Government Studies a Study about Studies

From ABC News, is this a case of government being accountable or out of control?

The Pentagon was inundated with so many studies in 2010 that it commissioned a study to determine how much it cost to produce all those studies. Two years later, the Pentagon is still studying the studies so Congress asked the GAO to look over the Pentagon’s shoulder. The GAO found that after two years, only 9 reports had been examined and that the Pentagon could not  “readily retrieve documentation” for six of the reports studied.

How sad when a study of studies is a failure.

Gloomy Economic News

I saw many articles this weekend that the global economy is not recovering any time soon. We may have wait several years for the "sun to come out tommorrow."
No End in Sight to Global Jobs Crisis: UN Agency

"The global employment market that shows no sign of recovering, the International Labour Organization said on Sunday. In advanced countries, especially in Europe, employment is not expected to return to pre-crisis levels of 2008 until the end of 2016"

95 Percent Of The Jobs Lost During The Recession Were Middle Class Jobs

A higher percentage of Americans are working low income jobs than ever before, and the cost of living continues to rise at a very brisk pace. This is causing an erosion of the middle class unlike anything we have ever seen in American history. ... [for] college graduates, the future is not so bright. Last year, a staggering 53 percent of all U.S. college graduates under the age of 25 were either unemployed or underemployed.

Hugh Hendry On Europe "You Can't Make Up How Bad It Is"

We have reached a profound point in economic history where the truth is unpalatable to the political class - and that truth is that the scale and magnitude of the problem is larger than their ability to respond - and it terrifies them.

12 Things Bought in a Bad Economy

“An avowal of poverty is no disgrace to any man; to make no effort to escape it is indeed disgraceful”
-Thucydides (Greek historian, 460-404 BC)

Moneyland at Time.com lists 12 items that are selling quite well at present. They call them "recession-proof" products but keep in mind that with some items (like #1) sales were flat before the recession so these might not be "good-times-proof" products.

1. Romance Novels - sales are up 7% at Harlequin
2. Junk food - doughnut sales are up, as are chips and other snacks
3. Nail polish - sales are up 68%. Traditionally lipstick has been the recession-proof cosmetic as a cheap way to look and feel better.
4. Halloween Costumes - yet another form of escapism from dreary reality
5. Fast Food - McDonalds is up 5% from last year. Sad in a way because fast food is not so cheap anymore.
6. Lottery tickets - wishful thinking
7. Generic Drugs - that makes sense
8. Chocolate - Hershey up 20%
9. Vegetable seeds?  - I guess people are hoping to save money by growing their own food. It didn't work for us - we grew two peppers.
10. Condoms - cheap entertainment yet reluctance to beget children in troubled times?
11. Yoga??? - inexpensive stress relief?

Bottom Line

When times are tough people find ways to distract themselves with cheap thrills and escapism. Can money buy happiness?

Wall Street Protests

“Wall Street indices predicted nine out of the last five recessions!”
-Paul A. Samuelson

Spengler at http://pajamasmedia.com/ notes that America household's and bankers got rich from the housing bubble and that they have forgotten that bubbles are the exception, not the norm.

Wall Street Protestors Have Met the Enemy and It Is They

That is why the Wall Street protesters are foolish and petulant. American households levered a $6 trillion net inflow of foreign savings during the decade 1998 through 2007 into a bubble that benefited them far more than it did Wall Street. The impact of the bubble on the household balance sheet exceeds the growth in real-estate assets, moreover, because most small business expansion followed the housing bubble.

For fifteen years we rode a tsunami of foreign capital pouring into American markets. We didn’t save a penny. Why should we? Our home equity was our retirement account. Our smartest kids got MBAs and went to Wall Street derivatives desks. Engineering was for dummies. Home prices rose so fast that local governments swam with tax revenues and hired with abandon. Everybody went to the party. Now everybody has a hangover, especially the bankers. We thought we were geniuses because we won the lottery. Now we actually have to produce and export things, and we have to play catch-up. Our kids are competing with Asian kids who go to cram school and practice the violin in the afternoon. This isn’t going to be easy, and the sooner we decide to roll up our sleeves and get back to work instead of looking for bankers to blame, the better our chances of coming back.

Bottom Line

Whom did the housing bubble help the most? According to Spengler, it was households, not banks,

Household real estate wealth remains 70% higher than it was in 1998, even after the crash in home prices. Bank stocks, by contrast, are worth half of what they were in 1998. Many of the big banks are much worse off. Bank of America is trading at less than a third of its 1998 price, and Citigroup is at barely a tenth of its 1998 level.

I recall about 3 years ago that Citigroup stock was hovering around the $1 mark. People forget that Wall Street is really a lottery. There are some big winners but many losers. We see the big winners and give them credit for being smart when really it's mostly luck. What is pathetic is the big bucks paid to investment bankers for playing with other's people money when studies show they rarely, if ever, do better than the market average.

