October 13, 2011
I’ve been reading the Weekly Market Comment section over at HussmanFunds for a while now as one of my top few sources of insight on what is going on in our economy. A new post by John P. Hussman, Ph.D. goes up every Monday. Their quality and interest varies, but when he’s on a roll, I find myself re-reading the post several times throughout the week, seeking deeper understanding. A few excerpts from the October 10, 2011 post and links to other posts below:
“When Wall Street talks about the “failure” of a bank or other financial institution it means the failure of the company to pay off its own bondholders. It does not mean that depositors, counterparties or other bank customers lose money. A bank is essentially a big portfolio of assets, about 70% which are typically financed by depositors, customers and other liabilities, about 20% by the bank’s own bondholders, and about 10% with the capital of the bank’s stockholders. In a typical bank “failure,” the bank is taken into receivership by regulators, the liabilities to stockholders and bondholders are cut away, the remaining package of assets and liabilities is sold as a single entity to some other firm, the old bondholders get the proceeds of that sale, and the stockholders are wiped out. When investors willingly take a risk, and buy the stocks and bonds issued by an institution that goes on to mismanage its business, this is the appropriate outcome. Depositors and customers typically don’t lose a penny”
“If public funds are provided during a financial crisis, and it cannot be clearly demonstrated that the institution is solvent, the funds should be provided post-failure, as senior loans to a restructured institution where shareholders and existing bondholders have already been subject to losses. The interest rate should be relatively high, to encourage replacement of public funds with private ones. With few exceptions, when public funds are used to avoid major restructuring and shield private investors from losses, the result is almost inevitably a larger, less transparent, and more recklessly managed institution.”
“The same is true for government or “sovereign” debt. When Wall Street talks about “failure” of Greece, for example, it means failure of Greece to pay off its own bondholders. In trying to avoid this failure, Greece is instead forced to impose extreme austerity and depression on its citizens. From the standpoint of those citizens, Greece has already failed them painfully. Those are the choices – let bad debt “fail” or force depression on innocent citizens.”
“In 2008, the Federal Reserve created a set of off-balance sheet shell companies called “Maiden Lane” to buy undesirable long-term assets of Bear Stearns and other financial companies, justifying the purchases by appealing to Section 13.3 of the Federal Reserve Act. But if you actually read Section 13, it is clear that under the law, “discounting” means (as it has always meant) providing short-term liquidity by essentially providing a check-cashing service for obligations that are short-dated, well-collateralized, and promptly collectible. The Fed’s creation of the Maiden Lane companies to purchase bad assets was, and remains, illegal under the language and intent of the Federal Reserve Act.”
50% Contraction in the Fed’s Balance Sheet This is a great article on the Federal Reserve and it’s actions regarding interest rates and Treasuries. It’s a bit of a tough read, but if you can get through it and understand it, I think you will gain tremendous understanding of our current economic regulatory motivations and hurdles.
Handicapping QE3 This one has an in depth look at the results of the previous rounds of Quantitative Easing, and the likely timing and effects of a third round.
For the rest of his analysis, check out the full list of Weekly Market Comments here.
September 25, 2011
• U.S. Tax revenue: $2,170,000,000,000 • Fed budget: $3,820,000,000,000 • New debt: $ 1,650,000,000,000 • National debt: $14,271,000,000,000 • Recent budget cut: $ 38,500,000,000
OK, now let’s remove 8 zeros and pretend it’s a household budget:
• Annual family income: $21,700 • Money family spent: $38,200 • New debt on credit card: $16,500 • Outstanding balance on credit card: $142,710 • Total budget cuts: $385
I’ve seen the above posted on a number of sites recently. The oldest source I saw for it was here. I think it’s valid to think of the budget in these terms. Sure, there are differences, such as our government’s ability to legally launder money, but the basic principles of home finance do relate, and taking eight zeroes off helps make things imaginable. Considering that there are approximately 300,000,000 Americans, around half of whom don’t pay income taxes, it isn’t even too far off for figuring your own percentage of the debt. Gimmicks aren’t going to change this chart. You can tax the people to give out loans (more debt) to small businesses, but that is mostly zero-sum. You can tax the people to pay for unemployment to encourage the unemployed to spend money to stimulate demand for products and thus create jobs, but that is like buying your employer’s product on your credit card in order to keep them paying your paycheck; It gets you nowhere or worse. You can tax the rich dry and barely make a dent in that number. Just like in your personal finance, if you want to gain wealth, you need to provide something that someone else needs. If we aren’t selling more to foreign nations than we are buying, we are losing. This isn’t so much a supply or demand problem as it is a relative value problem. If we are going to be on the losing side of this equation, we need to be printing money rather than borrowing it. This may not be fair to the savers, but they will fail right along with the rest of us on the current course. Printing money eventually devalues it. A devalued currency will make imports more expensive and exports more affordable, putting us to our rightful place in the market again. I would also support an eye-for-an-eye tariff policy to prevent socialist nations from taking advantage of us. Until one or both of these things are instituted, our economy will continue to decline. Even with those changes, we also need to reduce our spending on the military, foreign aid, micromanaging regulations, incarceration, social programs for non-citizens, and benefits for public employees.
September 5, 2011
If you went to college before the turn of the millennium and you are now trying to convince your kids to go to college, it may be worth more careful deliberation. There was a time when college was the path to a wealthy future. Back then it was one of the only ways to get a decent education.
