I look at the economy differently than most Wall Street Economists. These highly paid salespeople have been consistent with their advice for the past 20 years. There is no economic problem that can’t be solved with more indebtedness. My perspective is different. Although I have a degree in Economics, I am an Accountant.
Presently our nation’s perceived high unemployment rate is the new mantra to sell our country more debt. Economists, such as Dr. Paul Krugman of Princeton, tell us that we are facing another Great Depression unless we borrow tens of trillions of dollars from hostile foreign nations and give it to our wasteful government. I can only shake my head and say, “Please look at the numbers before you panic our nation with unfounded comparisons.”
These are the facts. Our economy is growing and creating plenty of income for everyone. This income growth is being funneled to our government and the financial sector and away from the job creating productive private sector. Our government is using it's disproportionate share of income to subsidize inefficient areas of our economy and to give huge pay and pensions to it's highest paid employees. The highest paid bureaucrats retire at 50 with $100,000 pensions as we give pink slips to teachers and police officers. The government is the second best job killing machine that has ever existed.
The financial sector puts the government job killing machine to shame. Our financial sector has been able to kill the economy with huge investment bubbles. If the government can be called a job creation machine gun then the financial sector must be compared to an economic neutron bomb.
None of these government or financial sector shenanigans create jobs for the productive private sector. They are destroyers of jobs as income is misallocated and then wasted. One could almost call it a perfect system of wastefulness. The antithesis of the business model.
We can call the support of such a system 'Princeton Economics'. More debt, bigger government and an explosive financial sector while the economists are "tilting at windmills".
Let's look at the numbers.
Looking at the Asset side of the equation, our current housing market, our stock market, our bond market and our commodities markets are over valued compared to historical standards. We have a record $4.2 trillion in money in banks that could flow into investment markets when investors decide that the economy is safe once again. So there appears to be plenty of money in the economy. A rational person with an eye toward the long term could even argue that there might be too much liquidity in the system. Excess liquidity in 2003 caused the Housing Bubble.
Currently we have overpriced investment markets and plenty of liquidity to back them up. Now, compare that to the Great Depression. Stocks, Real Estate, Bonds and Commodities were driven to deep undervaluation. Banks closed their doors so depositors could not access their money. There wasn’t just a lack of money, there was no money. So we have too much money in the system today compared to none at the outset of the Great Depression.
Now the income side of the equation appears even better. Over the last 6 years our nation’s disposable household income has increased 34% and our nation’s GDP has increased by about the same amount. This is extremely good income growth considering we are overcoming a massive government induced bubble from too much liquidity in 2003. By all rights our nation’s GDP should be going down as a hangover from the Housing Bubble.
During the Great Depression the GDP was cut in half. This slash in income was a truly unprecedented event. A massive hit to income plus the historic lack of liquidity meant we got the one-two punch that knocked our nation to its knees in 1929 and did not recover until WWII.
Just in case the Princeton Economists are confused by the numbers let me recap. Today we have plenty of capital and very good income growth. During the Great Depression our nation was down for the count with income cut in half and the money spigot turned off. We are living through the antithesis of the Great Depression.
So instead of ludicrous comparisons to the Great Depression wouldn’t it be more useful to determine why the unemployed 10% of our population are not benefiting from the 34% national income growth over the last 6 years? Would it not be more fitting for a Nobel Prizing winning economist to question why we give our income growth to the government to mow down private sector job growth and why we enable our financial sector to play with economic bombs?
During the darkest days of the Great Depression 25% of our nation desperately wanted a job and had absolutely no income. There was no government support system so in many cases the unemployed went from town to town, willing to work at any job just for a hot meal. Our national income was cut in half so there just wasn’t enough money for everyone. Many investors lost everything. People starved.
Today 10% of our workers are paid by the government to stay at home. The other 90% share our growing national income with an unequal split between the government’s favorites and our productive private sector. We have created a huge government-run financial casino where rich investors are urged to make ridiculous leveraged bets and then are bailed out when these crazy bets lose money. As the rich spend an amount equivalent to the GDP of all the starving nations of the world on the diet industry, our poorest neighborhoods tend to lean toward obesity.
The only common variable between our current period of excess and waste and the deprivation of the Great Depression is the Government. During both periods our nation lived through historically bad government policy.
Krugman says we are reliving 1937. The numbers suggest that we are reliving 2003. We are bailing out rich investors. Absolutely no private jobs were created with Greenspan’s 2003 bailouts. Absolutely no private jobs will be created with the debt we are incurring now. The rich investors will be bailed our again and the poor will get poorer and more dependent on the government.
This is the antithesis of the Great Depression.
I am shocked by the waste and lack of accountability in our current government. But what is more shocking to me is how a Nobel Prize winning economists can demand that the remedy to our nation’s 15-year orgy of debt due to a total lack of government accountability is to give the government more money.
