Saturday, December 29, 2012

The Fiscal Cliff is more like Fiscal Quicksand

The United States government is nearly $17 trillion in the hole. It's an unimaginably large number. Years ago people predicted disaster if we went over $6 trillion, then $10 trillion. The train wreck never came. What's the limit of our debt? The fact is, there isn't any.

The Federal Reserve can literally create money at will. It's nothing more than a spreadsheet entry. Theoretically, they could create $17 trillion out of thin air and buy up the entirety of U.S. debt. What if the U.S. defaulted on its debt to the Fed? So what? The Fed can create money. They'll never go bankrupt. The government will never default though, because the Fed will provide all the money that's needed, even to borrow to pay the the Fed. It can even loan the government money at zero or negative interest rates.

At some point people will come to realize that the only restraint on the spending of the Federal government is the will of Congress. Congress has shown no signs that it's appetite for more spending is diminishing. When they talk about cuts, they're really talking about slowing down the rate of growth of spending, not actually reducing spending.

The consequence is not really government taking money from the private sector, it's the government directing resources, rather than the private sector. Once people figure out that the government is a source of unrestricted cash, lots of them will want to work for and sell things to the government. What's wrong with that? Well, it directs human activity to the most unproductive endeavors human kind has ever come up with.

In the old Soviet Union, people had savings. But what do you spend your money on when you walk into a shop and there are 25 of the same crappy suit you already own? Nobody's engaged in anything creative, new or exciting. That's not how government work rolls.

Cuba recently announced that unemployment hit a high of 3.8%. They have virtually no unemployment, because 80+ percent of adult workers work for the government and many adults just don't work, and aren't counted as members of the workforce. So even with great employment stats, the economy and quality of life are third world.

A thriving economy is not built on statistics. It's more than a measure of the cash in circulation. It's about incentives. People want to do exciting things in exchange for cash they can use to buy exciting things. If cash can be obtained by simply engaging and participating in some mundane make-work activity assigned by Uncle Sugar, there's no incentive to be extraordinary, and there's nothing extraordinary to buy, because nobody else has any reason to excel either.

This explains how you can have a mountain of debt, printing presses running at full tilt, and no inflation. The inflation doesn't come about until necessities become scarce. We're not there yet. But we're on our way.

Friday, December 7, 2012

Obamacare and the job market

With the re-election of Barack Obama and the Supreme Court decision that the individual mandate can stand as a tax, Obamacare is the law of the land, like it or not. It will be fully implemented in 2014. With all the uncertainty surrounding the law, one thing is certain; labor costs are going to go up. How will that effect the labor market? For clues, look at the housing market.

After the credit market debacle of 2008, new requirements were put in place for loans, making qualifying for a home mortgage much more difficult. Demand for housing is still there, but fewer people can qualify to buy a house. Hence the housing market, four years later, is still lackluster at best.

The same principals will apply to the labor market. In fact, anticipated cost increases have already had a major impact. The official unemployment rate for November actually dropped to 7.7% as the economy reportedly created 120,000 new jobs. However, the drop in the rate came from the fact that 350,000 people quit looking for work and are therefore no longer counted in the employment numbers. The percentage of working age adults participating in the workforce is now at a 50+ year low.

There are job openings out there, but the bar has been raised and is going to be raised further. Consider a company that operates on a 30% margin. That means that for every $1 they generate in revenue, they net a profit of 30 cents after expenses. If their current cost per employes is $20,000 per year, they have to take in an additional $66,000 in revenue per new employee to maintain that margin. Now increase the cost per employee by $5,000 per year to cover an insurance requirement. The company now has to generate over $83,000 per employee to justify a new hire. If you can't deliver that kind of productivity, they don't need you.

This may actually benefit companies at the top of their field as companies operating on tighter margins drop out. It could also benefit temporary employment services. More companies may opt for "just in time" labor, using them only when they really need them, rather than taking them on as employees. Again, look at the housing market. In our area, it now costs almost twice as much to rent a house as to it does to pay a monthly mortgage, but if you can't get the mortgage, you're going to have to rent. Your hourly cost to rent an employee may be substantially higher than taking one on permanently, but you can let them go or stop using them any time without consequence.

It may also cause an increase in independent contractors as individuals find it easier to get a little work from a lot of companies than to get a full time position with one company.

Obamacare will cause changes in more than just the labor market, but the labor market may be where most people experience change first. I'm not going to say the world will come to an end or that we're going to suddenly experience some kind of train wreck. After all, Greece, Portugal and Spain still exist, despite their economic woes. Life will go on, but it will likely be quite different. You can't regulate, mandate, tax and spend your way to a vibrant economy, but that's not what America voted for.

Saturday, December 1, 2012

The Fiscal Cliff: We've already gone over it

As Congress and the White House put up a front of frantically trying to put together a deal to avoid the so called "fiscal cliff" the punch line is, we  went over that cliff years ago, and the fleecing of the younger generations is already well underway.

I'd say the actual edge of the cliff occurred in late 2008 with the passage of TARP. We were in a situation where large banks, financial institutions and car companies were on the verge of failure. Had they been allowed to fail, perhaps we'd have been plunged into a depression; a depression we'd be out of by now. Yes, financial institutions and car companies would have gone under, and they'd have been replaced by new financial institutions and car companies. Instead, John McCain famously suspended his campaign to run to Washington D.C. and put a stop to the madness, then promptly embraced the madness.

Republicans and Democrats alike decided that preserving the comfort level of the older generation was paramount, even if that meant throwing younger generations under the bus, and under the bus is where the younger generation is now. By the way, the average age of members of Congress is 60.

