MONEY 79 - WORLD ISSUES

THIS IS MY 79^TH 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 18^th 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.