I am an accountant and I have described the math of the situation. If Dr. Krugman is adamant that he wants us to borrow money in our children’s name from hostile foreign nations to be paid back at high interest rates, so be it. Just please do me this courtesy. Please don’t compare the speculation and income misallocation of today with the desperation and hardship that our grandparents faced during the Great Depression.
They were our nation’s greatest generation and alas, we are the most selfish.
There is no comparison.
Friday, June 25, 2010
Monday, June 21, 2010
The Government Bubble
Our government has pushed our nation of foolish investors solidly into our third bubble in the series. I was able to clearly document the Tech Bubble and the Housing Bubble while they were happening. My charts showed once in a hundred year manias that our nation’s economists demanded was a normal occurrence. But this bubble seems more opaque. I predicted this opacity a year ago as I stated that none of the economic indicators would point to a recession in 2011. This is because of the monumental market manipulation by our government in our investment markets and our economy. Even the most sophisticated market investors could be blindsided by this downturn.
When I say sophisticated investors I mean stock investors. The Government has managed to wipe out all of the sophisticated investors from the housing market. The housing market will be dead for the next ten years.
I’m not saying that there aren’t some reasonable values in lower end markets. For the first time in ten years rental real estate investors can get positive cash flow on an investment home purchase. This is good. But most of the investors that are coming into the low end market have very unrealistic expectations of the future. They see their investment as a way to make a quick buck and not a back loaded stream of income for the next 30 years. Even though these investors are buying in at fair value most have a good chance to lose money as the economy slows and interest rates rise. Only long term low end real estate investors will make money.
Most of the Bay Area’s high end real estate markets are the antithesis of the lower end markets. The Federal Reserve can feel proud that they are pushing many affluent young families into economic debt servitude for the next 30 years with no chance escape. Many families are paying bubble prices for homes that will be underwater in 5 years. I can not imagine how anyone can justify paying 30% to 50% above rental value in a contracting economy at historically low interest rates. When interest rates begin to increase these families will be locked into a runaway train. High end home prices will absolutely be forced toward fair value and quite possibly below fair value by rising interest rates, economic contraction, skyrocketing taxes for the rich and a higher national savings rate. There are no short term gains or long term gains anywhere in high end real estate.
I would absolutely love to own a home in Lafayette but unfortunately I am a value investor. I sold my home in 2007 with the hope that the housing bubble would subside in high end markets by 2010. It appears that I could be renting for another three years.
I have tried to think of a combination of economic events that could either keep home prices above fair value in Lafayette for an extended period or how the government could manipulate our economy to make rents and income increase at a faster rate than GDP. I am looking for some event that could force Lafayette home prices to fair value without a decline in prices.
Mathematically there is no combination of events that could push up income and rents without raising interest rates.
But there are two possible events that might create a demand shift in the higher end real estate markets. First would be if we let rich Chinese nationals become citizens if they buy our high end homes. The only other shift would be if our government makes an immediate overnight cut in the value of the dollar by 50%.
Both of these options will be suggested by lobbyists during the recession of 2011.
There is a very good chance that the financially unsophisticated families that are buying into overpriced high end housing will show outrage at their loss in value and demand a solution from the government.
As our nation of incompetent debt fueled speculators continues to make terrible decisions and then expect a bailout, I think anything is possible.
Who knows, in a couple years I might have to learn Chinese so I can communicate with my next door neighbors.
When I say sophisticated investors I mean stock investors. The Government has managed to wipe out all of the sophisticated investors from the housing market. The housing market will be dead for the next ten years.
I’m not saying that there aren’t some reasonable values in lower end markets. For the first time in ten years rental real estate investors can get positive cash flow on an investment home purchase. This is good. But most of the investors that are coming into the low end market have very unrealistic expectations of the future. They see their investment as a way to make a quick buck and not a back loaded stream of income for the next 30 years. Even though these investors are buying in at fair value most have a good chance to lose money as the economy slows and interest rates rise. Only long term low end real estate investors will make money.
Most of the Bay Area’s high end real estate markets are the antithesis of the lower end markets. The Federal Reserve can feel proud that they are pushing many affluent young families into economic debt servitude for the next 30 years with no chance escape. Many families are paying bubble prices for homes that will be underwater in 5 years. I can not imagine how anyone can justify paying 30% to 50% above rental value in a contracting economy at historically low interest rates. When interest rates begin to increase these families will be locked into a runaway train. High end home prices will absolutely be forced toward fair value and quite possibly below fair value by rising interest rates, economic contraction, skyrocketing taxes for the rich and a higher national savings rate. There are no short term gains or long term gains anywhere in high end real estate.
I would absolutely love to own a home in Lafayette but unfortunately I am a value investor. I sold my home in 2007 with the hope that the housing bubble would subside in high end markets by 2010. It appears that I could be renting for another three years.
