Burton Finance Blog

So, Who Is the Free Market Candidate?

2012-01-31T04:54:00.000-08:00

Who among the various candidates, Democratic or Republican, truly believes that economic scarcity is best solved by free markets? Indeed!

It is not clear that any of the candidates now running for the Republican nomination, other than Ron Paul, have any real faith in free market solutions to the problems of economic scarcity. No one is really proposing returning to free market principles. The battle ground seems much narrower -- personal and business tax rates, minor amendations to Obamacare, support for the Keystone project -- but not much else really.

The most likely outcome is a Romney candidacy. As much as that will be presented as the free market alternative to President Obama, in truth there is not much daylight between Romney and Obama. Neither seem to understand the fundamental economic malaise of modern America, nor to understand the root cause. One way you can tell that neither "get it" is the constant China-bashing that comes from the White House and the campaign trail.

Anybody that thinks China is at the heart of our economic stagnation believes in a fantasy. China is not the culprit. China is doing the right thing for its people by creating the largest expansion in free markets in the history of the world. The result -- economic prosperity for hundreds of millions of people who lived in subjection and poverty a mere generation ago.

What has the West accomplished in the last couple of generations? Growth of government mainly and a declining status of the middle class whose savings rate has collapsed to zero in the US and whose work ethic has slipped into the mud. Absent a savings rate and a work ethic, no amount of government waste will pull the US out of its malaise.

So, who speaks up for free markets. Sadly, no one except Ron Paul and he's not on a path to the White House, given his isolationist outlook on foreign policy.

Obama Is Right on Tuition Levels

2012-01-29T05:25:00.001-08:00

In his State of the Union address last week, the President put forth an idea that is a long time in coming. Federal government aid should be curtailed to schools whose tuition is going through the roof and redirected toward schools who are running a tight ship. Amen.

In the past, the answer to the surging costs of higher education was to throw more money at higher education through more federal dollars and increasing loan availability to students. All this did was feed the beast and have universities searching for ways to toss money down ratholes. Meanwhile, millions of our college graduates are now saddled with debts that they have no hope of ever coming out from under. All of this to fatten the ever bloated monstrosity that is known as higher education.

Higher education is one of the few areas of American life, where there has been no serious change in technology implementation. Most schools still run their classroom in the same old way -- blackboard, chalk and someone droning on in the front of a mostly empty classroom. While there is technology available in abundance, it lies mostly unused at the modern American university. Facebook gets more action from University students than any websites that provide serious educational offerings.

Obama is on the right track on this one. Higher education costs are completely out of control. The priorities in the modern American university are less about educating students and improving skills and more about advancing the narrow political agenda of university faculty and administrations. The losers are taxpayers and students.

Three cheers for the President.

The New Normal in the Obama Economy

2012-01-28T03:39:00.000-08:00

Peter Whoriskey's article in today's Washington Post gives a brief summary of the "Obama Recovery" and it's not pretty. The slowest economic recovery in post World War II history has left the economy, even at this late date, with 6 million fewer jobs than it had before Obama took office. This after the most incredible expansion in federal spending and the national debt in American history. Quite a record!

The article shows who are the winners and who are the losers. The winners are businesses, who no longer intend to carry the albatross of the American worker. Loaded up with government mandates, rights, privileges, benefits, and lawyers, the American worker is a luxury that American businesses are determined to wean themselves away from.

"Businesses are swiftly investing in equipment and software. Those investments were up 5 percent in the last quarter of 2011 and 16 percent the quarter before that...."

As for the middle class that Obama claims to be defending: " disposable personal income is slightly lower, in inflation-adjusted dollars, than it was a year earlier."

That's the report card for big government. The rich and powerful do fine in the Obama economy. But, everyone else is in big trouble.

The Obama Plan to Lower Tax Revenues

2012-01-26T04:12:00.000-08:00

The so-called "Buffett-Rule," which would impose a minimum tax on incomes above $ 1 million, would guarantee lower tax revenues for the US Treasury. Folks with high income would simply choose to lower their taxable income. That is a fairly simple thing to do and always happens when you raise tax rates on wealthy citizens. Short of confiscating folk's wealth, something Obama may get around to eventually, raising tax rates just encourages tax lawyers and leverage (the wealthy borrow more to live and let their assets grow unrealized...that solves the problem of lowering your taxable income without affecting your lifestyle).

Meanwhile, as tax revenues collapse, the Obama folks will find a way to tack on a tax increase for the middle class to offset the revenue loss from rich folks. This is always the route that tax rate increase advocates end up taking. The result: the middle class gets soaked with more taxation, while the no-nothings revel in the irrelevant higher rate structure that wealthy folks face, but do not pay. This is the kind of absurdity that Obama's class warfare will lead to. No wonderrich people support higher tax rates. Buffett knows he will pay less under Obama's soak-the-rich tax than he does now, so why worry? (Once the new rates are passed, Buffett will lob a call into his high priced tax attorney and get the advice he needs to pay less taxes under the Obama plan than he pays now. Don't think he won't make that call. He will).

Meanwhile, higher marginal rates will mean that money that would have flowed into the capital markets to create new businesses and new jobs will lie dormant in frozen assets. High levels of unemployment, economic stagnation and increasing misery for the poor, minorities and old folks will be the Obama legacy. This is what happens when economic policy is an outgrowth of coffee-house conversations at Harvard by people who have never held a real job.

More Politics from Obama

2012-01-25T03:18:00.000-08:00

The state of the union speech revealed a complete lack of interest in the absence of growth in the US economy on the part of the President. This means that lower income folks can expect their misery to continue as long as this President remains in office.

Instead the President launched a variety of attacks against his coffee-house enemies -- "the rich." As Buffett knows, apparently better than Obama, the tax rate is completely irrelevant to the truly wealthy. The truly wealthy can arrange things so that they have zero income for tax purposes, so who cares whether the tax rate is 30 percent or 100 percent. 30 percent of zero is zero. That's math that the President and his crew don't seem to understand.

But, it all sounds good I guess, to the uninformed. There is no question that this is class warfare and shows a President of the United States several shades to the left of the most socialist leaders in Europe. Whether Obama gets his way on all of this economic nonsense is yet to be seen.

The rich have nothing to fear from this President and they know it. That's why most of the truly wealthy support Obama now and will continue to support him throughout his political career. Those with modest incomes and those among the youth, the aged and the minorities, whose futures are blighted by the economic mess that the Administration has created, have little to look forward to.

America's economic stagnation will continue and it's dwindling world economic stature will continue with the kind of policies advocated by President Obama. Only free markets and capitalism can provide a rebirth to the American economy. Overbearing government will simply lead to more and more economic decline for what once was the most vibrant economy in the world.

Podesta Needs a Reality Check

2012-01-24T05:14:00.000-08:00

The op-ed in today's Wall Street Journal co-authored by John Podesta, life long Democratic Party strategist, suggests that the "clean energy" industry is soon to reduce America's dependence on foreign oil. That is so absurd as to be laughable.

One supposes that this article was trotted out to defend the indefensible -- the Obama decision not to give the go-ahead to the Keystone pipeline project that would have permitted the US to tap Canada as an oil source instead of Syria.

There is no "clean energy" industry out there, either in the US or China, that has any potential to reduce America's or anyone else' dependence on fossil fuels. To pretend that there is, is irresponsible.

Whatever there may or may not be to a "clean energy" industry is far into the distant future and will only come into existence when the free market wills it so. Governments will just continue to waste taxpayer money. Does anyone really think wasting money on the Solyndras of the world will be a substitute for entrepreneurship and the free market?

Podesta should be ashamed of this article.

Republicans In the Mud

2012-01-23T20:20:00.001-08:00

It is hard to see either Mitt Romney or Newt Gingrich emerging with much of a claim to lead a major political party campaign after the absurd performance in Tampa tonight. Instead of discussing the economy and the important campaign issues, the main spotlight was on who was the biggest devil in the room. The President must have enjoyed this debate.

State and Local Pension Reform

2012-01-22T04:59:00.000-08:00

As everyone by now must know, state and local defined benefit pension funds are broke and are not sustainable in their present form. So, what should be done?

Most states are creating Rube Goldberg machines to "reform" their state pension systems. Virginia is a good example. The proposals by the McDonnell Administration recently unveiled have the potential to make a bad system even worse.

What should state pension funds look like?

If you lump defined benefit pension funds in with social security, it is easy to see the overall problem -- the absence of saving. Social security is a net dis-saver (that's really the meaning of the "social security trust fund") and defined benefit systems have the effect of encouraging state workers to dramatically reduce their personal savings because of the expectation of future benefits. The result is that the national savings rate plummets effectively to zero (except for the savings done by the wealthy and by the corporate sector).

If savings are negligible, then there are no assets to support retirees (or to support young folks either). That's the problem in the US. Our assets are declining (Mostly by being purchased by non-US entities). It is as if the squirrels quit gathering acorns to prepare for the winter. When the winter comes, there are no acorns. For a while, you might be able to borrow acorns from the squirrels down the road, but that will only postpone the inevitable disaster.

Retirement plans should be about accumulating savings. The rationale behind defined benefit plans was that states would do the accumulating (ditto with social security), but we know that didn't work. States, all of them, use various accounting tricks and political excuses to avoid providing the necessary accumulation of assets to support future retirees. Early retirees win, but later retirees have no hope of winning.

Here is what a state retirement system for employees should look like: Employees should be required to put away five percent of compensation. The state can kick in another 2 1/2 percent. The total 7 1/2 percent should be exempt from current taxation so that it would essentially be structured like an IRA. Individuals should not be permitted to withdraw anything until age 65. Period. Individuals should be permitted to invest the money however they choose.

On top of the 7 1/2 percent the state could provide a 1 for 3 match up to some maximum. For example, if the employee chooses they could save another three percent of income and the state would match that with an addition one percent contribution. Imagine that you capped this at 9 percent (with a 3 percent kick-in by the state). Adding it all up, an employee could potentially end up saving 7 1/2 plus 9 plus 3 for nearly 20 percent annual, tax-deferred saving.

Notice that system would cost the state, at most 5 1/2% (or a mere 2 1/2 % if no one opts to go for the match) of total payroll. The employee would end up with annual savings of between 7 1/2 percent and 19 1/2 percent depending upon how much they choose to take advantage of the "free-money" match).

People could then choose the lifestyle they want in retirement: minimal or maximal. The state could lock in its liability to current contributions. Unfunded liability would be impossible in this system.

Best of all, aggregate savings would increase without question. Thus, the acorns would be available when winter comes as opposed to the almost complete absence of acorns that the current system promises.

The only objection to this is the old and tired excuse that employees cannot competently invest their own money. TIAA-CREF is the largest pension fund in
America and the most successful. The employees choose their own investments in TIAA-CREF and I doubt that any participant has ever voiced any real complaint about this system. So, individual investing works, contrary to popular myth. People do learn.

A similar structure could be used for social security. Together these reforms would create adequate savings for comfortable retirements for all Americans and get government out of the "unfunded liability" business.

These are the reforms needed, not the half-baked measures that are currently under review.

Check Out Iceland

2012-01-17T04:43:00.000-08:00

Faced with a banking system that was broke, Iceland simply let their major banks fail. This happened three years ago as the US and Western Europe were busily fashioning government rescue plans. No rescue plan for Iceland! Nope!

They just let them fail.

So, what happened? Did their civilization end? No. Iceland today is the one of the fastest growing countries on the globe. Business is booming, unemployment has cratered, and good times are back. This, in just three short years after Iceland let nature take its course. (A pattern very similar to what happened in Asia after the 1997 collapse of Asian financial institutions).

This story is laid out in detail in today's Washington Post in an article by Brady Dennis with the fetching title: "Could US and Europe Learn a Thing or Two from Iceland's Financial Collapse?"

All of those who say that the TARP and other government bailouts were essential should take note of what happened when governments stepped aside (which doesn't happen often, but it does happen occasionally). Take heed of the aftermath of the Asian crisis in 1997 and what happened in Iceland in the past three years.

Economic growth, prosperity and recovery are critically dependent upon government inaction. Activist policies just guarantee slow growth and massive economic dislocation. A generation of stagnation will be the reward for the US government activism in 2008 and 2009. Fortunately, for Iceland, they chose a rational road and are prospering mightily for their own government's inaction.

Romney Is The Only Adult in the Room

2012-01-17T04:14:00.000-08:00

The debate in South Carolina last night revealed what everyone has long known and no one has been willing to say: Romney is the only truly viable candidate that the Republicans have. Gingrich and Perry have revealed themselves as attack dogs against capitalism, Santorum has a non-sensical tax plan that would create a distinction in tax law between manufacturing companies and all other companies, and Ron Paul is delightfully irrelevant. That leaves only Romney, who, admittedly from his resume, is Obama-lite.

It is interesting irony that in the day of the tea party, there is no real conservative alternative to Mitt Romney. Romney will be the Republican nominee. It is time for the other guys to admit reality and head home.

S&P Downgrade Is Not News

2012-01-13T19:30:00.000-08:00

The S&P downgrade is simply a public statement of what everyone already knows -- Eurozone debt is unsustainable. That France was included in the downgrade should surprise no one. Sooner or later the French government will be forced to absorb the balance sheets of the major French banks. The French are in as much trouble as everyone else.

Really important news will come when sovereign debt auctions begin to falter. That will happen. That will be the beginning of the end.

Far better is to face reality now and begin the "workout" process. But, politicians are loath to face reality on their own watch. So, don't look for anything good on the European sovereign debt front anytime soon.

But, the markets surely know all of this.

Capitalism Under Siege

2012-01-13T06:24:00.000-08:00

What do Warren Buffett and Newt Gingrich have in common? Actually, quite a lot. They both relish being in the spotlight and both dote on the sound of their own voice. Now, they have both joined the Rick Perry choir denouncing private equity as some kind of evil pursuit. Strange since all three -- Perry, Gingrich, and Buffett -- have all benefitted financially in a big way from private equity activities (or it's equivalents).

What next? Why not condemn LaBron James since his existence, no doubt, led to a basketball player losing his job.

Where does this absurdity end?

It's beginning to look like Romney may be an attractive candidate, if only because only he (and Ron Paul) seem to favor capitalism over the alternatives.

Conservative Economists' Foolishness

2012-01-09T04:53:00.000-08:00

Today's Wall Street Journal shows that right wing economists are no better than their left wing brethren at separating economics from politics. Professor Robert Barro of Harvard University and the conservative Hoover Institution of Stanford University opines today for the Wall Street Journal that the Euro should be abandoned and outlines a gradual policy to convert the Euro back into the original currencies of the countries presently in the Eurozone.

Why does Barro reach this remarkable conclusion? "In light of the ongoing fiscal and currency crisis -- which is leaning strongly toward a centralized political entity that will likely be even more unpopular than the common currency -- I would suggest it would be better to reverse course and eliminate the Euro." Politics is the reason!

So, toss aside the enormous benefits of a single currency union simply because of the "ongoing fiscal and currency crisis." Nowhere does Barro propose any economic solution to the crisis, although there are several good candidates available. Instead, he simply throws up his hands and says "drop the Euro." If Illinois and California get in fiscal trouble, will Barro advocate a separate currency for Illinois and California to avoid their "ongoing fiscal and currency crisis?"

The common currency is a good idea and should not be abandoned. What should be abandoned is the idea that creditors and debtors cannot sit down and readjust their unrealistic contracts with one another. Going back to separate currencies, with the implicit idea that weaker countries will inflate their way out of their debtloads is a cop out.

On the same editorial page, the WSJ has another conservative economist arguing for a wealth tax. Why? Because income is hard to define, according to Professor Ronald MacKinnon of Stanford University. "The basic problem is that defining 'income' becomes progressively more difficult as income and wealth rise." So, is wealth any easier to define? What is a piece of land worth? or an old building? or anything that isn't trading on an exchange every day. McKinnon looks like a shill for the appraisal industry in this piece. His proposal would simply lead to an enormous incentive to hide wealth or distort its value in various ways, much as takes place today with reported income for tax purposes.

Professor McKinnon might raise the more relevant question: why is there such an enormous need for revenue? Answering that question might spares us more inefficiencies and distortions in our economy than McKinnon's proposed strategy of creating a new bonanza for tax lawyers.

The Drag from Minimum Wage Laws

2012-01-08T05:43:00.000-08:00

When the economy is struggling to create new jobs and pull itself back up by its bootstraps, it is not helpful to have laws that make it illegal to create jobs. Minimum wage laws are exactly those kinds of laws. Someone who would like to make $ 6 per hour, rather than remain among the unemployed cannot legally do so anywhere in the United States. In San Francisco, it is not legal to take a job that pays $ 10 per hour! In many states, it is illegal to take a job making $ 9 per hour. It is also unlawful to offer anyone a job at these various rates in these various localities. That is what minimum wage legislation mandates.