Consider what has already been decided by both parties. Entitlement changes for anyone 55 or older, the generations that are actually responsible for our out of control debt, are out of the question. For future generations, raising the eligibility ages and reducing benefits are a foregone conclusion. They just need to work out the details.

Even with cuts to entitlements and tax hikes, there is no plan for actually achieving a balanced budget, never mind paying down the debt. The plan only calls for reducing the rate of growth of the debt a bit from what it's projected to be now. That means that in a few more years, we'll be looking at another fiscal crisis, but by that time, the folks working on today's deal will be comfortably retired.

A strong leader with a real plan has not emerged on the national stage because the environment isn't there for one at the moment. Why would someone put themselves into the political meat grinder knowing they'll be despised for pointing out the obvious and end up losing anyway?

The American public is not convinced that major short term pain is the right medicine. So, for the time being we will continue the descent over the cliff. Remember, it's not the fall the kills you. It's the sudden stop.

Friday, November 23, 2012


Philips, you're pants are on fire.

I was reading an issue of Popular Science (25th annual 'Best of What's New issue, page 7) when a Philips LED bulb ad caught my eye. I read in the top portion of the ad that using an 11W, 800 lumen Philips LED bulb could save you $134 annually over the cost of a standard 60W bulb. Annually is the key word here. Naturally, I had to do the math.

In the footnotes, they explain that the savings was calculated by using a cost basis of 11 cents per kWh as the electricity rate and an estimated life of 25,000 hours for the bulb. There are only 8760 hours in a year, and that's if you use the bulb 24 hours a day, 7 days a week. A kWh (kilowatt hour) is 1000 watt hours or in this case about 91 hours of continuous use for an 11 watt bulb.

In the second footnote they explain how they calculated the 22.8 year lifespan of the bulb. It's based on estimated usage of just 3 hours a day. If you accept that as an average use number, it would actually take you almost 19 years to realize that $134 in savings.

They didn't display a price for this particular bulb in this ad, but LED bulbs in general currently go for between $30 and $60 at Home Depot or Lowes, so you could recoup the cost of the bulb in electricity savings in between 4 and 8 years, assuming you stay in your current home for that long, or you take your light bulbs with you when you move.

Here's an even simpler way to look at it. If you can really save $134 annually per bulb using an 11 watt as opposed to a 60 watt bulb, that means you're currently paying about $165 per year, per light bulb in your home. If you have just 20 light bulbs, that's $3300 per year or $275 per month, just for light bulbs. That doesn't include your TV's, computers, radio's, hot water heater, appliances, etc. Does that sound right to you?

Thursday, October 11, 2012

How government subsidies can lead to failure

It seems that a disproportionate number of start ups that receive grant money or loan guarantees from the federal government wind up going under. You've probably heard of Solyndra, Amonix and Ener1, to name a few. Is it corruption? Well, there may be a little of that, but fundamentally, premature financing can actually lead to business failure.

In the free market, when a start up is looking for financing, they have to go to investors and convince them that they'll make a good return. They have to demonstrate not just a good idea, but a marketing plan, a production plan, a distribution plan and perhaps most importantly, demand for the product. It takes a lot of work and sacrifice on the part of the start up. The business model is continually tweaked as they desperately try to create positive cash flow or at least demonstrate that positive cash flow is a high probability, over time.

When the government gets involved, it's usually for political reasons. They favor companies and industries that suit their agenda. There is a lot less scrutiny of the actual business plan and model for the individual company. Giving a company a big pile of working capital before they've ironed the bugs out of their business model can create a false sense of security and accomplishment. Executives may feel they can now pay themselves the six or seven figure salaries and bonuses they believe they've earned. The desperate search for efficiency is held at bay. They are now actually able to move forward with what may be bad ideas. This actually happened on a large scale, even in the private sector.

During the advent of publicly traded companies doing business on the Internet, investors flocked to just about any stock with a .com at the end of it's company name. Executives gave themselves huge pay and bonuses, and in the end, most investors got fleeced. The marketplace has gotten a lot more cautious since. The government doesn't seem to have learned anything.

Government can play a role in advancing new technology. However, given that it's everyone's money, they should stay away from investing in individual companies and stick to funding research, the results of which should be available to everyone, since we've already paid for it.

The free marketplace is a harsh and objective judge, at its best. It evaluates every aspect of a business based on the individual decisions and judgments made by consumers and end-users. Sound investors don't trade on hopes and dreams and warm fuzzy feelings. They trade results and probabilities based on hard data, observation and experience.

Everyone wants to see advancement in new technology, especially new energy technology. But to be viable in the long term, it has to come from real demand, efficiency and competence. These are things that can only be tested in the arena that is the free market. Consumers will tell us what is worth pursuing. Picking out individuals and giving them an A before they've even taken the test does not make them smarter.

Saturday, September 29, 2012

Supply side vs demand side

Once again I hear the pundits on the Saturday business shows stating that the problem with the economy is not taxes and regulations. It's lack of demand. The implication being that if we just dole out more money, the economy will fix itself. Of course demand is great for business. The question is, where does demand come from.

Some pundits and economists believe that creating demand is a simple matter of putting more money in someone's hands. Wouldn't it be great if that were true? All we'd have to do when recession hits would be to cut everyone a government check. Recessions would last a few days rather than months or years.

The fact is that demand comes from exposure to new things. Once you get past the basic needs; food, clothing, shelter; demand becomes subjective. What came first, the iPhone or demand for the iPhone? You didn't know you had to have it before it existed, or at least not before the commercials for it existed.

