THIS IS MY 79TH BLOG ON UNDERSTANDING MONEY TOOLS
Many issues are happening in the world today beyond money
tools that are going to have an everlasting impact on all of us. In this blog I am going to hit upon
various topics and try to make an understanding of what and why things are
occurring. With this I will make some personal guesses as to outcomes.
Let’s start with the US. The world economic downturn is
having a profound effect on US companies, it has to. Our media is given statistics from the government that is
very manipulated to the point of being not accurate and untrue. Let me point
out a couple examples. In regard to Gross Domestic Product (GDP) the government
is now eliminating two industries to provide a rosy picture, these being the
agriculture and oil/gas industry. When oil was above $100/barrel and we were
creating numerous jobs the government loved adding the good numbers into GDP
and employment, however now eliminating that industry. The other is
agriculture, sometimes it is added in, sometimes not, currently not. The reason
for this I know all too well as I farm 55 acres of land in corn. Currently, all
costs amortized into a bushel of corn is $4.25. The current market sales price
for a bushel of corn is about $3.50, which is a loss of $.75 for every bushel
of corn produced. Either the government will need to subsidize this loss or
farmers will go out of business.
Every time we have an election year statistics will be
slanted to favor the party in office, and attempts will be made to avoid recession.
A recession during an election year will kill the party in office, and that
party running for election. Take a
look at 2007 as an example. In August, 2007, our banks were broke and our
economy near collapsing. George W. Bush tried to keep this news a secret, and even
Senator John McCain running for president said our economy was in great shape
that September. Many things lead up to that disaster, and starting in 2006 the
decline had already begun.
Right now our government is trying it’s best to keep the
negative news from the media and reaching the American public. We have a ton of
“bubbles” happening once again. The government along with the Federal Reserve
is caught, and has no answers. The loose big money from the Quantitative
Easings ($4.5 trillion) reached big banks, including Wall Street investment
banks, big corporations and the wealthy. As mentioned many times before, the
money never got to middle-America and small businesses that make up this
country. 70% of the US economy is
based upon consumer spending. If
the discretionary and available money doesn’t reach the middle class
economically we trend downward.
With this we’ve created a mess. Let me explain. If we go into a slowdown
or recession the Federal Reserve cannot lower interest rates further, but will
need to print more money as Japan, China and the European Union are doing. For
the past 6 years big US corporations have refinanced and increased their debt
with low interest rate bonds. The world is now flowing with bonds, especially junk
bonds from emerging countries that will not be able to pay off debt. Government
debt, municipal debt and personal debt have all increased. The reason that this
is so disastrous is that county, city and personal incomes have either
stagnated or gone down. Bottom line, defaults.
Wall Street and the stock markets are interesting these
days. Wall Street and the stock market is manipulated, not a true market.
Remember that Wall Street members are “extractionists”, they add little value
and make their money extracting money from investors on each trade. Big money
is made from their merger and acquisition departments and the law firms
representing all parties concerned.
The values of the markets are very inflated especially with
only two sectors doing quite well, those being the drug/health care industry
and staples (necessary items like food).
Costs in the health care industry have risen 320% from 1999 until 2015.
This cannot be sustained. Today, a
family of 4 is paying over 20% of their income on health care costs. The rest
of the industries like transportations, even finance, are down with the energy
sector falling the most. Why is the stock market falsely high? It is because of
all the money we printed headed into it, and foreign money seeking American stability.
The banks and wealthy individuals control about 85% of the total value of the
markets.
Here is another manipulation by the government to keep costs
down. For 2016 the government has decided not to raise social security payments
that are indexed to inflation. The
justification is that lower gas prices have been passed on to the social
security recipients, and therefore balances out inflation. Not all retirees
drive, although transportation costs for merchandise would be affected. While we are on this topic let’s point
out that because of the lack of restraints on the pricing of US drugs, the
government is raising the price on Medicare Part B between $50 and $250 per
month (this amount varies as to each individual’s adjusted gross income). This
is going to have a profound effect on retired, fixed income people.
Okay, back to basics. 2 plus 2 should equal 4. Cause should have a relationship to
effect. To keep interest rates artificially low what have we done? The Federal Reserve has bought in our
debt, China and Japan have bought about $1 trillion each of our bonds to keep
our trading relationships. Saudi Arabia has also bought a lot of US debt;
favors for the USA.
Let’s look at the pros and cons of keeping interest rates at
a near zero level:
Pros:
- Higher
stock market values.
- Lower
interest rates for consumers on most products and mortgages for buying homes.
- Less
of a deficit each year as interest on US bonds is low. The US still runs about
a $500 billion and growing deficit each year.
- Fewer
defaults on bonds from emerging countries.
Cons:
- Tough
on consumer savings and retirement accounts.
- Artificial
Keynesian theories employed too long.
- Pension
plans, many under-funded and not meeting projected returns.
Currently, here in the US as well as most of the world, we
have a deflationary trend. Some countries have gone to negative interest rates,
we may also. What this means is that banks will charge their customers a rate
to hold dollars and savings.
Electronic banking and credit cards usage will increase.
This negative deflationary trend will only last so long and
then we will have a good deal of inflation from all the money printed, and
waiting too long to raise rates permitting the real free market to
prevail. Unfortunately, bubbles
will burst and the stock market and real estate markets will go down in value,
or should go down. Everything
cycles.
