Of course, the answer depends on who's talking, but since this is Marko's Take, I'll weigh in as to my personal opinion.
Before we venture further, let's first review the difference between a "recession" and a "depression". The standard definition of a recession is a decline in the Gross Domestic Product (GDP) for two or more consecutive quarters. A depression is any economic downturn where real GDP declines by more than 10%. A recession is an economic downturn that is less severe.
Larry Summers, who formerly held the position of Treasury Secretary, is now the head of President Obama's National Economic Council. Mr. Summers, whose credentials are exemplary, proclaimed yesterday that "everyone agrees that the recession is over"! Mr. Summers, for some reason, didn't check with me, as I entirely and respectfully disagree!
Christina Romer, a member of the President's Council of Economic Advisers has a differerent view. Mrs. Romer believes the country is still in a recession. Apparently, Mr. Summers did not check with Mrs. Romer either!
John "Walter" Williams, who has a fantastic website called "Shadow Stats" (http://www.shadowstats.com/), has an entirely different point of view. Dr. Williams believes that we are currently in a "double-dip depression". According to HIS methodology for computing various economic statistics, in the fourth quarter of 2008 and first quarter of 2009, Gross Domestic Product fell by approximately 6% each. Therefore, peak-to-trough, the criteria for a Depression has already been met.
At this time, as far as I'm concerned, I'm completely in sync with Dr. Williams, but I would add something further. I've written recently about possible signs of a "recovery", however, this may only prove to be some sort of temporary lull. I believe that we were in a depression, which ultimately may turn into a HYPER-INFLATIONARY one. I believe that Dr. Williams would agree with this assessment as well, but he doesn't specifically say so in the article appearing on his home page.
In any event, I felt it important to distinguish between these terms and the various points of view on them. I hope you find this piece informative and interesting. As to finding it useful, well, honestly, the economy is beyond our control! If you would like to weigh-in with your own "Take", please feel free to do so by leaving a comment below.
Marko's Take
P.S. The Producer Price Index was just released this morning. It went up during the last month by 1.8%!
Showing posts with label government. Show all posts
Showing posts with label government. Show all posts
Tuesday, December 15, 2009
Monday, December 14, 2009
Rethinking The American Dream
For as long as I can remember, the United States has been known as the "land of opportunity". The "American Dream" was a popularized notion that even the poorest of immigrants and citizens could realize untold success in the United States, by virtue of the opportunities afforded by our free and entrepreneurial spirit.
Unfortunately, that's all changed. Not only have some of the liberties we once enjoyed been taken from us, but America has now become a complete horror show. Just take a look around and you'll see all the "For Lease" or "Going Out Of Business" signs. In so doing, you'll become aware of the trememdous pressure this formerly accommodating economy has been putting people through.
Small businesses are failing in droves. The very driver of our previous economic miracle had been via small business, be it a garage, which would ultimately create many millionaires, a la Microsoft, or some housewife's notion that garage sales could be taken national, like EBay!
Now, the "American Dream" has been reduced to mere survival! Sadly, while innovation continues, the means of financing and promoting that innovation has been thwarted by the only beneficiaries of the current admistration's efforts. OUR BANKS!!!! Statistics are unequivocal in demonstrating an utter reluctance to lend plus a regulatory effort to furthur impose roadblocks to lending.
This makes me want to SCREAM!
Economists, as a whole, are notorious for their bumblehood, but they DO agree that small business and innovation are the key drivers of economic growth.
Sadly, the adminstration has done precious little to help the plight of small business while rallying around the "boy's club", which includes some of Wall St., the Federal Reserve and the administration itself.
Clearly, the administration knows better. I'm just a regular guy in Los Angeles. On the other hand, the boy's club has all the true information at ITS fingertips.
All I can suggest at this point is the ballot box. The election of 2010 can send the greatest possible message to our "benefactors". Please vote! Please vote! Our future DEPENDS on it!
I apologize if my ramblings have come across as hyperbolic. My intention was to demonstrate the passion that this issue raises in me. If nothing else, tell your friends, leave a comment and let the power of social networking do it's miracle.
Marko's Take
Unfortunately, that's all changed. Not only have some of the liberties we once enjoyed been taken from us, but America has now become a complete horror show. Just take a look around and you'll see all the "For Lease" or "Going Out Of Business" signs. In so doing, you'll become aware of the trememdous pressure this formerly accommodating economy has been putting people through.
Small businesses are failing in droves. The very driver of our previous economic miracle had been via small business, be it a garage, which would ultimately create many millionaires, a la Microsoft, or some housewife's notion that garage sales could be taken national, like EBay!