Obama by the numbers

"If I don't have this done in three years, then there's going to be a one-term proposition." - Barack Obama, 2009

There is an excellent Infographic at Flicker called The Obama Presidency, By the Numbers.  In each case below I'll list the before Obama # i and then the  current # under our President - each has a great quote by Obama which I'll paraphrase here:

War on Poverty - "led him to a life of service" 
Povert Rate: 13.2% (2008),  14.3% (2010)

"We have to have a president who understands that the essence of the american dream is a good job" - Obama 2008
U-6 Unemployment 14% (Jan 2009), 16.2% (Aug 2011)
Avg Weeks Unemployed  19.9 (Jan '09), 40.3 (Aug '11)
Jobs 142,201,000 (Jan '09), 139, 627,000 (Aug '11)
Families on Food Stamps:  31.9 million (Jan '09), 45.2 million (May '11)

"America families, since George Bush has been in office, have seen average family incomes go down $2000." - Obama 2008
Ditto for Obama: $52,029 (2008),  $49,445 (2010)

After the great ObamaCare,
Average Family Health Plan:  $12,680 (2008), $15,073 (2011)

There's more at the link above. It's interesting to contrast Obama's words with his accomplishments.

Bottom Line

The President's defense is, it would have been worse without me. That is not a provable statement and also highly unlikely. In a typical recession, the economy rebounds after 18 months and employment picks up. No so now. A trillion dollars was spent and after three years the economy has not recovered. The excuse given, we did not spend enough, again an unprovable statement.

What if we spent too much already? Or spent it on the wrong things? That's the Tea Party position.

Solyndra makes a good example. Over $500,000,000 spent on a company with a bad business plan (Their current cost of manufacturing solar panels was greater than the current market price. They had hoped by ramping up production with a new plant they could lower their cost and make a profit. The plan failed when China lowered the global cost for solar panels by building even cheaper than Solyndra could ever hope to achieve.) In the government there is no downside for supporting losers or making bad bets with the public's money. No one in government is losing their job over this and the tax payer picks up the bill.

Are You Better Off Than Your Grandparents?

My current commuting book is called Aftershock. It's thought invoking but not the book I had intended to listen to. I was expecting Aftershock: Protect Yourself and Profit in the Next Global Financial Meltdown  by David Wiedemer but what I got from the library was Aftershock: The Next Economy and America's Future  by Robert Reich, Labor Secretary under President Clinton.

The book I got is 100% Democratic-Keynesian economics which believes that one person's spendings goes towards anothers earnings, who in turn spends and supports anothers earnings. This circle continues on and helps support a normal functioning economy. Recessions/Depressions are difficult to break out of because unemployment leads to less spending, so business produce less and hire less, which increases unemployment, and around we go. Keynes advocated government spending to break out of this cycle and this was adopted (reluctantly) by FDR during the Great Depression and enthusiastically by Obama in the Great Recession with the Trillion dollar Stimulus.

Nancy Pelosi was criticized by Conservatives for saying unemployment checks were part of the Stimulus and good for economy but she's right according to Keynes. Unemployment checks allow the unemployed to keep buying and creating demand for goods and services. Ditto for Social Security with helps the elderly and disabled to continue to spending. Personally I now favor the government putting money into the hands of impoverished individuals and letting individuals determine how to spend it, a bottom-up money flow. The alternative Stimulus of shovel-ready projects and funding from the top-down has not worked. Stimulus to companies has created a limited number of jobs but often at a cost of $80K to $100K per job created. We might have been better off giving $20K to 4 or 5 families instead of a single (temporary) job created. [Conservative agree that individuals must spend but argue that if we lower taxes then families will have more money to spend and we won't need the government to act as a middle man and redistributer of cash.]

Reich claims that the economy is better off when money is widely distributed. The one family with a new job can only eat and spend so much whereas 5 families with $20K handouts will spend more collectively and create a larger economic boost. From Reich's viewpoint the problem with the Super Rich is not that they earn too much but that they spend too little. If you earn $500 million a year you'd have $240,000 to spend EVERY hour of the working day to use it up (ignoring taxes). Conspicuous consumption and a fleet of servants is a good thing because it puts money back into the economy. If the vast sum of money is not spent, where does it go? In the good-old days the money might go to an endowment or matching fund for a college or hospital, or invested in a company. Or the money might have gone into a bank, giving the bank the funds to make loans to businesses and families so they can improve themselves. But now the cash goes into hedge funds or investment banking whose purpose it to make a great returns by gambling on "sure-bets"; investing in precious metals, foreign currencies, or stock in proven, successful companies. The money won't typically go to the risky new business.

