Archive for the ‘Nature of Wealth’ Category

Why we cannot “save our way to prosperity”

Sunday, September 25th, 2011

I just found an article by London Banker on Marriner Eccles’ testimony in 1933 to a Senate committee that actually and seriously investigated the nation’s economic problems.  (Back then, we had a government that managed to get useful things done!)

London Banker is one of the most thoughtful economics bloggers, and I’m glad to see he’s back, after evidently taking a break from blogging to work on the U.K. banking system!

There is a quote that Eccles gave in 1933, from W.T. Foster, which resonates today:

It is utterly impossible, as this country has demonstrated again and again, for the rich to save as much as they have been trying to save, and save anything that is worth saving. They can save idle factories and useless railroad coaches; they can save empty office buildings and closed banks; they can save paper evidences of foreign loans; but as a class they can not save anything that is worth saving, above and beyond the amount that is made profitable by the increase of consumer buying. It is for the interests of the well to do – to protect them from the results of their own folly – that we should take from them a sufficient amount of their surplus to enable consumers to consume and business to operate at a profit. This is not “soaking the rich”; it is saving the rich. Incidentally, it is the only way to assure them the serenity and security which they do not have at the present moment.

Now, this message is not real popular with my family, who believe everyone ought to earn what they get, and be able to keep what they earn. And in the current U.S. political climate, there are grave reasons to fear that in “saving the rich” from themselves, we will squander our last chance to rescue the economy through another round of waste, corruption, nonfeasance and injustice.

But there’s an abundance of evidence that the economic structure has made it too easy for too many to keep too much — and on top of that, the amount which “can” be “saved” is simply not enough for everyone who faces retirement and wants to save!

Here is a quick quantification of why the quote matters today:

In the U.S., it’s simply mathematically impossible for 76 million Baby Boomers, representing 1/4 of the population, to save 16-25 times their accustomed (final, peak) annual income and retire on “savings” by drawing out 4-6%/year. Such “savings” would have to amount to well over 4 to 5 times U.S. GDP… well over 60 to 75 TRILLION dollars. This value, 60,000,000,000,000 exceeds by at least $20 trillion the total wealth of the country! And that would leave no room for either older or younger generations to own anything!

Retirement in any civilized form simply cannot be funded by any credible “stock” of real “savings”… it must be a “flow” of goods and services provided by the increasingly productive young to the increasingly numerous elderly.

The same issue applies to China, Japan, and Europe, all of which are now facing similar demographics.

This issue is exacerbated by our credit-based approach to everything, in which very few people stockpile years worth of food, gasoline, etc. in advance in order to survive old age. In a purely tangible sense, the retired, unemployed and wealthy cannot consume more than the surplus produced by the workers.

The economically-dependent can, however, politically squeeze the workers’ share of consumption, in order to have more for themselves!

Interestingly, if one imagines persistent zero interest rates and negative real yields, the financial incentive to stockpile goods should start to impact behavior. Hopefully this will provide the stimulus to restore full production, because otherwise it must result in yet another squeeze on current consumption.

So in the end I’m forced to agree with the quotation.  The economic playing field must be leveled, to restore prosperity for all, and to bring the machinery of production back into full use.  We must not squander what we spend, any further.  But if we can pull this off, the growth in total national wealth should make the sacrifice of the rich a worthwhile investment.

Must-Read Article: Breaking the banksters’ framing

Monday, June 6th, 2011

From Michael Hudson by way of Naked Capitalism (also circulating via Mauldin’s newsletter):

Michael Hudson: Will Greece Let EU Central Bankers Destroy Democracy?

The majority of today’s financial discussions use bank-centric framing and terminology to discuss the situations facing the debtor nations (and debtor citizens and corporations).  However, there are two sides to every contract, and it’s clear that the borrowers are not exclusively to blame for their over-indebtedness, as a result of fraudulent inducements, bribes, and all manner of self-serving spin from the financiers.  Moreover, when the bankers’ “solutions” consist of (a) more debt for the over-indebted, and (b) taxpayer bailouts for the bankers when the over-indebted finally stop paying, it’s clear that the bankers are part of the problem, not part of the solution — literally!