Now, the "American Dream" has been reduced to mere survival! Sadly, while innovation continues, the means of financing and promoting that innovation has been thwarted by the only beneficiaries of the current admistration's efforts. OUR BANKS!!!! Statistics are unequivocal in demonstrating an utter reluctance to lend plus a regulatory effort to furthur impose roadblocks to lending.
This makes me want to SCREAM!
Economists, as a whole, are notorious for their bumblehood, but they DO agree that small business and innovation are the key drivers of economic growth.
Sadly, the adminstration has done precious little to help the plight of small business while rallying around the "boy's club", which includes some of Wall St., the Federal Reserve and the administration itself.
Clearly, the administration knows better. I'm just a regular guy in Los Angeles. On the other hand, the boy's club has all the true information at ITS fingertips.
All I can suggest at this point is the ballot box. The election of 2010 can send the greatest possible message to our "benefactors". Please vote! Please vote! Our future DEPENDS on it!
I apologize if my ramblings have come across as hyperbolic. My intention was to demonstrate the passion that this issue raises in me. If nothing else, tell your friends, leave a comment and let the power of social networking do it's miracle.
Marko's Take
Saturday, December 5, 2009
Has A True Economic Recovery Actually Begun?
Right off the bat, I can tell you that I don't know. I've been as skeptical as anyone and said so in prior blogs. However, it appears POSSIBLE that we indeed are in the very early stages of some sort of recovery. But, the evidence remains a mixed bag. In addition, it's WAY too early to speculate as to how strong that recovery might become, if it's started at all.
On the positive side, a website called Shadow Stats (http://www.shadowstats.com/), which calculates various government-reported statistics and adjusts them for a variety of misleading alterations, has shown an actual slight "downtick" in the unemployment rate. Now, one month doesn't make a trend, but it IS the first time they show a drop since late 2007.
There is also the persistent strength in the stock market, which has historically led recoveries by 6 to 12 months. The stock market bottomed 9 months ago.
Another very reliable leading indicator is the money supply, which, thanks to Fed chief Ben Bernanke, has been exploding. Historically, high rates of growth in money supply have led to economic recovery within a period of between 6 to 18 months. All of the emergency stimulus and bailouts, which have caused the growth in money, began within the terminal months of the Bush administration, so they fall within the reliable historical precedent.
In addition, yesterday I became aware of a new program offered by certain banks of mortgage relief - EVEN FOR THE UNEMPLOYED! This was reported in an article by the Sacramento Bee, ironically titled "Mortgage relief program helps relatively few troubled homeowners". An unemployed friend of mine spent two hours talking to Wells Fargo, the holder of his mortgage, and found that this was indeed true. They went over his financial condition meticulously. They couldn't pre-qualify him for any immediate relief, but they are sending him a package requesting certain documents from which they can verify the information and consider the merits of his request.
Now, for the bad news! Retail sales remain DISMAL On "Black Friday", the day after Thanksgiving, one of the two most heavily trafficked shopping days of the year, Sacks reported a 26% DROP in year-over-year sales. Macy's and J.C. Penney also reported greater than estimated slides of about 6%. We don't yet know about Wal-Mart, as it has stopped reporting monthly sales statistics altogether! But, this bad news may be somewhat offset by some good news in online sales, which were UP 11% year-over-year.
According to the FDIC, six more banks were seized on Friday, with combined assets of $13.4 billion. And, as pointed out in recent blogs, the fortunes of states and municipalities continue to deteriorate.
So, the "recovery" theory remains quite speculative as the evidence is a mixed bag. However, I suspect that we will know the answer relatively soon. More evidence will arise after Christmas. Anecdotally, I know that most of my friends have, at most, a "token gift only" intention this holiday season.
Finally, the REALLY bad news is that any recovery is merely more evidence of a precursor to a vastly heightend level of inflation. Without exception, history shows that the "growth effect" of stimulus programs precedes the subsequent "price effect". And, as the "growth effect" tapers off, the "price effect" accelerates.
Therefore, we are sowing the seeds of an even greater crisis which is yet to be experienced.
I hope you found this essay useful, interesting and informative. I appreciate the rapidly growing readership and the questions, which I am delighted to answer.
Marko's Take
On the positive side, a website called Shadow Stats (http://www.shadowstats.com/), which calculates various government-reported statistics and adjusts them for a variety of misleading alterations, has shown an actual slight "downtick" in the unemployment rate. Now, one month doesn't make a trend, but it IS the first time they show a drop since late 2007.
There is also the persistent strength in the stock market, which has historically led recoveries by 6 to 12 months. The stock market bottomed 9 months ago.