What these laws are saying is that until the economy has made a dramatic recovery, those of our citizens at the bottom of the pile will have the boot heel of big government on their necks. Once unemployment rates are small and the boom is on, if that day ever comes again, then and only then can folks at the bottom of the talent pool have the legal right to work. Because only at the peak of the boom will wage rates for many jobs began to exceed the minimum wage levels that various states and municipalities, not to mention the federal government, have imposed.

This is unfair and economically absurd. When will politicians remove this obstacle from the hopes, dreams and aspirations of our citizenry at the bottom of the economic pile?

200,000 New Jobs -- Nothing New Here

2012-01-06T05:57:00.000-08:00

The unemployment report this morning showed the unemployment rate is down to 8.5 percent. This is being celebrated by the Obama Administration as stupendously good news.

Well, it's not bad news. It's just more of the same -- a slow, sluggish economic recovery consistent with 2 percent GDP growth continues to trudge along.

The only reason the unemployment rate is down to 8.5 percent, is that so many people (and this is the only real record that Obama has been able to set) have simply given up looking for work and have disappeared from both the numerator and denominator that makes up the unemployment rate. That's why Congress periodically extends unemployment benefits (also an Obama Administration record).

A good month would be 350,000 plus jobs. That's not going to happen with this Administration in the driving seat.

Another Academic Economist in Action

2012-01-06T05:46:00.000-08:00

Today's example of absurd economics coming from academia is Professor Uwe Reinhardt's blog post in this morning's NY Times entitled "What Price Pluralism in Health Insurance?"

It is really hard to believe that Professor Reinhardt put pen to paper with this nonsense. Here is his argument: In the US, people have a tough time figuring out which health insurance plan to buy because there is such a diversity of plans. No such problem exists in some European countries through the simple expedient of requiring everyone to purchase identical plans. "Premium shopping among insurers is easy, because the standard benefit package is common to all."

Why not apply this logic to cars, television sets, fitness centers, etc? If the government would simply mandate that only one type of car, only one type of television set, only one type of fitness center, etc, can exist, think how easy it would be for consumers to comparison shop! Consumers would no longer have to make the difficult decision between a Chevrolet and a Ford. Now, the government would require that Chevys and Fords be identical. What a boon for consumers, according to Professor Reinhardt.

This is, of course, the identical system that Russia and China once had in place. Consumer choice is "inefficient' and "expensive," according to Professor Reinhardt, who teaches this stuff to young folks at Princeton University.

Your tax dollars and tuition dollars at work.

The Biggest Myth About The Euro

2012-01-02T04:21:00.000-08:00

You hear it all the time. "They created a monetary union without a fiscal union." What complete nonsense that is. There is absolutely no need for a fiscal union in the Eurozone.

Those who push this notion: 1) completely ignore the US experience where, at least at the national level, there is a monetary union and fiscal union and, nonetheless, sovereign US debt is spiraling out of control; 2) if there was a "fiscal union," things would be far worse due to logrolling and moral hazard problems.

What is missing in the Eurozone is that those who owe money should sit down with their creditors and work out a repayment schedule that involves a substantial foregiveness of principal -- a partial (or perhaps nearly complete) default. Each country is and should be on its own.

If country A is profligate and spends money it doesn't have and if someone is foolish enough to lend them the money to do that, then why should country B be involved at all. Country B may have lived within its means and has no reason to bail out country A.

Markets will learn if country A defaults. Lenders will demand better behavior by country A and they will get it. It is the only way that country A will ever enact serious reforms. Country A will never bind itself to a serious austerity program for the sake of their creditors. It just will not happen, regardless of what Merkel-Sarcozy think.

The Eurozone is a great idea and should be preserved. A single currency union eliminates many of the bottlenecks of trade and finance and enhances economic growth. In the case of the Euro since 1997, lenders have blinded themselves to the differences between the credit-worthiness of the various countries that make up the Eurozone. Not any more. Thanks goodness. It is high time lenders woke up.

The very idea that somehow there is some political solution to this (using a bazooka to quote Hank Paulson) is ridiculous. The "print Euros" solution will destroy the European union as well as the Eurozone. Much simpler is to preserve the Euro and begin the process of writing down European sovereign debt -- country by country. Creditors deserve their fate in this one.

Happy New Year

2011-12-31T07:37:00.000-08:00

Bad policies are not enough to derail the most powerful economic engine the world has ever seen -- the US economy.

Here is where we are headed in 2012:

Higher stocks prices, lower bond prices.

A slowly expanding economy -- roughly 2 percent. Because of the way GDP is measured, the reported numbers will bounce around, but should average about 2 percent for 2012 as a whole.

China will stumble but recover. Bad government policy will be overcome by the hard work and entrepreneurial spirit of ordinary Chinese. China will continue to be on a roll.

Europe will sink further into the abyss. The failure to rationalize sovereign debt problems (meaning the failure to begin some managed default process) will mean negative economic growth in Europe for 2012. At the end of the day, it will turn out that Europe is less important than everyone thinks. Except for very isolated situations, Europe as an economic entity has been moribund for a generation. That situation will only become more obvious in 2012.

Emerging markets will plod along, but if you own emerging market stocks, you'll wish you had bet on the US market by year end (same as 2011).

Growing disparities in the Western economies between the haves and the have nots. But, not what you think. The "haves" in the Western economies are those with "protected" jobs -- public employees, teachers especially, people that work for Universities, heavily regulated industries,companies that are basically the government (Fannie, Freddie, etc.), and elected politicians.

The have-nots in the Western world are those in the bottom half of the income spectrum -- the aged, the young and poorly educated, the minorities. These folks are going to see their situation deteriorate more in 2012, mostly because of the impact of government policies that have built up over the past fifty years.

Inflation will begin to be significantly more visible in 2012, but runaway problems are still a couple of years or more down the road. It will feel good in 2012, but the seeds of future problems will be evident.

So, 2012 will be a plus year and will feel better for the "haves" than 2011.

Another Economist Off The Rails

2011-12-30T04:51:00.000-08:00

Laura d'Andrea Tyson has now joined the chorus of academic economists spouting economic nonsense. (Although Tyson is more a politico and a professional board sitter these days and is definitely one of the 1%).

Tyson has a piece in today's NYTimes attacking the Wyden-Ryan proposal to reform medicare that would move medicare more into the free market. Tyson notes that the cost of medicare, in the past ten years (and especially in the last three years) has grown more slowly than private insurance. That is an absurd comparison.

Medicare grows by whatever it's budget is and that's that. Private insurance is beset by changes in state legislation (and virtually every state has dramatically altered it's health insurance rules making them more expensive by mandate) in the past ten years. Tyson also seems relatively unconcerned that medicare has a $ 66 Trillion unfunded liability into the future while private insurance has a zero unfunded liability into the future.

Tyson's argument is like saying if I buy now, pay later, then the cost is zero.

Reading Tyson's piece in today's NYTimes is one more trip down the anti-capitalism roadway that so many "star" economists seem to have taken. Economics to these folks is more about have the right politics than about economic logic and economic facts.

Before medicare came into existence, health care was cheap and plentiful and health insurance cost almost nothing. Go back and read newspapers and articles about health care in the world pre-1964 and you will find that health care was a backburner issue. Health care did not become a major problem until the last thirty years and most of our problems with health care provision have to do with too much government, not too little.

The free market is the best way to allocate a scarce resource. Subsidies for the less affluent are a humane way to deal with poverty and low income families. Entitlements for Warren Buffett and Bill Gates are a prescription for disaster and result in a $ 66 Trillion unfunded liability. Where are economists when we really need them?

Gold and Investment

2011-12-29T18:33:00.000-08:00

Most thoughtful observers realize that the US and the major Western economies are going to have significant inflation at some point. It is unlikely that politicians will ever deal forthrightly with the entitlement issues and the only thing left is to monetize the debt -- print money -- and hope that rampant inflation will destroy the value of the outstanding sovereign debt. An interesting future.

The conclusion that some draw is that gold (and perhaps other precious metals) should thrive in a world of out-of-control inflation and the absence of a safe haven asset. It is an appealing idea and gold has done well in recent years, until recent months.

But, how do you value gold? or silver? Normally things have some alternative use. But the prices of gold and silver are way beyond any alternative use value. Gold could trade anywhere -- up or down. There is no way of establishing a value for gold.

Should gold be a part of a diversified portfolio? No. But gold mining companies should.

Which brings us to the Hedge Fund industry in 2011. The hedge fund industry has stubbed it's toe big time by holding outsize positions in gold and in gold stocks. Why? What "expertise" that is worth paying money for leads a hedge fund to take a huge long position in gold? What are the analytics? Is it simply that Europe is imploding and the US is next? Is that it?

Is their some serious analytics behind the huge gold positions taken by hedge funds in 2011 or is this simply the herd instinct speculating in something with a bubble-like recent history?

Professor Cochrane and Dodd-Frank

2011-12-28T18:00:00.000-08:00

Professor John Cochrane of the University of Chicago opines today on the implementation of "too big to fail" in the Dodd-Frank legislation in the Wall Street Journal. As Professor Cochrane notes, the Dodd-Frank structure has nothing to do with the problems that beset the financial industry in the 2008 collapse but instead empowers arbitrary control of the US financial institutions by an unelected bureaucracy, accountable to no one.

Cochrane, correctly, redirects our attention to the stifling impact the Dodd-Frank "reforms" are having on our financial system and, as a result, on our economy. Economic stagnation by design. That's the Dodd-Frank regime.

The spirit of Dodd-Frank has breathed life into an anti-lending campaign by bank regulators the past two years. The result -- a bifurcation in the lending market. For those who don't need credit, it is available in abundance. For those who need credit, it is prohibited by the activities of the regulators. Obama could change this, but he chooses not to.

The time to tighten lending standards is during the boom, not during the bust. Tightening lightening standards during the bust just prolongs the bust. Why isn't that obvious?

More Goofball Economics

2011-12-27T04:10:00.001-08:00

Today's NY Times has yet another economist in action. Nancy Folbre, whose byline in today's blog puts her at University of Massachusetts as an "economics professor," argues that "...most ordinary people understand that the incentives built into the global capitalist system tend to reward some very bad behaviors." She then goes on to list things like "dumping waste products into the environment" and other capitalistic ills.

That would suggest that where there is no capitalism, there must be no real environmental damage. Is she kidding? The non-capitalist countries lead the league in environmental pollution. Try breathing the air in a typical non-capitalist country. I guess Professor Folbre doesn't travel much.

So, what does Professor Folbre recommend? She cites "calls for changes to articles of incorporation that would allow companies to pursue social missions without fear of shareholder litigation." What a great idea! Who would buy stocks with the knowledge that companies could toss company assets down the chute in pursuit of whatever "social mission" that Professor Folbre approves of? Do we all agree what a "social mission" is? Is my social mission the same as your social mission?

What is truly unbelievable is that Professor Folbre teaches young minds about economics. No mention in her blog today that only countries with capitalism can afford professors who indulge in this kind of nonsense. Countries without capitalism and who pursue "social missions" are mired in poverty, corruption, and, yes, environmental degradation. The non-capitalist countries don't have the luxury of blog-writing economics professors who detest capitalism.

More Nonsense from Academic Economists

2011-12-25T07:47:00.000-08:00

Peter Diamond (MIT) and Emmanuel Saez (Berkeley) recently published an article in The Journal of Economic Perspectives (Fall 2011 issue) entitled: "The Case for a Progressive Tax: From Basic Research to Public Policy." This article exhibits the total absurdity of modern academic economic research.

The point of the article is to show the "scientific" case for progressive taxes. Their conclusion: the highest marginal income tax rates should approach 80 percent! That is the conclusion of Diamond-Saez so-called science.

Here are a few of the assumptions in this "science:"

1. "Because the government values redistribution, the social marginal value of consumption to top bracket taxpayers ...can be ignored..."

Transalation: rich people don't value income at all so they won't miss it if it is taxed away. (Note this is an assumption!) You might wonder how Diamond and Saez know what "the government values" (or what that expression even means). They don't elaborate. They just make the statement "...the government values..." and then they fill in the blanks. Must be nice.

Here's another "scientific" assumption:

2. "Since the goal of the marginal rates on very high income incomes is to get revenue in order to hold down taxes on lower earners, this equation does not depend on the total revenue needs of the government."

Translation: regardless of whether government spends anything we should tax rich people at the highest possible marginal rate so that we can redistribute income.

3. "..the tax avoidance or evasion component of the elasticity e is not an immutable parameter and can be reduced through base broadening and tax enforcement."

Translation: By eliminating all deductions and exemptions and taxing capital gains and all other forms of revenue to high income tax payers as ordinary income, we can eliminate any tendency to avoid taxes.

Turns out this is utter nonsense. All the wealthy have to do is borrow the necessary money to live their lifestyle and not show any income at all -- ordinary or capital income. Consider Warren Buffet. He could just borrow $ 100 million per year and live on that without showing any income for tax purposes at all. Diamond and Saez are probably unaware that high income folks borrow, so they have ignored this among the myriad other things this "scientific" study has ignored.

Or, alternatively, high income folks could move to a country with more rational policies regarding income taxes. Diamond and Saez did not consider that possibility. Perhaps, they should talk to the states of California and New York to discover whether high marginal rates drive people away.

Here's the ridiculous conclusion of this "scientific" paper: "Thus we have identified basic research findings that we find relevant in thinking about practical tax setting......the case for higher rates at the top appears robust in the context of this model."

The above is what passes for economic research in modern academia, along with the argument that increasing minimum wages increase employment. Next, I guess we will be reading about how enacting maximum home price laws will revive the housing market. You can't make this stuff up. This is why tuition levels are going through the roof...to support this nonsense.

The Poverty of "Economics"

2011-12-24T03:13:00.000-08:00

An article in this morning's NYTimes by Catherine Rampell outlines the minimum wage increases that are coming on the 1st of January in eight states. As if lower income employees don't have enough problems this Christmas season, leave it to politicians (and economists) to make their lives worse.

The minimum wage increases will take place in Arizona, Colorado, Florida, Montana, Ohio, Oregon, Vermont and Washington. Note that some of these states are controlled by Republicans, some by Democrats. This is bi-partisan mischief.

Imagine that these same states passed a law saying that a gallon of milk can't be sold for less than $ 10 per gallon. Would dozens of economists step forward with studies showing that milk consumption would be unaffected by this kind of law? Would there be a bi-partisan consensus that a minimum price of milk is a good idea and would promote milk drinking? But, precisely this kind of absurd reasoning is brought forward to defend minimum wage laws (and their increases). Economists are notorious for putting forward their partisan political views as if they were science.

Minimum wage laws are an infringement on the freedom of contract and they deny job opportunities to people who need them. Those who might wish to work free as a way of gaining skills are legally prohibited from doing so. Those with skill sets below the minimum wage level would like to have a job at a lower wage (rather than no job at all), but are forbidden by law to have that first step up the ladder.

Why not just pass a law saying that poor people should be required to stay poor by law? That would have an effect similar to that of minimum wage laws. Economists and politicians who support minimum wage legislation should be ashamed of themselves. Perhaps we should pass a law saying that economists should be paid $ 10,000 per hour or otherwise be forbidden to work. Then, perhaps, economists would begin to understand the pernicious effects of minimum wage laws.

Another "Rip Van Winkle Year"

2011-12-22T13:23:00.000-08:00

In 1987, the Dow Jones Industrial Average began and ended the year in the neighborhood of 2200. In July it topped out above 2700 and hit a low of 1700 in October. A lot of sound and fury to end unchanged!

It looks like we have a repeat performance this year. After the big rally in the first half of the year and the huge slump at the end of the summer, the Dow and the S&P are within a day's rally of being unchanged on the year. Not bad given all the bad news and disappointments.

Look for a big rally in 2012. 2011 isn't over yet, but it certainly seems to be about to finish about where it began, if not better.

Europe is a mess. US government policy is a mess. But, business is getting better and profits are improving. If you're looking for a job and you are in the bottom half of the nation's skill set, you're still in trouble and things aren't going to improve much for you in 2012. But, for the highly paid and for government employees, next year looks pretty good. Stocks will do well, bonds won't. Europe will adopt something akin to a monetization of the sovereign debt of the Eurozone countries -- a big mistake, but one that will give them a few years' breathing space until disastrous inflation overtakes them.

So, the long run future is pretty bleak, but the next couple of years will be good for stocks, good for rich people and good for protected government employees. For everyone else, let them enjoy the liberal rhetoric, because the liberal policies have undermined their future.