So I like the article above because it re-frames the issues (with emphasis on Greece and Iceland) in terms of the more fundamental, classical economic issue:  how do we reorganize to optimize national output?  It most likely does not entail continuing to enable the lenders to live off the labors of others, at least not as much as they do now.

Quick implications for debtor nations and investors therein:  (1) Stop feeding the squid!  Get out of debt if you can, and don’t fund the banksters’ shenanigans with your “investments”.  (2) Prepare for higher interest rates due to defaults and devaluation-driven inflation. Obviously more thought will be needed here, but as in the 1970s, a simple stock-and-bond portfolio may result in serious losses after inflation.  Watch and learn from the other nations, before it comes to our own doorstep…

Inflation: Why might it be worse than the CPI data?

Tuesday, February 15th, 2011

There was a nice post on “The Inflation Disconnect” at MacroBlog by the good folks at the Federal Reserve Bank of Atlanta last Friday.  (This was following up on an earlier post on “Inflation Confusion“.) They explained how the Federal Reserve attempts to keep an eye on inflation in many ways besides looking at the Consumer Price Index data.

As a comment there, I suggested the following three (really 4) possible “inflation disconnects”, three ways in which the Federal Reserve’s view of inflation might differ from grassroots realities, that were not covered in the MacroBlog article (though the first is alluded to in the comments there):

(1) Inflation in necessities hits the poor much harder than the rich. In recent decades, Per Capita GDP has been skewed to the high side by changes in income distribution. The median income has not done as well. The basket used in the computation of the various CPIs doesn’t do a very good job of representing the budget impacts of the current price changes on lower-income vs. upper-income folks.  When rent, gas, food and clothing are the bulk of your budget, it doesn’t really matter if the CPI stays low because computers and digital toys are getting cheaper and property prices are declining… you still have to choose between paying rent, getting to work, having servicable clothes and eating.

(2) Inflation as measured by the CPI has a very large fraction allocated to “owner’s equivalent rent”, which is very badly measured.  From 2004-2008 the OER totally missed the housing bubble, which was an inflationary disaster for anyone trying to buy a home with traditional financing.  More recently, declines in OER have offset some of the inflation in other areas, particularly food and fuel. But for those consumers who either own homes outright (no mortgage) or who bought a house in the bubble (with nontraditional financing), the decline in home values is a negative, not a positive.  The inclusion of OER in the CPI is grossly disconnected from the budgetary realities of these households.

(3) It might be worth questioning whether the REIN approach of surveying business leaders provides an unbiased view of price changes and inflationary trends. Business leaders profiting from low interest rates can hardly be expected to give answers which would lead the Federal Reserve to raise interest rates!  (Note that this doesn’t mean anyone is intentionally being misleading; there are plenty of examples where even very conscientious people will, without thinking about it, give misleading answers — if their incentives are misaligned.) Even if one doesn’t go that far, based on recent economic history it’s clear that a lot of business owners (especially in finance) have no clue what is actually going on in their business, and they may in fact be as ignorant as the Federal Reserve about price changes being implemented at much lower levels. In particular, there is a fair amount of evidence that businesses have been passing on higher costs by changing product size & volume without changing the “price” on the package. Do the leaders of those businesses actually report such changes via REIN?

(4) Bonus item:  One thing the REIN group does not provide is a representative sample of consumers.  Given the importance of accurate inflation data to policymaking, and given the resources available to the U.S. Government and Federal Reserve, why isn’t there a “household survey” of consumers regarding their budgets and inflation perceptions, to complement the CPI and the REIN “establishment survey”?  In other words, shouldn’t there be a reporting structure analogous to the monthly payrolls report, which captures the perspective from multiple sides of the market?

Real Capitalists Respect Regulation

Monday, September 20th, 2010

Regulation is vital to functioning markets.

Without regulation, there is no trust. Without trust, there is much more friction in the exchange of goods, development of brands, and so on.

Would you be comfortable buying food if the FDA were not regulating the agribusinesses to ensure (reasonable) food safety?  (Or would you prefer to live in China and worry about whether your children were drinking real milk, or a poisonous but cheaper substitute formulation?)

