Greece will default, maybe not today, but it is only days or weeks away. Odious Debt, a concept suggested in a 1927 treatise by Alexander Nahum Sack dwells on the principle that debt accumulated by a Sovereign Country doesn’t have to be repaid if it was borrowed for use that did not benefit the State and its citizens. With that in mind, all banks need to think twice about whom they loan to.
Right now Greece has problem borrowing money, the rates are outrageously high, and they are a bad credit risk. But what happens if they default? The bonds at that point probably go to about being worth 10% of face value. The Greek government could redeem those bonds at 10 cents on the dollar. Not a bad deal. Of course, the question comes up; do they really need to redeem the bonds at 10 cents on the dollar? Probably not.
Then after the default, their credit rating might surpass that of Iceland.
The world banks want their loans to be repaid. Better terms and more years to pay doesn’t make the debts any more manageable. The debts will not be paid. But that concept eludes our international bankers. This is just hanging paper, over a bad financial transaction. There comes a point when kicking the can down the road no longer has any appeal, it ceases to ameliorate the problem.
Greece has arrived at its final destination. Repudiation is the next step and from there, better times for the country. The repudiation pretty much ruins anyone with retirement savings, they are gone. Everyone gets to start over again. If you are 75, the idea might not be greeted with much enthusiasm.
After Greece defaults, the game is pretty much over. Do we cover their debts to keep the financial ball rolling? If so, what stops the rest of the PIIGS from queuing up?
Of course, could it be, that maybe the bail out money being used to finance Greece’s bailout, is from the funds deposited by the USA in the IMF? Why do I get the feeling that the answer is yes? Maybe, because the Germans have no desire to finance the spendthrift Greeks?
The headline could read “Bernanke Finances Greek Bailout.” Of course I could be wrong. It is all Greek to me.
Tuesday, June 28, 2011
Sunday, June 19, 2011
Military Spending Cuts—Why?
A lot of newspaper talk revolves around the cost of the wars in Iraq, Afghanistan and in Libya. Congress wants to cut military spending so they can keep the social programs of entitlements running at full bore.
There are two things to look at here. The billions we are spending on the wars are not being spent in those countries, but rather in the US. We build weapons and tanks for deployment by the military. Secondly there is an obsolescence factor for many weapons. The Napalm produced for the Vietnam War is still hanging around leaking, presenting a nightmare disposal problem. I’d hazard a guess that the missiles we fired on Libya had a “use by date” that had expired (this eliminates a potential disposal problem and justifies the reordering of replacement weapons).
The Kennedy moon program was on par with military spending, the money was spent on research and production in the private sector and it stimulated the economy. Critics often point to the space craft on the moon being worth 2 billion dollars. Not quite, it took two billion dollars to put them there.
Right now in simple terms, our government has three spending modes, administrative costs (running the government), two transfer payments (Social Security, Unemployment, Medicare) commonly called entitlements, and third, discretionary, spending (military, infrastructure, scientific research etc).
Administrative spending won’t be cut much, unless they cut a department or two ( offhand 9 or 10 come to mind).
Of the three types of spending, entitlements (non discretionary) are just a redistribution of wealth to people for consumption. These payments stimulate the economy the least.
Discretionary spending is where we get the biggest bang for tax dollar spent, and it’s all “optional.” A strong defense and a solid infrastructure have a definite return for the average citizen and is a necessary expense, but of course, here is where the first cuts come. In the future, we will have to tolerate bad roads and lousy government service. Funding will not be there for it. Honk your horn before you drive into a pot hole.
Military spending is an exceptional economic stimulus, but it does have one drawback, it is not for private consumption. You might want a wide screen TV, but not a Bradley Tank; it wouldn’t fit in the garage, plus it gets lousy gas mileage.
The government interest expense last year ($413 billion) is close to what we budgeted for defense ($515 billion). The current Congressional goal is to cut spending and at the same time continue borrowing. How does that work? Why not just stop borrowing? It’s a little like using a pay toilet that has no toilet paper. The solution to one problem creates another.