Republicans Blink and Cave -- Once Again

2011-12-22T13:08:00.000-08:00

Extending the two percent payroll tax holiday is bad policy. The Republican House's rejection of the Senate bill was the right thing to do. Now, for purely political reasons, they are reversing course. Big mistake.

If, at the end of the day, Republicans can't show more backbone than this, then the future is not bright. Obama, even with no constructive policies (he has lots of destructive one) will coast to re-election if the public sees Republicans as lacking principles. Capitulating on the two month payroll tax holiday is not a good sign.

What Explains Corzine? Really?

2011-12-20T17:49:00.001-08:00

Who would have thought: a former top dog of Goldman Sachs betting the ranch on Spanish and Italian sovereign debt. Really?

This is one for the behavioral finance boys. Hubris is the only real explanation. You would have to believe that you are the smartest man in the world and that there is virtually no possibility that you could be wrong. Then, away you go! Load up on junky sovereign debt and show the world!

Is this were a movie script, no one would buy it. It's too ridiculous.

But, happen it did. Not only that, Mr. Corzine appeared before Congressional committees and tritely explained that he knew nothing at all about how his company, MF Global, was meeting the daily margin calls (all repo transactions are marked to market daily). But, of course, Corzine did not know anything about that. He bought 6.5 billion in bonds and didn't give a thought to what the necessary cash position was that would be necessary to sustain that position as it collapsed in the market place. Really?

I suppose the reason that Corzine wasn't concerned about how his firm was going to meet the cash marks on their huge bond bet was that it was 100% certain to go his way. No need for cash!

Did they have to dip into customer accounts to meet margin calls? Apparently, this was not Corzine's concern. He was not involved in how the firm met the growing cash margin calls that were escalating daily at MF Global. Really?

I suppose Corzine was merely a face man. Someone else must have been running MFGlobal all this time. I wonder when that person will appear and own up to what happened to the customers $ 1.2 billion in missing funds. Really?

The Payroll "Tax Cut"

2011-12-20T17:28:00.000-08:00

Is reducing the payroll tax for one year by 2 percentage points a good idea? Normally, I think reducing any tax is a good idea. Why feed the beast?

But, don't forget the real issues are: 1) economic stagnation; 2) size and reach of government; 3) the growing national debt. A temporary drop in the payroll tax doesn't do much about any of these issues. So, what good is it really?

It's interesting that the politicos have seized on this debate as a big deal. In truth, whether or not the payroll tax is temporarily reduced by an amount of this magnitude is mostly political theater.

The big Obama concession in this drama is the Senate Democrats retreat from the millionaire surtax. The millionaire surtax is a completely absurd idea that moves us away from the resolving the three problems cited above.

Name me a millionaire who cares what the tax rate is. Millionaires can simply readjust their assets (or better yet just take out loans) and avoid taxable income at their pleasure. Thus raising the tax rates on millionaires just guarantees a lower level of tax revenues from millionaires. Who wins with that outcome?

The House Republicans are the only adults in the room. They see the folly of a two month drop in the payroll tax. It is political theater and should be rejected as such.

If the public can't see through this silliness, then they deserve the government (and the economy) that they have.

Visions of Sugar Plums

2011-12-18T05:20:00.000-08:00

One more week and Santa comes cruising our way. What will be in his stocking and what does the New Year portend?

The good news for many Americans is that the US economy is not falling off the cliff. Even the coming debacle in Europe will not prevent the American economy from a slow and steady climb out of the abyss.

Bad economic policy has throttled the American and western economies in ways that the Asian economies haven't yet learned (they will learn in time). But even bad policy can't completely eliminate economic growth, if some remnants of capitalism remain.

So, the future is bright for Asia and the future is bright for most of the under-developed world. The advanced economies have mortgaged their futures, so the lights will dim for the coming generations in the western economies. At the end of the day, someone has to work, someone has to save, someone has to hire people. This is a message that the western world has forgotten, but the underdeveloped world has not.

There will continue to be cycles of all types, booms and busts, bubbles, bankruptcies and all the rest. These are all necessary ingredients of healthy capitalism and will not go away until capitalism is extinguished by ardent reformers.

True economic fairness and justice requires providing the opportunity for every citizen to use his/her talents to the fullest. Policies in the US and Western Europe go in the other direction. Anyone with real talent will be stifled in the western economies over the next few generations. The bright lights are on in Asia, the dimmer switch has been hit in the Western world.

Perhaps this is not all bad. The advanced economies have had their moment in the sun and the current advancing economies are hungry to supplant them. That they will do so will write the history of the 21st century.

The Equity Market Spurt

2011-12-02T03:45:00.000-08:00

This is another extraordinary week for global stock markets. The US market has climbed nearly eight percent in just the past four market days. Why?

Once again, the pundits look to Europe and the ongoing circus of inept politicians struggling to keep defaults from occurring on their watch. This week's announcement of non-Euro central bank swap facilities' rate drop to provide liquidity to the ECB, to be passed along to the European banking community, is cited as the reason for the rally. Not likely.

The political antics in the Eurozone will provide no relief to the inevitable defaults that will sweep the Eurozone. Nothing will prevent that from happening. The only thing the European politicians are trying to do is kick the can down the road. No one is discussing the real solution, which involves dismantling the entitlement structures and reducing the role of government in their economies. Anything short of the real solution is no solution and will ultimately fail.

But, does it really matter all that much for global equity markets? The markets have struggled to find any direction since late July even though the microeconomics of public companies have rarely been as good as they appear today. The US economy, in particular, is not falling into a second recession. The US economy is growing, though saddled with some of the most perverse economic policies in its history. Today's NY Times has a very instructive article detailing the plight of the unemployed who are at the bottom of the skill pyramid. The administration's policies have doomed these folks to permanent penury.

But, the US economy as a whole is growing. The rich get richer and the poor get poorer under the Obama regime's policies, which, ironically, are designed to help the poor at the expense of the rich. Policies like that always boomerang. The US economy will continue to grow slowly and businesses will continue to find ways to avoid hiring in any large numbers.

Remember September, 1983 when the economy produced 1.1 million jobs? That seems like a lost memory of the bad old days of Reagan-economics. That won't happen again as long as the Obama team is in place. An administration committing to demonizing job creators will find job creation a long, slow process and the many Americans that are looking for jobs will keep looking until these policies change. But stocks will do fine.

A False Choice

2011-11-24T11:00:00.000-08:00

It's President Obama's favorite expression -- "a false choice" -- but it seems like the right expression for what pundits are describing as the Eurozone's only alternatives at this point: issue eurobonds or face chaotic default. But, are these really the only choices?

What about a workout -- Argentina style? Why won't that work? A debt workout would likely be a win-win for the Eurozone debtors and their creditors.

The market has already set the stage for such a workout for Greece, whose outstanding debt is now trading at a fraction of its originally issued value. Why not go the rest of the way by offering creditors repayment with a substantial haircut? That would then set the stage for similar "workouts" across Europe.

This would reduce Eurozone debt, force creditors to absorb some of the impact of their poor investment decisions, and avoid the austerity measures that can only lead to political upheaval.

No need to abandon the Euro. All that is needed is a touch of realism

Sequestration is a Better Solution

2011-11-21T16:54:00.000-08:00

The Super Committee, at best, would have ended up with a variety of tricks that would not reduce the burgeoning size of government, so we should all celebrate the failure of the Super Committee. Bring on sequestration. The US cannot afford it's current path and whatever reduces the size of the mountain is a plus. We should resist any and all efforts to restore any of the cuts that are mandated under sequestration.

Time to include entitlements in the sequestration.

Why The Young Have a "European" Future

2011-11-20T04:26:00.000-08:00

Young people in America face much less opportunity than their parents. Why? Corporate greed?

Is greed something new that just burst on the scenes in the past ten years or so and has squashed the hopes of our young folks? Is greed the reason that young folks increasingly can't find jobs and are forced to take the European way -- live at home with your parents until you are in your late 30s? So, if no one is greedy, then jobs will magically appear and all will be well? Is that the thinking of the OWS crowd?

For starters, absent greed, there would be no jobs. Someone has to be greedy enough to want to make a profit and thus hire employees. The more profit they want to make, the more they have to expand their business and the more employees they will have to hire. Greed creates jobs. The absence of greed means there is no motive to hire anyone.

Those who push the "greed" thesis believe that an economy is a fixed pie that is available for everyone to take a slice and that politics is about who gets the biggest slice. If that view of the economy is correct, then the OWS people are right. That would simplify things a lot. That would mean that some of the poorest nations in the world have figured it out. Everyone is on the brink of starvation. The pie is fixed, not growing, and the only political issues are how to divide it in countries like that. OWS folks would like that, I suppose.

"Greed" has taken over in China and pushed it to nearly 10 percent economic growth year after year. The result is nearly 300 million people have moved from a standard of living of $ 200 per year to a standard of living of $ 20,000 per year in the newly prosperous cities of China. Where there is no apparent greed, in the Chinese countryside, the standard of living remains stuck at $ 200 per year. The OWS folks would like this because there is no 1 %. 100 % of folks in rural China live badly, but the pie is certainly sliced fairly....everyone gets virtually nothing.

What has happened to America that young people don't have the opportunities that were available to their parents? First and foremost, our parents were not saddled with modern employment laws that dramatically raise the cost of labor. Our parents got to keep most of what the employer paid in labor costs. Not anymore. What an employee gets is a fraction of what an employer must pay in modern America. This means that employers that want workers are becoming a vanishing breed. Minimum wage laws, family leave acts, OSHA, discrimination laws. growing legal liabilities for things both in the workplace and outside of the workplace, health care costs (why are health care costs an expense to be borne by employers?). All of these "good" things make labor too expensive in modern America and those who will suffer the most will be the least skilled amongst us -- minorities, youth, the unemployed. These are the victims of the big government agenda.

Second, social security and medicare have provided benefits to the older folks that are paid for by young workers and future young workers. That's a bad deal for young workers and future young workers to be saddled with a monstrous debt load that arose by providing benefits to people that never earned them (in any actuarial sense). But they have to paid for. The youth do that. What do they get for this? Nothing.

So young folks are prisoners of bad government policy. What the country needs is for those who want to get rich to have the opportunity to do so by hiring workers. If you don't like rich people, you probably don't mind high levels of unemployment (as long as it's not you) and young people increasingly forced to return home to their parents. That's been the European way for generations. It is now becoming the American way and for pretty much the same set of reasons.

OWS: Gimme, Gimme

2011-11-15T04:12:00.000-08:00

Occupy Wall Street is not about a political argument really. It is simply the idea that some folks are entitled and others are not. The protestors are "demanding" various things that they claim are theirs by right -- mostly they want things other people have worked hard to obtain.

Instead of putting their shoulder to the wheel and working to accomplish things in life, the protestors want others -- the rich, they say -- to fund them. College graduates after four years of fun frequenting the local bar scene on government (taxpayer) loan funding, now, with sociology degree in hand, want high paying jobs for which they have no qualifications.

None of this is really about politics. This is merely the anthem of the entitlement -- give me what others have because I am me and I am entitled. Not much else going on.

People with real responsibilities do not have time for this. They are busy out working hard either at their job or they are working hard looking for a job. Only the entitled need to do neither. Hopefully, the "entitled" are not 99 percent, but a much smaller percentage of our society.

Eventually as more and more people join the "entitled," you arrive at the situation Europe finds itself in. Everyone wants free this and free that. Unfortunately, there aren't enough "rich" people or naive bondholders to permit this situation to go on indefinitely.

What About the US?

2011-11-14T03:38:00.000-08:00

With Europe heading for massive defaults and economic contraction, what is the future for the US?

Weakness in Europe will not be a plus, but more fundamental problems await the US. Our debt situation is worse than the situation currently plaguing the Eurozone. Yes, our situation is worse.

The various "states" of Europe have unsustainable levels of debt, just as most of the larger states in the US have unsustainable levels of debt (Illinois, California, New York, New Jersey, etc.). But Europe does not have a federal debt problem. The Eurozone does not issue it's own debt. The US does. So, the US has sovereign debt at two levels -- the federal level and the state level, while the Eurozone has sovereign debt only at the "state" level.

No amount of cuts and tax increases will have any impact whatever on the dynamics of US debt. Thus, the current discussion about the Supercommittee is largely irrelevant. (Democrats have pretty much admitted that by listing as $ 1 Trillion in cuts the cuts from "not fighting future undeclared wars!)"

The problem of US federal debt is an entitlement problem and has an easy solution -- a very easy solution, an almost trivial solution. Moving the age of eligibility out a few years for both social security and medicare is the one and only solution that will have any impact whatsoever on our national debt problems (and scaling back medicaid). Nothing else really moves the (long term) needle at all.

As for the states, the states' problem is a problem of the benefits or "entitlements" that they provide for their public employees. Moving the age of "eligibility" out and substantially reducing the benefits for those not currently retired is the only way of moving the needle for the problems of the states (and municipalities). Nothing else really matters at all.

All the talk about tax increases and reducing (discretionary) spending is largely beside the point. Whatever virtues or vices there may be in altering the tax system and reducing the levels of discretionary spending, such tinkering does not make any difference at all in the long run debt dynamics of the US.

The numbers are the numbers.

Goodbye Italy

2011-11-09T03:48:00.000-08:00

Look at the numbers: $ 2.6 Trillion national debt which amounts to 120 percent of GDP. Nearly 15 percent of that debt comes due within the next twelve months. Yields on 10 year bonds now north of 7 percent. That's Italy.

The Italian political leader Berlusconi has resigned, joining his pal Papandreou. It's over for Italy. All that is left to speculate about is when Italy will recognize the necessity to do a planned workout -- commonly known as a (partial) default.

Before this is over, the leadership in Germany, France, and Spain will also step down, either voluntarily or by action of the voters.

This game has only one end. Either these countries sit down with their bondholders and work out a partial default plan or total chaos will be the end result when they simply can no longer sell debt at all and can't pay their day to day bills.

The unreality of the approach of European leaders is almost comic, except for the tragic implications that their foolishness may lead to.

There is no harm in a partial default. The bondholders already know they are in deep, deep trouble. A partial default only recognizes what markets have already accomplished -- major losses for bondholders. The bondholders are already there -- time for a workout.

Of course, this means that the entitlement systems can no longer function as they have in the past. There are simply no funds available for these systems. No one is willing to lend money to support other people in a grand lifestyle -- not anymore.

The countries of Europe will be forced, after a debt workout, to dismantle the entitlement systems that have undermined the work ethic in Europe and saddled their countries and much of the rest of the world with bonds that cannot be repaid.

Next up on the docket is the US. It's just a matter of time, but it is basically the same scenario.

Greek Political Turmoil

2011-11-05T04:01:00.000-07:00

According to the news media, what Greek politicians do next will determine whether or not the current Euro crisis can be "resolved." Not really.

The main significance of the past week of Greek political back and forth is that political leaders throughout Europe are in trouble -- big trouble.

Countries forced into austerity measures will, in the end, replace their political leadership. That process is already under way in Greece and Spain and is surfacing in Italy as well.

Countries who are putting their taxpayers on the line to support the bailout of the profligate countries will also soon begin the process of replacing their political leaders -- Germany and France.

Neither side of this grand scheme, the bailors or the bailees, have the support of their voters. Why is this a surprise? The effort to bail out the sovereign debt problems of Greece, Spain, Italy (Portugal, Ireland) is a "lose-lose" policy and voters can see clearly that it is not in their interest, no matter what country they live in.

What works is a recognition that the debts are unsustainable and that it is time to sit down with creditors and do a workout -- a planned default.

It might take changing the political leadership in all major European countries, not just in Greece, to get the focus on the real solution to the European debt crisis.

Corzine Bets and Loses

2011-11-04T04:49:00.000-07:00

John Corzine, former Senator and Governor of New Jersey and former Chairman of Goldman Sachs, stepped down today as Chairman of MFGlobal, as MFGlobal remained in the headlines for its bankruptcy filing two days ago. Corzine presided over the firm as it made huge bets on European sovereign debt, thinking that the worst of that crisis had passed. Unfortunately for Corzine and MFGlobal, the worst of the crisis is yet to come and MFGlobal and its leader are no more.

To Corzine's credit, he has always espoused the view that sovereign debt problems are imaginary and not real problems. He never had much interest in measures that might tame the growth in US national debt or the debt problems in New Jersey. So, at least, Corzine is consistent.

The blind spot that poisoned Corzine's reign at MFGlobal is the same blindspot that pervades current attitudes on the US's national debt (and the obligations of a number of state governments). These huge debt loads are not sustainable, blind spots notwithstanding.

One good thing worth noting is that there was no rescue for MFGlobal, which is good. Second, Corzine took no severance as he fell on his sword today. That is also good.

