Saturday, August 28, 2010

The Most Expensive War in History

Our nation is wasting an incredible amount of productive resources to fight a battle that has become distasteful to many in our population. At one time this war was cheered as patriotic, but with the massive increase in expenditures and mind boggling waste, many are becoming resentful of our American government’s presence in an area where it does not belong. Even if we stopped the war now it will have a lingering effect for generations.

Of course I am talking about our government’s War on Affordable Housing.

Today many young families must purchase homes for 6 times their household income. This is compared to their parents that bought homes at 3 times their household income 15 years ago and their grandparents that purchased at 2 times their household income.

The government has spent trillions of dollars through subsidies, tax breaks and direct market manipulation of interest rates in an attempt to make housing prices unaffordable for young families that want to enter the real estate market.

Our War on Affordable Housing dwarfs the resources that are presently being spent on the War on Drugs or The War on Terror.

Many are starting to question whether this is the proper battlefield to expend the limited resources of our nation.

An assault that might be more justified would be a War on Unemployment, like Roosevelt funded during the Great Depression He employed millions of workers to build things. This program constructed Hoover dam and much of the infrastructure in our National Parks.

How about a War on Outsourcing? This engagement would fight all of the crazy tax breaks that allow companies to send jobs overseas and would replace them with subsidies to hire workers at home.

The only thing that we must consider is that if we stopped the War on Affordable Housing and used those resources to fight a War on Unemployment and a War on Outsourcing at the same time, it could cause massive problems in our economy. Our unemployed labor pool would shrink to zero as the sale of fairly priced homes would quadruple. This would cause the biggest economic boom in our nation's history. We would then be forced to start a War on Employment to counteract the unbridled prosperity.

The biggest problem with the War on Affordable Housing is that prices are always being pulled toward affordability. The market trends in line with historical fair value in the long run no matter how much money is expended to manipulate the free market in the short run.

On top of the trillions that we have already spent, our government will have to spend many hundreds of billions of dollars a year, forever, to continually battle the forces of the free market to keep homes unaffordable for new families entering the real estate market.

So the War on Affordable Housing appears to be an extremely expensive fight that we can never win.

Also, understandably, it is fast becoming an unpopular government policy for our younger citizens who can't afford to buy a home because of the high taxes they have to pay to continue fighting the War on Affordable Housing.

But the War on Unemployment or the War on Outsourcing would be supported by everybody. Either battle would only be temporary. And both are 100% winnable.

The best part is that our nation will be able to win a war for the first time in a very long while.

Saturday, August 21, 2010

Economic Elitism is not the Solution

Last Tuesday we had what was called “The Summit on Housing Finance”. This was a get together of a group of individuals that were instrumental in the policy choices that caused The Housing Bubble, The Credit Crisis and The Great Recession. This is our “Economic Elite”. The government invited them to get together to figure out how to repair the system that they and others like them have destroyed.

Unsurprisingly the main suggestions from the event were that we need more unsustainable debt to taxpayers, more government control piled on top of our already dysfunctional markets and of course much more subsidies for the financial sector.

I looked back at all of the quotes from the economic philosophers of the past 2,500 years. And I couldn’t find any references that espoused unsustainable debt to manipulate asset prices, rewarding speculators at the expense of prudent savers or tightly controlling markets to reward government favorites.

No, actually there are a few economists that favored controlling free markets. Karl Marx is the most notable.

And I must admit there was a period where people felt that it was wise to give all of the resources of a country to a few very rich elite with the hope that this nobility would trickle some of the spoils back down to the rest of the populace. This “trickle down” economic period was called feudalism or more appropriately, “The Dark Ages”.

The tightly controlled markets of Karl Marx run by an Economic Elite of feudal lords sounds rather archaic. But that is how our economy runs today.

The Economic Elite have usurped our economy. Many of our markets are broken. The participants of “The Summit on Housing Finance” suggest that we break them even more.

The Economic Elite are saying that taxpayers must borrow ever more money and give it to the Government and The Financial Sector to waste, just like Japan.

But why do we want to emulate Japan? Japan’s economy is terrible.
Why can’t we emulate Germany? Or Canada? Or Australia?

Or better yet, why can’t we emulate the US economy at the point before our Economic Elite diverged from the philosophy of our forefathers?

Our country was based on free markets and rewarding good ideas. It was called capitalism. The market rewarded good ideas with wealth and power. The same free market severely penalized bad ideas with loss of wealth and power.

This freedom of markets has been removed and is now controlled by the Economic Elite through the government. Most of the people that ran our economy into the ground should be penniless and powerless. Instead they are put in charge.

This is not absolute tyranny but it is autocracy through subterfuge.