Another very reliable leading indicator is the money supply, which, thanks to Fed chief Ben Bernanke, has been exploding. Historically, high rates of growth in money supply have led to economic recovery within a period of between 6 to 18 months. All of the emergency stimulus and bailouts, which have caused the growth in money, began within the terminal months of the Bush administration, so they fall within the reliable historical precedent.
In addition, yesterday I became aware of a new program offered by certain banks of mortgage relief - EVEN FOR THE UNEMPLOYED! This was reported in an article by the Sacramento Bee, ironically titled "Mortgage relief program helps relatively few troubled homeowners". An unemployed friend of mine spent two hours talking to Wells Fargo, the holder of his mortgage, and found that this was indeed true. They went over his financial condition meticulously. They couldn't pre-qualify him for any immediate relief, but they are sending him a package requesting certain documents from which they can verify the information and consider the merits of his request.
Now, for the bad news! Retail sales remain DISMAL On "Black Friday", the day after Thanksgiving, one of the two most heavily trafficked shopping days of the year, Sacks reported a 26% DROP in year-over-year sales. Macy's and J.C. Penney also reported greater than estimated slides of about 6%. We don't yet know about Wal-Mart, as it has stopped reporting monthly sales statistics altogether! But, this bad news may be somewhat offset by some good news in online sales, which were UP 11% year-over-year.
According to the FDIC, six more banks were seized on Friday, with combined assets of $13.4 billion. And, as pointed out in recent blogs, the fortunes of states and municipalities continue to deteriorate.
So, the "recovery" theory remains quite speculative as the evidence is a mixed bag. However, I suspect that we will know the answer relatively soon. More evidence will arise after Christmas. Anecdotally, I know that most of my friends have, at most, a "token gift only" intention this holiday season.
Finally, the REALLY bad news is that any recovery is merely more evidence of a precursor to a vastly heightend level of inflation. Without exception, history shows that the "growth effect" of stimulus programs precedes the subsequent "price effect". And, as the "growth effect" tapers off, the "price effect" accelerates.
Therefore, we are sowing the seeds of an even greater crisis which is yet to be experienced.
I hope you found this essay useful, interesting and informative. I appreciate the rapidly growing readership and the questions, which I am delighted to answer.
Marko's Take
Tuesday, December 1, 2009
Exactly Why IS The Stock Market Rallying?
To he honest answer is that I don't know! But, I can think of several possibilites. In fact, NO ONE can know with any degree of certainty. The fact is that markets of all sorts do what they want and when they want. The reasons are only clear in hindsight. What I CAN do is review the potential reasons and make an educated guess.
One possibility is that the economy is indeed recovering. That's less ridiculous than it might seem at first. Given the level of stimulus, coupled with the high level of growth in the money supply, the economy typically would respond with an initial recovery. The unfortunate side effect of all the economic juicing is that eventually, prices start to rise at an accelerated rate. A good analogy would be a drug addict. At first the drug gives one a "high" but is followed by the inevitable withdrawal symptoms. The drug addict then builds a tolerance and needs MORE of the drug. Subsequently, the crashes become more painful.
Another reason for this rally may be inflation expectations. In Zimbabwe, which is just starting to recover from one of the most severe bouts of hyperinflation I've ever heard of, their stock market shot up exponentially. Zimbabwe's inflation rate was so high that it reduced the value of ITS dollar to 6 QUADRILLIONTHS of its value in 2003! However, in the U.S., in the late 1960's through 1982, a period of high inflation, stocks fell by an astonishing 90% from peak to trough, if the cumulative inflation was taken into account. That loss was virtually identical to that experienced during the Great Depression.
A third possibility is that we are in a temporary rally within a longer-term overall downtrend. This is a very common occurrence, especially after the severity of the accelerating panic that engulfed the market between the emergency takeover of Bear, Stearns in 2008 and the March lows of 2009. The market behaves like a pendulum. It frequently overshoots in one direction only to be followed by a sudden sharp about-face.
Finally, the idea that the market is manipulated by agents or proxies of the government is gaining acceptance. It has also been, to some extent, even admitted to, but only very recently. Until we get an audit of the Federal Reserve, we won't know with any certainty as to what extent this may or may not have occurred. It's clear the Federal Reserve DOES manipulate some markets such as interest rates and, therefore, the price of bonds.
They also manipulate the U.S. Dollar. But we don't know how far that manipulation extends, nor its overall effect on the stock market. If this indeed is true, it will ultimately fail because it can only work temporarily. We can be certain that whatever power the Federal Reseerve exerts, it must be limited. Otherwise, the market would have never crashed in the first place!
So, here's "Marko's Take" on all this! My own personal belief is that we are indeed in a temporary rally that will ultimately prove to be of limited duration and NOT make new highs for a long time. And it may be somewhat overdone with help from our friends and their proxies at the Federal Reserve. Even if I AM correct, I don't have any firm conviction as to how long it will last, nor how high it will ultimately go.