I have tried to think of a combination of economic events that could either keep home prices above fair value in Lafayette for an extended period or how the government could manipulate our economy to make rents and income increase at a faster rate than GDP. I am looking for some event that could force Lafayette home prices to fair value without a decline in prices.
Mathematically there is no combination of events that could push up income and rents without raising interest rates.
But there are two possible events that might create a demand shift in the higher end real estate markets. First would be if we let rich Chinese nationals become citizens if they buy our high end homes. The only other shift would be if our government makes an immediate overnight cut in the value of the dollar by 50%.
Both of these options will be suggested by lobbyists during the recession of 2011.
There is a very good chance that the financially unsophisticated families that are buying into overpriced high end housing will show outrage at their loss in value and demand a solution from the government.
As our nation of incompetent debt fueled speculators continues to make terrible decisions and then expect a bailout, I think anything is possible.
Who knows, in a couple years I might have to learn Chinese so I can communicate with my next door neighbors.
Friday, June 18, 2010
It's not an unemployment problem!
I look forward to perusing the Federal Reserve Z.1 economic data when it is published each quarter. I am an accountant so I tend to look at the numbers a little differently than our nation’s cadre of highly paid Wall Street economists. The current numbers show some interesting facts.
Since 2003 disposable personal has increased 34% as our GDP has increased by about the same amount. Housing has increased about 2% as stocks have gone up 25%. The star performer in the investment markets has been long term bonds. Because of falling interest rates bond values have gone through the roof.
So in the past 6 years we had very good growth in our disposable household income and we made a ton of money on bonds. It seems crazy to me that our economists are comparing the last few years in our economy to The Great Depression. How on Earth do they come up with this stuff?
The reason that we have 10% unemployment now is because of monumental waste and greed in the system.
In the first quarter of 2010 each person’s share of total disposable household income was $37,000 per person per year. In 2003 it was $30,000 per person per year. So what we are going through now is not an income problem. From an accounting standpoint what we have now is an allocation problem.
And I would bet that the biggest impediment to the proper distribution of resources is the dysfunctional markets created by the government and the financial sector.
Pay in the unproductive government sector and the financial sector has increased at a much higher pace than the productive sectors of our economy. This is a zero sum game where the record profits and pay of employees in the heavily subsidized financial firms are taken from the unemployed factory workers.
There are record pay raises for the government’s favorites at the direct expense of the unemployed.
It's simple to understand if you are an accountant or unemployed.
It's impossible to understand if you are a Wall Street economist. Your $200,000 bonus depends on you not understanding it.
Since 2003 disposable personal has increased 34% as our GDP has increased by about the same amount. Housing has increased about 2% as stocks have gone up 25%. The star performer in the investment markets has been long term bonds. Because of falling interest rates bond values have gone through the roof.
So in the past 6 years we had very good growth in our disposable household income and we made a ton of money on bonds. It seems crazy to me that our economists are comparing the last few years in our economy to The Great Depression. How on Earth do they come up with this stuff?
The reason that we have 10% unemployment now is because of monumental waste and greed in the system.
In the first quarter of 2010 each person’s share of total disposable household income was $37,000 per person per year. In 2003 it was $30,000 per person per year. So what we are going through now is not an income problem. From an accounting standpoint what we have now is an allocation problem.
And I would bet that the biggest impediment to the proper distribution of resources is the dysfunctional markets created by the government and the financial sector.
Pay in the unproductive government sector and the financial sector has increased at a much higher pace than the productive sectors of our economy. This is a zero sum game where the record profits and pay of employees in the heavily subsidized financial firms are taken from the unemployed factory workers.
There are record pay raises for the government’s favorites at the direct expense of the unemployed.
It's simple to understand if you are an accountant or unemployed.
It's impossible to understand if you are a Wall Street economist. Your $200,000 bonus depends on you not understanding it.
Saturday, June 5, 2010
You Gotta Know When to Hold 'Em and Know When to Fold 'Em
We are now solidly into our third and final economic bubble. I call it The Government Bubble. It will be the last bubble because of its nature. Our previous bubbles were created by greed and fear. This current bubble is different. It is the culmination of a chain of events that is leading our country into a period of disillusioned apathy. This is the point when a gambler realizes that realistically the game is over. The last step is just to hurry up and lose the rest of his money.
I would like to compare this point in history to that of a compulsive gambler on a bender in Las Vegas.
There is a family man that comes to Las Vegas with his $10,000 nest egg and high hopes. With help from the casino there is a chain of events that will occur to eventually appropriate the gambler from his money.
The first $5,000 would be lost because of greed at the crap table. This first loss isn't earth shaking and it could be fun. There is still hope for a comeback.
Compare the family man at the crap table to the Tech Bubble.