How did we get into the current economic mess? A key point to Reich's book is that the middle class has not benefited from America's growth for the past 40 years. The money has been diverted to the upper 2% or less of families and does not flow back into the economy as described above. He compares it to a poker game where one player wins most of the chips and everyone else must bow out of the game. During the golden age of prosperity after the great depression, average income for families rose from $15,000 (in inflation adjusted dollars) to $40,000 by 1970. An almost 3-fold (300%) increase. So most families could afford to buy TVs and fridges, a car, etc. But since 1970 the household income has risen to only $45,000, a measly 12% increase over 40 years.  So there's no money for a better lifestyle. We are stuck at the same standard of living as our grandparents.

Is this because the American economy flat lined for 40 years? No. Real income for families in the top 75% and 90% brackets did increase by 60% or more.

The book also suggests that the reality for average families is worse than the graph shows. While household income was increased (slightly) Reich claims that Individual Income has declined and households have been forced to use "coping" methods. I've not been able to find support for a decline but I did find one table where individual average earnings for males has not improved since 1976. Real wages for women has improved and for many households the "increase" in earnings is due to having both parents working. Also both husbands and wives put in longer shifts, creating a species of family Reich calls DINS — “double income, no sex.”  According to some estimates, Americans sleep an average of one or two fewer hours per night than did their parents in the 1960s; in 2007 they spent a whopping $23.9 billion on sleep aids, from white-noise machines to medications.

The household situation is like the Red Queen in Alice Through the Looking Glass; one must run as fast as one can just to stay in the same place.

Bottom Line

Is there a solution? Reich favors stronger unions, taxing the rich, and other traditional Democratic ideas which I don't buy into. He also recommends government support for research and infrastructure which I do agree with. What's missing from his book is the Conservative idea that business must WANT to hire. When government regulations become extreme businesses won't expand and may even shut down and leave. I recall an account by a Surfboard maker who described how regulators in California drove him out of the state. Or a recent government raid on Gibson guitars (over the wood they use?) Or raids on bunny farmers. Reagan rightly realized that government must encourage business to grow and hire. And not with temporary stimulus handouts or tax credits. These are short-term fixes. And subsidizing the public with money to maintain demand will only last so long if there are no profits being made to flow back via taxes.

We need to find ways to hire more people in productive work. But how?

Entitlements

It could probably be shown by facts and figures that there is no distinctly native American criminal class except Congress.
- Mark Twain

Today I'll let a picture say its thousand words,

Bottom Line

Remember when Social Security was going to crash the government budget? With more seniors there will be higher payments out. The expense will rise from about 4% of Gross Domestic Product to 6 or 7%. Where is that money going to come from?

But it turns out that Social Security is just a drop in the bucket compared to Heath Care which was just 1% in 1970 and today is equal to Social Security. Look at the projected rate of climb on health care. The Obamacare bill was supposed to "bend the cost curve" so that health care would not grow so fast. It failed at that.

Keep in mind that the GDP itself is growing at 1 to 2% each year (3% in really good years). For the SS and health care to become a larger percentage of the GDP means that they are growing at an even faster rate than the economy as a whole. The GDP today is about 14 trillion dollars so each percentage point in the graph represents 140 billion dollars. That may sound "small" compared to the total but consider this: the 2 trillion dollars "cut" from spending over ten years in the recent debt cap bill comes to about 200 billion saved per year. It took a near collapse of the government to reach an agreement to cut just 200 billion a year. What will be cut in the future to pay for health care?

Scrap Metal Theft in Chicago

"Heat not a furnace for your foe so hot that it do singe yourself."
William Shakespeare

Last month I wrote about Scrap Metal Theft. This month CBS Chicago reports that thieves are stealing air conditioner units for the metal value.

"They work silently, leaving no trace behind. A Chicago neighborhood is on alert after the number of thefts of air conditioning units have jumped sharply in recent weeks. The robbers are after the copper inside, which they can resell for scrap, a favorite quick money-making method for drug addicts. But they're not just cracking open the units and plundering the pipe, they're lifting the entire central AC unit."

NBC Chicago reports that,

Some 100 orphaned cats and dogs living in a Chicago animal welfare center are in danger heading into the expected-to-be-hot weekend after vandals either stole or destroyed all of the building's main air conditioning units Thursday evening.

The shelter will need $20,000 to replace the A/C.

Bottom Line

"Residents have taken to enclosing their air conditioning in thick cages with multiple locks. If you live in an area where AC theft is a concern, you should also lock up the disconnect box to make it harder to get to the AC."

The Most Dangerous Cities in America

According to 24/7 Wall St. the FBI reports that:

violent crime dropped 5.5% in 2010 while reported property crimes fell 2.8% during the depths of the worst economic slowdown since the Great Depression. The news, though, is far from positive.
Though most regions of the U.S. saw declines, the Northeast saw an increase in murders (8.3%), forcible rapes (1.4%) and aggravated assaults (0.7%). ... Even when crime rates dropped, older urban areas still had more violent crime than other cities. Philadelphia, Cleveland, Buffalo and Hartford finished high on the FBI's list.

