Posts Tagged ‘gdp growth’

Today’s Federal Reserve Meeting

Thursday, June 19th, 2014

 

Dear Friends,

 

It seems to me, economists have been predicting three plus percent GDP growth since Obama came into office, and all their predictions have been wrong. The US GDP has stagnated for over five years despite the huge recession we were in when Obama came into office. Today, the Federal Reserve danced around the obvious, and all the economists Bloomberg radio interviewed, provided the dance partners. Yellen claimed the economy will achieve liftoff once we get by this latest slow patch and will exceed long term economic output… next year. This, despite all the previous predictions that have said the same thing, and have been wrong. I guess if they predict it enough, eventually it will come true, like if I predict a solid gold meteor will land on my property making me rich… long enough, it will happen. At some point however, this ceases to be a prediction, and becomes instead wishful thinking.

 

Typically, immediately after a recession economic activity rebounds strongly for a year or two, but the recovery from the 2008 recession didn’t. The reason economies typically rebound strongly after a recession is due to the fact that the units of production become cheap. Labor rates go down, interests rates plummet along with the cost of plant and equipment. The destruction of outmoded firms drives down the costs. Lower costs of the means of production give those with new ideas, the ability to implement those ideas, resulting in the virtuous cycle of economic growth. This is the creation part of creative destruction.

 

This last recession had it’s share of what, at he time, were called “Vee shapers.” They were largely those economists in Obama’s political camp, who eschew the Schumpeter model of the economic cycle, creative destruction, and instead favor the Keynesian, aggregate supply aggregate demand model. They thought that since interest rates had been so suppressed by the Federal reserve, government was spending such tremendous amounts of money, in the form of stimulus, and their man was in, demand would go up and the economy would rebound very strongly, resulting in a V shaped recovery. We found that they were wrong… it was more of an L shaped recovery.

 

The economy dropped like a cow chip. Instead of rebounding it stagnated despite the record amount of stimulus. Trillions of dollars were spent by the government, what is called fiscal tailwinds, spending that drove up aggregate demand, but did nothing for the average man and woman. Interest rates have been extraordinary low for half a decade now with essentially no real GDP growth to show for it. Inflation has been alarmingly low as well despite the record monetizing of government debt that the Federal Reserve has done. Pimco has named the recovery, or lack of one, the “New Normal,” now the term has become the “New Neutral,” but by any name a skunk is a skunk. The labor participation rate has fallen off the table, GDP growth hasn’t even reached normal levels, let alone takeoff velocity, and the Federal Reserve along with most of the central banks of the developed countries have followed along and monetized their debt… to no avail.

 

The one exception is Britain who instead embarked on a policy of fiscal austerity. Economists the world over warned that Britain would suffer economic Armageddon as a result. They were wrong. Today Britain and Germany are the only developed countries that are experiencing real economic growth at all. Since their economies are too small to be the engine of the world’s economy, the world is left with America as the little engine, that couldn’t. The developing countries have stalled as well due to the lack of an engine pulling the train.

 

What everyone in the economic community are dancing around, and trying their best to ignore, is the tsunami of regulation that washed over the US economy in 2008-2009. That tidal wave of regulation continues flowing in to this day. Obama care was a thousand page law, one that has fluffed up to tens of thousands of pages of arcane regulation, hindering economic growth in a myriad of ways. It has driven up the cost of labor dramatically, without a penny of it going to workers. That increase in the cost of labor is still rising even today from Obama care! The incentives of that single piece of legislation has directly resulted in lower wages, terrific job losses and a cost of labor that is unpredictable. Dodd Frank was meant to eliminate the problem of too big to fail but has made that problem even more intractable than ever. It is driving small banks out of business, and pushing large banks to get larger, exacerbating too big to fail. In short Dodd Frank has failed. Environmental regulation has skyrocketed under this administration. But these are only the top waves of the tsunami.

 

These problems that regulation has created cannot be worked through with low interest rates, we have had a low interest rate policy for 5 years, and it has failed. No amount of new regulation can solve the problem of too much regulation, it’s like trying to heal a burn, by burning yourself more. The long term unemployed will not be solved by importing millions of low skilled labor, sopping up the few jobs that are still available, and raising the minimum wage will only drive down the demand for those low skilled jobs in the first place. Dancing is all well and good, but when the elite dance around the problems they created, simply to protect a President and theory they are in love with, all of us suffer. Any alcoholic can tell you, the only way to solve a problem is to recognize it, then roll up your sleeves and actually fix it. Unfortunately, that is not on the Federal Reserve’s dance card.

