Saturday, February 26, 2011

Inflation, “Painless Taxation”

Inflation concepts are not taught in school, it is just something we are told to live with. Historically, it has ranged between 3 to 12 percent. Prices increase and employers raise pay rates to offset it. It lends to the perception that you are moving up with each “pay raise.” Notice as you “earn more” you tax rate increases accordingly. Congress doesn’t need to raise the bar, inflation did it for them.

What is inflation? In simple terms, it is the government printing money instead of taxing the people. But there is more to it, than that. In a normal economy we produce 100 widgets and get paid 100 dollars. You get a dollar for each widget. If the government needed 50 widgets, they would print 50 dollars, purchase them, and then consume them. Then there would be 50 widgets left for consumption and 150 dollars chasing the remaining widgets. The net effect is that widgets have jumped in price to three dollars apiece. This is what inflation is all about.

Inflation is too much money chasing too few goods. When Spain brought tremendous amounts of silver back from the new world, inflation took off. This was “real money” but there wasn’t any product to match to it, prices increased dramatically. The same thing is happening here. We get paid money for making product. When dollars are printed, the product is still consumed, but now there are more dollars chasing fewer products. The government can print money, but they cannot print food, energy, and housing. Government consumption, by way of food stamps and unemployment insurance, makes goods scarcer for consumption and prices rise.

The government taxes about 20% of our earnings through income taxes. With inflation there is no government paperwork. Let’s say you were lucky and saved up a million dollars before retirement and it took you 20 years. In this case, inflation is an invisible tax, you haven’t lost any dollars, but your dollars have lost half of their purchasing power. The government’s printing of money has confiscated half of your bank savings. The reason this government game works so well, is that the average person has a complete disconnect, between the concept of the real purchasing power of the dollar, and the apparent value of their savings. Their dollars are all there, nothing is missing---shhh, no need to upset them.

The politicians want to tax the rich; I suggest they are already doing an outstanding job of it. The sky rocketing ascent of the national debt is proof enough. Inflation is rampant if you include food and energy. We will see a dramatic loss of our purchasing power over the coming years. You won’t lose one dollar, but a dozen eggs could cost 12 dollars. Naturally, there will be a Congressional investigation into the chicken farmers gouging the public.

The thing that ought to make everyone angry is that inflation is stealing from those that saved a lifetime. You save hard earned money only to have the government make it worth less over time. Inflation is not perceived by our youth, it takes time to experience the reality of it. But, to those about to retire, they have experienced its effects. The silver foxes can see what it has done to their retirement savings and their plans for the future. Mention any of this to a Congressman and he’ll look back over his/her shoulder to see who you are talking to,--it can’t be him.

What’s next, ten dollars for a cup of coffee? -- And a dollar for cream and sugar? Of course with Obamacare, maybe I can get my doctor to write me a prescription for Bacon and Eggs with Coffee and OJ ( I have a $10 co-pay on prescriptions). That’s an inflation pill I can swallow.

Tuesday, February 22, 2011

Democracy on Life support

Democratic Wisconsin legislators leave the state so the legislature wouldn’t have a quorum to act on legislation. The reason being, they did not want to see certain legislation passed. If this isn’t an undemocratic act, what is? These representatives need to be relieved of their elected position and replaced. An example needs to be set here. Democracy works because of the vote, not from the lack of it.

The idea that the money is there, if it is spent “our way,” doesn’t float. Pay as you go or forget the trip. And that doesn’t set well with Democrats, social programs are their agenda, the funding is just not there. What is going to be cut? Easy answer, if you don’t pay taxes, whatever you are collecting will be cut. What’s that mean? They are cutting benefits to everyone that pays little or no taxes.

Some Congressman the other day defended not cutting Social Security entitlements. He stated that “Social Security is independently funded with no cost to the taxpayer.” What he said was true and very misleading. Congress uses this fund as a piggy bank. Our government has borrowed and spent the 2.5 trillion dollar Social Security surplus. What we need to look at, is the fact that the government can’t pay back the funds borrowed or meet the obligations of promised Social Security benefits for the future. In FDR’s time, 7/8th of the population was dead before retirement. That alone was enough money for the 1/8th that survived to collect benefits.

So let’s see if I have this right now. You pay in 12 percent of your earnings into Social Security per year and when you retire, you get to collect 10 times what you paid in. If this sounds too good to be true, then it probably is. To top that off, your contributed funds are not invested, they are spent that year on the budget. Of course the Social Security fund gets an IOU from Uncle Sam. The words “Congress” and “Pond Scum” seem to define each other here.