New technological advances don’t come from Social Security and health care entitlements. Investing in our future has to do with the youth of our country. Entitlements are benefits that should be the first things to be cut in the government budget, not the last. Congress is eyeball to eyeball with the silver foxes. What will happen to military spending and other government research? Sadly, it is all about votes. Maybe that’s why Congress and the President like to play golf, if you lose your balls, you can always buy more.
There are two things to look at here. The billions we are spending on the wars are not being spent in those countries, but rather in the US. We build weapons and tanks for deployment by the military. Secondly there is an obsolescence factor for many weapons. The Napalm produced for the Vietnam War is still hanging around leaking, presenting a nightmare disposal problem. I’d hazard a guess that the missiles we fired on Libya had a “use by date” that had expired (this eliminates a potential disposal problem and justifies the reordering of replacement weapons).
The Kennedy moon program was on par with military spending, the money was spent on research and production in the private sector and it stimulated the economy. Critics often point to the space craft on the moon being worth 2 billion dollars. Not quite, it took two billion dollars to put them there.
Right now in simple terms, our government has three spending modes, administrative costs (running the government), two transfer payments (Social Security, Unemployment, Medicare) commonly called entitlements, and third, discretionary, spending (military, infrastructure, scientific research etc).
Administrative spending won’t be cut much, unless they cut a department or two ( offhand 9 or 10 come to mind).
Of the three types of spending, entitlements (non discretionary) are just a redistribution of wealth to people for consumption. These payments stimulate the economy the least.
Discretionary spending is where we get the biggest bang for tax dollar spent, and it’s all “optional.” A strong defense and a solid infrastructure have a definite return for the average citizen and is a necessary expense, but of course, here is where the first cuts come. In the future, we will have to tolerate bad roads and lousy government service. Funding will not be there for it. Honk your horn before you drive into a pot hole.
Military spending is an exceptional economic stimulus, but it does have one drawback, it is not for private consumption. You might want a wide screen TV, but not a Bradley Tank; it wouldn’t fit in the garage, plus it gets lousy gas mileage.
The government interest expense last year ($413 billion) is close to what we budgeted for defense ($515 billion). The current Congressional goal is to cut spending and at the same time continue borrowing. How does that work? Why not just stop borrowing? It’s a little like using a pay toilet that has no toilet paper. The solution to one problem creates another.
New technological advances don’t come from Social Security and health care entitlements. Investing in our future has to do with the youth of our country. Entitlements are benefits that should be the first things to be cut in the government budget, not the last. Congress is eyeball to eyeball with the silver foxes. What will happen to military spending and other government research? Sadly, it is all about votes. Maybe that’s why Congress and the President like to play golf, if you lose your balls, you can always buy more.
Sunday, June 12, 2011
What Lies Ahead?
Don’t look for housing to rise out of the ashes and get back to 2006 production levels any time soon. The housing bubble was all about greed. Getting a bank loan, was robbery without a gun. While the drunken real estate orgy was in full swing, nobody bad mouthed bankers by calling them banksters. In this country, making a lot of money is a sign of intelligence, inversely, poor people are considered stupid. So if you are poor and not stupid it has to be somebody else’s fault.
From there we could claim that the large unemployment numbers are the result of the poor economy, but the problem is far bigger. The Information Age has bloomed and left many people unemployed. Back in the early 1900’s banks employed thousands of accountants to tally their books from day to day. The invention of the Burroughs adding machine made about half of the banking work force redundant.
In the early 1900’s, the agrarian (farming) economy employed 41% of the population. By 1930 it had dropped to about 21%. The mechanical combine harvester and the tractor changed farming forever. At the same time, the assembly line production increased worker efficiency and output. It was this shift in technology that added to the unemployment of the Great Depression.
