THIS IS MY 77TH BLOG ON UNDERSTANDING MONEY TOOLS
In this blog we are discussing economics from geopolitics to
world and national issues that are current as of the first part of September,
2015. This blog will be very
subjective in terms of my interpretation of things, and a summary from
interactions/discussions that I have with some pretty astute friends. Two of these friends I meet with once a
week, both have master’s degrees, highly intelligent and are octogenarians
(that is different than octane you put in your gas!).
If you keep up with the news most of this will not be new,
perhaps a re-cap or summary of current events. If you don’t read or watch the
news, you might learn something. I view almost all the news we, the government,
“puts out” as “smoke and mirrors”, with little relativity to what is happening
and what may occur down the road. There is a valid old expression that goes,
“to understand how anything works, you must take it apart”. That is what I try
to do with economics, and government decision-making.
Let’s start out with China. Oh wow, Wall Street and the
government says that China’s weakening economy is dragging on the stock markets
and world. China’s GDP has weakened from about 7% down to estimated 3.5% or so,
if we can believe the news. 3.5% growth is still very healthy compared to other
countries in the world. They have a population of 1.4 billion, and many rising
into middle class and wanting of goods, services and new homes. So, China wants
to weaken their currency, the Yuan, and we go crazy. How absurd. They have an
ever-increasing middle class. Yes, it will have some effect on our companies
producing goods there like GE and the auto companies. It will make their exports more attractive/cheaper. On the other hand, we printed $4.5 trillion
US dollars (QE 1, 2 and 3) to weaken our dollar and make our exports more
favorable and you didn’t hear many complaints out of China and other
nations. Now Central Banks around
the world have copied our economic moves printing money, especially Japan. As
the expression goes, “you can’t have your cake and eat it too”. China in the
long run will be fine. We have more important world issues right now.
The world economies have weakened, we need to wake up.
Everyone is concerned about deflation, depreciation of assets. It’s here. There
is little inflation. Preceding
every recession is deflation, especially the downturn in commodities. Look at the bushel of corn selling for
$3.50 while production costs averages $4.25 in the US, look at copper prices -
down, real estate already dropping except for some key major cities around the
world, oil and gas - down, oil right now about $45/barrel.
Several months ago I addressed many of these facts in blogs
and now the effects are unfolding. The IMF and Central Banks have lent money in
US dollars over the past years in a crazy manner to emerging countries. Instead of the dollar going down that
was expected with the dilution of the currency it went up. I don’t know if the
US anticipated all the turmoil and wars creating a strong demand for our
currency from the wealthy all over the world. We became the financial “safe haven”. What this has done is
prevent many countries from being able to repay debt, as they now have to pay
back in a stronger dollar than when they borrowed the money. Puerto Rico is an
example of default.
Relative to the above is the question, will the Federal
Reserve raise interest rates in September? These are some of the concerns: 1) The stock market probably
will go down as money will seek the safer, higher interest yield bonds. 2) Our
economy is tepid at best, what will higher rates do to it? 3) The IMF has lent
money to emerging countries in US dollars. Two things will happen; big money
will pull out and seek US bonds and any repayment of debt that floats to our
dollar will be more expensive (as mentioned above).
Okay the world is stuck and no one has the vision to get us
out of this. Half the countries in South America are in financial trouble, the
EU is in trouble and now we have the immigration of millions of people out of
the Middle East and Northern Africa coming up into Europe. What do we do? I have no answers but see the long-term
effects that are not good. Let’s assume that most of these people are good,
well-meaning people, with a few ISIS terrorists intermingled, I am sure. Look
at the problems. This is a moral versus practical dilemma. First, no country
has the money to support all these immigrants. The individual immigrant has
left his/her country for good reason, however they immigrated with no money,
and no means of support. Many do not speak the language of the country, they
have a different culture and religion, and most have little education and
training for the Western World. Their culture and religion do not permit
intermingling. Countries will need
to set up housing, clothing/food centers and support. I have no idea where the
money will come from, but all countries are printing money like crazy right now
trying to keep up a good face that in the long run will fade. This is a prime
example of cause and effect.
100 years ago immigrants from Europe came to New York City
and Ellis Island. Times were different. For one, we needed workers in our
factories that were expanding. Another point is that these people came from
Europe where most of our ancestors came from; we had commonality from the
start. Today, we need less
manpower as the factories of the future will be robotic. We have covered the
make-up of the best countries in the world and these commonalities are: smaller
populations, strong nationalism, politically socialistic providing free
education, health and dental care, common culture, educated people, and a
generally common race.