Using the FBI report, 24/7 Wall St. created a list of the ten most crime-plagued cities in the U.S. with populations of more than 100,000.

1. Flint, MI  (22/1000 violent crime) - poverty and high unemployment
2. Detroit, MI (18.9/1000) - ditto. The median income is just $26,098, 48% below the national average.
3. St. Louis (17.5/1000) - 30% below the average income
4. New Haven, Conn. (15.8/1000) - highest on the east coast. A stark mix of poverty and the elites of Yale University.
5. Memphis, Tenn (15.4/1000) - what would Elvis do?
6. Oakland, CA (15.3/1000) - income and employment are slightly above the national averages so why the violence. May be youth gangs.
7. Little Rock, Ark. (15.2/1000) - one of the highest incidents of rape (no Clinton jokes please).
8. Baltimore (14.6/1000) - only Detroit had more murders
9. Rockford, Ill. (14.5/1000) - "unusually high violent crime rates for a city of its size".  Rockford receives traffic from the drug markets in Madison, Chicago, and Milwaukee.
10. Stockton, CA (13.8) - "rated one of the most miserable cities to live in the country by Forbes in March, 2010"

Bottom Line

24/7 Wall St. concludes,

Unemployment will inevitably improve in these cities. The most hard-hit sections, however, may never completely recover. They failed to do so after the last economic upswing -- and the one before that. Some part of all the cities on this list will be home to high levels of violent crime permanently.

Scrap Metal Theft

“He that steals an egg will steal an ox”

-Proverb

A year ago I wrote about Appliance Fires in England caused by a power surge when thieves broke into an electrical substation and stole £20 worth of copper switching parts to sell on the black market. Likewise I recall a story during the Iraq war that power outages resulted when thieves stole remote power lines in the desert to sell as scrap metal.

The Consumerist reports a similar story here in the US. In 2009 the mayor of Pittsburgh purchased 250 trash receptacles printed with his name for $1,010 apiece. Critics objected to the high price (and to his name on the cans). Other cities had spent less to stash the trash - Cincinnati ($500), Philadelphia ($118) and Minneapolis ($323). The mayor replied that a lower price was just not possible,

"I would challenge somebody that suggests that it is (possible) to prove where that can happen — and what is the quality and the durability and the maintenance factor of those garbage cans?"

Three years later the durability and maintenance are a problem. I'm sure the cans are in fine condition when you can find one - but it seems that 50 cans have gone missing. Some detective work revealed that the $1000 cans are being sold to scrap dealers for about $40. Maybe the city should have bolted the pricey cans to the concrete?

My wife and I have similar concerns about buying a lawn ornament. We love the look of bears carved from a tree log but wonder how long it would last in the front yard before someone stole it (or vandalized it). So instead we purchased a glass table supported by a carved bear that we use in the living room where it will be safe.

Bottom Line

Is the economy making theft worse? Here are some headlines from DrudgeReport.com

Is Progress Slowing Down?

“When Moses was alive, these pyramids were a thousand years old. Here began the history of architecture. Here people learned to measure time by a calendar, to plot the stars by astronomy and chart the earth by geometry. And here they developed that most awesome of all ideas - the idea of eternity.”

-Walter Cronkite

An editorial by Matt Patterson at pajamasmedia.com asks if the times are a'changing.

In his penetrating new book The Great Stagnation, economist Tyler Cowen ... calls the period from roughly the early 19th to the mid-20th centuries the era of “low hanging fruit.” According to Cowen, technological advances in this period were relatively easy to produce and exploit, resulting in a staggering explosion of living standards.
But by around 1970, most of this low hanging fruit had been plucked and growth rates began to slow. Indeed, growth rates are “lower today than before 1973, no matter what exact numbers you settle on for the absolute living standard.”

There are at least two reasons for this.

1. The age of cheap resources is ending. Many companies relied on cheap water, electricity, iron, etc for production. We've used up the easily accessible resources ("low hanging fruit") so what remains costs more to process and there is now global competition to use it as China and India industrialize and extend middle class comforts to billions of people.

2. The complexity of manufacturing keeps increasing. Compare the engine of a car from 1950 to today. Robots help with the assembly but there are more moving parts and of greater sophistication. Consider the clean room requirements and requirements of perfection on a small scale to create computer microchips.
Complexity makes it harder to create and produce new products.

There is an interesting flip side to the second point. This is the Information Age and while computer software also increases in complexity, well built software hides the complexity to produce "tools" that are easy to use and promote the creation of more information products. Anyone now can create publication ready books, art works, web services, etc on computers. So complexity enables information products and hinders physical products.