Would you be comfortable taking out a mortgage (or credit card) if the banks weren’t being regulated?  Or would you rather have to read all the legal fine print to ensure there was no hidden scam?  (Oops, we practically have to do that anyway…)

Would you be willing to send your children to schools with no public oversight?  To buy them toys if there were no safety regulations?

Of course not.

Which is why real capitalists respect regulation.  Because trust is vital to business and, in the absence of trust, we’d have much smaller markets – and much more friction in them – which would all crush business profitability.

Perhaps, then, instead of blindly deriding markets and regulation, we should be appraising them and understanding the economic value that could be destroyed if we do not take good care of our system?

What’s wrong with this picture?

Tuesday, July 20th, 2010

So, how do we spend our time, collectively, as a nation?  What do we do?

For the ears of babes, we find this nugget of statistical wisdom in a 2009 children’s book:

“If America Were a Village” (by David J. Smith):

(Imagine the United States is a village with a population of 100. What would it look like, based on (carefully sourced) national statistics?)

“More than one quarter of the inhabitants of our village – 27 in all – attend school.”

“47 are employed… 18 are in professions… 12 are in sales… 7 in service occupations… 5 work in construction and repair… 5 work in manufacturing, farming and the transportation of goods.”

“There are 5 people in the village who want to work but can’t find jobs.”

“The remaining 21 people don’t work: 15 are retired, while 6 are not looking for work or are unable to work. Of the 6, 1 person is in prison or jail. (One other, who may be working, is on parole from prison.)”

So…  what is wrong with this picture?

First, I don’t see where the military workers went… but nevermind that, maybe they are in “service occupations”, which lists “1 in firefighting and law enforcement”.

Second, I don’t see where the babies and children not in school went.

But perhaps most shocking to me is that less than half the population is working, and evidently the population (on balance) also spends 27% of its lifetime just on going to school!

It seems to me that standards of living could be improved for the whole population if the workforce were increased (producing more goods and services for all to exchange), and if the educational system were streamlined (less years in school, more years being productive… maybe some years working for experience while also going to school?).  It also seems that the “sales” population (1 in 4 workers? really?) is too high. Imagine if we had half as many sales clerks and twice as many manufacturing workers!  Or if we needed only 4 construction workers (not 5) and put them to work making other things?  Also, some of the “professionals” may not really be needed (see below)… that’s another place where we could actually produce more for each other, instead of most workers just pushing papers and staffing cash registers, while only a few workers actually produce.

One worry is that the number of elderly retirees/nonworkers is likely to increase in proportion to the population. We will have to reduce the proportion of  “workers”, or the number of students, just to make room for the retirees in the “pie chart”.

Also, “One person has more than 30 percent of the wealth.” and with 4 more it’s also true that “5 people have more than half of all the wealth” … “while the 60 poorest people share only about 4 percent of the wealth.”  That just isn’t right. Although, to be fair, some of those 5 saved like mad while they were working and have earned their retirements.

For the detail oriented:

The 27 in schools can be broken down as follows: 3 are in preschool/kindergarten, 12 in elementary school, 6 in high school and 6 in college/other training.  (If 12 are in Elementary, then I believe 9, not 3, should be listed as being in preschool/kindergarten, since children typically enter Kindergarten at age 5, whereas elementary school K-6 is 7 years. 9 is about 5/7 of 12.)

The 18 in professions break down as: 4 in management, 3 in education/training/library, 2 in health care, 2 in finance, 1 in computer tech, 1 in architecture/engineering, 5 in science/law/social service/arts (not that these all have equal social value…)

The 7 in service occupations break down as: 2 in food preparation (cooks), 2 in cleaning/maintenance of buildings and grounds, 1 in health care support, 1 in firefighting/law enforcement, and 1 in personal care & services (hairstylists, etc.).

I suspect that if we had 1 less each in management, finance, health care and law, no one would notice (especially if we simplified our over-complicated legal, financial and health care systems).  That makes room to support more productive workers and/or more retirees…

Will Keeping Interest Rates Low Actually Stimulate the Economy?