Then we have the word “Bipartisan,” repeated incessantly in every Congressional interview. It’s the panacea for what ails the economy. It translates from the Latin as “two parties together.” Today it is defined as “Complementary rectal loading.”

The States are literally falling apart and are bankrupt. Most have already spent that loan we gave them (over payment of 2010 taxes) (They will probably apply your refund to next year’s taxes). We have 5 months before the new fiscal year begins for most of the States, this is when it will "hit the fan."

It is becoming very apparent that something is wrong with government on the State level that cannot be fixed. Obama pulled a fast one on the Republicans in Congress with health care and now we have a similar situation in Wisconsin where the outcome is a given. In this case it was different. The Democrats got up and left the state; what they did was very un-American. Voters, not protesters make our laws--hmmm, I might be wrong about that.

Tongue in Cheek Solution for California Budget shortfall:

Governor Brown should send several armed ships to Somali to hijack oil tankers and hold them for ransom. The insurance companies would pay the ransom and California could then make its budget; 29 ships and 660 hostages held in that country is a travesty. The only reason they are there, is because piracy has become very profitable.

Monday, February 14, 2011

Naivety: A Political Definition of the Hoi Polloi

The Teabag movement is like a wave sweeping the country. Ride the wave, count the votes and get elected. I listened to several Tea Party home town meetings and it was summed up by one moderator, “We will stand behind you [the Congressman having the town meeting] in making those cuts in spending.” What these town hall meetings lacked in youth, they more than made up for with participants my age or older. When it comes time to make cuts; out comes a list of things that can’t be cut. That there, gives you an idea of how serious the concept of cuts are. Of course, the cuts I deem reasonable are not the ones my neighbor agrees on, so how do we cut any program? The solution was simple, until we tried to implement it.

Then we have an 8 trillion dollar commitment guarantee to save the Fanny and Freddie GSE’s (prop up property prices). Add to that, about 4 trillion in insurance guarantees to bail out the banks, some of which are “too big to fail.” Actual out of pocket so far, is a vague amount. It is kind of like throwing a party on a budget. When you see the estimated bill, for 10 cases of vodka, two hookers and 1000 condoms, you know the party isn’t going to be as advertised; expectations for the hookers were set a tad too high.

Let’s move to Egypt. The people there think that they have overthrown a dictator. I can’t quite figure that out. The dude Mubarak was 82 years old. All they had to do was pop a paper bag behind his back to induce heart failure. I think all this guy wanted to do, was die in office and get the tribute of a free State funeral. It’s not like he needed to kill a few more people to keep the regime going. The country has been a dictatorship since 1958. The youth of the country think that things have changed and they are now in control, the naivety of their thinking will be tested very shortly. The Egyptian military still runs the country.

So where are we now? Everyone wants change, but the money needed is not there. We can have less, but not more. The Well is dry. Obama proposes a budget of 3.7 trillion dollars with a savings of over 1.1 trillion over 10 years (I guess the savings are all in the 10th year). Tax collections this year are about 2.1 trillion. Here we have a President standing up and announcing a budget that is underfunded by 1.6 trillion dollars claiming a savings of 1.1 trillion over 10 years. The real implied statement here is that the President thinks the general population is dumber than a sack of rocks. I don’t have any problem with that; I think he’s on to something. I get irate for being grouped with the Hoi Polloi (the sack of rocks).

Our political representatives have promised us that lobster and steak dinner and believe it or not, they are going to serve it to you at McDonald's. It looks like three card Monte and selling well know bridges are passé. I’m getting hungry, let’s go to McDuck's for Surf and Turf!

Saturday, February 05, 2011

Things Change Over Time

In the 1930’s, Social Security was for those over the age of 65. Very few people lived to be 65. Smoking wasn’t going to kill you, old age was. Penicillin and new medical treatments later on in the century extended our lifetimes tremendously.

Back in Abe Lincoln’s time, health care wasn’t a big expense; you either died or got better. Today you can exist in a coma for years; premature babies can cost 100k apiece. The personal concept of paying for it all doesn’t exist. Just who pays for all that is another story. Now we have government health care for those who can’t afford it. The private insurance companies can see the handwriting on the wall; you can’t compete and undercut the price of government programs, the government doesn’t have to make a profit to survive. Look for private health care to fade out of existence.