I'm always delighted by your comments, pro or con. If you like what you've seen, it would thrill me to have you email this piece, or any other of my pieces, to a friend or two.
Marko's Take
One possibility is that the economy is indeed recovering. That's less ridiculous than it might seem at first. Given the level of stimulus, coupled with the high level of growth in the money supply, the economy typically would respond with an initial recovery. The unfortunate side effect of all the economic juicing is that eventually, prices start to rise at an accelerated rate. A good analogy would be a drug addict. At first the drug gives one a "high" but is followed by the inevitable withdrawal symptoms. The drug addict then builds a tolerance and needs MORE of the drug. Subsequently, the crashes become more painful.
Another reason for this rally may be inflation expectations. In Zimbabwe, which is just starting to recover from one of the most severe bouts of hyperinflation I've ever heard of, their stock market shot up exponentially. Zimbabwe's inflation rate was so high that it reduced the value of ITS dollar to 6 QUADRILLIONTHS of its value in 2003! However, in the U.S., in the late 1960's through 1982, a period of high inflation, stocks fell by an astonishing 90% from peak to trough, if the cumulative inflation was taken into account. That loss was virtually identical to that experienced during the Great Depression.
A third possibility is that we are in a temporary rally within a longer-term overall downtrend. This is a very common occurrence, especially after the severity of the accelerating panic that engulfed the market between the emergency takeover of Bear, Stearns in 2008 and the March lows of 2009. The market behaves like a pendulum. It frequently overshoots in one direction only to be followed by a sudden sharp about-face.
Finally, the idea that the market is manipulated by agents or proxies of the government is gaining acceptance. It has also been, to some extent, even admitted to, but only very recently. Until we get an audit of the Federal Reserve, we won't know with any certainty as to what extent this may or may not have occurred. It's clear the Federal Reserve DOES manipulate some markets such as interest rates and, therefore, the price of bonds.
They also manipulate the U.S. Dollar. But we don't know how far that manipulation extends, nor its overall effect on the stock market. If this indeed is true, it will ultimately fail because it can only work temporarily. We can be certain that whatever power the Federal Reseerve exerts, it must be limited. Otherwise, the market would have never crashed in the first place!
So, here's "Marko's Take" on all this! My own personal belief is that we are indeed in a temporary rally that will ultimately prove to be of limited duration and NOT make new highs for a long time. And it may be somewhat overdone with help from our friends and their proxies at the Federal Reserve. Even if I AM correct, I don't have any firm conviction as to how long it will last, nor how high it will ultimately go.
I'm always delighted by your comments, pro or con. If you like what you've seen, it would thrill me to have you email this piece, or any other of my pieces, to a friend or two.
Marko's Take
Sunday, November 29, 2009
California's Crisis Deepens... Part 2
When the words bankruptcy and default come up in the context of California's financial crisis, they have the tendency to unnecessarily scare the heck out of many people. As we pointed out in Part 1 last Monday, the situation IS dire, in fact, VERY dire, but let's discuss what all this rhetoric really means.
First of all, a default differs materially from a bankruptcy. A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement. Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due. In the case of California, the use of "IOUs" has precluded, for the time being, a default.
Therefore, a series of defaults must occur BEFORE a bankruptcy. So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.
There is precedent for individual states to be in default. According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843. One of which was Florida, which was, at that time, considered to be a territory,
Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.
According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY. The Constitution currently precludes enforcement of these debt through lawsuits. Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.
California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis. Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.
The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic. Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.
None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate. State defaults have precedent, while State bankruptcies DO NOT.
Finally, I do appreciate feedback and comments, pro or con. I will continue to provide regular updates on California as they become material. In the meantime, I will cover Gold, Silver and other timely and relevant topics.
Marko's Take
First of all, a default differs materially from a bankruptcy. A default is the failure to make required debt payments on a timely basis or to comply with other conditions of an obligation or agreement. Bankruptcy, on the other hand, is defined as the condition of a legal entity that does not have the financial ability to pay their incurred debts as they come due. In the case of California, the use of "IOUs" has precluded, for the time being, a default.
Therefore, a series of defaults must occur BEFORE a bankruptcy. So, an entity can be in default WITHOUT being bankrupt, but it cannot be bankrupt without first being in default.
There is precedent for individual states to be in default. According to an article by William B. English titled "Understanding The Costs of Sovereign Default: American State Debts In the 1840's", 9 states went into default between 1841 and 1843. One of which was Florida, which was, at that time, considered to be a territory,
Of these defaulting states, 5 had already repudiated their debt in all or part by the end of the decade. The other 4 used a variety of factors to ultimately fix THEIR problems.