There is a whiff in the air that there might be a problem in customer accounts, but I suspect that that is probably not the case, but we shall see. Assuming no mingling of customer accounts, this seems to be a case where markets worked properly and the outcome is the proper one. The company made a big bad bet and it didn't work. The result -- bankruptcy. That is as it should be. Firms will learn if we let them.

The Unraveling of a Dumb Idea

2011-11-03T04:15:00.000-07:00

The proposed "deal" that has been crafted by France and Germany for the EU to "save" the Euro is one of the most absurd plans that has ever been concocted. It should be obvious that neither the bailors nor the bailees are going to go along with this (even if their leaders continue to pursue such foolishness).

It's time to say: "we're broke" and be done with all of this obfuscation. None of the deals make any sense and none will survive past the self-congratulatory posturing deal-announcements of Merkel and Sarcozy. Give it up.

It isn't clear on the basis of the data that the sovereign debt of France and Germany has any real hope of survival, much less the southern periphery of Europe. (Is the US really in a position to "bail out" Illinois, California and New York, when the inevitable time of their impending defaults arrive?).

The problem is not "confidence" or "liquidity." When your house is burning to the ground, a cup of water isn't going to help. The problem in Europe is identical to the problem in the US and Japan. Promises have been made to people that cannot be kept. There is no way to shift the chairs around on the deck. No one can afford all the free and subsidized stuff that Europe and America have promised. The party is over.

Two generations have lived high on the hog until the ponzi-scheme nature of the funding of retirement and health care have been exposed. Now, the party is over. There isn't some group of future bondholders out there willing to throw good money after bad. Let's face it. It's time for Greece, Spain, Italy, etc (probably Germany and France as well within two or three years) to throw in the towel and began to sit down with their creditors and fashion a realistic deal (meaning default).

A lot of newsprint and stock market gyrations have been wasted on the continuing political sideshow going on in Europe. It will lead nowhere and defaults are inevitable.

Greeks Should Vote No

2011-11-01T04:07:00.000-07:00

Why should the Greeks agree to the bailout terms of the EU? If I were a Greek citizen, I would vote no. There is simply no way that generations of Greeks should buy in to austerity to support bad decisions by Greek bondholders. Default is the right answer -- for everyone -- not just for Greece.

If Greece defaults, and that doesn't necessarily mean leaving the Euro (any more than when Illinois defaults, which it will, that it means Illinois will leave the US dollar zone), then and only then can Greece, on its own, begin to correct the absurd government policies that have wrecked their economy. They have to reach this realization on their own. It cannot be forced from outside.

Greece is just the first gong in a series of bells that will ring of default through the Western world. No one, no one, can afford the economic policies that Europe has adopted over the past half century. Why the present US administration wants to emulate this disastrous course is not clear.

The idea that health care, retirement, education, housing, minimum wages, right to sue for virtually any absurd reason that one can dream up are all rights that must be provided to every citizen free of charge is so absurd as to hardly call for discussion. But these are the very policies that the Western world has adopted. Now, Europe and the US will have to live with the consequences and they are not pretty.

Again, Asia (ex-Japan), has not adopted the foolish policies of the West. Asia will achieve economic supremacy and fairly quickly as the West descends into the economic chaos that it has brought upon itself by the foolish view that government can provide all things to all people free of charge.

Back to Basics

2011-10-30T05:36:00.001-07:00

The number one problem for the US and for Western Europe is job creation. There is no bigger problem. The politicians can focus on all sorts of other things: taxing rich people, subsidizing pet projects, bashing China, etc. But, anyone who thinks there is a bigger problem than unemployment is missing the forest for the trees.

How do we get more jobs? That is not a tough question. It is only tough because we are talking about labor. If we asked the identical question about anything else, the answer would be painfully obvious. For some reason, politicians and many economists become completely irrational when asked how to increase the demand for labor. If the same politicians and economists were asked about how to increase the demand for anything else the answer would be immediately forthcoming.

How do you increase the demand for something?

How about making that something more expensive? Would that help?

What about substantially increasing the taxes for people that use that something? Would that help?

What about passing new regulations that would apply to using that something? Would that help?

To increase the demand for apples, why not make apples more expensive, tax folks who eat apples, and make anyone who buys apples spend one month of every year filling out paperwork to satisfy the regulations required to consume apples. Would that increase the demand for apples?

Yet, politicians and economists (like Paul Krugman) think that this is exactly the prescription necessary to get to full employment of labor. They are wrong.

To get more jobs, you need to reduce the cost of labor, increase the economic incentives for those who employ labor and reduce the regulations that surround the employment of labor. That's how you would increase the demand for anything including labor.

The Anger of the Entitled

2011-10-29T05:28:00.000-07:00

Wherever you look these days, there are people demonstrating for their "rights." These "rights" are the right to take money from other people so that the demonstrators can have free this and free that. If education and health care are to be free, who pays? The demonstrators could care less.

Look at Greece. There are daily and massive demonstrations demanding that their failed welfare state continue to support the "entitled." It is always someone else that should pay for all of the things that the "entitled" want. Everything is a fundamental "right" without obligations on the part of the entitled to fund anything. There are no obligations to be imposed on the entitled. After all, they are the entitled.

What about Italy and Spain? Who pays? Their answer is the same as the OWS (Occupy Wall Street) crowd. They payers are "the rich." As if the rich had enough assets to keep all of these entitled folks going on indefinitely. The move to "get the rich" has historical precedents and none of them are very attractive for average people.

The Russian and Cuban experiments were long playing disasters for the average person living through those experiments. It's worth noting that even those "leveling" societies had their privileged. The Castro family lives in a style that America's rich would love to aspire to.

People with responsibilities, kids to take care of, old folks to support and the like don't have time to camp out in make-shift camps around the US and the world and make posters with four letter words describing their hatred for capitalism.

When winter comes, the OWS gang will retreat to the warmth of their comfortable homes or back to their "entitled" college community.

The truly disadvantaged don't have time for this stuff. But the truly "entitled" can camp out for years on end before retreating to a more comfortable lifestyle that they are "entitled" to.

The rest of us have to work for a living.

Milton Friedman noted long ago that the only societies that have ever produced for the average person were capitalist societies. Such societies also produced rich people as a by product of raising the standard of living of the average person. You can see the fruits of capitalism today in China raising the standard of living of hundreds of millions of Chinese. Capitalism is what is needed if the average person is going to have a fair shake.

But, the entitled are not interested in capitalism. They are mainly interested in getting their "rights" at the expense of others.

Ho Hum

2011-10-28T04:39:00.000-07:00

The European "deal" is mostly a mirage. The only "real" thing that takes place in the deal is the 50% write down of Greek sovereign debt and even that write down only applies to the 60 percent of the debt that is in "private" hands, meaning mainly in the hands of commercial banks.

Buried in this deal is the possibility that CDS (credit default swap) contracts will not be triggered. That is probably a sop to the banks who are on the hook for these contracts, which, among other things, insure Greek sovereign debt. No payoff for those who took out insurance. Who would have thought?

Europe is following the American pattern of reneging on past contracts to foster the illusion that they are solving today's problems. (America continues this pattern with debt forgiveness orchestrated by the White House, invalidating legitimate private sector contracts with the hope of securing more votes for Obama in 2012).

As for the EFSF (European Financial Stability Fund), the plan for that entity is ridiculous. Somehow, someway, someone is going to give the EFSF $ 1 Trillion and then that will be used to "insure" the first twenty percent of loss on newly issued debt, presumably debt issued by Greece, Spain and Italy. Who is going to come up with the $ 1 Trillion? The short answer is no one. The long answer involves numerous future headlines about the Chinese, the Saudis, and other targets, who will play nice, but, in the end, will donate nothing at all to this silly idea.

This "deal" now gives breathing space for a further expansion in sovereign debt by the weakest members of the EU so that a year from now, problems will be much, much worse than they are now. Meanwhile, Greece can go back to running the most inefficient economy on the planet without fearing a default (in the next few weeks).

So, why did the markets go up?

Because the US economy continues to grow, albeit slowly, and business is learning how to do without employees and still make money. So stocks will continue their upward march -- at least for a while yet. A sick Europe and an ever growing sovereign debt debacle is factored into market prices already. That's why the market is cheap (but getting less cheap).

Side Issues and Reality

2011-10-23T06:05:00.000-07:00

You might wonder why all the talk about greed and Wall Street. Isn't the real issue that the American economy is moribund and that unemployment is at staggeringly high levels? Why is the national debt important? Because it threatens the economic vitality of the future. These are the real issues -- the economy. They are made more real by the simple fact that opportunities for those who are less fortunate always improve with economic growth and always decline with economic stagnation.

Case in point -- today. As much as the Obama folks crow that they support the economically less fortunate, the Obama policies are devastating the poor, minorities and the less fortunate among us. Folks cannot find work. That is the real problem.

It is clear that President Obama will never focus on the economy's real problem -- stagnation and unemployment. He doesn't understand such problems because he has never experienced them and knows no one who has ever experienced these problems. His olympian view is that politics can solve all ills.

Well, politics has devastated our economy and our economic future. Government policy, regulation, and taxes have brought the American economy to its knees. Europe and the US have made promises to their citizenry that cannot be kept. So, why not change the subject? Find someone else to blame. We've seen this political tactic before many times in world history.

If Germany Caves

2011-10-17T08:35:00.000-07:00

There is always the possibility that Germany will agree to underwrite the sovereign debt problems of the PIIGS countries (Portugal, Italy, Ireland, Greece, Spain). How would that look? Imagine the concept of creating Eurobonds that all of the Eurozone countries stand behind (which would basically put Germany on a hook that they are not currently on) or have the ECB buy $ 2 Trillion of Sovereign debt (which would be pretty much the same thing). What happens then?

If this happens, you have the situation that will, in time, present itself to the US. There will be a massive debt that really cannot ever be paid off other than by simply printing currency and using the currency to continue to fund the debt. That means massive worldwide inflation with the purpose of destroying the "value" of the outstanding sovereign debt. If the inflation does not spiral out of control, this could work. It would be simply another way of defaulting.

Imagine a 10 percent inflation rate worldwide. In a reasonably short time, the value of outstanding sovereign debt would fall dramatically (along with all currency-denominated assets). In effect, you simply destroy the value of the sovereign bonds as you use the printing press to keep them current. If you can keep the inflation rate high but under control, this will do the trick. The danger is, of course, that inflation can have a mind of its own and might not remain under control. This could mean hyperinflation which could destroy the major economies of the world. But, it is possible that inflation could be kept under control at a high level. Who knows?

One side effect is the destruction of all of the entitlement programs. Social security and pension funds which are denominated in dollars will lose much of their value (politicians will find a way to eliminate cost of living indices that are in place to preserve the value of these funds). Health care programs are budgeted in dollars. They will become worthless as well. Public employees will find their salaries fixed and they will find themselves impoverished.

What will prosper in this environment is anything whose value is not stated and fixed in currency terms -- commodities, free market businesses, anything where prices adjust upward with inflation.

In other words, world wide inflation triggered by selling Eurobonds or some other equivalent scheme, is just a default by another name (see Rogoff and Rinehart's recent book, "This Time is Different").

Just plain defaulting would be much simpler, but may not suit the politicians as well as massive inflation.

The Blame Game

2011-10-15T05:13:00.000-07:00

If you buy a residence in the US and live in it, you are in a remarkable situation, especially if you finance the home with a large mortgage. If the value of your home rises, you can sell it tax free (in more than 98 percent of actual home sale situations) and if the value of your home falls, you can, in most states, simply move away and owe nothing. Even better, the government subsidizes the interest expense that you pay on the mortgage by permitting tax deductions for mortgage interest paid.

If you decide to pay off your mortgage early (to take advantage of lower mortgage rates), the government insists that all "conformable" mortgage loans (comformable to GNMA standards, which accounts for more than 90 percent of all US mortgages) provide for no penalty whatsoever to homeowners choosing to refinance their homes (a luxury unheard of in the mortgage market for commercial real estate).

As if that isn't enough, Congress has created two "quasi" government agencies, Federal National Mortgage Association (Fannie Mae) and Federal Mortgage Corporation (Freddie Mac) who currently own or guarantee more than half of the mortgages in the US. The effect of this taxpayer largess to home buyers is to lower the interest rates paid on home mortgages by providing massive amounts of taxpayer dollars for the mortgage market.

Is there a wonder that there was a housing bubble? Does it really require predatory lenders to get this rocket-fueled housing bubble going?

If virtually all capital gains on common stock were tax free, we would see a massive bubble in US stocks, especially if the interest on stock loans were tax deductible and if the government provided taxpayer money to loan money to potential stock holders.

So, why the deal with housing?

The government (both political parties) made the decision to favor home ownership over renting for the average American.

Note that none of the legislation introduced by either President Obama or Republicans does anything to change the current government favoritism of residential housing. So, guess what? We are absolutely assured to repeat the housing bubble and bust in the future. Nothing in Dodd-Frank or the other sledgehammer attacks on capitalism initiated by President Obama and his Democratic Congress do anything to change government's policies that guarantee another housing disaster at some future date.

What about Canada? Canada does not have tax-free sales of residential homes. Canada does not permit tax deductions for interest expense. Canada does not have a Fannie Mae or Freddie Mac? Guess what? Canada had no housing bubble either. Are Canadians that different from Americans? Nope. They just have different government policies regarding housing.

So, why are Wall Streeters blamed for the housing bubble, but government policies get a free ride? Because politicans have no clue as to what happened from 2006 to the present. Today's Obama tirades are simply a knee-jerk, anti-capitalism reflex to a downturn that their very own political allies put in motion generations earlier.

Wall Streeters did not cause the housing bubble or its subsequent collapse. Wall Streeters did not put in place the Obama policies that have stifled any hopes of a vigorous economic recovery.

The real blame for the housing bubble and collapse belongs to current government policies regarding residential housing. Until those policies end, we are doomed to repeat the housing bubbles and busts.

Background Noise

2011-10-13T20:06:00.000-07:00

Occupy Wall Street (OWS) and the President's "jobs plan" have become background noise to the faltering US economy. Far more interesting are the political shenanigans in Europe attempting mission impossible -- trying to keep most of Europe from defaulting. This steady drumbeat of irrelevance beats on as the Western economies slide into the mud.

Capitalism is now so hamstrung in the Western economies that we will soon be trumpeting 8 % unemployment as full employment. Europe is pretty much used to that already. European countries haven't seen four percent unemployment since Queen Victoria's days and they are not likely to see it again in the future. The US is a tag along.

All of our troubles in the Western world stem from one simple consideration: many people have an insatiable desire to be appear to be "good" people. Appearance is the key here. Really helping people is not the plan.

Look at Buffett. He is complaining that people like him don't pay enough taxes. That problem is easily solved. He can send in more money with his tax return. Then he can pay what he deems his fair share. You think he would do that? Are you kidding? Buffett is just trying to prove that he is a "good" guy. This is all about appearances. Buffett has no intention of paying more in taxes. If he did, he would do it. Nothing prevents Buffett from paying more in taxes right now, except that he doesn't want to pay them. But, he sure wants to BS about how he wants to pay more. Interesting!

Most good ideas that people want to foist on others, such as minimum wage laws, don't affect anyone but poor people. Minimum wage laws simply outlaw certain contractual arrangements because one is poor. That's it....nothing more. Heaven help you if your skill set doesn't merit some liberal's idea of a living wage. You are just flat out of lack. Let them eat cake, one supposes.

And so it goes. Laws passed to help workers invariably end up creating reasons for employers to not have workers. Anytime government favors a group, it makes them toxic to other people and especially toxic to people who make hiring decisions.

Good ideas designed to help people become anchors that prevent people from the having the opportunity to improve their lot. That's why inequality has grown so dramatically in the past several decades. Liberal help has created a situation where the poorest among us have no real upside anymore.

The rich are comfortable which is why virtually every wealthy suburb in America is now represented by some arrogant white liberal. Nancy Pelosi's district isn't full of poor people and Nancy Pelosi is herself among the 1/100 of 1 percent of the richest people in America. Let them eat cake. Thanks Nancy!

These folks bask in self adulation thinking that they are doing good, but what they are really doing is preserving their dominance over folks less fortunate. The welfare state is like a boot on the neck of poor people. They just don't have a chance in this kind of environment.

What the less fortunate among us need is for the government to get out of the way and give them a chance. Asia is giving their citizens a shot. That's why Asia will supplant the West as the dominant economic power within another two generations.

The Wall Street Protestors

2011-10-05T20:45:00.001-07:00

You just knew that it couldn't be confined to Greece. The US has more than its share of folks that feel entitled and now they are congregating daily on Wall Street. Students, having spent four years boozing it up and studying sociology, now wonder where are the jobs?