You may think, no problem, we'll just transition to an information society where the majority of workers are information workers. In the past the “creative destruction” of progress might end one industry like horse buggy making but resulted in an even bigger automotive industry. However software advances don't do that. Advances in software tend to decrease or eliminate jobs like travel agents. McDonald’s plans to eliminate cashiers in many of its European restaurants, replacing them with touch-screen ordering systems.

Internet companies can be worth more than old fashion manufacturing and reach hundreds of millions of customers and yet employ very few.

[Economist Tyler] Cowen notes that Google employs a mere 20,000; the increasingly ubiquitous Twitter only 300. Facebook has millions of users, but only about 1,700 workers.

For comparison, General Motors employs 209,000 people around the world.

Bottom Line

Again from Matt Patterson,

Unfortunately, politicians in the “low hanging fruit” period made policy decisions based on the assumption that the growth rates of that era — and their corresponding tax revenues — would continue indefinitely. And the American public, seeing successive generations do better than prior ones, came to expect this was the natural order of things. Both governments and individuals borrowed against a future they assumed would be richer and more technologically wondrous than the present.

Patterson observes from history that no civilization lasts forever.The ancient Greeks created the myth of the Cyclops to explain even more ancient fortresses with walls of giant stones that no one knew how to move. It must have been built by giants. In reality it was the Greeks own ancestors several hundred years before.  "The Great Pyramid of Cheops was the largest building in the world until well into the modern era, and still stands after nearly five millennia". And yet a few centuries after its making, Egypt fell and the world forgot how to make them.

Bubbles result when people say, "This time it's different". But the Internet bubble burst, the housing bubble burst (many times) when expectations exceed reality. Have we been living in a technology bubble of 200 years?

The Great Recession, 2008 - ???

"So, for example, the country was into recession right after I was sworn in, a dot-com bust had taken place. Then the attacks of September the 11th, and then of course the great financial meltdown - the fundamental question facing any presidency is how do you deal with the hand you're dealt?"
George W. Bush

May we all be dealt a better hand in 2011. In 2010 we may have reached the bottom of the Great Recession but we are still in for a long recovery period.

click to enlarge

This graph from CalculatedRisk shows the percent of jobs lost in each recession since 1948, relative to the peak of the pre-recession job market. In terms of the percent of jobs lost, the current recession is by far the worst we’ve seen since World War II.

I have a friend who is an economics professor. He said the Gross National Product (GNP) is nearly back to a pre-recession level. This means most companies have succeeded in restoring revenue without hiring back employees fired or laid off. It's called a jobless recovery.

Bottom Line

From the graph above, it looks like only the 2001 recession has lasted as long as the current one, but the impact on employment was much less then. There are many articles online stating that current government policy during this recession, from health care, to tax law, to environment regulations have discouraged corporate growth and new hiring.

So what about the Trillion dollar stimulus package? Did it help create jobs? Counting back from November 2010 in the graph to January of 2009 when Obama began his office as President, the red line was just crossing 2% line. It fell an additional 4% over the past two years despite the Stimulus. The brief upwards dip in the graph last year came for hirings for the 2010 census. So there is no evidence that the Stimulus helped at all.

The Allure of Gold

"And when they were come into the house, they saw the young child with Mary his mother, and fell down, and worshipped him: and when they had opened their treasures, they presented unto him gifts; gold, and frankincense and myrrh" - Matthew 2:11 KJV

With financially unstable times, some investors put their money in gold. But why gold, what makes gold so special? NPR Money Planet asked Sanat Kumar, a chemical engineer at Columbia University, to examine the 118 elements in the Periodic Table to find which ones could be used as money.

The orange column on the far right is all gasses - so cross that off.

The light orange elements on the far left are very reactive and can burn or explode. Sanat crossed out another 38 elements as too reactive for safe keeping.

The two rows on the bottom of the chart are radioactive; cross them off.

These three rules: Not a gas, Doesn't corrode or burn, and Doesn't kill you, reduces the list of usable elements from 118 to just 30.

Some of the 30, like carbon, are just too common to be "valuable". Imagine a currency that anyone can make from wood!  And a few of the 30 are just too rare  - for example osmium comes mostly from meteorites.

Eliminate the too common and extremely rare and you are left with five "precious metals", rhodium, palladium, silver, platinum and gold. Silver is popular and used as a currency but it tarnishes; it is mildly reactive with air. I'm not that familiar with rhodium or palladium and apparently few are, they were not discovered until the early 1800s due to their rarity. They belong to the platinum group of metals. One quarter of all goods manufactured today either contain platinum group metals or the platinum group metals play a key role during their manufacturing process.

That leaves platinum and gold as safe, non-reactive metals, both of which can be found in rivers and streams in limited but not super rare quantities. Gold was preferred because it melts at a lower temperature (just under 2000 degrees Fahrenheit) and could be fashioned into art and coinage by pre-industrial people. Gold artifacts in the Balkans appear from the 4th millennium BC.