According to Mr. English, these debts are seen as "sovereign" debts, or debts of the COUNTRY. The Constitution currently precludes enforcement of these debt through lawsuits. Therefore, a State bankruptcy, for the time being, is IMPOSSIBLE.
California, despite its recent hardships, still has the 9th largest economy IN THE WORLD, if viewed on a stand-alone basis. Therefore, it is WAY too critical to the world to let the Golden State default, let alone go bankrupt.
The only conclusion one could reasonably draw, is that the frequent use of the words default and bankruptcy in the context of California is nothing more than an irresponsible scare tactic. Its likely intent is to bully the Federal Government into providing bailout funds sooner rather than later. Although, to be fair, California MAY be bordering on default status, since it IS issuing IOUs as discussed at length in Part 1 last week.
None of this is intended to suggest that a State default cannot happen, especially if California's worsening financial condition continues to deteriorate. State defaults have precedent, while State bankruptcies DO NOT.
Finally, I do appreciate feedback and comments, pro or con. I will continue to provide regular updates on California as they become material. In the meantime, I will cover Gold, Silver and other timely and relevant topics.
Marko's Take
Tuesday, November 24, 2009
Taxes on Taxes
It's property tax time in California. YAY!! I looked at my bill very carefully, since, like a lot of folks, I'm watching my pennies these days. What I noticed was downright shocking. The actual amount owed was 25% greater than the levy that would prevail under Proposition 13, which set a limit of 1% of assessed value. The bill contained 12 additional "assessments", including one for "mosquito abatement'!
The bulk of the remaining assessments went to the public school systems. Interestingly, in 1984, the California Lottery was ALSO established for the express purpose of funding schools.
To be fair, all of these extra charges were voted for by the appropriate electorate in some form of referendum or special election. So I'm not alleging "foul play". I'm as guilty as anyone else. What I AM saying is that this has gotten so out-of-control that voters MUST pay careful attention when they vote on any future referendums. I know it's difficult because these referendums seem to be purposely written vaguely and most people simply lack the time to gain a true understanding. And then, of course, there are the incessant commercials which are also, for the most part, misleading.
But tax quirks don't stop there. One is a concept known as "double taxation", which is defined as two layers of tax. One common example is the policy on corporate dividends to shareholders. Any corporation must pay these from "after-tax" earnings, while the recipient is ALSO being subject to tax on the income received. By comparison, debt interest is paid out of "before-tax" earnings. Countless examples of "double", "triple", or even "mulitiple" taxation exist.
THE major form of "multiple taxation" occurs with the personal income tax system. Some people are taxed federally, by their state and even by their city. Typically, the state and city taxes are deductible against the federal. However, the social security tax is not. And, of course there are a host of smaller assessments, such as State Disability Insurance, that get tacked on as well. Are you starting to think we desperately need tax simplification?
Next we have "surtaxes", which are an extra and ostensibly temporary tax on personal income. President Johnson employed a "surtax" to help fund the Vietnam War and it was later repealed, well before the war ended. More recently, President Clinton passed a "surtax" on higher incomes only to have them rolled back by President Bush.
Currently, Charles Rangel, Chairman of the House Ways and Means Committee, is seeking a 5.4% surtax on certain taxpayers to fund the new proposed Obamacare. Despite the implication that they are "temporary", history has shown that they are very hard to roll back once enacted. While a fool and his money will be soon parted, the exception to that rule is politicians!
Another form of "double taxation" is the "Windfall Profits Tax". It's defined as a higher tax imposed when some entity is deemed to be in receipt of a "windfall", such as the oil companies subsequent to sudden and substantial rises in the price of oil. President Carter enacted one only to have it repealed by President Reagan. Another Federal "Windfall Profits Tax" has been proposed in light of the oil price rise last year and again now as oil prices have rebounded. So far, they have been defeated, but I believe that this potential source of revenue will be too tempting to not ultimately pass.
Yet, in 2008, the state of Alaska DID impose its own "Windfall Profits Tax" on state oil. That tax was approved by none other than Sarah Palin!
I'd like to wish everyone a Happy Thanksgiving, especially to those that are really struggling in this economy. We have major challenges ahead and I'll keep plugging away at raising public awareness as long as it takes. But, no matter what, virtually everyone has something to be grateful for, and I hope that this brief holiday break gives you a chance to reflect on that.
I'll take some time off myself and return to the blog in a few days. As always, I welcome opinions and comments, pro or con . If by some chance you're bored and have liked this essay, there are now a dozen to read in our easy to access archives.