Economic doctrine has replaced free markets. This doctrine has become so complex, convoluted and conflicted that our economy doesn’t work properly anymore. Most of the policy we are using to solve our problems can’t be justified with logic, reason or common sense.

I feel that our economic policy needs to be simplified so it is in line with a time before our free markets were totally usurped by this failed experiment at government directed economic control.

The goal should be toward sustaining an economy with:

· A very large middle class.
· Free Markets for everyone where the government protects against collusion, monopoly and entities that become too large to compete fairly with the rest of the players.
· A government that runs like a business with a balanced budget.

I am suggesting that we replace the last 20 years of crony capitalism orchestrated by our nation’s economic elite with 200 years of successful economic governance by free markets.

I am also suggesting that no nation has ever prospered by:

· Tightly controlling investment markets to reward political favorites.
· Creating temporary bubbles to force an economy to grow.
· Robbing from savers to reward speculators.
· Robbing from future generations to live at a higher than sustainable standard of living today.
· Starving the productive private sector to create a bloated and inefficient non productive public sector.

Each of these policies would have been abhorrent to our founding fathers. They understood the nature of tyranny and economic elitism.

In the last 20 years we have thrown away a system that was put in place by our forefathers. It had worked perfectly for the previous 200 years.

We are refusing to emulate the United States of our grandparents. Instead the goal of our nation’s economic elite is to become an impoverished and feudalistic crony capitalistic version of Japan.

Sunday, August 15, 2010

Inevitable Impossibilities

Many economists are suggesting that our government continue pushing our economy in the same direction that caused The Tech Bubble, The Housing Bubble, The Credit Bubble, The Subprime Crisis, The Banking Crisis and The Great Recession.

As each of these economic events occurred these same economists were surprised by them. Each bubble or crisis was an outlier that was one of the last possibilities that they had expected.

Economists have stated that these outliers are “Impossible” to predict. This is ironic because, in my opinion, each of these economic events seems like the “Inevitable” outcome of bad government policy.

So in essence they are “Inevitable Impossibilities”.

As the government continues to push our economy in the same direction that caused all of our previous crises we are very likely to incur more “Inevitable Impossibilities”.

· The “Inevitable Impossibility” of increasing interest rates: Our nation’s interest rates have spent the last 30 years on a continuous trend almost straight down. A significant percentage of our nation’s economic growth is predicated on the continued contraction of interest rates forcing ever more gains from our extremely overvalued bond and real estate markets. Although it is an impossible event to economists, there is a distinct possibility that interest rates will increase in the future. Economists don't understand that as interest rates increase, bonds and real estate prices decline proportionally. So as our Federal Reserve is forcing rates artificially lower it is proportionally increasing the size of the inevitable crisis in the future.

· The “Inevitable Impossibility” of Living With-in Our Means: As a country we have been able to live beyond our means by borrowing resources from the future. We started by tripling our debt load to GDP over the last 30 years. When our individual credit ran dry we learned to use the government in our stead to borrow money from hostile foreign nations in the name of our grandchildren. Although economists feel that it is very unlikely, it is possible that during our lifetime we will be forced to stop robbing resources from our kids. As we continue to steal from our children it is just creating a bigger problem in the future.

· The “Inevitable Impossibility” of Free Investment Markets and Fair Wages: The government has usurped many of our formerly free markets. Interest rates are controlled by our political officials. The mortgage market is run by our government. Political policy sets most wages in the country with massive subsidies to the non productive sectors and huge tax burdens to the productive ones. Presently our elected officials have created a perfectly imbalanced economy where the financial sector earns twice and much as the government sector. And the government sector earns twice as much as the private sector. If the invisible hand of government stopped subsidizing the non productive sectors of the economy, then money would come flooding into the productive private sector. This would cause equally proportionate private sector employment growth with subsequent unbridled prosperity and possibly inflation. We are forcing more and more money out of the private sector. This is creating a bigger inflation problem once the flow of money starts to enter the private sector again.

All the examples above seem to be the most likely culmination of bad government policy because:·

  1. Interest rates can’t be artificially manipulated any lower than they are now.
  2. Asset prices can’t be artificially held above historical fair value forever.
  3. We can’t live beyond our means forever.
  4. In a democracy the government can’t control markets to reward political favorites forever.

But all of these logically “Inevitable” outcomes are not even among the “Possibilities” of our economic community. Economists say interest rates must be lower, asset prices must be forced higher, we must continue to borrow and spend. And absolutely the government is our savior.

For some reason, the most likely outcome of each of these “Inevitable Impossibilities” seems to lie far beyond the scope of our current crop of economic theorists to predict.