The melting point for platinum is over 3,000 degrees Fahrenheit.

Sanat says,  "For the earth, ... gold is the sweet spot. It would come out no other way."

According to Wikipedia, "Gold has been widely used throughout the world as a vehicle for monetary exchange ... [but] pure gold is too soft for day-to-day monetary use and is typically hardened by alloying with copper, silver or other base metals. The gold content of alloys is measured in carats (k). Pure gold is designated as 24k. English gold coins intended for circulation from 1526 into the 1930s were typically a standard 22k alloy called crown gold."

Modern bullion coins used for investment are frequently pure gold. The popular Canadian Gold Maple Leaf coin has a purity of 99.99%.

Bottom Line

How rare is Gold? We see it everywhere as gold leaf, gold wire connections in computer chips, gold fillings, etc. There is an estimated 158,000 British tonnes of gold that has been excavated globally. This sounds like a lot but gold is very heavy,  a cubic meter of gold would weigh 19.3 tonnes. All the gold in the world would fit inside a cube 20.15 meters, or 66 feet 1.3 inches on each edge. Consider that the Washington Monument measures 55 feet by 55 feet at its base and is 555 feet tall (17 x 17 x 170 m). If you wanted to rebuild the Washington Monument in solid gold, all the gold known to man would only reach 1/3 the height of the monument.

Platinum is slightly more rare. All of the platinum in the entire world would easily fit inside the average home.

Inflation?

“The price of anything is the amount of life you exchange for it.” - Henry David Thoreau

The economy is in a funny state. Officially the inflation rate is very low. The Bureau of Labor Statistics (BLS) says that consumer prices in August grew at an annual rate of just 1.1%. This consumer price index tracks the price for a basket of products from ...

• FOOD AND BEVERAGES (breakfast cereal, milk, coffee, chicken, wine, full service meals, snacks)
• HOUSING (rent of primary residence, owners' equivalent rent, fuel oil, bedroom furniture)
• APPAREL (men's shirts and sweaters, women's dresses, jewelry)
• TRANSPORTATION (new vehicles, airline fares, gasoline, motor vehicle insurance)
• MEDICAL CARE (prescription drugs and medical supplies, physicians' services, eyeglasses and eye care, hospital services)
• RECREATION (televisions, toys, pets and pet products, sports equipment, admissions);
• EDUCATION AND COMMUNICATION (college tuition, postage, telephone services, computer software and accessories);
• OTHER GOODS AND SERVICES (tobacco and smoking products, haircuts and other personal services, funeral expenses).

However while the overall consumer basket is price stable, some individual components, like food, are skyrocketing in price.

Bottom Line

While you can get great bargains on discretionary items like electronics and clothing, the essential items like food and gas are shooting up in price. Be prepared to pay more over the next year for the basics.

"On average, our basic food costs have increased by an incredible 48% over the last year (measured by wheat, corn, oats, and canola prices). From the price at the pump to heating your stove, energy costs are up 23% on average (heating oil, gasoline, natural gas). A little protein at dinner is now 39% higher (beef and pork), and your morning cup of coffee with a little sugar has risen by 36% since last October."  - the Casey Report

Update
http://online.wsj.com/article/SB10001424052748704506404575592313664715360.html?mod=WSJ_hp_mostpop_read
Food prices are rising faster than overall inflation. ...The U.S. Agricultural Department is predicting overall food inflation of about 2% to 3% next year.

What did TARP accomplish?

"If some banks are thought to be too big to fail, then, in the words of a distinguished American economist, they are too big. It is not sensible to allow large banks to combine high street retail banking with risky investment banking or funding strategies, and then provide an implicit state guarantee against failure."
Mervyn King, the governor of the Bank of England

Matt Welch at Reason.com looks at TARP (the big government Troubled Asset Relief Program to save our nations banks and US car makers) and asks, what did it accomplish? There are some who claim it was a big success - but measured against what criteria? That things could be worse? That the economy did not completely and utterly collapse?

Here is what President Bush said would happen if the US Congress failed to take "immediate action" to spend $356 billion to save the banks...

More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account. The value of your home could plummet. Foreclosures would rise dramatically. And if you own a business or a farm, you would find it harder and more expensive to get credit. More businesses would close their doors, and millions of Americans could lose their jobs. Even if you have good credit history, it would be more difficult for you to get the loans you need to buy a car or send your children to college. And ultimately, our country could experience a long and painful recession.

Keep in mind this was said towards the end of 2008. What has happened since? Money was given to Banks, two US car companies purchased, a huge Stimulus bill approved, and still every single item in this list has occurred.