Marko's Take
The bulk of the remaining assessments went to the public school systems. Interestingly, in 1984, the California Lottery was ALSO established for the express purpose of funding schools.
To be fair, all of these extra charges were voted for by the appropriate electorate in some form of referendum or special election. So I'm not alleging "foul play". I'm as guilty as anyone else. What I AM saying is that this has gotten so out-of-control that voters MUST pay careful attention when they vote on any future referendums. I know it's difficult because these referendums seem to be purposely written vaguely and most people simply lack the time to gain a true understanding. And then, of course, there are the incessant commercials which are also, for the most part, misleading.
But tax quirks don't stop there. One is a concept known as "double taxation", which is defined as two layers of tax. One common example is the policy on corporate dividends to shareholders. Any corporation must pay these from "after-tax" earnings, while the recipient is ALSO being subject to tax on the income received. By comparison, debt interest is paid out of "before-tax" earnings. Countless examples of "double", "triple", or even "mulitiple" taxation exist.
THE major form of "multiple taxation" occurs with the personal income tax system. Some people are taxed federally, by their state and even by their city. Typically, the state and city taxes are deductible against the federal. However, the social security tax is not. And, of course there are a host of smaller assessments, such as State Disability Insurance, that get tacked on as well. Are you starting to think we desperately need tax simplification?
Next we have "surtaxes", which are an extra and ostensibly temporary tax on personal income. President Johnson employed a "surtax" to help fund the Vietnam War and it was later repealed, well before the war ended. More recently, President Clinton passed a "surtax" on higher incomes only to have them rolled back by President Bush.
Currently, Charles Rangel, Chairman of the House Ways and Means Committee, is seeking a 5.4% surtax on certain taxpayers to fund the new proposed Obamacare. Despite the implication that they are "temporary", history has shown that they are very hard to roll back once enacted. While a fool and his money will be soon parted, the exception to that rule is politicians!
Another form of "double taxation" is the "Windfall Profits Tax". It's defined as a higher tax imposed when some entity is deemed to be in receipt of a "windfall", such as the oil companies subsequent to sudden and substantial rises in the price of oil. President Carter enacted one only to have it repealed by President Reagan. Another Federal "Windfall Profits Tax" has been proposed in light of the oil price rise last year and again now as oil prices have rebounded. So far, they have been defeated, but I believe that this potential source of revenue will be too tempting to not ultimately pass.
Yet, in 2008, the state of Alaska DID impose its own "Windfall Profits Tax" on state oil. That tax was approved by none other than Sarah Palin!
I'd like to wish everyone a Happy Thanksgiving, especially to those that are really struggling in this economy. We have major challenges ahead and I'll keep plugging away at raising public awareness as long as it takes. But, no matter what, virtually everyone has something to be grateful for, and I hope that this brief holiday break gives you a chance to reflect on that.
I'll take some time off myself and return to the blog in a few days. As always, I welcome opinions and comments, pro or con . If by some chance you're bored and have liked this essay, there are now a dozen to read in our easy to access archives.
Marko's Take
Saturday, November 21, 2009
The Interest Rate Conundrum
If the economy were truly in recovery, as we have been told time and time again, market interest rates ought to be MUCH higher. For example, according to the U.S. Treasury's own website, as of last Friday, 1 month TBills yielded a scant .04%, 3 month TBills .02% and if you entrust the government with your dough for a year, you'll see a "fat" .26%. If you're willing to tie up your money for 10 years, the yield jumps to a "juicy" 4.03%!
So, one has to wonder why ANYONE would accept so little on Treasuries. My guess is that either people are afraid of yet more bank failures, or the Federal Reserve has become a large clandestine buyer. (As bond prices rise yields go down, therefore significant purchases of bonds would tend to drive yields lower). We know the largest buyer through last year was China but they have stopped buying, and are instead accumulating hard assets like Gold. If the Fed indeed is buying Treasuries, it might go a long way to explain why all attempts to audit the Fed have been blocked despite the support of an overwhelming majority of the House.
To be fair, the United States still carries the highest credit rating, AAA, but so did issuers of mortgage derivatives, who ultimately led the meltdown of 2008. So this rating may not last or be accurate.
The market is telling us that there IS risk to government debt. The financial instrument employed to provide insurance is also known as a Credit Default Swap. According to Rob Kirby, who writes the fabulous newletter, Kirby Analytics (http://www.kirbyanalytics.com/), the "cost" of insuring $10MM of 10 year Treasuries is $25,000. He further states that this in itself is a fraud, since if the insurance were made good, the proceeds would be in dollars. Now I ask you, what would a dollar be worth if the U.S. did indeed default?