The fact that innovation and creativity spur demand is what incentivizes companies and entrepreneurs to innovate and create. If this were not the case, and demand was simply a matter of individuals having more money, companies would only have to maintain inventory and have access to more. There would be no reason to spend anything on research, innovation and creation because they would be irrelevant.

But they're not irrellevant. If you suddenly came into some extra cash and you already have an iPhone 5, your not going to go out and buy another iPhone 5. You might buy a cool new add on or accessory for it, but you're not just going to buy more of what you already have or buy something you've already decided you don't need or don't want.

To create demand you must enable producers to produce, create, innovate. That means making the risk/reward ratio pay off. Most new products don't work out. That means there has to be room for failure. Lower tax rates, less regulation; in short less time spent complying with government demands and more time spent working on consumer demand. Yes, demand is important, but it comes from supply. The two work together, but trying to create demand for products with your boot on the neck of producers is a losing model.

Saturday, September 8, 2012

Specifics on the proposal to broaden the tax base would be a really bad idea

Mitt Romney has proposed "broadening the tax base" by eliminating loopholes and tax credits while lowering tax rates across the board. Critics have dogged him for not getting specific about which loopholes and credits he would eliminate. However, getting into specifics at this point would likely kill the whole idea before it even began.

I like the idea of eliminating targeted tax credits and loopholes because I'm generally opposed to the practice of trying to influence individual decision making through the tax code, a.k.a. social engineering. I just don't believe that trying to direct the subjective decision making processes of individuals is a legitimate function of government and it's counter to free market principals.

 I don't believe that all of such tax credits and loopholes can be eliminated in one fell swoop, or that it would even be a good idea to do so. People need time to evaluate how it effects them and make adjustments where they deem necessary. Therefore, there would be a negotiation process. If you go into that process with ultimatums, you may just wind up going in all alone.

For example, I would not mind seeing the home mortgage interest deduction go away, if over a period of years, for a number of reasons. I have very good friends and customers who would vehemently disagree with me on this. I would likely get a lot of support for the notion of eliminating tax credits and loopholes from all of them, but if I prefaced it with a demand that this particular tax credit is going to be eliminated, the negotiation would never take place.

Instead, I could present it as an option, once we're at the table. It would likely be met with fierce resistance and I'd end up backing off from it in favor of some alternatives. The important thing is that the process was started, the overall premise agreed upon and now we can look for opportunities to agree on specifics.

It sounds like politics as usual, but it's really negotiation as usual. You don't make ultimatums unless and until you are ready, willing and able to walk away if you don't get your demand. Opponents of the general concept would seize on any specific provided in advance as justification for dismissing the whole thing before it got started. The firestorm would make for good television, but it would not be an effective strategy for actually accomplishing the goal.

I will say that Governor Romney, nor his supporters have done a very good job of explaining the reasoning behind not getting specific. They should give the American people credit for having enough intelligence to see the logic of it, given the opportunity.

Saturday, August 4, 2012

Why government stimulus isn't what it used to be

Many Keynesian economists, including the folks in the current U.S. administration, believe that stimulating a down economy is a simple matter of spending enough money. When the private sector slows down, the government fills the gap by spending more, and they don't much care what the money is spent on, just spend it.  They point to government spending and jobs programs in the 40's and 50's as proof that such stimulus can be effective. The problem is, this isn't the 40's and 50's and it wasn't the spending in and of itself that helped the economy.

The most obvious difference between then and now is the number of people required to do a large project. Back in the day, building a highway or a dam or a bridge required hundreds or even thousands of individual workers. These days the same projects can be done with dozens. That's why our nearly $1 trillion stimulus program resulted in only a handful of jobs at a ridiculous cost per job. Furthermore, with all the regulations and procedures put in place in the name of protecting the environment and workers and whatever else requires extensive study, just getting a project underway can take many years. Even President Obama learned that, and lamented that the jobs weren't as "shovel ready" as he thought.

If roads and bridges need to be built, updated, repaired, so be it. But that's not going to create a bunch of jobs or pull the economy out of recession. There just aren't enough people involved and the time period is too spread out.

Another difference between then and now is that, for the most part, public works projects were things that were actually in demand and that furthered the engineering and manufacturing revolution that came about due to World War II. There was the Trans Alaska Highway and the Hoover Dam for example. These were not roads to nowhere or speculation on technology that had not been proven in the market place.

So what's a government to do if simply spending more money isn't going to get the job done? There's really only one path left. There are thousands of small businesses within 20 miles of my house. If each had the confidence and optimism to hire one worker, that would be one heck of a jobs program. They don't need hand outs, or programs or grants from the government. They just need fewer regulations, less paperwork and the flexibility to negotiate with employees for pay and benefit packages that work for both, rather than with a government that's not involved in any aspect of the production process, except for those that slow it down and make it less efficient.

Government trying to control and direct the free market is like the Lenny character in "OI Mice and Men", and the free market is a bunny rabbit. Put the bunny down and give it some room to run before you do something you can't undo.

Sunday, July 29, 2012

Captian's Doctrine # 1

Individual freedom requires individual responsibility and accountability; the complete ownership of all of one's mistakes. If you can't take it, you don't get it.

Monday, July 23, 2012

Fascism by any other name...

They're not calling it fascism, but it's been all the rage, especially in the last decade. The new and improved term is State Capitalism. I guess that's supposed to make it more palatable to actual capitalists.