With the advent of the internet, knowledge in many fields is at your fingertips. Unless you want to be a doctor or something similarly carefully regulated, chances are you can learn most of what you need online and at your own pace, and nearly free.
Contrast that with the current college system. Colleges are putting professors on furlough and reducing the amount of education they produce each semester. Meanwhile tuition is going up far faster than the rate of inflation. College loans have increased over 500% since 1999.
Why? What is it in the system that is justifying tuition going up while quality of education is dropping? In this case I believe it is actually a self-defeating government subsidy. Credit is tight right now. If you want a loan for most things, you have to first prove that you don’t need it. This credit crunch has hit every sector but education, in which government loans are still easily available and low interest. Combine this with the lack of work, and people are going back to school and living off loans. The natural result of this is that colleges raise tuition, since the students can afford it.
Looking back a decade, government-sponsored enterprises gave out adjustable rate mortgages to the poor, and once they had them on the hook, raised the rates. What they didn’t take into account is what would happen when they took it too far and people just defaulted and walked away. This time around, they are ensuring that it doesn’t happen again. Federal student loans follow you till you die. Bankruptcy doesn’t help. What will happen when all of this debt comes due? Will people spend the rest of their lives trying to get above water? Will the government forgive the debt on the backs of the taxpayer? Will the next credit bubble use your children as collateral? When will they stop trying to hide the debt and start working to correct it?
What still doesn’t make sense is the furloughs. If tuition is up, and full time attendance is up, and professor salaries aren’t skyrocketing, then why the furloughs? It’s because we are becoming a nation of administrators. Less than a third of your tuition goes into educating you, and the percentage of funds going to college administrative costs is going up at a truly unreasonable rate. I’m not even saying anyone is getting fat here, just that as a society, we are spending far more on administrating producers than we are on actually producing anything.
What we need now is some transparency. Unfortunately, creating the Office of Administrative Overview Regulation or some such won’t help. What we need is simple disclosure. Let the resulting outrage do the rest.
July 16, 2011
Here we have a man, Dennis Kucinich, who is a contender for being the farthest left of center in our government, speaking out against the legitimacy of that government, its monetary policies, and the two party system. What surer sign can we have that the system is broken?
I’ve spoken of Dennis Kucinich before. I don’t always agree with him, but he has my support for one simple reason. He’s one of the few honest politicians we have left who are willing to speak out against their own party, their own president, even be the only dissenting vote in the house, to set things right. Look at recent legislation, if you are in Congress and you haven’t voted against your party lately, then you have no ethics and no credibility with me.
July 16, 2011
It seems that these days, Congress takes a few breaks each year from legislating on important topics like who can marry who and baseball to bicker over some massive piece of legislation. This legislation is always claimed to be crucial to the continuation of society as we know it (sometimes it really is!), and has a deadline for doom avoidance. For months we see news anchors biting their nails over which side is going to win and whether it will pass in time to avert disaster.
The answer is always the same: It will pass. It will pass because if it doesn’t, the legislators will lose money like the rest of us, their constituents will abandon them, and the populace will make what remains of their now final term really unpleasant. Sure, some will vote the other way, but all they need is a majority.
Why do they wait? Why not just make a deal early on and be done with it? Because somebody has to lose, in fact, most of us have to lose.
Our problems are too big to solve in a way that makes everyone happy. Take the budget for example. Taxing the rich isn’t nearly enough (and it makes them not rich), reducing the military is slow and more expensive in the short term than leaving it alone, and the problem needs to be solved now. Raising taxes on the middle class just shifts the overwhelming burden to another group who can’t bear it, without fixing the core problem of a lack of national wealth, and the middle class are the majority of the voters. Stimulus is not much more than smoke and mirrors, and costs money we don’t have. Spending cuts cause outrage among those who are being cut and their sympathizers.
So what’s a politician to do? It’s pretty simple really. Put on a good show. Bang your fist on the podium, cry, point the finger at the other guys, all the while drilling home the point that the deadline of doom is approaching. The most important part is that you don’t make a deal until the clock has nearly run out. If you wait until the very end, you can vote something in that appears to address the problem and helps out your biggest donors (you know, the insurance companies, the unions, and the military industrial complex). Then you go to the American people and you tell them that the other guys put the bad stuff in there, but you had to pass it to avert catastrophe because the deadline was up. If you make the deal early, they will claim you should have kept fighting, and that you sold out.
How do we fix the system?
- Take on problems in smaller bites. Deadlines should be staggered rather than overwhelming. Bills should be mandated to be short and legible.
- Transparency. These people are public servants and we should be allowed to hear what they say on our behalf. All discussions should be on public record.
- Our taxes are a percentage of our earnings, so funding should be percentage based as well. That way, when revenue goes down, spending automatically matches it without the need for an emergency vote.
- Stop taxing the trade of Dollars for gold and silver. It’s Constitutional and allows people to shield themselves from the toxic inflationary effects of Congressional irresponsibility.
- If you want the money out of politics, take away the power from politicians to choose winners and losers. Take away the mandated insurance, the mandated union memberships, the private military contractors, and the corporate bailouts, and the money will take itself out of politics.
“Son, if you can’t take their money, drink their whiskey, screw their women, and then vote against ‘em, you don’t deserve to be here.” – Sam Rayburn, longst serving Speaker of the House