Corporate greed, huh? Who owns corporations? Workers mainly...in their pension funds. So, if you can destroy corporations, you are basically destroying the savings and the economic future of the average worker -- union worker, state and local public employee worker, anyone with an IRA. There isn't some rich guy out there that owns Big Oil. The average worker owns Big Oil in his pension fund.

So, we come full circle. The attack on greed is really an attack on the retirement hopes and dreams of the average American. They have been so greedy as to plan for retirement or to work for an employer that provides a pension fund. By all means, lets destroy it in a war on "corporate greed."

We are no longer debating policies; we are now debating "sharing burdens." "Sharing" means I want what is yours. That is sharing. The idea is that we no longer intend to see the pie grow, so let's start cutting the pie up and sharing it. Forget about the idea that America can be a properous and growing country. That's so....Reagan-like.

This is what happens when the highest levels of government no longer have any policy prescriptions other than demonizing rich people. It catches on. Pretty soon rich people are really the middle class and the working classes. They are all greedy when compared to a bunch of students used to cutting classes (which they are doing now), and wondering why the world isn't beating a path to their door.

There isn't much of a labor market for empty political rhetoric. These protestors are going to be out there for a long time. They represent the new normal in the Obama economy.

Growing Slowly

2011-10-02T18:03:00.000-07:00

The US economy is not going to get much worse. It will improve. But, it won't be like the economy in past years. Why?

Unemployment is here to stay and especially for those in the bottom half of the skill pool. The future will have a permanent unemployed part of the American population. The unemployed will survive by various "safety nets" funded by government. It is hard to see how they will ever be legally employable again in any great numbers.

The absence of work opportunities for the unemployed suggests that their children will be disadvantaged as well, since useful employment will not be a day-to-day feature of these households. The US will have a perpetual underclass, basically created by government fiat.

For the upper middle income and the rich, the "new economy" will seem much as before. Using "outsourcing" and technology, the wealthiest part of America will find a way to get by without the unskilled labor force that once had a home in this economy.

The rags to riches stories will be things of the past. Just as in modern day Europe, economic and social classes will be frozen, economic growth will move along at a snail's pace, and social and economic mobility will come to an end.

This unfortunate future is the result of pricing the low income part of the labor force out of the market. Business just cannot afford them anymore thanks to the blithering array of taxes, mandates, litigation fears. All of these things that government has decided to do to "help" workers, simply makes them toxic to employers. We've gone past the tipping point.

These obstacles that shackle poor folks are not that formidable for high income, highly skilled folks. Their incomes are high enough and their skill sets are high enough that they can still be employed -- at least for now.

One way to see what has happened is to imagine that the minimum wage has been raised to $ 50 per hour. Who then will get a job? Those with the skills that are worth more than $ 50 per hour to the employer. Everybody else is flat out of luck.

This doesn't mean that the economy can't grow. It can and will. Europe has grown and gotten used to the idea of double digit unemployment and a permanent underclass with no social and economic mobility. (Europe arrived at this situation by the simple expedient of passing laws that forbid companies to fire anyone). It has taken the US a bit longer to get to the "creeping stagnation" economy, but we're there now.

As the West slowly trudges along, Asia, Eastern Europe, Africa, Latin America and perhaps even the Arab world have a real chance to take over center stage in the world economy. The West has abdicated. It remains to be seen who will supplant the West -- most likely China and the countries on China's periphery.

All of this is why stocks are probably a pretty good bet. Some companies, indeed many oompanies, will do fine in the world that is coming. There will be growing demand from China, Brazil, India, and the rest of the world for products that the West has long taken for granted. This doesn't mean that stocks won't stumble a bit when the inevitable European sovereign defaults begin. But, the defaults are inevitable and everybody but Tim Geithner knows it. The real stock market bottom has probably already passed, but if hasn't, then wait until Greece, Spain, and Italy default and the German and French banks are nationalized and then buy stocks with a reckless abandon.

A New Wrinkle

2011-09-26T17:44:00.001-07:00

The latest scheme out of the European political class is the idea of creating an SPV (Special Purpose Vehicle) that will "leverage up" the $ 400 billion fund that had been previously put in place to "stabilize" the sovereign debt crisis. How will this work?

The idea is that you create this SPV (think Fund) and put $ 400 billion into it in the form of equity capital. The SPV then borrows $ 1.2 Trillion from willing bond buyers. That gives you $ 1.6 Trillion to buy up Greek, Spanish, and Italian debt and stave off disaster. So, the theory goes.

So who provides the $ 1.2 trillion in debt capital? That is, who are the willing bond buyers who think investing in a vehicle that buys trash will be a winner? If you thought Wall Street cooked up outrageous schemes, try this one on for size.

This idea will not work. It is not the magic elixir. No one in his right mind would provide the debt financing for this vehicle. The US, no doubt, will volunteer to put money into this. (We love throwing money away). But, the rest of the world will balk at this silly idea. The Chinese will not fall for this.

What this scheme shows is that the politicians still haven't figured out that defaults are inevitable. Only defaults have any real shot of turning the situation around in Europe. Politicians can only make things worse by these kinds of dreams and schemes.

Mind The Gap

2011-09-25T13:49:00.000-07:00

The so-called income gap between rich and poor is growing we are told. The rich are "sharing disproportionately" in the economic gains we are told. What does this mean? Should we do something about it? If so, what should we do?

Imagine, that adopting "Policy A" would double the income of the poorest sixty percent of the population, but, at the same time, quadruple the income of the richest forty percent of the population? Suppose that there was simply no other feasible way to double the income of the poorest sixty percent? Would you favor implementing "Policy A?" After all, "Policy A" increases inequality. The dreaded "income gap" widens under "Policy A."

One way to eliminate income inequality -- eliminate the income gap -- is to force the entire citizenry to live at the edge of starvation. This is, more or less, the experiment that the Soviet Union embarked upon in 1917. How did that turn out? The Soviet Union successfully eliminated the "income gap."

Suppose "taxing millionaires and billionaires" meant that unemployment for the rest of us would rise to double digits and stay there for the next thirty years. Is it still worth it, so that we can make "the rich pay their fair share," even if such a policy would guarantee that large numbers of people cannot find jobs?

Why does anyone care about the income gap? The issue is not how to divide a fixed pie after all. The issue is how to grow the pie. Suppose our only concern is with people whose income and wealth puts them in the bottom 50 percent of the pile. It might be necessary to enrich a few folks in order improve the lot of the bottom 50 percent. Who cares if the rich get richer?

Isn't it the right policy to try to improve the lot of the poorest 50 percent of our population regardless of how rich the rest of the folks get? It just might turn out that income inequality is a by-product of improving the lot of the poorest folks in society and that deliberate policies to reduce inequality damage the economic prospects of the poorest half of the population. So, why the interest in the income gap?

What we should be concerned about are policies that improve the economic prospects of the half of the population with the lowest income and least amount of wealth. If improving the prospects of the less fortunate increases income and wealth inequality, so be it.

If You Want Jobs, The Micro Environment Must Change

2011-09-23T04:21:00.000-07:00

The regulatory and litigation environment virtually guarantees that job growth in the US will be anemic for years to come. No macro activities (or short term tax gimmicks) will change the employment picture.

The truth is: employers are scared to expand payrolls. They don't want to get sued; they don't want to take on future health care and retirement liabilities that are limitless; they don't want to deal with all of the extra costs that government has imposed on employers. The motives for all of this employee protection were no doubt noble.

The latest wrinkle is that Obama's "Job's Plan" permits the unemployed to sue a business that has the temerity to hire someone who already has a job elsewhere instead of hiring an unemployed person. Laws like that make employers leave the playing field. Who wants to hire anyone when the very act of taking on a new hire can trigger litigation that can put you out of business? Why can't the Obama folks get this?

Until the micro conditions of the labor market change (and no one is really discussing making these changes), the poor, the minorities, the less-educated have no real future in this economy other than collecting welfare checks and entitlement payments. Working for a living is increasingly not a likely possibility.

Obama and the liberal elite don't get this because they know nothing about hiring and why businesses hire people. None of the Obama people have any experience at all with business or with unemployment.

The Obama folks think that the solution is to have government build roads and patch up airports and transfer money to public employees. That is not the answer. The only people that benefit from stuff like that are highly paid union employees with rich retirement plans and generous health plans. They really don't need the government's help. They are riding high in this economy. Obama and his gang are riding high as well.

But, Americans that are least able to defend themselves -- lower middle income, minorities, the lower-skilled work force -- have no real chance in the economy that Obama and his crowd have created. Businesses are not going to hire employees that are "lawyered up" and ready to sue them. Why should they? The alternative is to outsource and to substitute capital for labor. That will continue.

We need micro changes. Even if the economy grows, the beneficiaries will not be the unemployed. Obama has seen to it that these folks have no real shot.

So, Why the Selloff?

2011-09-23T02:39:00.001-07:00

Other than Obama's new(?) tax plan to tax "millionaires and billionaires," there wasn't much news to point to for an explanation of the nearly 8 percent drop in world equity markets from Tuesday at 2 PM until Thursday afternoon's market close.

Greece is old news and so is the weakness in the American economy. Nothing new on this front was announced prior to the selloff.

The equity markets seem to be stuck in a very wide trading range since early August. If so, the market probably rallies from here. My own guess continues to be that this is buying time for long term investors. This is not a time to be exiting equity markets, but a time to be planting a large foot into these markets.

It is scary. Government policies in western countries have been so absurd for so long that one despairs that things can ever be turned around. But, they can be and, I think, will be. Most Eurozone countries are going to default on their debt and a number of high-profile European banks have no hope of survival. Once these things happen, then we have a real chance for an economic revival.

As long as western politicians think there is some magic and painless solution to the debt crisis that avoids defaults, then economic stagnation will continue. But, the clock is ticking. Defaults will come whether politicians like it or not. The sooner the better.

So, it still makes sense to own equities -- perhaps more now than ever. Markets can see into the future and past unpleasant events. We will get there and get past all of this.

The Obama Tax Plan

2011-09-19T04:20:00.000-07:00

Obama will announce his new tax plan today -- more than $ 1.5 trillion in new taxes. Even a Democratically-controlled Congress wouldn't pass something like this in the middle of a recession. You have to wonder if Obama really cares at all. He is wasting everyone's time with proposals like this. He should go back to Martha's Vineyard.

It Won't Be Long Now

2011-09-18T18:30:00.000-07:00

Goodbye Greece. We are getting into the fourth quarter on the Greece situation. The Germans are increasingly unlikely to continue the bailout game for domestic political reasons. Ditto for Greece. The Greeks are more likely to roll back their existing "austerity" measures than enact new ones. The game is just about over. Default is coming soon.

Then we look to Spain and Italy and watch that story unfold in much the same manner.

As If Things Weren't Bad Enough

2011-09-18T18:23:00.000-07:00

Here comes the President -- one more time: "Tax the Millionaires and Billionaires." Same ole, same ole.

Hidden in his tax-the-rich proposal is the virtual elimination of the current municipal bond market, because the Obama proposal essentially eliminates tax exempt interest on municipal bonds. That should help our cities and states!

If the Obama package could pass, it would nail the coffin shut on any future American economic progress. We would become the new Japan with no real prospect for economic growth in the next half century. (That may happen anyway. Obama has done a lot of damage already).

Fortunately, no one is listening to Obama anymore and new taxes are not in the cards with a Republican House of Representatives.

All Obama signifies with the package to be released on Monday is his irrelevance. He doesn't understand the private sector, he doesn't understand the dynamics of the entitlement programs, and he doesn't seem to care anyway.

He's still having a good time in the White House. There are still a lot of parties to attend and fun things to do. That the country is collapsing economically is not something that Obama seems much bothered about.

Nothing new there.

Geithner and "Catastrophic"

2011-09-17T04:57:00.000-07:00

Tim Geithner is an embarassment. He spent Friday in Poland lecturing European leaders on the necessity to increase the bailout fund for the bankrupt states of Greece, Spain, and Italy. According to Geithner, failure to expand the bailout fund and, implicitly, to let Greece (and Spain and Italy) to balloon their national debts to even greater heights, would be "catastrophic." Great idea! Add to the debts of Greece, Spain, and Italy! That's a novel way to solve the European debt crisis -- make it bigger.

Well, Geithner might respond, that's what we did in the US and look how wonderfully things are going there!

This is what happens when politicians think they can solve problems. They make the problems much bigger. This way when things collapse down the road, they won't be around to face the music. Europe will eventually implode. Geithner just doesn't want it to happen on his watch.

Unfortunately for the US, we are on "his watch" and the results are there for all to see -- economic stagnation.

It is embarrassing that the Obama Administration is still trying to pretend that more and more debt and more and more economic stagnation is the way to go. It makes one wonder what the real motive is here.

Geithner Selling His Failed Ideas to Europe

2011-09-15T18:08:00.000-07:00

Tim Geithner will be in Poland tomorrow to sell his failed US 2008 program to Europe. Heck, maybe it will work this time. It certainly didn't work in the US, unless you think our situation is a good outcome.

All these folks can ever say is that it would been worse. Really? What makes you think that? Letting nature take its course without government interference has worked in every other situation. Only when the government intervenes to "fix things" such as the 1930s in the US and 1990s in Japan,and now the US in the Obama era, have economies failed to recover.

Europe is so far gone, it won't matter anyway. All Geither will be able to do is make certain that when the defaults start, Germany and France can be added to the list, because they are the ones that will have to underwrite this stupidity.

Oh, by the way, the Federal Reserve is stepping up too. That means the US, which is reeling from massive indebtedness, is now adding to its own woes by helping to backstop the idle Greeks. What a great idea!

You just couldn't make this stuff up. The idiots are running the asylum!

A Clueless White House

2011-09-15T04:36:00.000-07:00

The White House released the following statement on Wednesday (Amy Brundage, White House spokesman):

"As the president has consistently said, he does not believe that Social Security is a driver of our near and medium term deficits."

How can the President of the United States be this misinformed on perhaps the most important issue facing the country?

Geithner to the Rescue

2011-09-14T19:56:00.000-07:00

Tim Geithner wasted a little more taxpayer money -- why not? -- going to Europe this week to have an important meeting with Germany's Angela Merkel to "convince" her how important it is that the Greek situation be contained. You really have to wonder about Tim Geithner. Does he really believe Greece is not going to default? How disconnected is this guy from reality? He still thinks his stimulus plan worked?

The lack of understanding of Economics in this White House is without parallel in American history. This White House not only doesn't know what to do, it doesn't even look like they care about whether the economy recovers or not. The so-called "Jobs Plan" is little more than transfer payments to Obama allies paid for, he says, by taxing "millionaires and billionaires," which apparently includes everyone who makes over $ 200,000 per year.

The sad fact is the folks below the median income are hit hardest by this White House. Those with protected jobs -- public school teachers, public employees, government bureaucrats of all stripes -- they're pretty happy. Their income hasn't fallen a bit. In fact their income has risen, while folks in the bottom half of the income spectrum have been savaged. Obama's war on lower middle incomes is bearing fruit -- massive long term unemployment, massive short term unemployment, and massive under-employment.

Maybe we should increase some of the old standards to get this economy going: 1) Raise the minimum wage to $ 100 per hour...that should raise living standards; 2) Why not let folks get six months a year paid sick leave...they might need it; 3) How about 100 days a year mandated family leave with pay; etc. etc. Heck if $ 7.25 is a good minimum, think how great $ 100 an hour would be. I can just imagine these kind of discussions going in the Obama White House.

Why not outlaw all pollution starting today? Why not mandate that all cars have to get 200 mpg starting next week? These are merely extensions in degree of the current Obama EPA actions. Heck, why not go for it, since we don't care one way or another about American jobs or the economy?

What about raising tax rates to 80 percent for all those rich people who make more than $ 75,000. That should bring in a lot of money. Lets eliminate corporate tax loopholes and raise corporate rates to 70 percent. That will solve our deficit problem.

All of these discussions are the kind that I suspect go on regularly in the Obama White House. They may seem extreme now, but we have gotten use to a lot of Obama stuff that would have seemed extreme ten years ago. Now we have nine percent unemployment; maybe we can double that number in two or three years. Why should people work anyway?

As goofy as all this sounds, it doesn't sound any goofier than what Obama and Geithner say regularly on the stump. No wonder the economy is moribund.

Europe -- A Case Study in Why Government Is Not The Answer

2011-09-13T03:41:00.001-07:00

So, where are we now in fixing the Greek debt crisis. Greek government debt maturing in March of 2012 is trading in the open market at 55 cents on the dollar, according to today's Wall Street Journal. The yield on two year Greek debt is now 75 percent, on 10 year paper 20 percent. So, the default has really already occurred. The fiscal deficit for Greece through the first eight months of the year is 22 percent higher than last year. Meanwhile, real GDP is likely to drop 10 percent this year as compared to a fall of 5 percent last year. So, where does it end? -- where it should have ended two years ago when Greek sovereign debt was a lot lower and European banks were in far, far better shape.

