Saturday, April 03, 2010

Reading Between the Lines

With Friday's job report, the message is “We have turned the corner on the recession.” This reinforces my belief that in bad times people want to hear good news. There are some serious miscalculations here. A lot of the jobs that have been lost are not coming back; people will have to be retrained for new types of work. In the 1930’s we switched from an agrarian economy to a manufacturing one. The switch is happening again. We need computer skills to fit into the new world of Information Technology. The problem is trying to retrain those over the age of 45 with these new job skills.

Housing also seems to be picking up. It seems like savvy investors are picking up rental property. Think about that for one moment, if housing prices drop below what renters are paying for rent, why rent? Buy a house. So as housing prices decrease, the rental market goes to hell. In some places like Detroit Michigan or Helmet, California, home prices have hit $80,000, that’s the construction cost of the house with zero land value. The net result home builders disappear. $600 dollars a month would move you into a home. I hear Fannie and Freddie Blowin' In The Wind; get a free toaster with your purchase of a house.

Then we have state budgets and legislators on the road to nowhere. The recently elected New Jersey governor Chris Christie is starting to get the state moving in the right direction. Here is a Link worth watching, it's about 26 minutes . He has the right ideas. He knows what he’s doing, won’t get him re elected. Maybe some of the right people, to fix this mess, are getting elected.

And finally, public employee retirement plans are making the news. Taxpayers are beginning to realize the retirement benefits are a bit on the extravagant side. The state financing (nationwide) needed to keep these plans funded, are a couple of trillion dollars short, three to be exact (so far). It will be interesting to see where this money comes from.

If you are wealthy, you’re oblivious to today’s hard times. Some Indian father threw a $200,000 wedding in downtown San Diego yesterday. He even rented an elephant, see the picture below.

It kind of makes one wonder about the distribution of wealth in the world. Opulent consumption of this sort during hard times never sits well with the masses. The quote “Let them eat cake” comes to mind and we know how that turned out.


Sackerson said...

We've turned the corner and met two guys with saps.

dearieme said...

I wish all conspicuous consumption were as upcheering as the elephant.

Anonymous said...

I hope your not suggesting that everyone run into IT. IT is still being outsourced, and jobs are not that easy to get.

Jim in San Marcos said...

Hi Anon 9:07

There is a lot going on you don't see. In retail sales at Camp Pendleton, cashiers have to know how to operate an RF gun to price merchandise and receive product. Plus all of their sales reports for the day have to be retrieved on line using a computer.

If you have sat in a dentist chair lately, your X-rays go straight to the computer and all of your records are stored there also.

When you combine all of this with network printers and credit card scanners, you need to know a lot about keeping the system functioning so you can perform your job.

The background check at Human Resources takes about an hour to fill out on-line if you know how to type and use a mouse.

The trash-man that picks up my garbage is on-line with a computer linked to his office and knows whether I have paid my bill or not. Same with a UPS carrier.

Computers are a work tool for just about everyone now. Even a farmer depends on infra red scans to determine whether to spray for pests or determine if it is time to harvest the crop.

You have to look to see it, but it is there. Information Technology is the new wave.

Thank you for your comments.

Anonymous said...

The last car plant in Calif., Nummi in Fremont, just closed.
These guys were used to making $56,000 to $75,000. a year, for putting wheels on a car, bolting in a dashboard, etc. Most of them came right out of high school, and as they left, they said "This is all I know".
They are about to find out how priveleged they were, and they never appreciated it.

Anonymous said...

Jim --

Did you see this debate between Jim Grant and David Rosenberg:

It seems to cover all the points made by deflationists and inflationists.
Since you are on the inflation side, I'd appreciate your thoughts as to where Rosenberg goes astray with his argument.
Does it center around the issue of "who will buy our debt."

The deflation position seems to be centered around the fact that the Fed can't print enough money to compensate for the more than $10 trillion in losses that still need to be written down (beyond what has already been lost).

Jim in San Marcos said...

Hi Anon 1:48

I watched it and it seemed more about credit contraction and destruction of debt. That would imply deflation.

I think that Jim was in error when he said that all debts are either paid off by the debtor or eaten by the bank. Our government pays on all bad bank loans. The borrower get the loan and the government pays it back to the bank and that is very inflationary.

Rosenberg thinks that interest rates are low because of the contraction of credit. My point of view is that the banks have so much money on deposit and no one wants to borrow it.

If you examine that 10 trillion that needs to be written down. It needs to show up as a loss, not as a government guarantee to make the banks whole.

The 10 trillion was borrowed and spent. The borrower can't pay it back. Do we pay back the people that loaned the money with printed dollars? The money these borrowers spent is still in the system. If the loans are marked to market, there is a 10 trillion dollar loss, but the money supply is unchanged.

Rosenberg made a good point when he stated that if the government debt reaches 100% of GDP then 60 percent of our taxes will go to servicing the debt.