Normally, one would expect even short term rates to exceed the rate of inflation, which the Bureau of Labor and Statistics claims to be running at about 0% annually, but has turned up markedly from mid-year. By comparison, John Williams, who has a site called Shadow Stats (http://www.shadowstats.com/), puts that figure at 3%. As you may recall from a prior essay, Mr. Williams computes key government statistics in the same way as they were calculated prior to a revision in algorithms instituted by the Clinton administration. His measures reveal a much higher level of inflation: 3% and rising. With the dollar having fallen so far this year, we KNOW that our imports are costing on the order of 10% more.
California's rating was recently cut by Fitch to BBB, a rating which is barely above junk status. Fitch is a respected credit rating agency. California has begun to issue "IOUs", whose value is at best, uncertain. The "IOUs" may ultimately turn out to be "worth" a fraction of their face value.
Problems like this are cropping up world-wide. For example, Fitch cut its ratings on Ukraine to B-, a very low quality junk bond rating. And, according to a recent Bloomberg news story, both Japan and Switzerland have fallen off the list of the top ten safest sovereign debtors. Safest countries include Denmark, Finland, Australia, New Zealand and the United States. The inclusion of the United States surprises me, especially given its enormous unfunded liabilities like Social Security and Medicare. In addition, the already enormous budget deficits are projected to rise as far as the eye can see. But then, who am I to argue with the market?
I hope you enjoy these essays and visit often. I appreciate comments, pro or con, and we cover a variety of topics that are simply too convoluted for just about anyone to understand. But, I'll do my best to clarify these issues. Our growing library includes pieces on Gold, Silver, Taxes, and much more.
Marko's Take
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So, one has to wonder why ANYONE would accept so little on Treasuries. My guess is that either people are afraid of yet more bank failures, or the Federal Reserve has become a large clandestine buyer. (As bond prices rise yields go down, therefore significant purchases of bonds would tend to drive yields lower). We know the largest buyer through last year was China but they have stopped buying, and are instead accumulating hard assets like Gold. If the Fed indeed is buying Treasuries, it might go a long way to explain why all attempts to audit the Fed have been blocked despite the support of an overwhelming majority of the House.
To be fair, the United States still carries the highest credit rating, AAA, but so did issuers of mortgage derivatives, who ultimately led the meltdown of 2008. So this rating may not last or be accurate.
The market is telling us that there IS risk to government debt. The financial instrument employed to provide insurance is also known as a Credit Default Swap. According to Rob Kirby, who writes the fabulous newletter, Kirby Analytics (http://www.kirbyanalytics.com/), the "cost" of insuring $10MM of 10 year Treasuries is $25,000. He further states that this in itself is a fraud, since if the insurance were made good, the proceeds would be in dollars. Now I ask you, what would a dollar be worth if the U.S. did indeed default?
Normally, one would expect even short term rates to exceed the rate of inflation, which the Bureau of Labor and Statistics claims to be running at about 0% annually, but has turned up markedly from mid-year. By comparison, John Williams, who has a site called Shadow Stats (http://www.shadowstats.com/), puts that figure at 3%. As you may recall from a prior essay, Mr. Williams computes key government statistics in the same way as they were calculated prior to a revision in algorithms instituted by the Clinton administration. His measures reveal a much higher level of inflation: 3% and rising. With the dollar having fallen so far this year, we KNOW that our imports are costing on the order of 10% more.
California's rating was recently cut by Fitch to BBB, a rating which is barely above junk status. Fitch is a respected credit rating agency. California has begun to issue "IOUs", whose value is at best, uncertain. The "IOUs" may ultimately turn out to be "worth" a fraction of their face value.
Problems like this are cropping up world-wide. For example, Fitch cut its ratings on Ukraine to B-, a very low quality junk bond rating. And, according to a recent Bloomberg news story, both Japan and Switzerland have fallen off the list of the top ten safest sovereign debtors. Safest countries include Denmark, Finland, Australia, New Zealand and the United States. The inclusion of the United States surprises me, especially given its enormous unfunded liabilities like Social Security and Medicare. In addition, the already enormous budget deficits are projected to rise as far as the eye can see. But then, who am I to argue with the market?
I hope you enjoy these essays and visit often. I appreciate comments, pro or con, and we cover a variety of topics that are simply too convoluted for just about anyone to understand. But, I'll do my best to clarify these issues. Our growing library includes pieces on Gold, Silver, Taxes, and much more.
Marko's Take
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Thursday, November 5, 2009
Marko's Take: The Economic Mess....Who's Fault Was It Really?
It's not nice to fool with Mother Nature and the economy follows many of the same rules. Let me explain. In 2000, I went on a vacation to Yellowstone and learned of a great fire that took place in 1988 wiping out nearly 40% of the park. It wasn't arson. It wasn't terrorism. It was the result of approximately 20 years of a faulty theory propogated by misguided environmentalists.