The Housing Bubble could be compared to the loss of the next $5,000 at the roulette wheel. This is where fear comes into play. The family man starts to worry about the long term consequences of his actions.
The final sequence in this chain of events is debt, then disillusionment and finally apathy.
Our current Government Bubble could be compared to the $10,000 marker that this family man signs in exhaustion at 3am to keep gambling at the high stakes poker table. This is a marker to the casino that is backed by his kid’s college account.
Later as the sun comes up, the gambler has $5,000 left to lose before he gets to go home and tell his wife the news. That he has gambled away his son’s college savings.
At this point the irony is that even though physically the gambler has only lost 75% of his total bankroll, mentally the money is already gone. The bets will get bigger and involve more risk. The compulsive gambler will play till his money is gone and his credit is cancelled.
Now compare this family man gone wild to our country's current predicament. Our homeowners are insolvent. Our banks are insolvent. Our taxpayers are insolvent. Our state and local governments are insolvent.
Our nation has spent the last 15 years spending our nest egg. Half the money has been wasted by our government and half has been gambled away by our citizens. But how the money disappeared doesn't matter. The tipping point comes when the gambler loses his fear. Fear is the emotion that will force a gambler away from table. It will snap him back to the reality of his obligation to his wife and his children.
There is no longer any fear in our economy. Only disillusionment and apathy. We are impoverishing our children to play another hand. There is no future, there is no past. Only living in the moment with borrowed money. Geithner flying to China, hat in hand, head bowed, begging for yet another stake to be gambled away in the markets.
A once proud nation of savers, now on it's knees groveling for loose change from strangers. Our forefathers that fought and died for our freedom would be horrified by the sight.
But we don't see it. We just sign the next marker so we are allowed to play the next hand.
It is 5am at the casino and the sun is coming up. We don't want to leave and face the realization that our nest egg is gone.
We will mechanically spend the last $10 trillion in credit that any hostile foreign nation will loan to us. It is all a part of the process. In the end we won't even save 5 bucks for a $3.99 steak and egg breakfast that the casino uses to lure unsuspecting patrons.
We will only stop borrowing and betting and spending when our last source of credit runs dry.
I would like to compare this point in history to that of a compulsive gambler on a bender in Las Vegas.
There is a family man that comes to Las Vegas with his $10,000 nest egg and high hopes. With help from the casino there is a chain of events that will occur to eventually appropriate the gambler from his money.
The first $5,000 would be lost because of greed at the crap table. This first loss isn't earth shaking and it could be fun. There is still hope for a comeback.
Compare the family man at the crap table to the Tech Bubble.
The Housing Bubble could be compared to the loss of the next $5,000 at the roulette wheel. This is where fear comes into play. The family man starts to worry about the long term consequences of his actions.
The final sequence in this chain of events is debt, then disillusionment and finally apathy.
Our current Government Bubble could be compared to the $10,000 marker that this family man signs in exhaustion at 3am to keep gambling at the high stakes poker table. This is a marker to the casino that is backed by his kid’s college account.
Later as the sun comes up, the gambler has $5,000 left to lose before he gets to go home and tell his wife the news. That he has gambled away his son’s college savings.
At this point the irony is that even though physically the gambler has only lost 75% of his total bankroll, mentally the money is already gone. The bets will get bigger and involve more risk. The compulsive gambler will play till his money is gone and his credit is cancelled.
Now compare this family man gone wild to our country's current predicament. Our homeowners are insolvent. Our banks are insolvent. Our taxpayers are insolvent. Our state and local governments are insolvent.
Our nation has spent the last 15 years spending our nest egg. Half the money has been wasted by our government and half has been gambled away by our citizens. But how the money disappeared doesn't matter. The tipping point comes when the gambler loses his fear. Fear is the emotion that will force a gambler away from table. It will snap him back to the reality of his obligation to his wife and his children.
There is no longer any fear in our economy. Only disillusionment and apathy. We are impoverishing our children to play another hand. There is no future, there is no past. Only living in the moment with borrowed money. Geithner flying to China, hat in hand, head bowed, begging for yet another stake to be gambled away in the markets.
A once proud nation of savers, now on it's knees groveling for loose change from strangers. Our forefathers that fought and died for our freedom would be horrified by the sight.
But we don't see it. We just sign the next marker so we are allowed to play the next hand.
It is 5am at the casino and the sun is coming up. We don't want to leave and face the realization that our nest egg is gone.
We will mechanically spend the last $10 trillion in credit that any hostile foreign nation will loan to us. It is all a part of the process. In the end we won't even save 5 bucks for a $3.99 steak and egg breakfast that the casino uses to lure unsuspecting patrons.
We will only stop borrowing and betting and spending when our last source of credit runs dry.
Subscribe to:
Posts (Atom)