China is the poster child for state capitalism. Many economists have predicted that China will be the world's new global economic power, replacing the United States, as they posted impressive GDP numbers and managed to avoid the calamity of 2008 to a great extent. The U.S. may be unseated as King of the Economic Hill one day, but it wont be by China.

What the experts forgot to tell you was that China avoided economic turmoil in the short term by investing billions and billions of dollars into the construction of cities that nobody lives in. They're still doing it, both in China and abroad. Yet their growth rate for this year will officially drop below 7.5% (that's assuming you trust the communist parties official data), which is well below their stated target. China is about to experience a real estate bubble burst of Biblical proportions.

The idea behind State Capitalism is that the government owns all or part of major industries. This enables these companies to bypass a lot of the red tape and regulatory burdens that privately owned companies have to deal with. Another distinct advantage is that whether the company is run well or not, they're back stopped by the full taxing power of the nation's government. How can the free market compete with such a thing?

Well, let's look at what the growth of "State Capitalism" has brought us; chronically high unemployment worldwide, unprecedented debt levels, lower standards of living and disposable income. In fact, even in the United States, where the government saw fit to become shareholders in GM, Chrysler and AIG to name a few, the percentage of Americans living in poverty is at a 20 year high.

Fascism by any other name is still fascism. It's both a rival and a cousin to communism. Both are based on the premise that a select enlightened few can do a better job of directing resources, natural, human and intellectual, than a bunch of free individuals running around freely associating and trading all willy nilly. In the case of running a prison camp, perhaps that would be so, but it's no way to create a thriving, growing economy.

State run companies may have access to unlimited financing and bureaucrats at their command, but free market, privately held companies have the incentive to excel, innovate, create, make things better, cheaper, faster, stronger. Giving consumers what they want and need in an efficient, cost effective manner is directly tied to their personal advancement. The state run business and its employees have only the incentive to obey their superiors in order to keep that state sponsored paycheck coming.

If private enterprise is allowed to continue (not a guarantee by any means) it will prove superior to the state run enterprise. It may not seem so now, because state run companies didn't have to go to investors to get a mountain of operating capital. They can print it. But in the end, you've got to produce and perform to stay in the game. They can dominate a market by force, but they wont dominate if freedom of choice has anything to do with it. If they successfully force private enterprise out of the arena, look for living standards to get progressively worse.

In the meantime, in the name of transparency, let's dispense with the "Capitalism" moniker for what is really just another flavor of fascism.

Sunday, July 1, 2012

Is Chief Justice John Roberts crazy a fox?

When Chief Justice John Roberts sided with the more liberal side of the Supreme Court bench to uphold the Affordable Health Care Act (Obamacare) under the taxing authority of the Federal government, a lot of Conservatives, Libertarians and Tea Party types thought he had lost his mind, if only temporarily. I must admit, that was my gut reaction. However, after hearing some of the punditry opine on the matter, I'm beginning to think the John Roberts opinion may some day be seen as the Trojan Horse that put the breaks on runaway Federal spending.

The Obama administration and Democrats in Congress did not want this law regarded as a taxing legislation. In fact, they rejected a version that referred to it as a tax. What the Roberts ruling does, is establish that a piece of legislation that requires individuals to make a payment to the Federal government is a tax, no matter what you call it or don't call it. This is important because a tax bill only takes 51 out of 100 votes in the Senate to undo. Other types of legislation can require a super-majority (60 votes) to accomplish a repeal. Whether the Obamacare bill survives or not, this will make it tougher to enact spending programs in the future, at least ones based on "fees", "surcharges", "penalties" and the like.

Perhaps more important, or at least equally important is the ruling on the expansion of Medicaid. Many states have opposed this portion of the law because it requires them to expand their Medicaid rolls through new eligibility rules. The Federal government, under the law as it stood before the ruling, would force states to comply by threatening to take away all of their Medicaid funding if they refused. The ruling says that's a no go. The Federal government can withhold funding for that particular program, but cannot take away existing funding. This is big, because other government programs have been forced on states using the same tactic. If you didn't raise your drinking age to 21 for example, you would have lost highway funds.

What this part of the ruling could enable is true state laboratories for government spending programs. States get to choose on their own, without the threat of force, whether or not to participate on an a' la carte basis. Good programs would be adopted by other states in the future. Bad ideas would gradually go away. More immediately, programs already in force are vulnerable. States may be able to now opt out of existing programs within programs without fear of reprisal.

Now, I think it's still possible that Roberts simply dropped the ball on this one. But whether unintentionally or with brilliant forethought, it's also possible that Chief Justice Roberts has opened up two new fronts in the war on over-reaching government. Fronts that big government fans were not prepared for.

Saturday, June 16, 2012

Why computers stopped getting cheaper

Remember about 6 years ago, when your standard, off the shelf desktop computer got down to about $500-$600? Well, they're about the same now. Sure, the processing power, memory and overall technology have continued to improve, but the lower end models are still around $500-$600. Why is that? This is one case where lack of demand has actually kept prices up.

When the economy was doing relatively well, if a lower income family or individual wanted to make an over-the-budget purchase, they could either put it on the card (credit was easy) or they could fairly easily pick up some over-time or even do some free lance or piecemeal work on the side. Now, we have 15% of the workforce either unemployed or underemployed. Extra work is hard to come by and credit, even harder.

Yes, it's certainly possible to make a decent desktop computer, say with 2 or 3 year old technology, load it with freeware so one could still surf the web, create documents and modify images, and retail it at around $300, but who would buy it? Right now, the market for new computers is people who can easily afford a new computer. Those folks aren't interested in 2 or 3 year old tech, when for a couple hundred bucks more they can have the new stuff. There just aren't enough buyers at the moment for trailing edge technology, at least not brand new trailing edge technology.

