You don't have to be an economist to understand that something is seriously, systemically wrong with the manufacturing industry in the United States. Consider the demise of the Great Lakes region in terms of employment and manufacturing.
First, you have to understand that the cheapest, most reliable way to transport tonnage over large distances is over water, if possible. If you have access to the Great Lakes, you have a direct water route to both international and domestic markets through the Atlantic and the Mississippi. This is a huge competitive advantage. How much extra costs do you have to pile on before that advantage evaporates? I don't have an exact number, but I know we've surpassed it. I know because people and companies are leaving the area and are not being replaced.
You can argue about the causes, but an exodus from an area that should be a geographic no-brainer from a manufacturer's point of view is an undeniable symptom that something is very wrong. The status quo is a loser.
I think we're finally getting to a point in our national conversation where things are becoming evident in terms everyone can clearly understand; dollars and cents. Good ideas attract cash. Bad ideas repel it.
Sunday, July 31, 2011
Sunday, July 24, 2011
Could a balanced budget send the U.S. economy to new highs?
You may find all the talk about Federal deficits and National debt boring or tedious, but something of pretty heavy global historic significance is taking place before our eyes. I find it fascinating.
The country is in the midst of deciding whether to limit the size and cost of Federal government or to continue to leave the upper limits an open question. Regardless of what you believe the government should or should not provide, a growing number of people are making those provisions contingent on operating within a budget. Even tithing is set, in most cases, at 10%. If religions can set a limit on how much they ask from their members, why can’t the government? The other option is to implement the programs and address the priorities you’ve decided to advance and worry about the fiscal consequences later.
If the United States actually implements a credible, feasible plan to get to and stay at a balanced budget, we will have achieved a level of fiscal strength unmatched around the globe. Europe’s string of bail out packages is just stall tactics. They have not addressed the underlying problems. Much of China’s growth has come from construction of cities that nobody lives in, highways nobody drives and mass transit systems they can’t maintain. This makes their numbers look good today, but they will be liabilities in the future.
A Constitutional amendment requiring a balanced budget is a must. Congress cannot write a law that binds a future Congress. Membership in Congress rolls over every two years. A plan that spans decades doesn’t stand a chance if it relies on the support of new members through several election cycles. They have to be bound by the Constitution. They could still over-ride spending limits with a ⅔ majority in case of emergency.
The underlying issue is that America may put fiscal and economic strength ahead of social and political agendas in the priority list. This would be a break from global consensus and a giant leap ahead of the pack for the United States.
The country is in the midst of deciding whether to limit the size and cost of Federal government or to continue to leave the upper limits an open question. Regardless of what you believe the government should or should not provide, a growing number of people are making those provisions contingent on operating within a budget. Even tithing is set, in most cases, at 10%. If religions can set a limit on how much they ask from their members, why can’t the government? The other option is to implement the programs and address the priorities you’ve decided to advance and worry about the fiscal consequences later.
If the United States actually implements a credible, feasible plan to get to and stay at a balanced budget, we will have achieved a level of fiscal strength unmatched around the globe. Europe’s string of bail out packages is just stall tactics. They have not addressed the underlying problems. Much of China’s growth has come from construction of cities that nobody lives in, highways nobody drives and mass transit systems they can’t maintain. This makes their numbers look good today, but they will be liabilities in the future.
A Constitutional amendment requiring a balanced budget is a must. Congress cannot write a law that binds a future Congress. Membership in Congress rolls over every two years. A plan that spans decades doesn’t stand a chance if it relies on the support of new members through several election cycles. They have to be bound by the Constitution. They could still over-ride spending limits with a ⅔ majority in case of emergency.
The underlying issue is that America may put fiscal and economic strength ahead of social and political agendas in the priority list. This would be a break from global consensus and a giant leap ahead of the pack for the United States.
Tuesday, July 12, 2011
Here we go again - European 3 card Monty
When is a default not a default? When it's a buyback!