These folks argued that immediately responding to fires would be beneficial to the park. The problem was that they failed to realize that a forest is a regenerating eco-system which NEEDS fires to clear the way for new growth. As a result, by 1988, the accumulation of deadwood that otherwise would have been cleared in smaller amounts had reached incredible proportions. All it took was some lightning in June and three months later the Park was nearly destroyed. Virtually every firefighting resource in the western United States was used to try to put it out.
Sadly, it wasn't until an early September snowfall that the fire was contained.
So, what's my point? Well, politicians like to get elected and re-elected. In order to do that, they learned that recessions were to be avoided at all costs, and that they could artificially juice prosperity by a variety of measures. For example, interfering in the markets was employed to artificially juice the economy. The most obvious of these was interest rates artificially low thus penalizing savers and rewarding over risk taking.
They "bought votes" by encouraging the quasi-public lenders like Fannie Mae and Freddy Mac to promulgate loans that artificially fooled people into over consuming houses. This caused the so called real estate bubble. It wasn't the buying public's fault: the vast majority were merely acting in their own self interest. The bubble created illusory wealth, which then lead to overconsumption via credit cards for example. Sure, some folks were reckless, but the VAST majority were merely making decisions based on faulty information.
Same reason doctors discourage the overuse of antibiotics. Occasional sickness like colds are NECESSARY to restore the immune system just like recessions restore a healthier economy.
As our economic forest fire continues to burn, there is no secret that our political leaders are throwing around a lot of money. The problem is that the continued series of bubbles, first in the Nasdaq, then in real estate, then in derivatives (a topic I'll explain later) is the result of decades of trying to keep anyone from feeling any economic pain by the political collective. There are a few exceptions, but the people who warned about the problems, like Ron Paul, weren't given the time of day.
So what's the point of all this? Politicians, worried about being re-elected and not the long term good, made decisions that were in THEIR OWN self interest not those of the country and they were given a pass because the period of prosperity we ended caused few to question their motives. This is not the fault of Democrats or Republicans alone. And, most importantly, not the fault of Capitalism either.
The truly sad part of all this is that the same incentives for this to keep happening are still in place, and market interference has grown steadily. And, worse yet, the quality of information is getting more obfuscated making it harder to have the proper corrective mechanisms put us back on course.
Marko's Take
These folks argued that immediately responding to fires would be beneficial to the park. The problem was that they failed to realize that a forest is a regenerating eco-system which NEEDS fires to clear the way for new growth. As a result, by 1988, the accumulation of deadwood that otherwise would have been cleared in smaller amounts had reached incredible proportions. All it took was some lightning in June and three months later the Park was nearly destroyed. Virtually every firefighting resource in the western United States was used to try to put it out.
Sadly, it wasn't until an early September snowfall that the fire was contained.
So, what's my point? Well, politicians like to get elected and re-elected. In order to do that, they learned that recessions were to be avoided at all costs, and that they could artificially juice prosperity by a variety of measures. For example, interfering in the markets was employed to artificially juice the economy. The most obvious of these was interest rates artificially low thus penalizing savers and rewarding over risk taking.
They "bought votes" by encouraging the quasi-public lenders like Fannie Mae and Freddy Mac to promulgate loans that artificially fooled people into over consuming houses. This caused the so called real estate bubble. It wasn't the buying public's fault: the vast majority were merely acting in their own self interest. The bubble created illusory wealth, which then lead to overconsumption via credit cards for example. Sure, some folks were reckless, but the VAST majority were merely making decisions based on faulty information.
Same reason doctors discourage the overuse of antibiotics. Occasional sickness like colds are NECESSARY to restore the immune system just like recessions restore a healthier economy.
As our economic forest fire continues to burn, there is no secret that our political leaders are throwing around a lot of money. The problem is that the continued series of bubbles, first in the Nasdaq, then in real estate, then in derivatives (a topic I'll explain later) is the result of decades of trying to keep anyone from feeling any economic pain by the political collective. There are a few exceptions, but the people who warned about the problems, like Ron Paul, weren't given the time of day.
So what's the point of all this? Politicians, worried about being re-elected and not the long term good, made decisions that were in THEIR OWN self interest not those of the country and they were given a pass because the period of prosperity we ended caused few to question their motives. This is not the fault of Democrats or Republicans alone. And, most importantly, not the fault of Capitalism either.
The truly sad part of all this is that the same incentives for this to keep happening are still in place, and market interference has grown steadily. And, worse yet, the quality of information is getting more obfuscated making it harder to have the proper corrective mechanisms put us back on course.
Marko's Take
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