Wednesday, August 11, 2010

"Now There's Something You Don't See Every Day"

Something interesting happened yesterday. The 5 year Treasury yield sailed below its historical all time low. In July of 1954 the 5 year Treasury yield spent a month below 1.9%. This was a temporary one month vacation and the only time since the Federal Reserve has kept records that the government’s 5 year bond yield has been below the 1.9% mark. Until Yesterday.

As of yesterday the 5 year Treasury bond is carrying a yield of 1.46%. That is over 21% below the unprecedented all time low in July of 1954. The amazing part of the equation is that it is still trending lower. It is 21% below the record and still trending lower! It reminds me of the famous line delivered by Kathy Bates playing the unsinkable Molly Brown in the movie Titanic. From a lifeboat as she was watching the ship sink she deadpanned: “Now there's something you don't see every day”.

I believe that Molly Brown’s line is appropriate today. We are incurring many events that our nation has never seen before. But the problem is not the events that we are seeing but our reaction to them.

The artificially low rates should be a specter of warning to investors. We are entering a period filled with financial icebergs. The only way to survive is to slow down and be more careful than anytime in your life.

Unfortunately most people are not heeding the warnings in the economy. We have events happening that are unprecedented and many investors are ignoring them as high end real estate, most commodities and all long term bonds are in bubble.

As individuals and as a nation we are steaming full speed into a sea filled with icebergs on a ship that is horrendously overloaded with debt.

My only thought at the moment is that anyone that is stretching to buy a home in the "high end" real estate market is buying a ticket on the RMS Titanic Housing Bubble II.

Low interest rates are pushing people into buying homes that they can’t afford.

Historically people will buy a home that is 3 times their household income. The low interest rates of today are allowing people to buy homes that are more than 6 times their household income.

I would like to suggest that this is 100% above the historical norm! So if you are buying a home today that is 6 times your household income you are making a highly leveraged bet that house prices will never come back down to historical fair value.

And I would like to add that there is definitely a possibility that home prices can go below historical fair value. It is happening in many, many lower end housing markets! Some markets are bottoming at historic valuation lows.

Because of our unsound economy and the historically low interest rates it is very, very imprudent to pay above historical valuation metrics for a home. Lower risk tolerances of investors in the future will lower prices. Higher interest rates will crush prices. Another recession will sink the boat.

The tried and true valuation metrics that you should follow to determine a prudent price of a home is 3 times your household income. And you should not buy a home that has monthly costs that are significantly higher than the monthly costs to rent the same house. Historically, the rule of thumb is not to pay more than 180 times the price of monthly rent for a house.

These are metrics for a normal economy. Presently we are living through the most unsound economy in our nation's history! Is this really the time to stretch your budget and borrow a million dollars to purchase an historically overpriced home?

There is still a flood of investors paying far above historical valuations for high end real estate. They are ignoring the economic warnings up ahead. They are ignoring the valuation metrics of the past.

To all of the speculators that are contemplating running full throttle into the purchase of high end real estate - Godspeed.

Sunday, August 8, 2010

Our Economic Shell Game

We are a nation of speculators that are being hoodwinked again and again in a confidence game run by our government subsidized financial sector.

We lost our savings in the Tech Bubble. Then we borrowed trillions of dollars to play in the biggest real estate bubble of our nation’s history. It was a highly leveraged bet that real estate prices would never come back down to historical average value again. This "fair value" is the average of the historical trend line so it the most likely outcome in the long run.

Of course this was an impossible bet. A shell game is driven by the profiteering of the operator and not the profits of the speculator.

Remember, this is not gambling. This is a shell game. There is no chance of winning.

The government and the financial sector sold our citizens on this impossible bet. Our job producing manufacturing sector that was the envy of the world has been dismantled as our nation’s resources are directed to the huge government run financial confidence game. Instead of growing our economy with increases in savings and productivity we live within the boom and bust caused by each new round of speculation.

The past two bubbles have taken our savings so now we are playing with borrowed money. We must go begging to China for the ten trillion dollars that will fund our next round of bets.

We have just begun the next game as our politicians have supposedly put the pea under the shell. The con is no different than before. We are betting that asset prices will continue to remain above historical fair value forever.

So far the game is exciting. Through massive unsustainable market manipulation by the government, high end real estate is being pushed back into a bubble as the cost to buy in many major metro areas is double the price of rent. Most commodities and many of the more speculative stocks are solidly in a bubble. Long term bonds are in a super bubble.

If the action slows then taxpayers fund bailouts to government shills to keep money in the game. The nimble fingers of the Federal Reserve pickpocket interest from savers to help foot the bill.