I think we get deflation now only because money is being saved and also to pay off previous consumption. Inflation will show up when consumption returns to the market. The governments printed dollars are just as good as the ones in your paycheck. The amount of product for sale will remain unchanged, but the money chasing it will have doubled.

The moderator called for a restructuring of government finance which really pin points the problem we now face.

Thank you for the link.

frakrak said...

Jim viewed the link you provided, featuring the New Jersey Governor, great clip! The gentleman seems to be on the ball! But it is typical that the pain will be spread ONLY amongst folk that pay their taxes!

Looks like the small end of town will be left holding both bags, the one they have created for themselves, and the one the big end got their bonuses for …. (passing their own “bag” on down the food chain)!

Tax payers could quite legitimately now be designated as porters (professional bag holders) ….

Anon On A Calif Mountain said...

Deflation will go into inflation (definitely extreme, and if things get really out of control... possibly hyper). The question is, how long will it take? Government intervention clouds the issue and ability to predict. We could go on for another year, or another 10 years (who knows what additional fiscal and monetary policies will be implemented over these next few years).

Time to stop thinking about the economy and fretting about the bad times that are here and those that are coming. It will collapse down further soon... maybe a year, maybe two, maybe three... but soon.

It is time to get to work on creating your own economy so that you can survive.

Tyrone said...

Our government pays on all bad bank loans.

Yes; they just might do that. And FOFOA wrote:
"My friend, debt is the very essence of fiat. As debt defaults, fiat is destroyed. This is where all these deflationists get their direction. Not seeing that hyperinflation is the process of saving debt at all costs, even buying it outright for cash. Deflation is impossible in today's dollar terms because policy will allow the printing of cash, if necessary, to cover every last bit of debt and dumping it on your front lawn! Worthless dollars, of course, but no deflation in dollar terms!"


Along the deflation/inflation lines, here is something from Chuck Smith...
Deleveraging and the Futility of "Printing Money"
Those who expect this policy to create inflation will be disappointed; there is simply no way that this policy can create inflation, nor can it reinstill households' belief in the exponential credit expansion system.

Tyrone said...

L.A. must go skinny dipping...

L.A. Faces Insolvency Without Using Reserve Fund
The Los Angeles city controller has warned the mayor and City Council that the city will not be able to make payroll next month if it doesn't dip into its reserve fund.

Anon On A Calif Mtn said...

To survive, one will have to create their own economy, or continue to be the effect of the existing economies of this country (which have all been created by the govmt, Wall St. and power elite and are headed for disaster).

This is where vigilance, willingness to fight for one's survival and creativity are necessary.

Only those who create their own economy and ensure they are successful will survive this decade with a decent standard of living.

Jim in San Marcos said...

Hi Frakrak

Glad you enjoyed it, the free lunch program is going to end sooner than we think.

Take care

Jim in San Marcos said...

Hi Tyrone

I tend to agree with FOFOA. Charles Smith is under the assumption that 10 trillion has vaporized out of the system and it hasn't. The people that bought the 10 trillion dollars worth of housing paid for it in cash. It went into the sellers bank accounts. Now the houses are worth 1 trillion dollars. 9 trillion dollars didn't leave the system. The houses have been revalued. As a bank depositor, you realize why they pay interest, because there is a risk. It is kind of like a bank robber stealing 9 trillion dollars without getting caught. He still has the money to spend and the depositors will be made whole by the FDIC insurance.

At this point you have the 9 trillion made in the housing market and the 9 Trillion created by the FDIC to make the banks whole.

Before the FDIC payment, a dollar represented a measure of produced goods like 1 dozen eggs. The original 9 trillion dollars represented product not yet consumed. Now with FDIC insurance, we still have 9 trillion of product, but now we have 18 trillion dollars chasing it.

There is no inflation, because there is no real consumption, everyone is saving or paying off debts.

Ask yourself one question, if the government can print money at will and give it to us, why do we have to work?

You can't print food or automobiles. At some point there is reality, we trade our labor for someone else's labor.

There will be inflation, and we are seeing some of it in day to day consumables like gasoline and meat. The baby boomer's have saved a lot of coin for retirement. When they retire, they stop producing product an only consume it. So it will take a while for inflation to kick in.

That's how I see it,--it doesn't mean I am right.

Take care

Jim in San Marcos said...

Hi Anon on a California Mountain

I see one problem. If the dollar was to become worthless, how would people get food? They can't buy it. No one is going to drive trucks to LA to stock shelves for a supermarket that can't pay for it.

Most evacuation plans for a city the size of LA would take 21 days. Since there would be no evacuation, there would be riots and looting.

If you think a hand gun will save you, use it, and they will just burn your house down with you in it.

We are on the brink of something here that could be quite scary.

Toilet paper and cigarettes could become our new currency. --What's in your wallet;>)

Thank you for your comments

rob in a now warmer NS said...