The good news is, the economy will come roaring back eventually. The Progressive experiment will come to an end, not because of some broad based ideological enlightenment, but because Americans like new stuff and big government is simply not delivering.

Tomorrow's trailing edge will be today's top of the line, which is pretty darn good. Tech will become widely available and affordable to even lower income families/individuals on the store shelves. Until then, there's always Ebay and Craigslist. Of course, you may have to go to the library to go online and look for them. Just be sure to check those feedback ratings and always meet strangers in a well lit, public place. Also, when you go to the polls this Fall, remember, big government doesn't make cool new stuff. They regulate it, tax it and try to control its characteristics and distribution. Let them know how you feel about that.

Monday, May 14, 2012

How protecting the consumer is hurting consumers

After the financial system meltdown of 2008, Congress and the executive branch decided to "clamp down" on risky trading by large financial institutions and enact reforms aimed at making them more transparent and solvent. More consumer protections were put in place, including the elimination of certain fees and stricter reporting requirements. They also decided to go after tax cheats by requiring foreign banks to keep more detailed records of transactions in American accounts overseas. These and other measures are supposed to protect consumers from the evil greedy capitalists, but like Joan Robinson said "The only thing worse than being exploited by a capitalist is not being exploited by a capitalist." Consumer protection measures have actually hurt the very people is was supposed to help.

Banks and financial institutions that once had no minimum account requirements have had to impose them. The cost of paperwork and record keeping for smaller accounts makes offering them for free unfeasible. Banks have had to raise requirements for borrowing, taking many would be borrowers out of the game. Financial institutions that have never had foreign branches in the past have had to open them, because doing business in the United States has become too expensive. Many foreign banks have stopped opening accounts for U.S. citizens due to regulatory burdens. The net result has been a reduction in credit and services available to the average Joe. Sure banks are making money. But, they're making it on foreign investments and sovereign debt, not on small business and consumer loans.

It's not just the financial sector that's affected by consumer protection laws run amok. In health care, many doctor's practices have the majority of their employees working on one thing; processing paperwork related to Medicaid, Medicare and other third-party payers. If you were to go to the doctor's office for an ear infection and pay in cash, you'd be saving them a tremendous amount of time and paperwork, and therefore money. However, they are forbidden by law to charge cash patients less than they would charge a Medicaid patient. They are not allowed to pass that savings on to you. The intent is to keep costs lower for Medicaid. The actual result is to remove any incentive to cut costs by offering a discount for cash payments. Nobody wins. The only out is to stop accepting Medicaid and Medicare patients, which many practices are now doing.

Protections put in place to protect us from the free market, more often than not have a negative affect on our choices and our economy. They stifle entrepreneurs and income mobility by ensuring that only those who can afford the cost of compliance can enter and remain in an industry. In most of the country, you can't start a business in your garage and become a huge success because you can't start a business in your garage.

One of the main issues the government was supposed to address after 2008 is the "too big to fail" problem. That is, when so many people and companies are so dependent on a single business entity, that it simply cannot be allowed to go under. There's really an easy fix for that which I haven't heard anyone propose. The government can simply state in no uncertain terms, or even pass legislation that forbids the government from providing financial assistance to a failing business, regardless of size. The markets would take care of the rest. Money would be spread out in order to spread the risk. Companies can afford to put all their eggs in one basket right now, due to the implied guarantee that the Feds will make them whole in the event of disaster. Take that guarantee away and they will take evasive action. This hasn't been done simply because most of the egg heads in Congress and our regulatory agencies really don't understand how a free marketplace works, although they truly believe they are geniuses on the subject.

Perhaps part of the problem is that free markets require that bureaucrats, regulators and legislators hold the default position of: do nothing. But you can't show how smart you are or make headlines by doing nothing. The natural impulse of a public figure is to do something; to guide, to manage, to control. When they do, they get accolades and awards for doing so, regardless of the actual result. The important thing is that they cared enough to act, not that their action had the desired effect.

I don't know if the governing cycle of "regulate, fail, repeat" can be broken. It's tough to get elected or appointed by promising to do less, but I sure wish they would.

Monday, April 23, 2012

U.S. Debt is a safe haven?

Stocks are stagnant, oil has settled below its recent high of $107. Even gold and silver seem to have run out of steam. The debt is approaching $16 trillion dollars with no plan to even address the deficit on the horizon. So why are Treasury Securities (U.S. debt) trading at historically low interest rates? Why the big global demand for more U.S. debt? They call it a flight to safety, but what's so safe about it? Why is it more attractive than other investments or other country's debt? Well, it's not because anyone's excited about the prospects for a solution any time soon. It's about our political system and our capacity to get things right, eventually.

 People and companies with large sums of money on hand have to store it somewhere. They want to make sure it's safe and ready to use in better times. Putting it to work right now is not all that attractive as governments are in over-regulation mode at the moment. European countries with debt issues similar to ours are faring much worse in the credit markets. There are several reasons for this.

For one, European countries generally are governed by a parliamentary system. There is no clear separation of the legislature and executive. The executive branch comes from the legislature. They also have multiple parties as opposed to the two main parties in the United States. At first blush, this might seem like it would provide better, across the board representation. That's the theory. In practice it usually means no party gets a clear mandate from the people. A party can come to power with say 30% of the public behind them. Now they have to ally themselves with one or more other parties to form a majority government. This is not a recipe for bold or quick changes.