Bottom Line

The Government (Republican and Democrat) simply has no clue how to fix an ailing economy. The government can feed people via welfare & unemployment insurance, it can provide some limited number of temporary jobs outside of civil service, but it can not, by itself, prevent a recession or turn it around. In fact government intervention just makes recessions worse by creating uncertainty and propping up failed businesses to complete with successful businesses. Money is spent to "save jobs" because this makes voters happy but in the long run they are upsetting maket forces that reward the talented companies and punish the inefficient under the flag "Too Big to Fail". Many of these businesses are failing for a reason - throwing money at them just postpones the inevitable.

Rent or Buy?

Our house, is a very, very, very fine house.
With two cats in the yard ...
- CROSBY, STILLS and NASH

Today I encourage you to read the article, The Renting Alternative Will Undermine The Housing Market For Years, from BusinessInsider.com. Ignore the misleading title. What the article is really about and covers well is the increasing tendency of successful individuals and couples to choose renting an apartment over buying a house. As one person put it,

"With a pool I don't pay for, a gym that's open 24 hours a day, and emergency plumbers on staff at 2 a.m., I have enough responsibility in my life that I don't need a home."

A commenter from Chicago says,

"I think we might be renters forever. My husband and I love sitting ... in the park reading the Sunday New York Times while our landlord is stuck fixing the garbage disposal. Time is priceless. And we are nowhere nearly as freaked out about finances as our friends are."

Bottom Line

I knew a man who worked as a school teacher by and a troubled youth counselor overnight in order to raise the money for a home for his family (this was back in the days you needed a real deposit on a new home.)
At the time he lived in a beautiful apartment complex with a tennis court, rec center, swimming pool, green fields, etc. but he felt it essential that his kids had their own lawn to play on.

Personally I'd be very happy to give up lawn care, etc. (I'm grateful my wife mows the lawn.)

Short Selling a House

"Our house is a very, very, very fine house
With two cats in the yard"
- Crosby, Stills, Nash & Young

A family I know fell behind in their mortgage payments and wanted to work with the bank to catch up but the bank refused to cooperate. After a year with no settlement, the bank has agreed to "short sell" the house and our friend will move elsewhere. What does "short selling" mean?

A short sale is a sale of real estate in which the sale price falls short of the balance owed on the property's loan. ... Both parties consent to the short sale, because it allows them to avoid foreclosure, which involves hefty fees for the bank and poorer credit report outcomes for the borrowers. This agreement, however, does not necessarily release the borrower from the obligation to pay the remaining balance of the loan. - Wikipedia

In a short sale the house is sold at or near market prices in a depressed market (much higher than a foreclosure sale but less than the purchase price). The seller saves their credit rating but may still have to make good on the entire loan (ouch!)

The buyer of a short sale may get a great price but the money saved might not be worth the extra hassle and additional months to closing. Read "What It's Like To Buy A Short Sale House" from Consumerist.com. The story ends happily but oh, the stress and follow-ups and loops to jump through along the way. And there was always the chance that the house would be auctioned off before the short sale was closed (and even afterwards).

Bottom Line

Read the comments on the Consumerist Short Sale story for more examples of short sales gone bad (or very slowwwwly). As one buyer put it, "I certainly would not recommend the short sale process to anybody, ever."

Unintended Consequences

“The supply of government exceeds demand.”- Lewis H. Lapham

My latest commuting lecture series on CD has been on the Fundamentals of Economics. With all the problems in the economy and odd government behavior, I decided to brush up on my Micro & Macro Economics that I learned so long ago in college. As the instructor points out, it would be a good thing for ALL government leaders to brush up on the basics.

For example: Supply & Demand. You don’t have to like it but it’s a “force of nature” that cannot be denied. It explains behavior in all kinds of economies – capitalism and socialism - around the world. It results in all manner of unintended consequences in “well-meaning” legislation.

Case in point – the economics professor says one should NOT use prices to bring about social change. The setting of price caps or wage floors upsets the balance of Supply & Demand and nature will not be denied. It will find ways to compensate.

Consider rent control laws. Landlords have no desire to support apartments that return less than market rates. They will let the place run down, or charge high fees (like key deposits) to make up the balance. New landlords stay out of an unprofitable market resulting in fewer “low-cost” places to live. There are also consequences for the renter. When supply of rent-controlled apartments diminishes, those that have them hold on to what they have, no matter what. They become reluctant to move or “trade up” because they have a great below-market deal. The apartments become family assets that are passed on to children or (illegally) subleased, sometimes at higher rates. Because the rent is fixed for everyone, there is little to stop the rich from getting great deals. A congressman from NY has 4 rent-controlled apartments in the same building that he combined into a nice living space.

What are the alternatives to rent-control? If the government wants to help low-income families to find affordable living, then target these families directly (not indirectly with prices that affect everyone). Give them an apartment check that is similar to food stamps – payable only towards rent. Or a tax rebate if rent exceeds x% of your budget for households earning less than $Y.

Or consider tax-cuts & other programs to simulate the economy. Sounds good at first glance – more money in peoples pockets. But what are the unintended consequences?