 

 

Sincerely,

 

John Pepin

 

Economics of A Scale

Thursday, May 1st, 2014

 

 

Dear Friends,

 

It seems to me, a simple way to think about a nation’s economy, is that of a balance. On one side of the scale there would be education, entrepreneurial ethos, work ethic, incentives, etc… and the other would be, cost of labor versus productivity, cost of start up, taxes, regulation, cronyism, etc… If the balance tips to the first side, GDP will have a positive incentive for growth, but if is tipped the other, the incentives for GDP growth turn negative. If we add to education and then to regulation, at a balance the scale is not changed, but moment of inertia is. If we take away from education by such follies as Common Core, while adding to regulation, the balance is tipped to negative incentives. The opposite is true if we add to productivity and subtract from taxes. If this is done the scale will be tipped to positive incentives for growth. This is important for people to understand… because when GDP is growing people’s lives get better and when GDP is not growing people’s lives get worse.

 

Moment of inertia in such a scale would be the resistance to change in the system. As an economy becomes more advanced it also necessarily becomes more weighted by the taxes and regulations that accompany an advanced economy. The same resistance both makes the system harder to change and over react when it does. Just like a fly wheel, it is hard to get spinning, but it imparts a great deal of power once it is.

 

The pivot point for our scale is how much a country’s people want to get ahead economically. This varies depending on all the factors that make up our scale. If the basic ethos of a society is to weigh the cost versus the benefit of a given action, as those who are raised in a capitalist society do, the point of the scale will be sharp. People who reason their actions differently have a large negative incentive to prosperity. In such countries, where capitalism has not trained the people to weigh cost v benefit, the pivot point will be so sticky it is certain to resist change until it breaks, and in total failure falls off the machine altogether.

 

On the positive side of the scale, education can always be improved. Perhaps the best method for improving the entrepreneurial education of children would be to add basic economics to the curriculum as early as possible. The basic concepts of economics are really pretty easy to understand, especially if theory and history are stressed, eschewing the heavy duty mathematics. A courteous society is helpful to creating the conditions where a country becomes prosperous. Courtesy really is the grease that allows society to function.

 

On the negative side many of the factors can be changed really pretty easily. Regulation and taxation can be directly changed by fiat of the political elite. It is almost never done because a corresponding loss of political might is lost as well. Cronyism can also be changed at the will of the ruling elite, but provides such an economic windfall for the political elite and their patrons that option is not even considered, except in spurious campaign ads targeted at conservatives.

 

The scale is actually the complex system that is a nation’s economy. All of us doing our thing. Every economic decision everyone makes every day is what makes our economy grow, stagnate or shrink. If we are flush we spend, if we are scraping by with high fuel prices, low wages, rising food prices, stressed at work and facing waves of cheap imported labor, we cannot spend, we have none to spend or save. When entrepreneurs are dissuaded from starting a business the economy suffers a critical wound. As expectations shrink with a new normal the standard of living must also go down. All this can be changed simply by removing weight from the negative side of the scale, but our leaders find it too vexing to lower taxes, or regulation, never mind limiting their cronyism, they drive up the cost of legal labor with minimum wage laws while lowering the cost of illegal labor with amnesty, plus they remove from the education system with folly and undermining morality. With all the weight our leaders are loading up on the negative side, seems no wonder that regardless of the stimulus of central banks, we are getting poorer as a planet.

 

 

Sincerely,

 

John Pepin

 

 

 

Economic Contraction Q4 2012, What does it mean?

Thursday, January 31st, 2013

Dear Friends,

It seems to me that if we don’t change headings, our economy will crash, bigger than 1929. The 4th quarter 2012 GDP figures that just came in showed a contraction. If we have another 2 quarters of contraction we are in recession. I don’t know if this quarter, 1st quarter 2013, will show decline or growth. I have strong suspicions that we are at the beginning of a pernicious downturn however. This would be tragic for the World Economy, the United States economy and the fortunes of every American.