We also have a Constitution and a an independent judiciary charged with ensuring that legislation adheres to it. It is not their function to decide whether or not the intention of a law is good, but to decide if the mechanism for achieving the intention is permitted under the Constitution. Other countries are bound only by majority vote. Ideas and programs that are short-term popular and long-term disaster have a much better chance there.

What investors are betting on is that the U.S. system will eventually produce a plan that works. There are really only two conceivable outs for our debt problem One is hyper-inflation. However, even if that's allowed to take hold, the American public will not tolerate it long enough to bring the debt down to manageable levels. Inflation may make the math work, but it's also devastating to a large portion of the population. More likely, we will go with a version of cut, cap and balance. Maybe next year; maybe in four years, but we'll get to it. As the saying goes, the government will inevitably do the right thing, but not until all other avenues have been exhausted.

The plan doesn't have to bring the budget to balance immediately. In fact it can be a 20, 30, 40 year or more plan. The only essentials are that the math works, it's feasible and there's reasonable expectation that it will be adhered to. The only way to achieve that last bit is with a Constitutional amendment. Congress can not bind a future Congress. Only the Constitution can. That's another reason the Constitution gives us an advantage over other countries. Even if Europe came up with a grand, bold plan, it can be undone at any time with a single vote.

As messy as our political system is, we are fortunate that our Founders realized that a vibrant economy must be based on free individuals and a government accountable to them. They laid down some absolute rules designed to limit the damage a government can do. We've had bad times, corruption, scandal and gone down some dead ends over the last couple of centuries, but on a net basis, you must admit, it's worked pretty well. It seems global investors agree.

Wednesday, March 21, 2012

How Government funding creates an enviornement for corruption to thrive and innovation to die

It seems the more government funding we apply to education, the worse it gets. Government tries to regulate and inform the public on nutrition and the population keeps getting less healthy. Recently we've spent more tax dollars on "green energy" companies that go bankrupt. There are those who believe that our elected officials and government bureaucrats actually conspire to destroy the things they claim to support. In some cases, maybe that's true. But for the most part, the system itself creates failure by its very nature.

In a free marketplace, ideally producers and end users voluntarily enter into transactions at mutually agreeable terms, absent any third party or government influence. A buyer may get fooled into buying a shoddy product or service once, even twice, but over time bad ideas wither and die. Good ideas thrive and are imitated and replicated.

Now add some government funding and regulation to the mix. Now there's money and opportunity on the table that comes not from customers, but from legislators and executives at government agencies. Where previously my product had to stand the test of a 300,000,000 person focus group, now I just have to influence a handful of bureaucrats. I put on a nice suit, maybe a lab coat, come up with a professional, heady presentation and presto, I've got a big ole subsidy or a competition crushing regulation. The legislator's intentions may be noble, but by taking the decision making out of the hands of the end user, they've corrupted the whole process.

This process actually favors those who are inclined to get ahead through deception, obstruction and fraud and puts those who would like to test good ideas in a free market at a distinct disadvantage. Legal maneuvering, and influence peddling become more important than hard work and innovation. Even with the best of intentions, the government employee is not going to get input from everyone. They guy with the small shop, trying to prove himself in the capitalist arena, can't afford the plane ticket, the suit and the time off to go to Washington and lobby a bunch of legislators. Advantage cronies.

Our lawmakers and executives are not omniscient experts in everything from nutrition to education and energy production. They're just people. Furthermore, they're more likely to be elected based on their "likability" or how they feel about abortion or gay marriage than any expertise in any of those fields. Of course they're influenced by lobbyists. We've charged them with making decisions effecting industries, products and services they know absolutely nothing about. Most of them have no experience in any kind of business outside law firms and politics.

The solution isn't to elect different people to make our decisions for us. It's to take those decisions back for ourselves. We're discouraged from doing so by people who constantly point to the worst possible outcomes and convince us that those are the norms; that left to our own devices, we are doomed to fail. But just look at the track record. Societies that have been most successful at limiting choice and restricting free markets don't have illegal immigration problems. In fact they have to force people to stay. Don't buy the rhetoric. Believe your own eyes.

Saturday, March 17, 2012

The return of multi-level marketing

Multi-level marketing has been around for a long time. Its popularity rises and falls and currently it's on the rise. This has been fueled by a still struggling economy as well as new regulations in the energy industry that require producers to make their products available to wholesale customers.

In the energy and utilities industries, you may have been approached by one or more purveyors of this business model. Essentially a cable provider, phone company or utility company agrees to sell x amount of accounts to a company at a wholesale rate. This company then recruits individuals, acting as sole proprietors, to go out and sell. In some cases they may offer the same service, with the same company you're already with, at the same or lower price, depending on the margin they're going for. In almost all cases, the person selling to you will encourage you to become a saleperson yourself, although they rarely use the term salesperson. They then get a piece of your sales.

The model is also used in cosmetics, travel, cleaning supplies, nutritional supplements and other areas. Here are some things to keep in mind before you sign up. First, many will claim they can undercut the competition because they don't spend money on big ad campaigns. That's true. They don't have to. Why should they spend money on a bunch of 30 second ads that might reach 1,000,000 viewers when they can get 1,000,000 individuals like yourself to schedule one-on-one sales appointments and pay them for the privilege? You're doing the marketing. You're investing the time, making the copies, scheduling and doing the appointments and making the pitch. Resources are being spent. Yours.

Your time is not free. If you spend a total of 40 hours in a week thinking about the program, attending expos, networking groups, seminars, generating leads, scheduling appointments, going to and from and conducting the appointments, and the result is a net of $200 to you (after expenses) in said week, you made $5/hour.