This impending disaster is a direct result of government policy. Merkel and Sarkozy in cahoots with the ECB (European Central Bank) have served up the myth that somehow they could avert a Greek default through politics. We now see the results of their efforts -- economic disaster for Greece and the weakening of the entire European financial structure. So much for bailouts.

Think of how regulation is faring. Why would European banks be in trouble if they are marking their positions to market, as liberal politicians claim regulators will force them to do. Actually, liberal politicians are forcing these banks to mis-mark their positions so as to foster the illusion that they are in good shape. Yesterday, these European banks shed between four and ten percent of their value in a single trading session and most are down more than sixty percent in value value this year. Way to go regulators!! If you have properly marked your bond positions, then why not just sell them? That shouldn't change your net worth at all since you have already marked them to market. But, no. The regulators know best. Now, they are forcing the banks to publicly lie about the value of their holdings. Wow! Isn't that great. Good to see the regulators doing their job.

But, meanwhile, the markets are not fooled by the regulators and the politicians. The markets are showing the way and the way is down for European sovereign debt and down for the European banking system. Had the market simply been permitted to work its will two years ago and let Greece default, we would have only minor problems today with the Euro and with European banking. But, no, politicians and central bankers had to take center stage, repeating the same mistakes that American policy makers made in the fall of 2008. These folks never learn.

Take a lesson from the Asian Crisis of 1997, which was first and foremost a debt crisis. What happened? Fortunately, the IMF was unable to be a backstop or a bailout source for that crisis. So what happened? The crisis ended naturally by 1998 and by 2000 Asia was back and roaring ahead. Why didn't Asia stagnate like the US did after 2008 and Europe is now? Because no one bailed them out. Three cheers for "no policy." "No policy" works.

What doesn't work is government policy. It doesn't work in the US and we are watching government policy turn a minor crisis in European sovereign debt into a major conflagration. When will we learn?

The Beginning of The Age of Default

2011-09-11T18:39:00.000-07:00

There have been many famous epochs in European history and we are now about to witness the dawn of the latest -- the Age of Default.

Greece is verging on financial collapse (this week) and there is no longer any viable way to prevent that collapse. Whatever they may call it, default is on the way and soon, certainly before the year is out perhaps much sooner.

But, that will just be the beginning, as we move swiftly from country to country throughout the Eurozone. There is some chance, but it is slim, that Germany can itself avoid default. The reason for pessimism on Germany is that Germany will end up absorbing the obligations of its major banks, much as Ireland did two years ago. When the bailer bails out too many bailees, then the bailer needs a bailer. Who will bail out Germany?

It will be interesting how this plays out in the US. California, Illinois, and New York have no hope of avoiding bankruptcy. They will, no doubt, appeal to the federal government for relief, which, if given, would only prolong the inevitable.

The question is not whether California, Illinois and NYS will go bankrupt, the question is when. To the extent the federal government absorbs the obligations of these states, such activity will hasten the collapse of the US federal debt market.

None of this involves the losses that you might think. While Greek's nominal debt is $ 450 billion, it's current market value is probably half of that. The market has already dictated a 50 percent default, so that there is only another $ 225 billion left for investors to lose. Ditto for Spain and Italy with corrections for market conditions.

The problem is going to be: most folks have simply assumed that the ECB had some magic formula to avoid a Greek default. The ECB doesn't have such a formula. A Greek default will shock the markets and awaken the markets to the prospect of further defaults both in Europe and in the US. That is the main significance of the Greek default -- the loss of $ 225 billion to bond holders is a relatively minor problem.

For some reason, financial commentators have bought in to the "we can bail out everyone" song that is sung by European politicians and the Obama White House. It's not so and the Greek default will be the first bell that rings to show that it is not so.

Tough Road Ahead for US and Europe

2011-09-11T06:33:00.000-07:00

Bad policy has a way of surviving, even though the results of bad policy may be plain for all to see. The US and the Western countries have managed, by government policies (political policies) to destroy the vibrancy of their economies. Perverse incentives and irrational agency costs so pervade these economies that real economic growth of the kind seen in the nineteenth and twentieth century is not likely to ever return.

Many in the Western world applaud the collapse of their own economies. They see economic growth as damaging to the well being of the population. Those who take this view are usually pretty well insulated from the downside of stagnant economic growth. But most of the citizenry are not insulated from that downside. Unemployment and under-employment mostly afflict folks that have no real way to protect themselves. In the US, minorities suffer the most from the collapse of the economy; white college graduates suffer the least.

John Maynard Keynes was, in my opinion, the greatest economist in history. Strangely, what passes as "Keynesianism" is an absurd, foolish set of doctrines that are routinely taught to undergraduates that suggest that wasteful government spending can lead to wealth. Keynes never believed anything of the sort as a perusal of his work would suggest. But, who reads Keynes these days? If you read Keynes, you will quickly run across the notion of "animal spirits" that motivate entrepreneurs to do the things that spur real economic growth. Where is that taught in the modern academic establishment?

In his classic "Treatise on Money," Keynes used the term inflation to mean mostly growth in the money supply. He was certainly no believer in the so-called trade-off between unemployment and inflation. He was aware of what happened in the 19th century when powerful economic growth carried Britain and the US to the pinnacle of power amidst more or less constant deflation (how can that be?). Keynes saw "pyramid building," which he cited in his 1935 work "The General Theory of Employment, Interest and Money" as a device to encourage business, not as Obama and his advisers see it, as a substitute for the private economy.

The media labels the Obama Administration as Keynesian. Nothing could be further from the truth. The Obama Administration basically believes in transfer payments to their political allies and throwing money down rat holes. Keynes would have been appalled. He probably would have joined the Tea Party.

The truth is that no amount of government spending or targeted tax cuts can do any good. They simply waste (future) taxpayers money and make things worse. Government is stifling entreneurial activity in the US and in Western Europe. It is that simple. Incentives do matter, contrary to what Obama and his folks think. Businesses are not the enemy, contrary to what Obama and his folks think. Until policies change, the future lies with Asia and parts of the world not bent on destroying private enterprise, but bent on encouraging it.

Just attend a movie in the Western world and you can see the stereotypes. Businessmen are always crooks and left-leaning lawyers and college professors and students are always the good guys. Businesses are portrayed constantly in the media as instruments of environmental destruction and unfeeling masters of downtrodden employees. Our modern literature portrays the same images. Pick up a college newspaper, anywhere in the country, you get the same message. College, student-run, newspaper columns spend most of their time counting up ethnic and social noses to see if they are all represented properly and if there are enough centers and resources sucking up tuition money to promote their agendas. Most of these latter efforts simply create divisions and animosities amongst people where there previously were none.

In short, the culture no longer believes in free enterprise. If you are rich enough or comfortable enough or have enough job security, then what do you care about people that can't find work or are in danger losing their job. In a sense, it is the preoccupation with pipedreams, that enables the liberal elite to ignore the economic plight of the average American or Western European. The average guy is pummelled by the government-only approach to the economy. But, what do Obama and his group care, except for their interest in re-election.

The controversy over the Boeing plant in South Carolina typifies the way this game is cynically played. The Obama Administration could care less if thousands of jobs are shipped out of the country so long as no non-union employees get hired in South Carolina by Boeing. It is not enough to be an American citizen to merit Obama's interest, you have to be a prospective union member as well. Obama could stop the travesty going on in the Boeing plant dispute, but he chooses not to. That tells us a lot about Obama.

In the end, you have to decide what kind of economy you want. China and Asia are choosing to have a dynamic economy with rising standards of living and increasing economic power. The US and the West have thrown in the towel and prefer political theater to economic progress. Not a pretty picture for those that need jobs and a future in the Western world.

Wasn't Listening to Me....Obviously

2011-09-09T14:03:00.000-07:00

I was sorely disappointed that the President did not follow my advice in Thursday night's speech and offer up the repeal of his entire first two and a half years in office. I guess there wasn't much chance of that after all.

What he did was promise to push for more of the same measures that have stifled economic recovery in the US and he seemed truly unaware of the real reasons that the economy is adrift. So, at least, you can say one thing for the man -- he is consistent and (intellectually) deaf.

So, what's the future look like. If the pundits are right that folks are souring on the tea party, then the future cannot be very good. The main agenda for the tea party is rolling back the size and scope of government and tackling our national debt problems. If that is truly out of favor, then we will eventually be making the kind of headlines that Greece is making, without any savior (Germany) as a prospective bailor.

In the short run, though, what happens with the economy? How bad can it get? It can get worse, but not a lot worse. There are too many unemployed resources out there for things to deteriorate too much from here. Businesses will have to spend a fair amount of time figuring out how to do end-runs around government policies. There is simply no way, other than out-sourcing and labor-saving, to operate a growth business with the current climate of government intervention. It will take some time.

The price will be paid, not by Jeffrey Immelt (GE's CEO) or Warren Buffett or the various wealthy folks who support the Obama Administration. No indeed. The losers from the Obama Stagnation will be the poor, the minorities, the unemployed, and large swaths of middle America. The rich and comfortable and the public employees and union members who still have jobs will cheer the Obama crushing-machine on. While those, least able to protect themselves will be savaged by the big government suffocation promoted by the Obama Administration and its allies.

So, look for very slow, anemic economic growth in the US and Western Europe. Perhaps, another mild downturn, but nothing big on the downside. Stock markets should fare well, even though volatile. There will be rolling defaults in Western Europe and effective defaults among selected states in the US. But, all will survive the Obama policies in time.

My Advice to the President

2011-09-03T05:10:00.000-07:00

Dear President Obama:

Your decision to request that the EPA suspend its new regulations on ozone that could have easily cost another one million jobs is a good one. Build on it. In your speech on the 8th of September, make the ozone regulation suspension the start of something big.

Announce that you are now suspending all new regulations that are the result of Dodd-Frank, Obamacare, the 2009 Credit Card reform act, new NLRB rules such as the Boeing-South Carolina fiasco. Further, you are suggesting that Congress impose limits on lawsuits against business when the businesses themselves are not at fault (but their employees might be). You are further going to request that Congress suspend minimum wage laws and family leave act provisions until unemployment sinks below six percent. Finally, you are going to ask Congress to exempt all companies with less than $ 50 billion market capitalization from the absurd provisions of Sarbanes-Oxley.

It is okay to say that all of these onerous things will come back once the economy is healthy again, but, for now, we should be brushing them aside so that folks can go back to work.

Once unemployment is below six percent and economic growth is consistently above three percent, then you can go back to demonizing business and imposing roadblocks to growth and employment. You will still do a lot of damage with your policies, but the country would be in a better position to withstand your assault on capitalism at that point.

If you do this Mr. President, you will steal the thunder from Republicans, and virtually guarantee your re-election next year. But, more important by far, the US economy will have a chance to recover and American workers can once again go back to work.

Your Pal,

Ed Burton

More Lawsuits By The Obama Team

2011-09-02T12:59:00.000-07:00

FHFA is now suing the major banks for subprime lending problems. Just what the economy needs. Why not just pass a law saying that no one but rich people can take out mortgage loans? That would accomplish the same agenda as this lawsuit by FHFA. I guess the Obama folks still don't get it. People other than Obama and Buffett need a chance in this economy. Suing the banks just makes more certain that they won't get that chance.

No Jobs, No Surprise

2011-09-02T11:35:00.001-07:00

The jobs report this morning was startling -- no new jobs created in the US economy for the month of August! It seems that Obama was listening this time as he quickly suspended the onerous new ozone rules propagated by his EPA. While suspending the new regulations will not create jobs, it will at least prevent the wholesale destruction of existing jobs. That's a start. The Administration, really for the first time, has halted something that destroys jobs!

Hope springs eternal. Maybe the President is beginning to get a glimmer of why his policies are destroying the American economy. This would be good news indeed.

Economic Policy Confusion

2011-08-29T04:24:00.001-07:00

Isn't it obvious that the politicians have no idea why the economy is staggering? After the arrogance of January, 2009, when the exuberant victors of the 2008 election proceeded to toss away $ 800 billion in a foolish waste of money known as "the stimulus."

The Obama folks assumed that throwing taxpayer money in the direction of Obama political allies (mostly state employee union members) would magically get the economy back on track. Why the Obama folks thought that, no one knows?

Then the Obama team began the process of erecting roadblocks (think Dodd Frank, Obamacare, the Credit Card Reform act, stifling regulations from the EPA and the NLRB) that would virtually guarantee that the economy had no real chance of recovery.

Now, Obama promises to come up with a new package to deal with the "jobs problem." This would be comical were it not so tragic. Putting up more roadblocks does not remove the original roadblocks.

This economy will not get out of its own way until the roadblocks are dismantled and real market forces are permitted to function again -- especially in the labor market.

Bernanke's comments on Friday were ridiculous. It is time that Bernanke return to academia. Bernanke's Fed is arguably the worst in the history of the Federal Reserve and its results on the economy are there for all to see.

The usual response by defenders of Obama and Bernanke is to say that things would have been much worse had they not done what they did. Really? When, other than the last time policies like these were tried in the 1930s, were things ever this bad.

The Reagan recovery in the 1980s shows how to get it done. Get the government off the back of the citizenry. That is the solution. The government is not the answer. The government is the problem and until it changes course (or gets changed), America will continue its slide into irrelevance.

The Jobs Problem

2011-08-28T04:14:00.000-07:00

If cell phones cost $ 10,000 apiece and required $ 1,000 monthly service bills, who would own them? Well, no doubt, Warren Buffett would own one and perhaps Bill Gates and Barrack Obama as well.

But, what about the average guy. Would he own a cell phone at those prices? What if the economy was very strong, would most folks get a cell phone, if these were the costs?

The answer is pretty obvious. At that price, very few people would be interested.

This is the fundamental jobs problem in the US. Because of government mandates, the anticipation of Obamacare, litigation fears, OSHA rules, threat of unionization, a blithering variety of employment taxes, family leave laws, American labor is priced out of the market for most businesses. There are some businesses for which price is not an issue: Wall Street, the movies, professional sports, working at the White House, etc. But, for most private businesses who do the bulk of hiring in the US, labor is just way too expensive thanks to the various levels of government.

If you are a movie star and a sports celebrity (or even a reality show star), then these are not your problems. The wealthy don't really have a problem in this brave new Obama world. They are a-ok. That is why the Buffetts of the world strongly support the Obama program. It doesn't hurt rich people. It is the average guy or girl who has no real hope in the Obama economy, not the rich guy. The rich guy, like Buffett, is having a ball. this is fun for him.

The average American worker is simply not affordable anymore and it has nothing to do with with wage and salary and has everything to do with government. All of these programs to "help the average guy" have made the average guy way too expensive.

Unemployment is not going to go away in the US. This is the new reality. Those who are protected from the problem, like Warren Buffett, will continue to cheerlead for the programs that devastate middle and lower income Americans. "Let them eat cake" has a certain ring to it for the Buffett-Obama class. But, for the rest of America, life will stay pretty grim. I wonder how long Obama and Buffett can blame all of this on George Bush -- 10 years? 20 years?

What Do Markets Assume?

2011-08-27T05:50:00.001-07:00

There are very scary stories out there: 1) a European debt crisis; 2) Incredibly slow economic growth in Western countries; 3) A potential for Asian economic growth to top out. Does this mean stocks cannot do well?

Surely "the market" knows what we know. How much worse news is yet to come?

Greece will default. Has the market fully factored that in? While the initial shock of a Greek default would likely cause stocks markets to skid, the reality is that a Greek default could be the harbinger of good news to come. The sooner that defaults and workouts become the order of the day in Europe, the sooner Europe can begin to heal its economic woes.

Why are defaults and workouts therapeutic for Europe? The reason is that politicians will never be able to reverse the spending and entitlement train. They just won't be able to do it. Instead, a default will let the market itself force the necessary reforms on Europe. It won't be possible for Europe to access debt markets in the future unless Europe begins to tackle its unaffordable spending and entitlement programs. Market discipline will solve a problem that politicians have no hope of solving. This is good. So, defaults are good news not bad news and defaults are coming soon.

What about the US? It is unlikely that the US is headed for a recession. Try as it might to strangle the economy, Obama and his allies will not be completely successful in their efforts to destroy the American economic engine. Besides, unless Obama shifts ground and does it quickly, he will be a one-termer and his successor is likely to to do a complete about face on the Obama agenda. This is good news as well, whichever way it shakes out. The hide tide of government intrusion and regulation in the economy may be just over the horizon. In any event, a downturn in GDP isn't likely. Slow growth, not negative growth, is probably our future for the next year or two until the cavalry arrives.

