Sunday, January 20, 2013
You're in Charge Here!
As I was watching a Fox News panel discuss the brilliance of the Obama administration's move to convert their re-election infrastructure assets into an issue advocacy organization it suddenly occurred to me that perpetuation the vision of both political machines; Democrat and Republican, as monolithic, insurmountable barriers to the interest of any particular individual, serves the interests of national celebrity pundits of all stripes.
The political machinery that operates our country is perceived and portrayed as too complicated and intricate to be understood by the common man (or woman) and therefore must be carefully studied and analyzed on our behalf by specially trained and educated experts who can tell you what to think and how to react.
In reality, the "massive databases" to which they refer are simply lists of contact information for individuals. The purpose of making contact with all those individuals is to influence the behavior, actions, non-actions or acceptance of each individual. Without the cooperation or at least surrender on an individual basis, none of the complicated, convoluted agendas of the monoliths can work.
Too many individuals in America have bought into the idea that they are powerless, when in fact, they are the source of all power. Just look at the typical political post on your social pages. Most have a common theme, which is that you either buy the entire package of ideas presented by the Democrats or the entire package of ideas presented by the Republicans. Recognize that neither party is a philosophy. They are infrastructures designed to do one thing; get their people elected. They will adopt whatever philosophy you, the individual demand in exchange for your vote.
The Constitution of the United States explicitly spells out the role of the Federal government and the limits of its authority, which is granted to it by the people. It has been blatantly ignored over the years, but it still exists. It can still be invoked and used to undo years of accumulated abuse of power on an unchecked government beginning at the local level.
When new laws and regulations are passed in your community, don't be afraid to ask "why?" and "under what authority?" Does it advance the rights of the individual to Life, Liberty and the Pursuit of Happiness or just provide a new revenue stream to politicians and bureaucrats and those who feed off them? Remember local politicians become state politicians who become national politicians. You can change the character of the "powers that be" from the bottom up.
Become familiar with your Constitution and the reasoning and purpose behind its provisions. It is a charter created to limit the power of government, not the individual.
It is the nature of politicians and bureaucrats to advance more regulation and grow their organizations. That's how they make headlines and advance their status within the party. You are the only check on that tendency. The people who make up our monolithic political parties work for you. Don't let talking heads of any political persuasion convince you otherwise.
Friday, January 4, 2013
How taxes on the rich get paid, by you
The Obama administration held true to the campaign promise of raising taxes on the rich. Now we've really started to take a whack at the Federal budget deficit by introducing new revenue, right? Not quite.
In recent days the yield on the 10-year Treasury bond has gone from around 1.75% to about 2%. What's the significance of that? Well, taxes went up on people making over $400,000/year. For many, a chunk of that income comes from interest on things like 10-year Treasury bonds. When the government raised taxes on that income, they lowered the net return, which lowered the value, hence higher rates. So how did the Treasury fare in this exchange?
Well, if you bought a $1,000 bond at 1.75%, over a year you'd get $17.50 in interest paid by the Federal government. You'd pay $6.30 in taxes at the old 36% tax rate. Now if you buy a $1,000 Treasury bond at 2%, you'll make $20 in a year and at the new tax rate of 39.6%, the Feds will take back $7.92. So, when you compare the net cost of borrowing for the government (interest paid, minus taxes received) their borrowing cost on that $1,000 actually went up by 88 cents. The effect is not immediate of course. They'll come out ahead on debt already issued, but on new debt, they're actually losing money on the deal. This from a scheme that was supposed to address the government's debt problem.
The wealthy also have options when it comes to income and the rate at which it's taxed. They can move investments around. Even in Treasuries, they can buy bonds with the coupons (interest payments) removed (they're sold off to other investors, money market funds, mutual funds, etc). Without the coupons, the net return is no longer income, but a capital gain, which is taxed at a much lower rate. They can also switch from Federal debt to local or state debt, which is not subject to Federal taxes.
The greeter at WalMart doesn't have these kinds of options. If your taxes go up, you pay them and that's that. The new deal did nothing to address the deficit and the ballooning national debt. It's going to get dealt with one way or the other. You'll pay in either higher taxes or by way of massive inflation. Maybe you'll get lucky and the party wont come to an end until after you're gone. In that case, your kids and grandkids will pay.
The moral of the story? There is no good way to pay for a bloated, out-of-control government. If you want to make it better, all you can do is make it smaller.
In recent days the yield on the 10-year Treasury bond has gone from around 1.75% to about 2%. What's the significance of that? Well, taxes went up on people making over $400,000/year. For many, a chunk of that income comes from interest on things like 10-year Treasury bonds. When the government raised taxes on that income, they lowered the net return, which lowered the value, hence higher rates. So how did the Treasury fare in this exchange?
Well, if you bought a $1,000 bond at 1.75%, over a year you'd get $17.50 in interest paid by the Federal government. You'd pay $6.30 in taxes at the old 36% tax rate. Now if you buy a $1,000 Treasury bond at 2%, you'll make $20 in a year and at the new tax rate of 39.6%, the Feds will take back $7.92. So, when you compare the net cost of borrowing for the government (interest paid, minus taxes received) their borrowing cost on that $1,000 actually went up by 88 cents. The effect is not immediate of course. They'll come out ahead on debt already issued, but on new debt, they're actually losing money on the deal. This from a scheme that was supposed to address the government's debt problem.
The wealthy also have options when it comes to income and the rate at which it's taxed. They can move investments around. Even in Treasuries, they can buy bonds with the coupons (interest payments) removed (they're sold off to other investors, money market funds, mutual funds, etc). Without the coupons, the net return is no longer income, but a capital gain, which is taxed at a much lower rate. They can also switch from Federal debt to local or state debt, which is not subject to Federal taxes.
The greeter at WalMart doesn't have these kinds of options. If your taxes go up, you pay them and that's that. The new deal did nothing to address the deficit and the ballooning national debt. It's going to get dealt with one way or the other. You'll pay in either higher taxes or by way of massive inflation. Maybe you'll get lucky and the party wont come to an end until after you're gone. In that case, your kids and grandkids will pay.
The moral of the story? There is no good way to pay for a bloated, out-of-control government. If you want to make it better, all you can do is make it smaller.
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 interest...to 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.
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 interest...to 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.
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.
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
LED BS
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.
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.
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