What are the barriers to entry? If you can become an "associate" by filling out a form and paying a fee, guess what? So can anyone else. If the company you're working with is reselling a commodity, guess what? Anyone can start a company just like it. If it's really that easy to make a whole bunch of money, the rest of the world isn't going to sit back and just leave it to you. You'll get more and more competition until the margins are squeezed right out of the game.

Now you can do well with these kinds of things if you're a talented salesperson. But that's all it is. It's a marketing and sales competition. If you enjoy it and you're doing well at it, more power to you. But don't be under any illusion that at some point you'll be able to just sit back and collect checks. Multi-level marketing is a high turnover business. Even the "Platinum" players have to work it full time to stay there. The most successful ones are those who are excellent motivational speakers. They get your assistance there too. When they come to your town, they can count on you and your fellow associates to fill the hall rather than having to spend a lot of money on media ads. After all, they're going to help you close your prospects, right?

Bottom line, if you think it's something you might enjoy, have at it. Just understand what you're getting in to. Do the math. Factor in your time and expenses. It's not magic. It's not passive and the product doesn't "sell itself". If it did, what would they need you for?

Tuesday, March 13, 2012

Republicans missing the point on the health care debate

Republicans may think they've gained an edge with the backlash against the White House for insisting on a requirement in the health care law that mandates insurance companies provide birth control. The dust up came from objections by religious institutions for whom birth control is morally wrong. They say it is a violation of religious freedom to require them to pay for a procedure or product that they find morally objectionable and are demanding an exemption.

Perhaps they'll get their exemption and feel as it they've won. Well, they may win the battle, but in doing so lose another big round in the war. For in accepting the exemption they are validating the rule. The rule being that it is right and fitting for the government to determine the nature of products offered in the marketplace. Of course, a free market advocate would say that what's included or not included in an insurance policy is between the buyer and the seller. No more. Now we're dealing with a buyer that's forced to buy a product and a seller that's forced to meet parameters, not set by said buyer, but by the government.

From the very beginning of the collectivist movement, it's been held that the system will only work properly when everyone participates. How do you make that happen? There's only one answer. By force. That's why every drive toward socialist Utopia ends the same way, no matter how progressive. It always ends in misery.

By focusing on objections to individual provisions of the health care law, Republicans are implying that the law itself is not the problem, just the details. We're still primarily arguing over which brand of Statism we're going to live under.

Saturday, March 10, 2012

Not sure when it will end, but I've got a good idea how

Two stories recently illustrated to me that the decline and fall of the great American experiment is moving along faster than I had imagined.

First, a young women testifies before Congress that she needs $3000 worth of birth control to get through 3 years of law school, and furthermore, that it's appalling that she doesn't get it free of charge. Now I don't actually believe that she has sex 3-6 times a day every day of every year, as her testimony would imply. I think she just pulled a number out of thin air and didn't expect anyone to actually do the math. The sad part is, there wasn't even an honest debate over the question of whether the government, and thereby the public at large, needs to all pitch in and cover everyone's birth control. It's been dubbed a women's health issue. If you're going to call birth control a women's health issue and something the taxpayer should cover, why are weights and gym equipment not equally men's health issues and covered by the taxpayer? Heck, food and shelter are health issues as well. Why should anyone pay for those?

Another story was about illegal immigrant detainees. Now you may not be aware that most people who are caught crossing the border illegally are simply given the option to get on a bus and go back to Mexico. Some refuse and are detained awaiting hearings. While they are detained they are provided free of charge, everything from dental care to abortions, to hormone therapy. Yes, if you're in Mexico and have a medical problem, or need a cavity filled, just sneak across the border, turn yourself in, and refuse to get on the bus. After that, Uncle Sam is responsible for all your health care needs.

Our entire political system has been contorted into a game to see who cares for what more. You prove how much you care by obtaining funding in its name. There are, of course, competing care camps for competing interests, but rarely are those who say "We really can't afford that." or "That's not really a role for government." portrayed in a pleasing light in the news or on the web. The health care law really raised the game to new heights. Now that the government is charged with ensuring everyone has health care, all you have to do to get goodies for your voters is connect it to health care. There are very few things and activities that can't, in some manner, be connected to health care.

Obviously, none of this is really free. Somebody has to do the work, and at least for now, work still requires money. The government doesn't actually earn money. They have two ways of obtaining it. They can print it, or they can take it. I suppose you could call borrowing a third way, but that's really just a delay on either printing or taking. Lately, they've been doing a bit of printing and a lot of delaying. It's becoming glaringly evident that taking is not going to fill the debt hole, unless entire generations are willing to live in slavery to their government. More likely, there will be a lot more printing going on at some point down the road.

It may seem like there's not a lot of money out there, but the reality is, there's tons of it in cold storage. Companies like Apple, Microsoft, Toyota, as well as governments like China, are sitting on mountains of dollar denominated cash hoards. If they see the U.S. Treasury start cranking out bills like there's no tomorrow it will spark a spending frenzy of Biblical proportions. The good news is, we'll all be millionaires. The bad news is, a loaf of bread will set you back $10,000.

I don't know where it goes from there. There are too many uncertainties. How the public at large will react to monetary chaos is anybody's guess. But I do know the notion that deficit spending is a financial burden upon our children and grandchildren is not exactly correct. There's no way they'd be willing or able to pay such a debt. That's not how it's going to go down. Inflation is the only remaining resolution. This isn't so much a warning as an observation. A warning only makes sense for something that can be prevented.