The new, old strategy for dealing with Greece's debt problem is for the European Financial Stability Facility (aka taxpayer funded pile of money) to buy Greek bonds on the secondary market, then allow Greece to pay back less than the face amount of the bonds or "retire them at a discount".
This is really a variation on the "Special Purpose Facility" scheme in which a quasi-private entity is formed, which owns Greek bonds. The former bondholders are now shareholders in this entity and the entity is backed up by guarantees from the European Central Bank. In both scenarios, the end game is to relieve the bondholders (the folks who actually made the investments) from risk and instead, place the risk on European taxpayers (who had nothing to do with the bond purchase decisions).
To put the buyback program in perspective, let's say Bob and John are coworkers of yours. Bob owes John $100. It's beginning to look like Bob wont be able to pay it all back. Your boss steps in and buys the debt from John (so now Bob owes your boss $100). Then your boss tells Bob he only has to pay back $45 and takes the difference ($55) out of your paycheck.
Sound ridiculous? That's essentially what's being proposed. And if it works over there, they'll do it over here.
The new, old strategy for dealing with Greece's debt problem is for the European Financial Stability Facility (aka taxpayer funded pile of money) to buy Greek bonds on the secondary market, then allow Greece to pay back less than the face amount of the bonds or "retire them at a discount".
This is really a variation on the "Special Purpose Facility" scheme in which a quasi-private entity is formed, which owns Greek bonds. The former bondholders are now shareholders in this entity and the entity is backed up by guarantees from the European Central Bank. In both scenarios, the end game is to relieve the bondholders (the folks who actually made the investments) from risk and instead, place the risk on European taxpayers (who had nothing to do with the bond purchase decisions).
To put the buyback program in perspective, let's say Bob and John are coworkers of yours. Bob owes John $100. It's beginning to look like Bob wont be able to pay it all back. Your boss steps in and buys the debt from John (so now Bob owes your boss $100). Then your boss tells Bob he only has to pay back $45 and takes the difference ($55) out of your paycheck.
Sound ridiculous? That's essentially what's being proposed. And if it works over there, they'll do it over here.
Tuesday, June 14, 2011
Minimum wage = Minimum opportunity
Recently, some friends and I were having a bit of a debate over the minimum wage. It actually came up during a discussion of a $900,000 federal grant that was given to a local organization to train 720 youngsters in “soft job skills” aka basic customer service. The idea is to provide them with at least the bare essentials of workplace behavior so they might stand a better chance of gaining employment. A worthy goal, but it got me to thinking why such a program was necessary. The answer was obvious.
Colorado’s minimum wage is currently $7.36/hour. When you factor in unemployment insurance, workers comp and payroll taxes, it’s closer to $9/hour. Now consider a 15, 16 or 17 year-old starting their very first job. They aren’t familiar with any workplace, never mind yours, or the equipment, the procedures, basic workplace etiquette; they are essentially clueless. It’s likely going to take a month on the job before they are productive enough to justify even $9/hour and you’re only going to have them for 3 months total.
The investment in training a brand spanking new entrant into the job market might make sense at say $5.50/hour. At $7.36, it’s a much bigger risk. This is why unemployment among teenagers is around 25%. The math just doesn’t make sense.
The opposition comes from the notion that nobody can live on $5.50/hour or even $7.36/hour. But that’s a straw man. The entry-level wage isn’t intended to be a living wage. Most teenagers are looking for some spending money. A low-paying summer job gives them valuable experience so they can get a better, higher paying job next year and it keeps them in iPhones, concerts and their favorite jeans over the summer.
In the longer term, the ability to fill very low skill positions with very low paid workers enables businesses to expand and provide better jobs. The workers gain experience which they can use to get better jobs. The alternative is what we have now. Those jobs simply don’t exist and junior sits on the couch playing video games at Mom and Dad’s expense, gaining zero work experience. The business can only hire employees who are ready and able to produce on day one, i.e. experienced employees. There is no room for entry-level.
