Monday, August 25, 2014

The Upside Down Logic of Today’s Economy

People used to buy homes because it was cheaper to own than to rent. Let’s face it, the ability to pick up and move at the drop of a hat, is real freedom. And just that alone should dictate that renters pay more for that freedom. That doesn’t seem to be the case. Selling a home in California can cost 20K, and that’s a year’s rent.

Common sense suggests that if you want people to save their money, you should pay them a reasonable interest rate so they would forgo immediate gratification. I can’t think of one reason if you are young, to put money in a bank at these interest rates. Buy something real and enjoy it.

If you are ready for retirement, even Suze Orman is suggesting that you hop into the stock market. The return on bonds is so low that you need to invest in stocks with some reasonable amount of return even if the risk is greater. Otherwise you will outlive your savings. And to think, that the eighth wonder of the world used to be “Compound Interest.” Right now the spread between Junk and Treasury’s is about 100 basis points and at times in the past, used to be as high as 800 to 1400 basis points (that's before the government insured everything).

It used to be that the minimum wage was an entry rate into the labor force. You couldn’t live on it as a career wage, but it gave you training and gave your employer a way to measure you for advancement. Now we have the realization by the masses that you can’t support a family on the minimum wage. Plus we have a new economic concept that raising the minimum wage will solve problems. Let me ask you one question, does a law solve a problem or set fines for violators? Just maybe pointing out that the minimum wage won’t support a family sells more newspapers. Everyone earning the minimum wage has a pretty good idea that family life will really suck on the minimum wage.

The infrastructure in most of the states is over 60 years old and needs to be replaced. “Infrastructure is a fancy name for; roads, sewer, water and electricity. On top of that, my state, California is in the middle of a drought. Add insult to injury, consuming less water by everyone will raise everyone’s water rates. A lot of the fixed costs used to be passed on to the large consumers. So in a down economy, consuming less costs more and we are not even talking inflation.

Inflation appears to have disappeared if we look at all of the government statistics. But if we examine the national debt, a jump of 10 trillion in the last 9 years, kind of makes one wonder. When I pointed out to someone some wastefully spending in our organization, the reply was, “Oh, that’s government money.” There appears to be a complete disconnect between the taxes we pay and government spending. So it’s not surprising to see that the average man on the street looks at the national debt as a government thing that has nothing to do with the people. Then carry it one step further; this form of government financing has worked great so far, why not continue it? Don’t rock the boat.

I remember as a kid offering up an excuse for bad behavior to my parents with “The other kids do it or their parents think its ok.” The response from my parents was wisdom for growing up into adulthood, “they might do it, but it doesn’t make it right. In this house you live up to our standards, not their lack of standards.” So when you open the morning paper and find out that all of the other countries are printing money at a very rapid rate just as we are; what you can deduce from the fracas, is that there are no “adults” in charge.

Common sense suggests that the economy is stressed to the limit. We are not sure, why or how but the facts don’t fit any model we use. Something is wrong, there is an economic conflict that has to be resolved. We cannot spend what we have not taxed, forever. There comes a point to where it has to fail. Of course we are not there yet, so as long as it works, it works.

It kind of reminds me of a roller coaster ride video from a blogger a few years ago about the Stock Market, we are now most certainly near a top and are ready for the real ride to begin. Or better yet, it's enjoying snow cones on the Titanic after the iceberg hit. Are we having fun yet? Do you get the idea that reality and common sense, are traits lacking from the players at our "roulette table" commonly referred to as the stock market? "Faites vos jeux."


Sackerson said...

Excellent survey!

dearieme said...

One of the most revealing comments I've ever seen on an American blog was from someone claiming that his state had an advantage compared to the rest of the world: licensing requirements for new small businesses could be easily and quickly met. I replied that both I and my wife had opened small businesses in Britain: no licence required. I sometimes wonder whether Americans realise how burdened they are with bureaucracies. They like to call European economies socialised: is the boot on the other foot? Consider these two links.

Jim in San Marcos said...

Hi dearieme

Thank you for the links.

I agree that licensing for new businesses in California is a place no employer wants to go. The paperwork would overwhelm you.

Opening a business in this state is not an easy task.

You can make more money growing pot than you can opening up a restaurant and employing 5 people, go figure!

Jim in San Marcos said...

Hi Sack

Thank you for the praise. Every little bit helps. I have a small ego and your attaboy, will feed it amply for several weeks.

Thank you and take care.

Rob in Nova Scotia said...

Dropping by to say Hello and let you know I'm still on this side of sod. I concur with Sack's assessment. Anyway we live today in a alternate Dr. Seuss world where Up is Down and Black is White. It is amazing that all the plates are still spinning in regards economy but everything will be alright until it's not. I'll end by saying we're just the foot soldiers in this war and can only prepare by keeping our heads down.

Rob in Nova Scotia said...

A quote from the wise Dr.

“You have brains in your head. You have feet in your shoes. You can steer yourself any direction you choose.”

Joseph Oppenheim said...

Every once in awhile a fantastic financial bargain comes along....the one now is 3% 15 year, with good credit and a down payment, just buy any home in a prime location which one can afford....and own a home free and clear in 15 years...all,with great tax deductions....everyone needs a place to live.

BTW, common sense means nothing with money, because few people become rich.