All of this suggests that stocks are probably a good buy for the long term investor. For the short term investor, who knows? But, for the long term investor, this is probably a historic opportunity to own equities.

All Eyes on Bernanke...Why?

2011-08-25T05:10:00.000-07:00

Whatever Ben Bernanke has to say on Friday is irrelevant to the grand picture. The American economy is stuck in a quagmire that Ben Bernanke cannot do anything about. He can make things worse, indeed he has already. But, can Bernanke do anything that can help? What can Bernanke can do that will convince a business to shoot itself in the foot by hiring someone in a world of massive regulation, litigation and mandates? Not much.

But, I guess the press has to talk about something. So, the Bernanke sideshow continues.

Europe and US Face Similar Problem

2011-08-24T05:10:00.000-07:00

The "Greek Problem" is really no different than what might be called the "California Problem" in the US. The 50 states of the US are in a common currency, yet each state has its own "fiscal policy." This is essentially the same as the situation in Europe wherein European countries (excepting Switzerland) are banded together in a common currency -- the Euro. Each country has its own fiscal policy.

Greece (and California) are eventually going to be unable to continue financing their outstanding debt. There is no scenario possible that would permit either Greece or California to fund their outstanding debt over any significant future time period. The only way to postpone a default in either place is for someone to step in and bail them out and let them continue to expand their indebtedness.

That's why politicians will soon be clamoring for the US government to bail out California, just as many are pushing the concept of Eurobonds in Europe to bail out Greece (and Spain and Italy and on and on).

These bailouts permit profligate countries to expand their indebtedness and postpone making the decisions that would be required to put their financial house in order. This only makes the impact of the ultimate default (which will come in any event) that much worse. Meanwhile, along the way, to entice the bailer to do the bailout, Greece and eventually California, will be asked to enact "austerity" measures that their populations will not support. Greeks will eventually reject the austerity measures and proceed to a default "workout" on their own. Three is no way that Greeks will, voluntarily, agree to the kind of austerity that the bailout folks will want to impose on them. Ditto for California.

In the US, there is a growing list of states that will join California in the rush to get a federal bailout. Essentially, the idea is to have states like Texas and Alaska, who haven't behaved stupidly with their spending, provide the money to bail out the delinquents like California, Illinois, New York, etc. This is the same idea as having Greece saved by the frugal German taxpayer.

All of this, as it takes place, rewards those who made bad decisions and punishes those who made good decisions. Ultimately, it won't work anyway as the bailer and the bailee will all be forced to some kind of debt default. Pity the poor bondholders who fall for all of this. They will be big losers.

But, there are other losers as well. The citizens of Greece and California and other profligate places will face economic paralysis as they put on the austerity straight jacket, which the bailers will insist upon. There will be a global economic paralysis brought on by the foolish idea that those who made good decisions should pick up the tab for those who made decisions. Foolish economic policy by the Eurozone and US politicians will cause a lengthy period of economic pain which will end with massive defaults through the Western economic structure.

It is possible that the citizens of Europe and the US might wake up before this situation develops too far along the bailout road. We shall see. The optimistic scenario is bolstered by the rise of the tea party and the focus of current debate upon the problems of sovereign debt. So, maybe, just maybe, the Western world will stop the bailout process before it goes too far and is irreversible.

A Bad Idea Can Do Some Real Damage

2011-08-22T16:57:00.000-07:00

What we are experiencing now are the fruits of the "too big to fail" mentality. In the US, the crisis of the Fall of 2008 began with the government orchestrating a purchase by JP Morgan of Bear Stearns with a $ 29 billion guarantee by the US government. That was the beginning. Before they were done the politicians had bailed out half the financial system, even those who did not wish to be bailed out.

Now the European politicians are doing the same thing. Greece was too big to fail. Now, Spain and Italy are too big to fail. Germany and France are, no doubt, to big to fail too, but there is no one left big enough to bail them out.

This is all ridiculous. No one is too big to fail. The world would not have come to an end if the various financial institutions that were liquidity starved had been permitted to fail in 2008 (or provided some orderly form of Chapter 11 bankruptcy). There was absolutely no reason to protect bondholders from the risks that they had assumed. They should have suffered not the taxpayer. Ditto today for Greece, Ireland, Italy, Spain, and Portugal and, if it gets that far, Germany and France.

Bondholders take risks too. Why shouldn't they pay the price, if they have taken a foolish risk.

By not letting the chips fall where they may, the Western economies now face austerity programs, zombie institutions, and economic stagnation for generations. Is this price worth paying just to protect a few bondholders?

The problem is that politicians love this. It makes folks like Tim Geithner feel really powerful to wander around distributing taxpayer funds to those in need. But, it is very bad economic policy and we are paying a horrendous price for such bad policy.

Reasons for Optimism

2011-08-21T13:09:00.000-07:00

Reading this blog and following the markets can get one down after a while. So, what is there to feel good about. Several things.

First and most important, the world is now fully cognizant of the profligate ways of the Western economies. This is a plus.

Second, the Asian economies and some scattered others are motoring along quite nicely and they are not enacting the kind of poison pill social policies that destroyed the Western economies. At least not yet.

Third, government bureaucrats have not yet caught up with technology, though they are trying to. It is still possible to come up with a new technological idea and put it out there without drowning in red tape (which is what happens to you in the bricks and mortar economy).

Fourth, the global warming folks are losing their audience, though they still have President Obama dutifully in attention.

Fifth, left-leaning Americans are mad at Obama.

Sixth, Paul Ryan might run for President

So, rejoice, buy stocks.....all is not lost

Martha's Vineyard

2011-08-21T12:48:00.000-07:00

There is no reason why the President should not have a vacation and enjoy it without the press (and Maxine Waters) villifying him for taking time off to be with his family. The focus on the President's trip to Martha's Vineyard shows the bankruptcy of the modern media.

The problem is not that the President is taking a vacation. He doesn't need to hurry back, call Congress back into session, and then inflict more damage on the US economy. Better that he enjoy himself at Martha's Vineyard and leave us alone. Would that his EPA and his NLRB would do the same.

Our problem is not too little attention from the President, but too much attention. The Credit Card "Reform" Act, Obamacare, Dodd-Frank as well as various direct administrative acts by government agencies have all but guaranteed that the US economy will remain mired in stagnation for a generation. This is what happens when Obama takes an interest in our welfare. Lets hope he forgets all about us. We will have a better chance for an economic recovery if he stays away. Perhaps he can take Harry Reid and Nancy Pelosi with him to Martha's Vineyard.

The Focus on Jackson Hole

2011-08-20T06:08:00.000-07:00

Once again all eyes are pointed in the wrong direction. The Federal Reserve's annual conclave is this coming week in Jackson Hole, Wyoming. Nothing of any significance can possibly emerge from this gathering.

But for the media, this is the big event. The media can pretend that somehow, someway it matters what happens and what gets said in Jackson Hole. This is complete nonsense.

The American economy's problems cannot be fixed by applying any strategies from the Federal Reserve. The Fed has done enormous damage to the American economy in the last three years, in part because it was handmaiden to an Administration and a Congress intent upon destroying the private sector economy. Ben Bernanke has only one goal -- getting himself reappointed by Obama as Fed chairman. Nothing else really matters to Bernanke at this point. Greenspan behaved in a similar fashion when Clinton was President. There is nothing new about a Fed Chairman playing the politics of survival.

But fixing the economy is an entirely different matter, unrelated to anything that might transpire in Jackson Hole. What the economy needs is breathing space. It won't get that breathing space. What it will get is more regulation, more litigation, more taxes and more demonizing rhetoric about millionaires, billionaires, special interests, etc. This Administration is all about finding the enemy and exposing the enemy to its political base. This Administration has little or no interest in economic recovery. Economic recovery shows the triumph of capitalism, not an outcome that this President shows much interest in.

So, forget the politics. Take a course on microeconomics. Learn why business hire employees. Ponder why raising the minimum wage does not create jobs. (If you think raising minimum wages is a good thing, why not raise it to a $ 1,000 per hour. That ought to make everyone wealthy!). Ponder why Obamacare and its mandates make business lose interest in having US employees and even US facilities. Ponder why litigation to protect the rights of virtually every group one can find a definition for saps the energy of businesses who might otherwise wish to grow and expand. Ponder why Sarbanes-Oxley and Dodd-Frank are destroying the American financial institutions so that they can be replaced by their equivalents in Asia. If you wanted to destroy the American economic engine, you could not dream up a better set of government policies than these. And, they are working. Capitalism is being annhilated in the US economy and is being replaced by government bureaucracy. We are switching places with China in every respect.

Outsourcing and replacing labor with capital is the sensible business policy when faced with the politics of big government interference in free markets. This is the future.

It is worth repeating that stocks can do fine in this environment. The main impact of Obama policies is to dramatically increase the inequality of opportunity, the inequality of income and the inequality of wealth. Buffett should like that.

A State of Denial

2011-08-19T05:21:00.000-07:00

Both the US and Europe are loath to acknowledge the facts on the ground. Governments in the US and Europe have, for half a century, pushed entitlement programs, erected massive regulatory edifices, and sold bonds to finance what taxpayers will not and cannot pay for. Now what?

You still see calls for politicians to act. Haven't they done enough?

When will the press and the politicians admit the cold hard truth. The policies enacted in Europe and the US are not affordable and are pushing their economies into permanent economic stagnation. The Krugman view that all one needs is a new dose of massive government spending has been tried by every country in the Western world. That it failed miserably spurs Krugman on to demand more of the same. Krugman is comfortable. He has a job. This is all "academic" to him. And, he's having fun to boot.

But the economic malaise that the world is stuck in is a direct result of the policies of Western governments for the past half century. Sticking your head in the sand is not the route to intelligent policy. It is time to admit failure.

Only free markets provide economic growth. Shutting down free markets in Western countries has lead to what we are now observing. Pretending that politicians can "fix" this so it all works is ridiculous.

The Cost of Dodd-Frank

2011-08-19T03:48:00.000-07:00

Senator Chris Dodd and Congressman Barney Frank know little about economics and less about financial services. Nevertheless, their names adorn one of the worst pieces of legislation in American history -- the Dodd-Frank bill. This bill, one of the first of Obama Administration's body blows to the American eoonomy, is now bearing fruit in massive layoffs at the major banks in the US.

What Dodd-Frank does is shift the center of the financial service world from the US to Asia. What Dodd-Frank doesn't do is provide any reform whatever to the delivery of financial services in the US. Dodd-Frank enshrines "too big to fail" as the cornerstone of US bank regulatory policy. Dodd-Frank is an absurd, suicidal act imposed upon the financial services by ignoramuses who don't understand the purpose or operation of a financial service industry. It's a lawyer's dream and country's nightmare.

Check out the bank stocks. This year they are down from 35 percent to 60 percent, pretty much across the board. Pick up a newspaper. Banks are laying off employees in the US in huge numbers.

I wouldn't be a bit surprised if this was the purpose of the "envy crowd." Crush American financial services so that you don't see those rich Wall Streeters around anymore. The rest of the country is just collateral damage in this assault on what used to be the dominant financial service country in the world.

All The Bad News is Going to Get Worse

2011-08-18T07:48:00.000-07:00

Don't expect the bad news to end any time soon. As long as politicians continue to try to sweep things under the rug, both in the US and in Europe, markets will swoon from time to time.

But, the markets have priced much of this in. The markets are not fooled by the politicians. The truth is that Europe and the US have both put their economies in straight jackets for the foreseeable future. The desire to do good has accomplished what sworn enemies could never achieve -- the decline of the Western economies. We are watching that unfold before our eyes. This means periodic slamming of markets.

But, the larger companies will survive this onslaught. They are in cahoots with the politicians in any event. It is the small companies and the middle and lower income groups who will bear the brunt of the unwinding of the European-US pipedreams.

All of this protection for minorities, for the disenfranchised, etc., simply entrenches the wealthy, like Warren Buffett and Bill Gates. None of this really affects them and their wealth will survive this. Obama will live to a ripe old age and will be worth hundreds of millions of dollars, if not billions, in the late stages of his life. They've got it made.

The ones that lose are those trying to make their way in this sea of red tape and mixed signals. Anyone who wants to start a business or build a career starting from ground zero has no real shot in the world that is now the Eurozone. The US is rapidly becoming its twin. The real losers will be the minorities, the low skilled, the poor and the middle class. They have no future in the world that their great champions have created for them. That's why Buffett likes this and is its most visible cheerleader. He and other rich folks have nothing to lose in this brave new world.

Economist Thomas Sowell wrote a great book entitled "The Vision of the Annointed," where he describes in detail the process by which do-gooders destroy the opportunities for poor folks. Now we are seeing Sowell's vision play out on the world stage.

But, stocks will do fine and so will Warren Buffett.

No Inflation....Just 6 Percent

2011-08-18T05:35:00.000-07:00

So Bernanke sees no inflation, nor do any of the major economists working with the Obama Administration. The CPI rose at an annualized rate of six percent in the month of July. How's that for no inflation.

The bankruptcy of Bernanke's and Obama's policies are unfolding in the only logical direction that such policies can take us: rising inflation and a weak and stagnant economy.

Politicians Busy Solving Europe's Problems

2011-08-18T05:22:00.000-07:00

You knew when various European countries banned short selling that the politicians were beginning to panic. Fix it! Fix it!

What is unfortunate is that folks in the investment community are on the sidelines urging them on. They want the taxpayers, once again, to step up and bankroll the banks, governments and whoever else has made serious, gigantic, mistakes and need financial help. Why? Why not let them go under? Why not force Greece, Spain, Portugal, Italy, whoever to do workouts with their creditors. The creditors loaned them money (or bought the debt with eyes wide open). Why is this the taxpayers' (of other countries) problem?

The usual tactic to justify putting taxpayers on the hook is to argue that, absent a bailout, the world is coming to an end. Really? How do they know that? Are they objective in this assessment?

The ECB should quit meeting. Merkel and Sarcozy should take a 16 month vacation. Let the profligate borrowers go bust or do workouts with their lenders and leave the taxpayers alone.

Now Germany

2011-08-16T04:24:00.000-07:00

You knew that, sooner or later, the German economy would slow under the onslaught of the bailouts demanded for the rest of Europe. The economies of both Germany and France are beginning to get crushed under the weight of the profligacy of the rest of Europe. In actuality, neither Germany nor France were in good shape to begin with. Only by comparison with the rest of Europe, did Germany and France look like winners. Both economies are long-run losers.

Unless the bailout game plan is reversed soon, there isn't much hope for economic growth in Europe. Unfortunately, the European culture has long ago adapted to the idea that everyone is entitled to everything. That worked as long as population increases and gullible bond buyers could fuel the pipe-dream. That's over now. Nothing short of a complete dismantling of the welfare state offers any hope of economic growth for Europe. This spells political upheaval, the beginnings of which we are already observing.

It will be interesting to see what happens next, but this movie will not have a happy ending.

Watch The Money Supply

2011-08-15T05:17:00.000-07:00

The money supply (M2) is growing again and at a very fast clip. This means three things: 1) The economy will not fall back into recession; 2) Asset markets are headed up, not down; 3) Inflation is going to pick up.

What growth in M2 does not necessarily imply: 1) a major increase in GDP growth; 2) any substantial improvement in employment levels.

So, watch for stagflation and watch for asset prices to move up.

It Takes a Year to a Year and a Half

2011-08-14T12:00:00.000-07:00

On CNBC this week, one businessman commented during an interview that "if you want to build a new house in California, the permitting process takes a year to a year and half." The situation is much worse if you want to construct a commercial building.

Given the half life of products these days (think how recently Iphone, Ipad, etc. have come to dominate our lives), any business wishing to move product in a hurry will do what Apple did -- have it manufactured in China.

It isn't realistic to expect a company like Boeing to get into a protracted multi-year argument with the National Labor Relations Board over whether or not they can locate a plant in South Carolina. Isn't it simpler to avoid that discussion entirely and to build the plant in China or Brazil or somewhere where government rules are not totally unreasonable?

The answer is obvious and points the way to the future.

What Next?

2011-08-14T11:12:00.000-07:00

Can the stock market do well if the real economy is likely to stagnate? That is the question.

The European debt crisis will ultimately lead to sovereign defaults that may leave no country unscathed. The US will probably use inflation as its default method of choice. So might Europe. But, Europe will witness a rolling pattern of workouts, country by country. The Euro itself should survive. The survival of the Euro, to me, was never in question. After all, if California defaults which is very likely, such a default would not threaten the US dollar.

There will be sovereign defaults within the US among cities and states.

Eventually, all the bad sovereign debt will be written off. It is just a matter of time and place.