I know the intentions of those who favor mandated wages are noble, but the results are in. It’s not a matter of opinion. It’s a matter of fact. When you remove the bottom rungs on the ladder of opportunity, there are people who just can’t get on it. There aren’t enough federal programs in the world to fill the void.
Colorado’s minimum wage is currently $7.36/hour. When you factor in unemployment insurance, workers comp and payroll taxes, it’s closer to $9/hour. Now consider a 15, 16 or 17 year-old starting their very first job. They aren’t familiar with any workplace, never mind yours, or the equipment, the procedures, basic workplace etiquette; they are essentially clueless. It’s likely going to take a month on the job before they are productive enough to justify even $9/hour and you’re only going to have them for 3 months total.
The investment in training a brand spanking new entrant into the job market might make sense at say $5.50/hour. At $7.36, it’s a much bigger risk. This is why unemployment among teenagers is around 25%. The math just doesn’t make sense.
The opposition comes from the notion that nobody can live on $5.50/hour or even $7.36/hour. But that’s a straw man. The entry-level wage isn’t intended to be a living wage. Most teenagers are looking for some spending money. A low-paying summer job gives them valuable experience so they can get a better, higher paying job next year and it keeps them in iPhones, concerts and their favorite jeans over the summer.
In the longer term, the ability to fill very low skill positions with very low paid workers enables businesses to expand and provide better jobs. The workers gain experience which they can use to get better jobs. The alternative is what we have now. Those jobs simply don’t exist and junior sits on the couch playing video games at Mom and Dad’s expense, gaining zero work experience. The business can only hire employees who are ready and able to produce on day one, i.e. experienced employees. There is no room for entry-level.
I know the intentions of those who favor mandated wages are noble, but the results are in. It’s not a matter of opinion. It’s a matter of fact. When you remove the bottom rungs on the ladder of opportunity, there are people who just can’t get on it. There aren’t enough federal programs in the world to fill the void.
Tuesday, May 31, 2011
America at a crossroads? or have we already crossed the event horizon?
For a while there, it looked as though there might be a chance that the United States would do what was necessary to get back to some sort of fiscal sanity....for a while there.
Today we still have our $14+ trillion dollar national debt, trillion dollar deficits as far as the eye can see and, perhaps more importantly, something like $57 trillion in unfunded liabilities, that is, money we've promised to pay out in entitlements that nobody has a clue where it's going to come from.
Paul Ryan and friends proposed to cut the growth of Medicare at least, by block granting fixed amounts to the states. You would have thought he proposed internment camps for the elderly. "Hands off Medicare" is the popular chant. I don't imagine Social Security reform is going to fare any better. Lest you think that government will be forced to make reforms just in the nick of time, consider Eastern Airlines. Unions knew full well that if they didn't make major concessions the company would go under. They didn't, it did. In the case of the auto industry, the government took the companies from the rightful owners, the bondholders, and just gave it to the unions. No incentive for concessions there. It's not just unions. It's everyone that get some kind of check from the government, and boy there are a lot of them.
Americans still like to think in terms of the land of the free, home of the brave, baseball, apple pie, etc., but they also seem to want to continue to work toward a society where everyone's basic needs are taken care of by somebody else. This has never worked and never will, but that's not slowing down the movement. Americans are looking for that fairy tale hybrid of capitalism and socialism. They want the vitality, innovation, creation, wealth and productivity of capitalism, with the carefree security of cradle to grave socialism. I guess the hope is that there are enough people who are genetically inclined to produce and excel, regardless of incentive or motivation, that they will deliver enough to take care of everyone else. It's a fairy tale.
It's entirely possible that hundreds of years from now, the decline and fall of the United States of America will be marked as beginning around 2007. I hope that I'm wrong, but I don't see any popular movement that would change it. No China is not going to be the new global superpower either. In fact, the alleged economic behemoth wont even be able to produce enough electricity to keep their own factories operational this summer. They have tightly controlled the power industry to the point that it's tied up in knots and they have no idea how to fix it. Getting out of the way is not on the proposed solutions list. I think a rudderless, backwards world economy is the more likely scenario for quite a while.