Today, one computer and an excel work sheet can eliminate the bean counters in a large retail firm. Stores no longer need to check the shelves when ordering inventory. Theirs scanned sales totals give them the numbers for their replenishment orders. The gas and electric companies don’t employ meter readers any more, each residential unit is in direct communication with the utility. Today we have 20 million unemployed people that need to be retrained, in order to secure a new job. For a lot of these people, their old jobs no longer exist.
There is a question to ask yourself when you go into a retail store,” How many of the items on the shelf are made in the United States?” A future Smoot-Hawley type tariff could be used to entice offshore American corporations to return to the USA to produce their wares. Of course your flat panel TV produced in the US would be of low quality and probably triple the price of anything made in China.
Over a span of 60 years, the shifting of American production overseas has been so gradual that it was not noticed. The companies that used to be US based, don’t need the added aggravation costs of health care and retirement benefits. They can survive very well outside the US. These labor jobs are not coming back.
Bernanke’s quantitative easing is a method of paying back for what we have already borrowed; with no tangible results that I can see. Whereas government program to improve the infrastructure of the country (roads, sewage, etc) would be a positive step in the right direction. Plus it would be something that they have to do anyway no matter what the economy is doing.
The aspect of whether we are facing inflation or deflation has been a rather active topic on this blog lately in the remarks section. I didn’t get a pay raise this year (government pay freeze). My wife got a 10% pay cut and all of our household bills went up (gas, electric, water cable and trash). My son’s tuition went up $1,200. If this is deflation, why am I paying more and getting less in return? The real irritating thing about the increase in the water bill was we had to pay more for consuming less (there was a push by the utility to conserve water and they accomplished their conservation goal). Unfortunately they didn’t sell enough water to cover the fixed costs, so we got a rate increase. This points out the vulnerability of large companies trying to down-size from a drop in consumer consumption. Fixed costs don’t disappear overnight.
I went to Starbucks this morning for a large Coffee (It’s probably been about 4 months since I was last there). The price has gone from $1.80 to $2.15. At the Supermarket, my favorite candy bar is still the same price, only it’s about half the size it used to be. Gasoline has dropped 15 cents this month (of course it’s still a dollar more than it was last year).
So what lies ahead? Hard times. Of course, that doesn’t sell newspapers does it? Don’t expect a government solution; our government is a consumer of wealth, not a producer. We are earning less, spending more and getting less in return. I guess inflation is when the size of the product you buy stays the same, and the price increases. Deflation must be where you (cough, cough) get less for the same price ;>)
From there we could claim that the large unemployment numbers are the result of the poor economy, but the problem is far bigger. The Information Age has bloomed and left many people unemployed. Back in the early 1900’s banks employed thousands of accountants to tally their books from day to day. The invention of the Burroughs adding machine made about half of the banking work force redundant.
In the early 1900’s, the agrarian (farming) economy employed 41% of the population. By 1930 it had dropped to about 21%. The mechanical combine harvester and the tractor changed farming forever. At the same time, the assembly line production increased worker efficiency and output. It was this shift in technology that added to the unemployment of the Great Depression.
Today, one computer and an excel work sheet can eliminate the bean counters in a large retail firm. Stores no longer need to check the shelves when ordering inventory. Theirs scanned sales totals give them the numbers for their replenishment orders. The gas and electric companies don’t employ meter readers any more, each residential unit is in direct communication with the utility. Today we have 20 million unemployed people that need to be retrained, in order to secure a new job. For a lot of these people, their old jobs no longer exist.
There is a question to ask yourself when you go into a retail store,” How many of the items on the shelf are made in the United States?” A future Smoot-Hawley type tariff could be used to entice offshore American corporations to return to the USA to produce their wares. Of course your flat panel TV produced in the US would be of low quality and probably triple the price of anything made in China.
Over a span of 60 years, the shifting of American production overseas has been so gradual that it was not noticed. The companies that used to be US based, don’t need the added aggravation costs of health care and retirement benefits. They can survive very well outside the US. These labor jobs are not coming back.