The Veneer on Civil Society is very thin. Several years ago there was a Hurricane that went thru Nova Scotia which interrupted power supplies for about a week. Everything coasted along for a while after power went out. That is until people needed more gas for their cars. There was one gas station that had the foresight to procure a generator to pump gas. Of course this lead to long line-up which then resulted in people fighting to butt into line. I sat with my coffee and watched people of every description and background acting badly. It's all good to say that we can create our own survival plan but it ultimately depends on everyone else to succeed.

Anon On a Calif Mtn said...

To further clarify:

What ever it takes... gold, silver, bartering, forming small protective communities, expatriation, etc.

Having a store of wealth (tools, tires, first aid kits, medicine, cigarettes, canned food, copper piping, etc.) so that you can sell or barter with them.

Also, offering services and products that are truly needed, wanted (and affordable during a depression/correction) and exchanging them for an acceptable currency (whatever it may be at the time).

Many will leave the "fruited plains" that extend from "sea to shining sea" and become expatriates (Brazil, Costa Rica, Belize, Panama, etc.) They will obtain 2nd citizenship and then renounce their US citizenship to avoid the prohibitive taxation that will be coming shortly.

This is what I mean by create your own economy.

Anonymous said...

AOCM I didn't mean to disparage your comments. I agree with what you are saying. I have to point out that living in Nova Scotia where ecomony has been stuck in a rut for last 100 years gives me plenty of practice at putting into effect what you suggest. I do however worry that your solution of moving to another country is not practical for the vast majority of citizens. Most have trouble scraping together enough money to drive to WalMart, little lone moving to another country. I'm an optimist deep down however and everyone who has some common sense will get thru this rough patch in one piece if they put their mind to it. Your suggestions are right on the money.

Anon On A Calif Mtn said...

Rob in NS...

No apology required. I just wanted to clarify and expand upon my point.

Capital always flees danger. Major companies are already leaving. The migration out of the country by the wealthy (and others with the wherewithal to leave) will increase in direct proportion to the actions of the state and federal governments becoming more aggressive with taxation. They'll take their businesses with them too.

There is already a brain drain in motion. Statistics show that foreign students (engineering, science, etc.) are no longer staying in the US once they complete their education. They can have a very good standard of living going back to India, China, Indonesia, etc.

Points like the ones above are historical symptoms of the beginning phase of the collapse of an empire.

Not many really understand how unsustainable the existing US infrastructure and economy actually is. Things will be so very different in 20-30 years.

I don't personally see this as negative. I see it as advancement and growth for humanity. Change and destruction is necessary for evolution.

As Krishnamurti said, "It does not matter to me what happens.". This was not apathy, this was an attitude from the opposite end of the emotional spectrum. He knew that the world was advancing and was willing to confront whatever came upon him and make the best of it. He knew that it did not matter what happened to him... it was his attitude about what happened to him and his response which was important.

frakrak said...

History is a very subjective topic, depends on who writes it and who reads it! The American Empire could be on the downside from its zenith, but who’s to say all we are seeing is a glitch in its path as a global leader for another 50 or 100 years? How can anyone tell at this point?

Russia was a basket case a few years ago, didn’t take them long to pickup their stride again. Remember all the doom and gloom when they were out for the count! They were selling their army and navy to make ends meet, now their building some of the best naval ships, aircraft in the world, back in the game!

America is bristling with weapons of mass destruction, history may not repeat this time. It is quite a different world from the days of the Roman Empire or the British Empire. If your captains of industry are moving capital out, and your country is destabilised politically, we all lose big time!!

So where is this capital going to go? China? India? I don’t think so! In fact I think we will be seeing the exact opposite in the near future.

We may be heading for the vegie patch in the garden to survive, but I see things a little more difficult than that on the horizon for the world. I am sure Mr Benancke would be saying America is too big to fail!!

Have some faith in yourselves; if it hits the fan big time then it will be a re-build on some fairly sturdy foundations, I think your up for it!

Rob said...

It totally agree with you Frakrak. All you have to do is look at a Map and you see between U.S.A and Canada we control a sizable chunk of the world landmass. Throw in Mexico and we have all the resources we need to an keep economy running.

Anonymous said...

I subscribe to the FFT newsletter at that guy is calling for a bigger event to come in the next few months. If you look back he has been spot on with things over many years, and someone that should be listened too!

IMHO this greece debt thing and commercial real estate thing could be the next thing to blow up in the US governments face. Time will tell.

Anon On A Calif Mtn said...

Dear Frakrak and others who are concerned...

I heartily suggest you read:

This Time is Different: Eight Centuries of Financial Folly -- by Carmen M. Reinhart and Kenneth Rogoff

The Fourth Turning -- by William Strauss, Neil Howe

I believe the historical facts and statistics in these two volumes will change your minds.