I don't know exactly what the future will bring in my lifetime. But I do know that, in general, the American public is not in the mood for limited government and real free markets and politicians are not going to do anything long term or substantial without the express consent of the voters.
I'm beginning to feel that we are not, as many like to say, at a "crossroads", a point where we can determine whether we're headed for greater prosperity or history's dust bin. We may have already crossed the event horizon into the black hole of "something for nothing" land. We're just too close to the situation to see it clearly.
Today we still have our $14+ trillion dollar national debt, trillion dollar deficits as far as the eye can see and, perhaps more importantly, something like $57 trillion in unfunded liabilities, that is, money we've promised to pay out in entitlements that nobody has a clue where it's going to come from.
Paul Ryan and friends proposed to cut the growth of Medicare at least, by block granting fixed amounts to the states. You would have thought he proposed internment camps for the elderly. "Hands off Medicare" is the popular chant. I don't imagine Social Security reform is going to fare any better. Lest you think that government will be forced to make reforms just in the nick of time, consider Eastern Airlines. Unions knew full well that if they didn't make major concessions the company would go under. They didn't, it did. In the case of the auto industry, the government took the companies from the rightful owners, the bondholders, and just gave it to the unions. No incentive for concessions there. It's not just unions. It's everyone that get some kind of check from the government, and boy there are a lot of them.
Americans still like to think in terms of the land of the free, home of the brave, baseball, apple pie, etc., but they also seem to want to continue to work toward a society where everyone's basic needs are taken care of by somebody else. This has never worked and never will, but that's not slowing down the movement. Americans are looking for that fairy tale hybrid of capitalism and socialism. They want the vitality, innovation, creation, wealth and productivity of capitalism, with the carefree security of cradle to grave socialism. I guess the hope is that there are enough people who are genetically inclined to produce and excel, regardless of incentive or motivation, that they will deliver enough to take care of everyone else. It's a fairy tale.
It's entirely possible that hundreds of years from now, the decline and fall of the United States of America will be marked as beginning around 2007. I hope that I'm wrong, but I don't see any popular movement that would change it. No China is not going to be the new global superpower either. In fact, the alleged economic behemoth wont even be able to produce enough electricity to keep their own factories operational this summer. They have tightly controlled the power industry to the point that it's tied up in knots and they have no idea how to fix it. Getting out of the way is not on the proposed solutions list. I think a rudderless, backwards world economy is the more likely scenario for quite a while.
I don't know exactly what the future will bring in my lifetime. But I do know that, in general, the American public is not in the mood for limited government and real free markets and politicians are not going to do anything long term or substantial without the express consent of the voters.
I'm beginning to feel that we are not, as many like to say, at a "crossroads", a point where we can determine whether we're headed for greater prosperity or history's dust bin. We may have already crossed the event horizon into the black hole of "something for nothing" land. We're just too close to the situation to see it clearly.
Monday, May 16, 2011
Jefferson the American Prophet
Among the many inspirational and insightful quotes collected for Brett Sizemore's book 'Here's a Straw, Suck it Up.' is this gem from Thomas Jefferson in 1802 that's eerily relevant today:
"Banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around them, will deprive the people of all their property until their children wake up homeless..."
Here's how that works. First, consider the purchase of a home. Now hold the value of the home constant and consider it is the value of the currency that fluctuates. During a time of inflation, or rapidly rising home prices, you buy your house (with a mortgage) at $200,000 with the expectation that prices will continue to rise. Now, deflation hits the housing market instead. Prices fall. Your house is now worth $100,000. You were counting on rising home prices to allow you to take out a mortgage to cover your other bills. Now you can't afford the payments and you can't sell the house for enough to cover the mortgage.