Bernanke’s quantitative easing is a method of paying back for what we have already borrowed; with no tangible results that I can see. Whereas government program to improve the infrastructure of the country (roads, sewage, etc) would be a positive step in the right direction. Plus it would be something that they have to do anyway no matter what the economy is doing.
The aspect of whether we are facing inflation or deflation has been a rather active topic on this blog lately in the remarks section. I didn’t get a pay raise this year (government pay freeze). My wife got a 10% pay cut and all of our household bills went up (gas, electric, water cable and trash). My son’s tuition went up $1,200. If this is deflation, why am I paying more and getting less in return? The real irritating thing about the increase in the water bill was we had to pay more for consuming less (there was a push by the utility to conserve water and they accomplished their conservation goal). Unfortunately they didn’t sell enough water to cover the fixed costs, so we got a rate increase. This points out the vulnerability of large companies trying to down-size from a drop in consumer consumption. Fixed costs don’t disappear overnight.
I went to Starbucks this morning for a large Coffee (It’s probably been about 4 months since I was last there). The price has gone from $1.80 to $2.15. At the Supermarket, my favorite candy bar is still the same price, only it’s about half the size it used to be. Gasoline has dropped 15 cents this month (of course it’s still a dollar more than it was last year).
So what lies ahead? Hard times. Of course, that doesn’t sell newspapers does it? Don’t expect a government solution; our government is a consumer of wealth, not a producer. We are earning less, spending more and getting less in return. I guess inflation is when the size of the product you buy stays the same, and the price increases. Deflation must be where you (cough, cough) get less for the same price ;>)
Thursday, June 02, 2011
The Kondratieff Wave Revisited (reprinted)
I'm suffering from a little bit of writers block, here's a reprint from October 2006. The historical quote below, sounds a bit too familiar.
A while back, in May, 2006 I covered the Kondratieff wave and it seems to be more to the point as time goes by. Below is a link to a history lesson that's well worth reading.
The Kondratieff Wave
This gentleman's theories were published in 1925 way before the Great Depression. Here is a quote from the link, dealing with "The Autumn" just before "The Winter," labeled Depression.
These cycles tend to be about 60 to 70 years long. If you think about it, everyone that was about 30 years old during the last depression is no longer with us. The group memory of the past depression is gone and most of the financial shenanigans going on, are "new" in our mind's eye.
The point about perceiving a depression, is that its only visible in your rear view mirror. The investment trusts that collapsed in the 1930's seem very similar to the index funds and derivatives of today.
As a post note: don't link a Depression automatically with deflation, hyperinflation is also an option. The Federal Reserve (with today's powers) and absurd national debts were not part of the mix way back then.
A while back, in May, 2006 I covered the Kondratieff wave and it seems to be more to the point as time goes by. Below is a link to a history lesson that's well worth reading.
The Kondratieff Wave
This gentleman's theories were published in 1925 way before the Great Depression. Here is a quote from the link, dealing with "The Autumn" just before "The Winter," labeled Depression.
Excesses of an unpopular war, along with fiscal liberalism, cause popular reaction toward stability or normalcy. A mood of isolationism permeates . The plateau period generally lasts seven to ten years and is characterized by selective industry growth, development of new ideas ( both technological and social ) and a strong feelings of affluence, terminating in a feeling of euphoria. The inflated price structure from the primary recession, along with the desire for consumption, produces a rapid increase in debt. Eventually, wealth consumption expands beyond all practical limits, and economy slips into a severe and protracted depression.
These cycles tend to be about 60 to 70 years long. If you think about it, everyone that was about 30 years old during the last depression is no longer with us. The group memory of the past depression is gone and most of the financial shenanigans going on, are "new" in our mind's eye.
The point about perceiving a depression, is that its only visible in your rear view mirror. The investment trusts that collapsed in the 1930's seem very similar to the index funds and derivatives of today.
As a post note: don't link a Depression automatically with deflation, hyperinflation is also an option. The Federal Reserve (with today's powers) and absurd national debts were not part of the mix way back then.
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