- More money chasing the limited goods can result in inflation that erodes away the new dollars available. So no one is better off afterwards.
- The extra money may be spent on foreign imports, improving the economies of other nations at the expense of US taxpayers. The “Cash for Clunkers” helped Japanese car makers more than US companies.
- Less tax means the government debt will increase (at least short term until the economy recovers). Government borrowing drains money from investors making it more costly for companies to borrow money or issue bonds/stocks for improvements. Instead of stimulating, the resulting debt can slow down the economy. This happened under FDR, Regan and looks to be happening again under Obama.

The alternative: government spending should focus on long-term improvements that lift up the nation, not handouts to “shovel-ready” jobs for frivolous projects. We could instead build a new Internet super-highway to bring network speeds up to levels enjoyed by nations like Japan. Or build wireless access across the nation. Or fix old roads and bridges and public waterworks. Strengthen our nation’s electricity grid against failure.

Bottom Line

The science of economics is not perfect; it’s not called the “dismal” science for nothing. Just look at the debate of Keynesian vs. Supply-Side vs. other theories on how to “fix” a recession. But an awareness of economic principles and history can teach us that there ain’t no such no such thing as a free lunch. Someone always pays though it may be quite hidden or indirect.

So the next time a politician promises to fix some ill via a law or spending, ask yourself – who will indirectly benefit from this? What will be the long-term consequences and who will suffer? Can this new law/spending be exploited by the rich and powerful [Example: a law was passed requiring government to spend X% of contract dollars on companies with female or minority ownership. What happened – big white-male companies set up dummy companies led by a woman or minority that would subcontract everything back to the big white-male company. There are always loopholes.]

Record Unemployment

"We have walked a substantial distance back from the economic abyss and are on the path toward economic recovery. Most importantly, we have seen a substantial change in the trend of job loss."-Sept. 2009, Larry Summers, Obama's top economic adviser

The Obama White House keeps saying the recession is over and their recovery plan worked but the real numbers tell a different story. The White House is pleased that December unemployment stayed at "only" 10% and did not climb. But this ignores two facts.

1. The Holiday Season is a peak time for employment (lots of late hours and Christmas crowds require temporary staff)

2. The official unemployment number does not count "discouraged" workers who have given up trying to find a job. When everyone truly unemployed is counted the value is 17%.

Here is graph that also shows reality quite plainly. The total number of people working continues to fall despite the 1 Trillion dollar stimulus. In fact 3.2 million jobs have been lost since the stimulus was approved.


Bottom Line

Do not expect the economy to recover quickly in 2010. We have not yet seen the bottom of this recession.

Private Property

“We're all pilgrims on the same journey-but some pilgrims have better road maps.”- Nelson DeMille

When the stock market fell last year there were many who blamed the evils of capitalism. Somehow people keep falling into the trap of thinking that socialism is "good" for people and private property capitalism is "bad". Yet history shows repeatedly that the reverse is true. For example, The Volokh Conspiracy has a Thanksgiving article entitled How Private Property Saved the Pilgrims.

"The Pilgrims nearly starved to death because of collectivism and eventually saved themselves by adopting a system of private property. Economist Benjamin Powell tells the story here:"

In 1620 the Plymouth Plantation was founded with a system of communal property rights. Food and supplies were held in common and then distributed based on equality and need as determined by Plantation officials. People received the same rations whether or not they contributed to producing the food, and residents were forbidden from producing their own food. Governor William Bradford, in his 1647 history, Of Plymouth Plantation, wrote that this system was found to breed much confusion and discontent and retard much employment that would have been to their benefit and comfort. The problem was that young men, that were most able and fit for labour,did repine that they should spend their time and strength to work for other men’s wives and children without any recompense. Because of the poor incentives, little food was produced.

Faced with potential starvation in the spring of 1623, the colony decided to implement a new economic system. Every family was assigned a private parcel of land. They could then keep all they grew for themselves, but now they alone were responsible for feeding themselves. While not a complete private property system, the move away from communal ownership had dramatic results.

This change, Bradford wrote, had very good success, for it made all hands very industrious, so as much more corn was planted than otherwise would have been. Giving people economic incentives changed their behavior. Once the new system of property rights was in place, the women now went willingly into the field, and took their little ones with them to set corn; which before would allege weakness and inability.

Once the Pilgrims in the Plymouth Plantation abandoned their communal economic system and adopted one with greater individual property rights, they never again faced the starvation and food shortages of the first three years. It was only after allowing greater property rights that they could feast without worrying that famine was just around the corner.

For a more detailed account, see this 1999 article by Tom Bethell.

Bottom Line

Russia experience a similar problem under the rule of Stalin. The collective farm fields were not producing enough food to feed the country. So families were given a small plot of land for their own use and these small plots kept the citizens alive.