Home ownership after WWII was considered a God given right. Private financing with acronyms like GSE kept the game going for 50 years. This financing plan has pretty much collapsed. The Federal Reserve and Congress stepped in to provide the funding to keep the ball rolling. When the game started, you needed a 20 percent down payment. Just before the collapse, the banks were writing loans to anyone that could fog a mirror. Now the government has extended the “fog a mirror” program; of course you have to “buy” one of the zillion homes they now own.

40 years ago, government jobs were very low paying. Most people went to work for private industry. Of course many people started working in government to get some experience and then jumped into the private sector. In today’s world, the government does surveys to figure out what to pay employees so “they won’t lose them to the private sector.” They weren’t really losing anyone at that pay rate; they were inconvenienced with the fact that they had to train a new employee. Yesterday’s low hire government employee is today’s retiree with the Rolls Royce health and pension plan.

When I went to school, it wasn’t hard to flunk a grade and get set back a year. I remember a guy graduating in my senior class, was 21, real nice guy, he was more into cars, girls, cigarettes and beer. He had a great time in High School. There were probably 4 straight A students in my high school with 800 students. My son who graduated from high school last year was a straight A student, as were many of his class mates. There are so many straight A students in today’s world, that it is meaningless. No kid left behind has pretty much trashed the educational system. The kid selling drugs on the sidewalk is getting more of a math lesson than the stoned kid in class who bought the weed. Success today, is guaranteed to our children; then they hit the reality of the real world, after graduation.

When the Constitution was written, there was the right to bear arms. If you ever want a fun time, try to load and fire a flint lock pistol from that era. When you pull the trigger, the intended victim has about 1 ½ seconds to dodge the bullet--- the flint hits the steel which lights the gunpowder in the flash pan, which ignites the powder in the barrel, which launches the bullet. It could probably misfire one out of three times. It’s not much like the weapons they sell in the gun stores today.

The invisible issue here is that things change over time very slowly. But our perspective doesn’t. We still see the program in its original design. The change has escaped us, but the penalties haven’t. The bill is coming due and everyone has all these entitlements they have been promised. It’s kind of like enjoying a full meal in a very expensive restaurant and informing the waiter that the next person to sit in your chair will pay your bill. The waiter will have none of that no matter how indignant you get. Reality is right around the corner, let’s see if we can kick the can that far.

Wednesday, February 02, 2011

Let's Define "A Depression" (Reprinted)

Here is a reprint from May 13, 2007 that you may enjoy. It is a travel back in time 4 years.

Let's define a Depression:

It’s a drop in economic productivity for a length of time. Speculation comes to a standstill, and bubbles cannot exist. There is a tremendous contraction in the wealth of the whole country. The great money making machines (plural) will collapse.

People are beginning to see the housing bubble. The machine that is cranking out new houses, is still making a profit. Building contractors can easily undercut home sellers, no reason to stop yet. Sticky housing prices are a plus (to the builder).

The stock market has Google at $500 and no dividend. It will probably still go higher. I still laugh about the AOL Time-Warner take over. It was like John Paul Jones with the Bon Homme Richard against the H.M.S. Serapis all over again. Then there are hedge funds who hypothecate the whole mess. They seem to be making big returns. When money enters the market faster than the creation of new issues, then prices rise—-forever???

The IRA’s and Mutual funds are increasing in value because of the increase in share price. What you are looking at is not a return on equity, but an increase in the prices of the equity. For example if Google rises to $600 you have a market perception of its new worth. But if IBM doubles its dividend, this is a real return on an investment. A money manager would probably invest in Google over IBM, because the apparent gains from that investment strategy would bring more investors to his fold. (I could be shot for this oversimplification)

If you look at Detroit, houses are so cheap, that you can't build a new one at those prices. The builders are leaving. The stock market could go to the same extreme. In a crash, Investors would demand a dividend of $4 to warrant a price of $100. Otherwise why not put it in the bank. What we would be looking at, is a return to more realistic values for assets. Some comedian during the Great Depression quipped, "I'm not interested in the return on my money, but rather, the return of my money."

The collapse could result in a massive redistribution of wealth, hitting the rich, not the poor. All of this hypothecated wealth would disappear. The million dollar cats, dogs and tulips would be marked to market. Paper millionaires would go up in a puff of smoke.

Decreased consumption, would lead to layoffs. This would expose the credit card bubble and threaten the banking industry, or who ever holds all of this credit debt. Liquidation would then be the final game.

If that isn’t enough, Congress will rise up and try to save us. That's the scary part! It's kind of like getting on an airplane and having an election, to see who's going to be the pilot.

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