Thursday, July 8th, 2010

A post today on CalculatedRisk caught my eye:  What might the Fed do?  There is a lot of anxiety about the future of the economy,  leading to wondering about whether the Fed may extend the current period of low short-term interest rates, or even buy down longer-term Treasury bonds to reduce rates further.

Implicit behind this is the idea that lower interest rates stimulate the economy.  There’s a lot of history behind the approach, but does it still hold true in today’s environment?  I am not so sure.

Low rates stimulate borrowing… but today we have few creditworthy borrowers with an appetite for additional credit. Instead we have debtors scrambling to get out of debt, unemployed people needing to live off savings, and a lot of people in and near retirement who are trying to figure out how they will generate enough income to get by.  I can see lower rates allowing debtors to reduce their interest costs, but savers then need to “save more” in order to maintain their income levels… or they need to cut spending.

Low rates encourage the government to borrow… but is that really the way to generate an economic recovery?  At present that just scares taxpaying consumers into worrying about future taxes… so they save more.

Low rates stimulate tangible investment… but today we have a surplus of capacity in everything: housing, commercial real estate, industrial production capability.

Low rates tend to make stocks more attractive than bonds… but do we want another stock market bubble?

It seems to me that what we need are new industries, new lines of work to employ the current surplus workforce and provide new demand for existing production capability. But we probably want those to be financed primarily out of equity capital rather than debt!

And it seems to me that we want to encourage saving and productive investment, by allowing those actions to generate reasonable rates of return — without frenzied capital-gains bubbles.

Too Much Debt = Too Much Credit

Tuesday, May 25th, 2010

For every debtor, there is a creditor…

I have read a lot of concern about the debt burdens of various nations, including not just government debt but also corporate, private, etc.  Mortgages, car loans, credit cards…  But, for every debtor, there must be a creditor.  Who are all the creditors?  And, with so much unsustainable debt, why is there so much credit?  Why have so many lent so much?

Did we try to sell the “New American Dream” of retirement to too many people?  Is there too much “retirement savings” chasing too few potential borrowers?  Can the economy support so many millions of non-working retiree creditors, as we will soon have?

Or is the distribution of wealth too skewed, with too many owing too much to too few?  Is the debt burden just another tax on the young and productive, transferring wealth to the aged and/or unproductive?

As for the creditors:  Why are they still trying to lend?  What happens when they stop trying?  Which borrowers will be able to pay off their debts, and which will default?

The Essence of Wealth?

Monday, April 19th, 2010

I spotted this quote over on The Big Picture today, and thought it apropos given the subtitle of this blog (“making the most of time and treasure”):

“Riches do not consist in the possession of treasures but in the use made of them.” —Napoleon Bonaparte

(Whatever one thinks of Napoleon, he certainly knew something about both treasure and many of its uses!)

From this perspective, much of Wall Street, though it has accumulated “treasure”, knows nothing of “riches”. Money not responsibly invested is wasted wealth, as is the labor (“time”) of those involved.

It is also worth pointing out that banks do not own their money.  They merely borrow it from their depositors and other creditors.  If they accumulate riches (i.e. siphoning profits off the spread between their borrowing costs and their lending rates), it is only because they are better at making “use” of your treasure than you are!

If we used the metrics used in the 1930s…

Monday, January 4th, 2010

This refreshes a comment I made some months ago on Calculated Risk.  What if we looked at the current market using the same approach that prevailed in 1929-1932?  Instead of the “Dow 30” (which is officially still called the Dow Jones Industrial Average, but no longer actually contains primarily industrial stocks), let’s use the S&P 500 Industrials (ticker: XLI) as a proxy for the health of the wealth-producing part of the economy.  There may be better choices, since this doesn’t include Tech, materials or utilities, but it will do.  Also, instead of using the current (fiat) dollar as the pricing unit, we should use the same one used in 1929-1932, which was gold.  Back then there was a fixed exchange rate between the dollar and gold.  I’m not a gold bug, but the truth is that since 1930 the dollar has evolved quite a bit, and gold is still … a chemically pure heavy metal useful for jewelry and electrical circuits, hard to produce and easy to identify, thus useful for stockpiling “value”.