Let’s take a look at the new Pacific Rim Trade deal, is it
good? I don’t know, but from the
basics I don’t think it will be good for small business owners in America or
the middle class worker. Why? What
we are doing is permitting many more emerging countries into our trading
agreements. As the hourly rates in
India and China have gone up for workers and an increased middle-class appears
we are seeking new countries where labor is even less expensive. The big American companies will use
this in their favor, so it is not bringing jobs back to the USA. In retrospect the NAFTA deal was not
good for the US labor market either. The government states that it will benefit
the American products to be sold abroad, but I don’t think that is the case as
our goods are expensive. We only
export about 12% of our goods as we are net importers and this will only
increase our trade deficit.
One last comment on what is happening worldwide and the
long-term effect it most likely will have on us here. In the last 6 months the
hot topic has been immigration from the war in Syria. Yes, Syria is a mess. The
war and disaster in Syria has only given reason for mass exodus out of the
Middle East and Northern Africa. Only 20% of the refugees going into Europe and
being implanted into the US are from Syria, the rest from Afghanistan, Iraq,
and northern Africa. These people
have a totally different culture, religion and value system than Westerners,
and they will change the countries and areas that they migrate into. It has been stated that countries like
Germany need workers. It has been estimated that the German integration of
immigrants with their vast needs including education, language training,
housing, clothing and feeding will cost approximately $1 trillion and take
years; assuming these immigrants will agree to being trained and want to
work. I don’t see where there is
any return on investment for the German people in any respect, even though this
is a humanitarian endeavor.
Before we leave this blog let’s think through some material
issues that are going to impact you, me and jobs. I will hit these quickly. Recently released news was that the US ranks 18th
in the world below China and Viet Nam for quality of life, we certainly rank
very low on happiness. We must
face the truth as far as a nation that we are all in this bed together. To be a
highly ranking country we need to be more socialistic providing free education
and health care.
Next, there are many Republican candidates (I am an
independent voter, by the way) that want to do away with the unification of
workers such as unions and cut back on public sector jobs. Here is where they
haven’t thought through the issue. There are currently 1.8 public sector jobs
for every private sector job. The average public sector job pays considerably
more than the private sector job. We cannot lessen the public sector employment
until we have private sector jobs paying equal to or greater than public sector
jobs or we will be in a depression.
In the 1920s one out of every three people worked for a wealthy family,
then came the Great Depression, then came FDR’s public works programs, then we were
coming out of the Depression, then the Republican Congress voted against the
money spent on the public sector and we sank back into recession. And then,
unfortunately the Japanese bombed Pearl Harbor and that regained our focus and
spending of government money again.
That public sector job program lasted until about 1957.
If we cut public sector jobs and union jobs you also include
fire and police protection. As I come from Milwaukee let’s use that as an
example. After WWII it was a successful union blue color city and safe, good
place to raise kids. Then, jobs
were cut because the auto business and other industries went abroad to Mexico
and Asia. Detroit’s collapsed
economy flowed over to Milwaukee jobs. The current governor, Walker, first
broke the teacher’s union, and then worked on eliminating public sector jobs
and cut budgets. The outcome has been on the news the past two months;
Milwaukee now is the second most violent city in the USA. Cause and effect!
Let me lay forth some basic economic principles and
statements to embellish your understanding of money and money tools.
- First
to the US income statement. Even though the US government is
borrowing at close to zero interest
when selling US bonds total revenue is expected to be at approximately $6
trillion and expenditures expected to be $6.5 trillion, leaving another growing
annual deficit of $500 billion. There is no answer to turn this trend except
raise taxes. (We derived this income from $3.7 trillion in income and payroll
taxes, $1.6 revenue from Social Security, $1.4 trillion in Ad Valorem taxes and
$500 billion from fees.)
- There
is an inverse relationship between taxes and GDP. In the
USA the average growth rate from
1790 to 1999 was 1.9%. Because of wars and deficits and the need for higher
taxes, GDP averaged 1% between 1999 and 2015.
- Keynesian
economic policies work well for a short term, however not long term. At some
point in the near future we need to get back to a free market of supply and
demand, and the Federal Reserve will need to raise interest rates. (These being
the economic policies of Friedman and Hayek.)
- There
is also an inverse relationship between interest rates and the world bond
markets. When interest rates go
up, the market value of bonds go down. Emerging countries will be struggling to
pay interest.
- As
interest rates go up the stock market will go down. Investors will tend to go
back into bonds and fixed income instruments.
- The
printing of money by a government is not inflationary by itself, as we have
seen. Money needs to circulate into society, especially the middle class and to
small businesses to have any bearing. The other variable is “velocity” (V).
Velocity is the speed at which money circulates annually through society. If
cash is hoarded and not spent there is no inflation.
- Public
and private debt is out of control in the USA, similar to most countries.
Currently, the combination of this debt is 370% of GDP.
- The
world’s economy is in the weakest state since the Great Depression in the
1930s. If you are thinking of
starting a new business think two or three times before proceeding. There are
several TV shows covering new business start-ups. What they omit in saying is
that 90% of these new start-ups fail.
There are reasons for failures, amongst these are:
- No normal risk
bank lending.
-
Private money wants too much for the use of their money and if the venture is successful these people would just as soon try to take it from you.
- Big business and
retailers will try to crush you on pricing and keep
competition out of their market.
- Business plans
and proformas not well thought out.
- Business
start-ups under capitalized.
If we trace this mess back to year 2000, it becomes quite
obvious what got us into it; wars and defense spending, too liberal lending
policies, and wanting people to borrow expanding our economy and hegemony.
Life is not only knowing how you will become successful, but
in what ways you can remove the variables and impediments on the path for
becoming successful.