What will equity markets do during that time? Some debt default is already priced-in; priced-in both in the debt market itself and presumably in equity markets as well.

The Asian crisis of 1997, which was largely a (private) debt crisis was overcome within three to five years. But, then Asia had no one to bail them out (and hence to prolong the process). They were lucky.

Unfortunately, Western countries are obsessed with the idea that bailouts actually work. Most Westerners think, incorrectly, that the bailouts in the Fall of 2008 saved the US economy. There is no reason to believe this, but most people do believe it. As a result, bailouts have become the policy of choice, both in the US and in Europe.

So long as bailouts are seen as the way out of the Western nations' debt problems, economic growth will be elusive. Equity markets could still improve in that environment, but probably won't run away on the upside.

The Fed Can't Do It

2011-08-12T05:28:00.000-07:00

The Fed has promised an extremely low interest rate environment until June 2013. It won't happen. First of all, the Fed does not have the power that must economists and pundits ascribe to it. If treasury yields want to go up, there isn't much the Fed can do about it. Even if they buy a ton of treasuries, eventually the markets will overwhelm the Fed's pocket book.

Inflation is coming. The money supply is growing rapidly and will continue to grow rapidly unless the Fed unwinds QE2, which it is not likely to do.

So, take advantage of the low rate environment while it lasts. It won't last two years.

The Group of Eight

2011-08-12T04:52:00.001-07:00

Last night eight Republicans participated in a debate monitored by Fox News. The debate was held in Ames, Iowa as a lead into the Iowa "straw poll," that takes place on Saturday. Who won?

With Obama collapsing in the polls, you would think the field would be full of outstanding candidates, but if you watched this group of eight it was difficult to pick a winner. None of these folks seem up to the task for differing reasons.

The overriding issue of curbing big government was addressed only by Ron Paul. The other seven seemed to favor some limits on government, but, in other ways, seemed to favor expanding government's reach in ways that they like. Ron Paul is delightfully honest, but it is hard to see him as a serious candidate, even though his idea content is higher than any candidate in recent memory.

Rick Perry is riding to the rescue on Saturday, but he has so many enemies in Republican circles that it is hard to see how, even if nominated, he could pull the party together enough to give Obama a real race to the finish line.

So, for now, weak though he is, Obama looks like he could easily defeat anyone in the current crowd.

Life in the Dependency Economy

2011-08-11T04:34:00.000-07:00

The vast majority of Americans now are "dependent" upon others for the most significant parts of their economic life. The entitlements are just the beginning. Most Americans feel "entitled" and don't ask who pays. Somehow, "the government" is an adequate answer to this question. Young folks emerge from American universities with the idea that "the rich" and the "big corporations" can somehow provide funding for all manner of projects that they find worthy. All of this is economic absurdity.

As long as most folks believe they don't have to pull on the oars, they won't pull on the oars. That's why the Greek riots (and now London riots) are so instructive. These folks do not believe that they need to work themselves to provide the elaborate lifestyle that they plan to live.

Compare the attitude of Asians. No one in an Asian culture believes that they are "entitled" to anything. The modern Asian attitude is similar to the attitude of Americans in the nineteenth century. They see opportunity to work, to save, and to improve the lives of themselves and their children. They see this opportunity as something that they can create, not something that are "entitled to." That is why the Chinese savings rate exceeds 50 percent while western savings rates are, at best, single digits.

So, what will be the outcome? The western nations no longer have the energy to move the dial. They expect the dial to settle comfortably somewhere that will provide for their needs. It won't. The rude awakening is that the Asian nations will not provide indefinitely for the lifestyle the western countries think they deserve. Instead the Asian nations, by individual effort not by government largesse, will grow and develop and surpass the West.

The idea that Americans, left and right, cannot even agree to move the age of eligibility of social security and medicare out to reflect the obvious demographics that are crushing these systems shows the welfare mentality in clear relief. By the time the US figures out that the entitlements need to be reigned in, it will likely to be too late to reign them in without directly reducing benefits for folks that depend upon them. This is the legacy of the welfare state -- a state of denial bordering on idiocy. No rational human remotely familiar with the facts would take the current line espoused by Obama and Pelosi. The entitlements cannot be saved by taxing the rich. That is pure idiocy.

The US is a pampered society that refuses to face the cold hard numbers that promise economic stagnation and economic decline. Fortunately for the world, there are other countries that don't see things this way.

Leave The Markets Alone

2011-08-10T14:47:00.000-07:00

Today's stock market loss of over 500 points, reversing Tuesday's 500+ point gain, has led to calls for action by various agencies of the government. Enough!

Let the markets sort themselves out. That's what they do best, when left alone. There is too much "what will the Fed do now?" This attitude forces politicians into action, just when they should remain silent.

Politicians don't know, any more than anyone else, why markets go up or down. There isn't any real news in the stock market since the slide began to accelerate last Thursday. We already knew (before last Thursday): 1) Europe was a basket case; 2) The US has a debt implosion; 3) GDP growth in the US was virtually non-existent 4)the President hasn't got a clue. This we all knew well before the market drifted below the 12,000 mark. The only new piece of news was the S&P downgrade. But, who did that surprise? (Other than Geithner, of course, who is surprised by everything).

The politicians should keep their hands off. We don't need more policy. We don't need calming statements. We don't need the ECB to do something. Let markets do their thing and keep the politicians on the sidelines. Haven't they done enough?

A Bankrupt Fed Policy

2011-08-10T05:06:00.000-07:00

All eyes were on Bernanke yesterday. The usual coterie of hysterical media folks -- Jim Cramer comes to mind -- were screaming loudly that the Fed needs to do something. Yes, the Fed needs to do something....go on vacation. The idea that the central bank can offset the sledghammering that the Obama Administration has done to this economy is ludicrous. All Bernanke is doing is angling for reappointment, nothing else.

The Fed is bankrupt (literally) and the US treasury is bankrupt. Bernanke and Geithner should be retired. They are the architects of the worst economic recovery since the 1930s. No policy at all is better than foolish policy.

The government needs to get out of the way, not come up with some new dumb idea that the media can focus on as a panacea for our economic troubles. Only free markets can get us out of our troubles, not more big government.

The Stock Market

2011-08-09T03:21:00.000-07:00

The stock market should be bought here. No one has made any serious money by holding stocks since March of 2000. That is more than eleven years of nothing, except occasional dividends. Stocks will do better over the next eleven years. Long term investors should own this market here.

That doesn't mean that stocks won't go lower. They probably will. But, picking a bottom is a fool's game. The economic environment always looks terrible when it is a good time to buy stocks. Otherwise, it would not be a good time to buy stocks.

Agreed that the Obama Administration and the Democratic Congress of 2009-10 have done everything they possibly can to destroy the American economic engine and have, in part, succeeded. But, help may be on the way. It isn't clear that the American worker will survive the Obama debacle, but American business might. American business can outsource, can expand plant and equipment and can sell its products to the rest of the world. The US is probably entering a long run period of economic stagnation, but that doesn't necessarily spell doom for the stock market.

Americans have chosen to price themselves out of the labor market by adopting an absurd litigation environment and onerous mandates and America has chosen to impose upon itself unaffordable retirement and health care schemes. But, the rest of the world, especially the part of the world that is growing, has not been so foolish. American business can, over time, link itself to the growing parts of the world. This is not encouraging for the future standard of living for the average American, but, for the investor, the non-western world can provide solace.

So, close your eyes, swallow hard, say a prayer and buy stocks.

Some Positives; Time to Buy

2011-08-08T13:14:00.000-07:00

The S&P downgrade is a salutary event. It spotlights the problems with US government finances. This is all to the good. In the midst of the downdraft today, President Obama gave a brief statement that exhibited a total lack of understanding of US debt problems. The stock market followed the Obama comments with an almost immediate drop of another 200 points. Overall the markets lost nearly seven percent by the time the smoke had cleared.

But most folks get it, even if the President doesn't.

No longer can politicians pretend that the debt issue can be swept under the rug or buried in a sea of class warfare.

It must be time to buy stocks again.

Do The Numbers

2011-08-08T06:16:00.000-07:00

The present value of our social security and medicare liabilities can be conservatively estimated at $ 66 trillion. How do we deal with that?

Lets tax the rich! If we raise taxes, ala the Obama plan to eliminate the Bush tax cuts for the rich, we will gain $ 770 billion in revenues over the next ten years. That assumes, of course, that business folks don't alter their plans after getting socked with this tax increase. So, let's assume we tax the rich. That gets us $ .7 trillion. That leaves $ 65.3 trillion to go.

What next?

Well, perhaps bondholders will step up and buy $ 65.3 trillion more in our debt to fund our retirement and health care. You think the Chinese will do that?

Here are some more numbers. A twenty two year old college graduate might work 40 years and then retire at 62 and collect social security (that's right, three-quarters of Americans take the early retirement option at 62 (now 63), so 62 (now 63) is relevant age, not 65). So, they don't work from zero to age 25 and then they don't work from age 63 to 83. That's 45 years of no work and 40 (41) years of work. And, they plan to live at, more or less, the same lifestyle in all of these periods. Really? Since the typical American doesn't remotely save enough to do this, who will step up to the plate? That's where the $ 65.3 trillion shortfall comes in. Who will put this money up?

What eventually will happen is that the US will dishonor it's pledge to its senior citizens. It won't have any choice. It will not have the money or the borrowing capacity to come up with $ 65.3 trillion.

So, S&P is right.

Only politicians and hack journalists think this is do-able if only the tea party would go away or if only we could "tax the rich."

CNBC Hysterics

2011-08-08T05:51:00.000-07:00

This morning's CNBC features Jim Cramer, of all people, calling for "bold" action by the ECB (European Central Bank). This is so absurb, it makes you wonder if Cramer is paying attention.

The world is drowning in sovereign debt and Cramer wants the ECB to step up and buy debt, effectively print money, and permit the current absurdity to continue unabated.

It's time for these countries to take their medicine. Yes, it will be painful, but not nearly as painful as it will become if nothing is done. Ditto for the US.

Forget about the immediate impact upon the stock market. That is totally irrelevant.

It is time to face the facts. The government spending in the western economies cannot be sustained. Period. Blame Standard and Poor. Blame the ECB. Blame the Tea Party. Blame whoever you want.

But, facts are facts. The western economies will ultimately default one way or another. The sooner they begin to do workouts and reduce their government spending, the sooner their economies can begin the process of real economic recovery.

Don't listen to the silly folks who are focused on where stocks may or may not trade today, this week, this month, or this year. That doesn't matter.

More Nonsense from Politicians

2011-08-08T04:22:00.000-07:00

Geithner is complaining about Standard and Poor. The G-7 says that they will take "concerted" action, whatever that means. The ECB says they will buy Spanish and Italian bonds. These folks still don't get it.

Politicians believe that all they need to do is "calm the waters." If that worked, it would have already worked. The world is drowning in sovereign debt. The US national debt is spiraling out of control. "Calming the waters" might get you through a day or two, but that is about it. Sooner or later the cold hard facts of the numbers intrudes.

The size of government needs to be reduced in the western economies and the entitlement programs need to be phased out. The western countries cannot afford these things anymore and bondholders won't fund them. All the discussion by Geithner, the G-7, and the ECB is irrelevant and distracting.

Quadruple A

2011-08-07T10:57:00.000-07:00

Warren Buffett is at it again. He has now declared that Standard and Poor was "wrong" to lower America's debt rating from AAA to AA+ and that it should be AAAA. This bizzare statement was offered to Bloomberg in an interview yesterday.

Buffett has famously urged Congress to raise tax rates, knowing full well that he will never pay them. Buffett, like other rich folks, can shift his assets around to avoid the tax man, so he could care less what the tax rates are.

Buffett wants everyone to see him as a modest, unassuming man who did well. That, of course, is nonsense. The son of a well-to-do Nebraska Senator (Republican, at that), Buffett has always had it pretty easy. He is definitely a smart guy, but he lives like a potentate, flying around is his private jet, hobnobbing with the wealthy and the far left as he issues absurd statements like his "AAAA" statement today.

No amount of obfuscation by Buffett hides the cold hard facts. The rating agencies are right on. US debt is in deep trouble. The US has $ 66 Trillion in unfunded liabilities in its entitlement programs. Buffett thinks that is okay and merits a "AAAA" rating. S&P doesn't agree. S&P is right.

Shoot the Messenger

2011-08-07T05:00:00.000-07:00

Listen to the outcry! The politicians have now decided that Standard and Poor is to blame for the near term financial chaos. Those evil folks at S&P should not have downgraded US debt (or not used the "process" that they used to downgrade US debt).

These are the same politicians who complained when the rating agencies were late to the party in the 2007-2008 crisis. Many of of these politicians blamed the rating agencies as contributors to that crisis, when they failed to downgrade weak debt.

So....damned if you do, damned if you don't. What does this tell you? It tells you that politicians (and central bankers) are looking for someone to blame for their own mistakes.

In both cases, the same facts prevail. Government created the current crisis just as surely as government created the 2007-2008 crisis. Politicians, who are mainly to blame, look for others to blame.

This "shoot the messenger" strategy is followed by both US and European politicians and central bankers alike. That strategy, they hope, will keep the public from the real truth -- the US and Europe are drowning in sovereign debt and have taken no steps to deal with the problem.

So, here they go again....blame the rating agencies.

Only Geithner is Surprised

2011-08-06T05:51:00.000-07:00

The S&P downgrade of US debt from AAA to AA+ comes as no surprise to anyone but Treasury Secretary Geithner who, as recently as a week ago, declared that there was "no chance" of a downgrade. Has he been living in a cave? Did he listen to the rating agency executives' testimony to Congress two weeks ago? Geithner has no credibility if he is surprised by the downgrade. He is either an idiot or he is uninformed (perhaps both).

The markets were certainly aware that this outcome was on the way. S&P had said, weeks ago, that unless $ 4 Trillion of credible debt reduction was accomplished and soon, the downgrade was highly likely. So, you have to wonder what the deal is with Geithner? Is this the guy advising the President and setting Administration policy.

It's one thing to have crackpot views, which seems rampant in this Administration. It is quite another thing to be uninformed and incompetent.

Geithner should step down and let someone who, at the very least keeps themselves informed of what is going on, come in to advise this apparently hopelessly befuddled President.

A Better Employment Number

2011-08-05T05:56:00.000-07:00

Today's employment report is marginally better than the market anticipated, showing 150,000 plus additional private sector jobs for the month of July. That number would be anemic, historically, for an economic recovery number. You need nearly 250,000 a month to put a dent into unemployment. The fall in the rate from 9.2 to 9.1 occurred only because so many folks gave up looking for a job and thus are no longer counted among the unemployed. But, that said, this morning's number was not disastrous, just merely discouraging.

Unfortunately, this is as good as it gets. That's the sad state of affairs for the US economy. We now face stagnation for a generation (or possibly generations) until economic policy does an about face (which it might not do).

Governments Not Helpful

2011-08-05T04:58:00.001-07:00

We are now reduced to bemoaning the obvious fact that governments are powerless to do anything about the current economic trauma. Why do we think this way? Governments have never had any real power to spur economic growth. Mostly, governments just get in the way.

But, over the years, a largely ignorant media has trumpeted the idea that governments are the solution to economic problems and much of the public now looks to government to solve their economic problems. Gradually, it is sinking in that government may be the problem, not the solution.

It is appealing to look to government to solve all problems -- provisions for old age, health care, education, whatever. But, government solutions to these problems sap the vitality of the economic system and the energy of its citizenry. Folks stop saving; students quit taking education seriously, citizens overeat...why not? We are all victims. It's not our fault, says the media. Let the government rescue us from ourselves!

Only individual effort, in the long run, makes any real difference. That's what the Asian economies know. Look at the effort that Asian students put in to their educational pursuits. The top students at practically every American university have Asian last names. Why? Because these kids know that they must make that effort themselves. Government is not going to do it for them. But, Americans and Europeans don't see it that way. They are convinced that they have already done their heavy lifting and now they look to government to solve their problems and provide for them.

The President's almost childish faith in the role of the big government belies the reality that his policies have turned the most powerful economy the world has ever known into a pathetic shell of its former self. Admittedly, he has had a lot of help from his Republican colleagues. They too think the government can solve our problems. It was the Bush Administration that proposed the prescription drug bill, no child left behind, the TARP and many other counter-productive policies. So, you can't blame all of this on President Obama. He's just one of the crowd.

It's time to take a second look at why our culture has lost its punch. Too much government. Too much class warfare. Not enough making people responsible for themselves and their families. The Asians see this clearly and the future is theirs. We are witnessing an historic shift in power. Ironically, a county emerging from communism is pointing the way to individual initiative, while a country born in a commitment to the individual is surrendering itself to the clutches of the collective.