So, here’s the chart!  Anyone see a recovery here yet?  Looks to me like the Dow Theory folks, if they hadn’t forgotten that the Fed-manipulated fiat “dollar” isn’t the right metric, would agree that this shows no sign yet of returning to a bull market.  The automatic ZigZag feature of StockCharts still shows lower lows and lower highs…

S&P 500 Industrials, Priced in Gold, 2007-2009

About the Author and the Blog

Wednesday, December 30th, 2009

“Wisdom Speaker” is a working physical scientist living on the east side of the San Francisco Bay Area.  Wisdom Speaker is between 30 and 50 years old and has a top-tier Ph.D. in his field.  W.S. also has a spouse, 2 children in school, a house with a mortgage, and occasionally a sharp tongue. Like many his age, W.S. manages a portfolio that is “big enough to worry about, but too small to retire on”.

For years, W.S.’s spouse led the family to develop strong saving habits, and over the years they invested using conventional buy-and-hold, dollar-cost-averaging, asset-allocation methods. But in 2005 realized that conventional financial wisdom was no longer adequate to the times. Unfortunately this occurred after buying a new home near the peak of the 2000-2006 housing bubble. Although the home equity could not be saved (for some years, anyway), the housing experience “woke them up” to the speculative/Ponzi financial environment. Time was invested in a more detailed financial education. Abandoning “buy-and-hold” and taking detailed control of the household finances, W.S. went to cash and avoided the 2008 financial panic.

The family finances came out well ahead of their 75/25 allocation benchmark, but now the question arises as to how, exactly, one should invest for sustainable gains going forward.  The classic definition of an “investment operation” is one which, “upon thorough analysis, promises security of principal and a reasonable rate of return” (Benjamin Graham). In short, a sustainable gain!  Now, some of what is often considered speculation is in fact investment (e.g. trading with a high probability of success, but a short time horizon).  On the other hand, the lesson America failed to learn from Enron and the dot-coms is that too often, what is sold as “investment”, is actually speculation – or worse, fraud!  Clearly we cannot trust others to do our “thorough analysis”, guarantee “security of principal”, or deliver a “reasonable rate of return” for us.  How now to invest?  W.S. hopes to share what he has learned about investing for “Sustainable Gains”, and to learn from others with similar interests.

W.S. also believes that Graham missed a critical element of what constitutes an “investment”.  There is an ethical or moral dimension to investing:  one must put one’s time and treasure to good use, and be able to sleep well knowing what the “investees” are doing with one’s treasure.  An “Investment Operation” must be one which “upon thorough analysis, promises security of principal and a reasonable rate of return while putting capital to a use one can agree with.  Wave upon wave of financial scandal shows that this issue is far wider than “socially responsible” index fund sellers would have one believe.  Even the simple act of buying a CD, or a T-bill, has an ethical component. So “Ethical Investing” will be another theme covered here.

Another issue that comes up almost immediately is that the fiat money we use today isn’t wealth, or capital, or anything really.  It’s a bunch of carefully arranged electrons (or paper, or metal disks, but always of minimal intrinsic value) which record the exchange of debts.  But debt is not capital!  Capital is the surplus of production over consumption.  Debt is an agreement to deliver future production in exchange for current production.  True wealth might be better defined as accumulated resources to meet human needs.  W.S. has only dabbled in this area so far, but understanding the “Nature of Wealth” is vital to having “Sustainable Gains” in this area, and will be another theme here.

Finally, there is the eternal issue of time. One can often earn more money, or save it, but one’s time is far more strictly limited. Time spends itself whether one likes it or not, one never knows how much one has left, and it’s darned hard to get more!  But perhaps careful “Time Investing” (not just time management), particularly in conjunction with financial investing, can lead to sustainable gains (measured in terms of any personal goal) as well?  At any rate, between work, family, and personal needs, W.S. feels time-poor, and struggles to fit all the joys and sorrows of life into the 24-hour day, so “Time Investing” will be another theme here.

Hope you enjoy the site!  I look forward to seeing where this goes…