensive and domestic products get less expensive. So one impact would be that oil will cost more. This could be a fairly dramatic increase since demand seems to be increasing also and that would also drive the price up. However if domestic products get cheaper, more of them will be sold both here and as exports. This will lead to increased employment.
It also leads potentially to inflationary pressure. Clearly if oil increases dramatically, it will increase the cost of products to some extent, if the price increases can be passed along. Of course the ultimate determiner of prices is and always will be the supply/demand curve so price increases will not be passed along unless there is demand.
So what about demand? Clearly we have gone through a rather dramatic period in which for various reasons demand in almost all areas decreased. The most dramatic factor in the reduction of demand was simply that so much equity was lost when the real estate bubble burst that a tremendous amount of buying power vanished. Further, the resultant stock market demise further impacted wealth and demand as the majority of investors are of the buy and hold variety and they saw the values of their investments plummet. As demand weakened unemployment increased and that led to even less demand.
So we have had the stimulus payments, the bailouts and the weak dollar. But the weak dollar is an indicator of economic improvement, since it makes American products more competitive and leads to increased production. There is a tremendous amount of slack in the marketplace and the production capacity of the economy so if we see an uptick in production it will be a while before the capacity gets to levels that mean real inflation. Further, the most inefficient suppliers have been forced out of the market, so the remainder are more productive right now. The next indicator will very likely be that products start being sold at retail instead of deep discounts.
A weak dollar is at this point in our economic cycle a good indicator.
The primary impact is that imports get more expensive and domestic products get less expensive. So one impact would be that oil will cost more. This could be a fairly dramatic increase since demand seems to be increasing also and that would also drive the price up. However if domestic products get cheaper, more of them will be sold both here and as exports. This will lead to increased employment.
It also leads potentially to inflationary pressure. Clearly if oil increases dramatically, it will increase the cost of products to some extent, if the price increases can be passed along. Of course the ultimate determiner of prices is and always will be the supply/demand curve so price increases will not be passed along unless there is demand.
So what about demand? Clearly we have gone through a rather dramatic period in which for various reasons demand in almost all areas decreased. The most dramatic factor in the reduction of demand was simply that so much equity was lost when the real estate bubble burst that a tremendous amount of buying power vanished. Further, the resultant stock market demise further impacted wealth and demand as the majority of investors are of the buy and hold variety and they saw the values of their investments plummet. As demand weakened unemployment increased and that led to even less demand.
So we have had the stimulus payments, the bailouts and the weak dollar. But the weak dollar is an indicator of economic improvement, since it makes American products more competitive and leads to increased production. There is a tremendous amount of slack in the marketplace and the production capacity of the economy so if we see an uptick in production it will be a while before the capacity gets to levels that mean real inflation. Further, the most inefficient suppliers have been forced out of the market, so the remainder are more productive right now. The next indicator will very likely be that products start being sold at retail instead of deep discounts.
A weak dollar is at this point in our economic cycle a good indicator.
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