Whether you foreclose or walk away, the bank gets the house back. Not only that, they were insured against losses with companies like AIG, so they also get the other $100k. On paper it looks as though the bank just broke even, or took a loss after expenses. In reality, if we're still keeping the value of the house constant, they started with the house, ended with the house + $100k minus expenses and insurance premiums. They did fine. The fluctuating value of the dollar is a smoke screen.
In the simplified scenario above, a number of players are inclusive in "the bank". I don't believe banks and real estate financing are inherently evil, but they are susceptible to great abuse if customers are not wary.
Banks give currency value in that they provide an orderly, secure delivery and storage system. They are run by human beings, who must not be entrusted with all our cash unsupervised and unchallenged. Trust, but verify.
The recipe is simple: Inflate, Deflate, Repeat.
"Banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around them, will deprive the people of all their property until their children wake up homeless..."
Here's how that works. First, consider the purchase of a home. Now hold the value of the home constant and consider it is the value of the currency that fluctuates. During a time of inflation, or rapidly rising home prices, you buy your house (with a mortgage) at $200,000 with the expectation that prices will continue to rise. Now, deflation hits the housing market instead. Prices fall. Your house is now worth $100,000. You were counting on rising home prices to allow you to take out a mortgage to cover your other bills. Now you can't afford the payments and you can't sell the house for enough to cover the mortgage.
Whether you foreclose or walk away, the bank gets the house back. Not only that, they were insured against losses with companies like AIG, so they also get the other $100k. On paper it looks as though the bank just broke even, or took a loss after expenses. In reality, if we're still keeping the value of the house constant, they started with the house, ended with the house + $100k minus expenses and insurance premiums. They did fine. The fluctuating value of the dollar is a smoke screen.
In the simplified scenario above, a number of players are inclusive in "the bank". I don't believe banks and real estate financing are inherently evil, but they are susceptible to great abuse if customers are not wary.
Banks give currency value in that they provide an orderly, secure delivery and storage system. They are run by human beings, who must not be entrusted with all our cash unsupervised and unchallenged. Trust, but verify.
The recipe is simple: Inflate, Deflate, Repeat.
Friday, May 13, 2011
The oil pantry effect
Crude oil supplies are plentiful. Use has not spiked, yet prices did? What's going on?
Well, the common explanation is "speculators". But, I'm familiar enough with speculation to know that paper trading of commodities one never takes delivery on cannot cause sustained price increases. It must be something else. So what?
What do you do if you believe food prices are going to go up substantially in the near future? You stock up your pantry and your freezer. I have to believe that large corporations and governments that consume a lot of petrol do the same.
The U.S. government publicly discloses figures for the U.S. strategic oil reserves, but private companies, the military and most other governments do not. If they see uncertainty ahead in the market, it is only prudent that they fill their reserve storage. This would explain how you get a spike in prices even without a spike in actual usage.
It also explains why the price of crude sometimes falls like a rock. When end users stop filling reserves, demand falls. If they actually start drawing from them for their day to day use, demand plummets. Prices follow.
This is the most logical and simple explanation for the behavior of oil prices, and according to Occum's razor, the most likely.
Well, the common explanation is "speculators". But, I'm familiar enough with speculation to know that paper trading of commodities one never takes delivery on cannot cause sustained price increases. It must be something else. So what?
What do you do if you believe food prices are going to go up substantially in the near future? You stock up your pantry and your freezer. I have to believe that large corporations and governments that consume a lot of petrol do the same.
The U.S. government publicly discloses figures for the U.S. strategic oil reserves, but private companies, the military and most other governments do not. If they see uncertainty ahead in the market, it is only prudent that they fill their reserve storage. This would explain how you get a spike in prices even without a spike in actual usage.
It also explains why the price of crude sometimes falls like a rock. When end users stop filling reserves, demand falls. If they actually start drawing from them for their day to day use, demand plummets. Prices follow.
This is the most logical and simple explanation for the behavior of oil prices, and according to Occum's razor, the most likely.
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