At some point in the future the shell will be lifted showing asset prices have come back down to historical fair value. As they absolutely always do, 100% of the time.

The suckers will be rolled yet again. Wall Street economists will call this inevitable loss a "black swan", or a "fat tail" or maybe a once in a 100 year event.

The outside observer must laugh at the fact that the most likely outcome is percieved as impossible by the speculators. This is all part of the "sleight of hand" in performing the con.

After the bust it will be time to go home and explain to our children that we have spent the last 15 years gambling at shell games instead of working and saving. Our money has left the job creating private sector to be wasted in this huge government subsidized financial con game.

I am sure our children won’t understand. But really what rational person can understand someone trying to win money in a shell game!

Our children will go back to just working and saving…

“Oh kids I almost forgot, China will probably be giving you a call soon about some money that you owe them ... "

“Double or Nothing?”

Sunday, August 1, 2010

A Heartfelt Appeal to the Unemployed

I am writing this letter as an appeal to all of the unemployed and underemployed people of this nation to contact your elected officials and demand that they vote for an extension of the Bush Tax cuts. We must help our government to make the difficult choices that will promote economic growth in the future. One of the most crucial decisions of Congress is to choose which sectors get heavily taxed and which sectors get heavily subsidized.

If you are an unemployed private sector worker, then I am sure that it is troubling to realize that your job was deemed unimportant by our politicians but you must understand this is all part of the “invisible hand” of government that will lead us to a higher standard of living in the future.

Quite frankly, no one in my circle of friends is unemployed. But I do read the Wall Street Journal so I understand the “rough patch” that our country is going through.

My friends and neighbors are highly paid government administrators, health care workers, lobbyists, university professors and Wall Street professionals.

We work as employees for the healthcare sector, the government sector and the finance sector. Our government subsidized salaries are increasing faster than GDP growth so we are the growth industries. Our pay is growing much faster than the salaries of the unimportant jobs in the private sector.

We must continue the Bush tax cuts because of the high salaries for the important jobs in government and the financial sector. Many of these employees are paying a lot of money in taxes. The workers in these growth industries will be the driver of consumption in the future. It is imperative that they continue spending lavishly.

I know that even with this perfect logic there are some naysayers.

My accountant Earl says that directing money toward rich government and financial sector employees does not create jobs. To create jobs we need targeted tax credits or direct subsidies for new hires in the private sector. Higher individual taxes and lower corporate tax rates will also promote job growth. He says in this way money goes directly to create jobs without rewarding people that don’t deserve it.

Now I ask you, who is he to say who deserves the money? I told him that even if he doesn’t want money to go to the rich government and financial workers, what about the rich farmers and the rich small employers? They create most of the jobs in this country.

Earl just blathers about how almost no small business owners in this country have wages of more than $250,000 a year, which is the lower income limit on the Bush tax cuts. Earl thinks that by lowering individual tax rates and raising corporate tax rates it just gives incentive for a handful of rich business owners to raise their own salaries and lower the wages of their employees – just like government administrators do as they ratchet up their own salaries and layoff police, teachers and firefighters.

I feel that Earl is just bitter and I take exception to his jibe against government administrators like me.

Earl is self employed in the heavily taxed private sector. He only makes $100,000 a year. Neither he nor his employees are subsidized at all. The government must feel that he has a very, very unimportant job. I have tried to explain this economic fact to him but he won’t listen.

He could make twice as much working for the government itself in a midlevel administrative job or four times as much in the government run financial sector. This pay would be remuneration for doing the same amount of work that he does now! Why would anyone choose to work in the private sector? It just doesn’t make any sense.

But Earl is very stubborn.

He talks about how if we removed the government subsidies from the non productive sectors there would be plenty of money for the productive ones. He says the government’s misdirected subsidies “crowd out” private sector investment. And that most of the small businesses that he works with could hire extra employees if the government got rid of some of the constantly changing and crazy financial, economic and regulatory laws that make it impossible for small employers to compete with the big corporate and foreign employers.

I think Earl belongs in the low paying private sector. He just doesn’t understand economics.

I would like to reaffirm to you little people that if you consider the extension of this gift to the rich, that in the long run it could create more jobs. Honey Poo and I are too busy with golf and “the club” to consider any new business endeavors. But with the continued tax breaks and my government subsidized salary increases my wife is planning to hire her own eyebrow and nail specialist and an additional au pair for Shitake, our beloved Shih Tzu.

This will be two new jobs to help the economy.

Also Honey Poo and I have made a pledge that we will continue to live well so that our spending will trickle down to help the people in need.

Thank you for continuing the Bush Tax Cuts.

Yours Truly,

Rich Administrator
Small Town, USA