It's about time

After watching the movie "In Time" which depicts a future world where the currency is time, it occurred to me that it's not really a futuristic concept. Time is already the essence of our currency, even if it's not immediately evident. In fact, the best yardstick with which to measure the value of anything, including actual paper currency, is the time standard.

What do you need money for? Housing? You could learn to build a house, gather and process the materials and make your own. What? That would take years, maybe decades. It's much more efficient and practical to pay someone else to do it. Same can be said for finding and processing your own food, clothes, toys. Money buys you time. You spent time doing something else in return for money, then exchanged the money for someone else's time.

This is not always top-of-the-mind math. For example, have you ever driven 5 miles out of your way to gas up at a station that's 10 cents/gallon cheaper than closer ones? If you spent 20 minutes round trip doing so and saved $2, you've valued your time at $6/hour. There may be other considerations of course. Maybe it's a nice ride on a Saturday afternoon, in which case your spending that same time on more than just gas, making it a better value.

The Internet uses time as currency much more directly. Google is a prime example. They offer services like their search engine, Blogger, YouTube and more, free of charge! Well, not really. It's free of any paper money charge. The currency is your time and attention, as well as information about yourself. Google resells those moments and bits of information to advertisers for cash. The information is actually used to try to gain a few more moments of your time later. It's something to consider when deciding whether or not to take someone up on their "free" offer. I ordered a pizza online a few days back and decided to look for free online coupons before I finished my order. I found some easily enough, but they all wanted me to "register" first. I decided I'd rather just pay the additional $3 or so than get put on a dozen or more new mailing lists.

The government taxes more than just your income. Every time you're required to fill out a form, register for something, take some mandatory action, you're paying out your time. Even the monetary taxes are really taxes on your time. If your tax rate is 15%, that's how much of your work day is going to the government rather than toward your personal agenda. Time is what gives money value. After all, the slaves of Egypt didn't have money to give to the Pharaohs, yet they built magnificent structures for them that still are revered today. It was all paid for with time.

In this period of financial uncertainty, with currencies and commodities fluctuating and the future of the very financial system that trades them up in the air, it can be difficult to determine the true value of a product, service or transaction. When in doubt, reduce it to lowest terms. Consider not "Is it worth the money." but, "Is it worth the time?".

Tuesday, January 17, 2012

Vulture Capitalism?

Newt Gingrich and Rick Perry have decided that it's politically expedient at the moment to attack their primary opponent, Mitt Romney on the grounds that he and the company he once ran, Bain Capital, engaged in "vulture capitalism". That is, they bought companies, closed them down, laid off their workers and sold off the assets for a profit. It's a shame they've decided to go down this road, and equally disturbing that Romney's defense is fairly tepid at best. It illustrates that the candidates either don't understand the principals of capitalism and free markets or they don't really believe in them. Neither one is a good scenario.

Let's first go to the fundamental issue. Companies are not created for the purpose of creating jobs. Successful, growing companies do tend to create jobs, but that's not their primary function. They're created to make money for their owners. That's not only a selfish pursuit on the part of the owners, it's essential for the survival of the company. Proponents of a government based economy don't relate to this because it doesn't apply in that realm. Our federal government takes in $2 trillion a year and spends $3.6 trillion. No problem in their minds. In fact, they'd like to spend even more. So far, no consequences, no worries. That's not the case in the private sector.

The "vulture capitalism" scenario stems from a company who's business model isn't working. The company does, however, have assets. If you can buy the company for less than the value of the liquidated assets, you can make money. To do this, you have to win a bidding war against others with either the same idea or who believe they can make the company work. In any case, it's up to the seller who's bid gets accepted, and up to the new owners what happens next. Kmart was purchased in bankruptcy by a group of investors who sought to profit from the company's real estate holdings. Shortly thereafter, the real estate market plummeted. The government did not step in to rescue the investors and the public did not clamor for such a rescue. There is only an outcry when such moves are successful.

The basic truth is that capitalism is based on selfishness. That's why it works. The net result of free market capitalism is that more people experience more benefit than from any other economic system ever tried. The reason is that people will pay you to help them, whether it's through the provision of a useful product or a service. To pursue ones selfish goals, one must figure out how to help people profitably, not because your aim is necessarily helping people, but because people aren't going to pay you for nothing (unless you're in government). The uncomfortable part about free market capitalism is that in some cases, bad things happen to good people. People make mistakes or just experience bad luck. Of course people can and do come to the aid of other people who are down on their luck. Problems arise when they try to get government to prevent bad luck and poor decisions from happening in the first place. They continue to believe the market can be controlled. If we just add the right mix of rules, regulations and limitations, we can have orderly prosperity. We can't and we wont.

Free markets are based on parallel processing dynamics. They express the cumulative result of billions and billions of individual decisions made by freely associating individuals in the absence of force. Central control destroys that dynamic. Out of the box ideas are not tried because they are not allowed. Big chances are not taken because the punishment for success exceeds any possible reward. Ideas are evaluated by a handful of pre-selected officials rather than by each individual according to their own judgement. Capital doesn't flow to innovation. It flows to the proverbial mattress, a.k.a. Treasury Securities.

If you believe in free markets you have to let them be free markets. If someone buys a company and decides to close it down and sell of the assets, for whatever reason, that's their prerogative. The trade-off in being an employee is steady paycheck, no liability. The downside is that the company you work for does not belong to you. If we continue down the road of holding up decisions about how to use private property, including companies, to government scrutiny and approval, "vulture capitalism" will be all we'll have left. Because the economy will be littered with the carcasses of ideas that had nowhere to grow.