In the United States our propaganda machine is working as
well or better than it ever has. The
stock markets are still at ludicrous levels. The US stating that the weakening
of the world economies will have little affect here. We are a wealthy nation.
Let’s look at facts. The total assets of the United States are at best equal to
what we owe today and in the future (entitlements) called liabilities. This is
a 1:1 ratio of assets to liabilities. Not good. No way out of our total debts
unless we default down the road or re-structure obligations. Feel sorry for
China’s problems? They have bought
$1 trillion worth of our bonds to help support the USA and our dollar.
Let’s beat up Wall Street a bit. The banks and Wall Street
bankers have never been honest, but I don’t think I have ever seen so much BS
come out, and no one goes to jail. Unbelievable. It was disclosed several
months ago that Greece would never have been permitted into the European Union
with actual/honest financial numbers presented to the EU. How did this
happen? Yup, Goldman Sachs, the favored
one on Wall Street worked the numbers until they were fraudulent and those
numbers got Greece into the EU. No one with jail time! Wall Street hitting
highs and everything in La, La land.
Take a look at reality. Companies have amassed huge capitalizations with
relatively nothing in assets and employ few people. Want a look?
- Facebook
capitalization: $248 billion
- Netflix
capitalization: $43 billion
- Twitter
capitalization: $19 billion
- Google
capitalization: $425 billion
Wow! About $1 trillion in magic, smoke and mirrors. These companies living off advertising
dollars. How do companies paying for this advertising measure results related
to dollars spent? They don’t and
can’t, but someday may wake up to this insanity. Remember that stock prices
have more to do with “perceived value” than “true value”. The markets are similar. The stock
markets are manipulated by traders. Traders and Wall Street can make a lot of
money with the market going up (buying stocks long) or down (selling stocks
short), however not so much in a stagnant market. Right now there is a lot of
volatility in the markets. Wall Street firms also make money especially with
high volume days as they make money from commissions on trades.
All in all, we might see a more realistic Dow of around
12,000-13, 500. Next, watch out for bonds. More and more municipal bonds can’t
be paid; again Puerto Rico as far as one country and cities like Chicago are
following in the footsteps of Detroit.
(But a judge said Chicago will not be permitted to go bankrupt…want to
buy some real estate in the City of Chicago?!)
Let’s look at the wonderful unemployment news that helps
boost our stock markets and new reporting. Our unemployment figure was lowered
to 5.1%. I hate to say that Americans don’t have a clue, but if they buy these
numbers as good news, they don’t have a clue. Job’s gained was 170,000 + - and
that was weak. Did anyone notice that people working age, mostly desiring of
employment went up from 93.3 million to 94 million? We calculate our numbers
for unemployment to satisfy reporting, not real numbers. We count people
unemployed if they were actual W2 employees that were laid off. After 6 months
they no longer are included. As everyone knows years ago companies started
outsourcing work, supplying these contract people with 1099 Forms for IRS reporting
and no benefits. These people are not included in employment or unemployment
numbers. All bogus numbers. What is important is people working at their
desired maximum and not under-employed or under paid. Wages and salaries have
not risen much in 15 years. Bottom
line, we can’ have a good economy and GDP without changes, and I don’t see
those changes happening.
The Iran Deal.
No one really knows much about it except probably Secretary of State
Kerry. If the deal is passed it will include the US releasing about $100
billion of frozen Iranian assets. Does Iran like the US, no. Is Iran a big
supporter of Western terrorism, yes.
Does Iran want to destroy Israel, yes. Is Iran against many Middle
Eastern countries like Saudi Arabia, yes.
There could be three obvious reasons for this proposal passing. The
first reason is the old adage of “keep your friends close and your enemies even
closer”, thus keep an eye on nuclear advancements. Second, turmoil in the
Middle East is great for our defense industry and the sales of fighter planes
and weapons, same goes for the Russian manufacturers. The third reason I see is
that the European Union and other countries need and want the oil and gas that
Iran has an abundance of and will trade with them, with or without the Deal.
Turmoil, unrest equals havoc. Unfortunately, one very
negative out to all of this may be war.
War has always benefited the wealthy and large corporations including
defense contractors. Take a simplistic look here. We have given many Middle
East countries money each year including Israel and Egypt. Then, part of that
money comes back to our defense contractors with sales of military weapons,
planes and helicopters.
Sorry for the pessimistic blog, however it is a dose of
reality.
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