When Obama came into office the economy was at the perihelion of a recession. Bush had enacted the Troubled Asset Relief program that became know as TARP. Bush had also began the bailout of AIG, to stop the cascade of bank failures, that seemed on the horizon at that time. The Swearing in ceremony in 2009 was at the very bottom of the recession.

Obama came in and immediately called for most of a trillion dollars to be spent on his “stimulus.” He claimed the US economy would hit 9% unemployment if he didn’t get the money, (it did anyway). $800 billion was borrowed in your name, and spent on pork, political slush funds and handouts to political backers. The idea was to stimulate the economy with all that added spending. Like Keynes urged government to do when in recession… spend spend spend, to drive up aggregate demand.

Not only did Obama get most of a trillion dollars to spend as he saw fit, (and has yet to meet his obligation to report to Congress the results), he got additional stimulus money, as well as an open checkbook. The US Senate has not passed a budget for the last 4 years! The House has for the last 2 but the Senate has not even voted on them. In Obama’s first 2 years in office the House was as indolent as the Senate. As a result the US budget deficit and debt has skyrocketed under Obama.

Obama care is starting to hit the American consumer and worker this year. Waves of taxes will be washing the cash from American consumer’s pockets from it. The economic impact will be bolstered by the tsunami of regulations that will hit American industry. The cost of health insurance is poised to double driving up the cost to business for every employee. All this will create a strong incentive, for firms to lay off as much of their work force as possible, simply to stay in business. Giving Obama care profound negative impacts on the economy.

The media is now starting to report, in the foreseeable future, the US debt will exceed 200% of annual GDP! This level of spending cannot continue. The bond market vigilantes will put an end to Obama’s profligate spending before that… I hope. No government can sustain this level of deficit spending and remain a viable concern. It is not possible. Historically, most countries that have found themselves in this situation, have printed money to get out, and slipped into a hyper inflationary cycle.

The Federal Reserve is printing money at $85 billion a month in their attempt to pull this economy out of the ditch. The money supply has grown under Obama and Bernanke at an extraordinary rate, (30% in the last year). This phenomenal printing of money has not resulted in fast GDP growth or inflation, countering traditional money theory. This is made possible by both the zero velocity of money and most other countries on Earth printing in a race to the bottom. And so, as more money is printed the tension builds, like winding a spring, at some point either the spring gives or the mechanism breaks. Neither outcomes are good especially in our economy.

Obama has made the political climate very hostile to profits and markets. People are not willing to take a chance and start a business in this anti business climate. Yet today, when the shocking numbers came out, Obama blamed the republicans! Claiming that their intransigence over the debt ceiling and fiscal cliff was the reason. His hypocrisy, due to his own intransigence, was never pointed out by the unbiased media… because that would be biased. So the irony is lost on the public. He also made the siren call for more government spending. As if the trillion dollars plus each year deficit he is racking up is not spending enough!

The fact is, we are heading to economic oblivion if we don’t change the course we are on. No nation can tax, print and spend it’s way to prosperity. That road only leads to calamity. Haven’t enough nations of people traveled down that road to ruin already? How many more millions will suffer oppression, poverty and subjugation, at the hands of those who claimed to be the protectors of the people? The only way to change direction is to call your Congressman or woman. Let them know you want the budget balanced, regulation lowered and stop the crony capitalism! In short… tell them to get off their fleshy derrieres and do their jobs!

Sincerely,

John Pepin

How Lives Can Be Improved

Sunday, October 14th, 2012

Dear Friends,

It seems to me, the way Romney could improve the lives of the American people, both economically and socially, (by diminishing crime and improving education)… would be to implement the concepts from the International Capitalist Party. The ideas we have put forth, throughout our series of articles, is a historically proven road map, to a society that is entrepreneurial. When a society has good education and a fast growing economy it necessarily has less crime. The growing crime rate, drop in educational scores and flat GDP growth, are all signs the policies in place today are ineffectual at best, but more likely, pernicious and counter productive. The true cost of counter productive government policy is the cumulative drop in future GDP growth. This not only impacts our standard of living… but the effect is magnified over a generation.

The economy is both the easiest and the hardest to fix. The answer we have pointed out, time and again, is to clean every regulation on the books, in regards to their applicability, economic impact, and redundancy. To do this, we could set up a panel of learned people, give them six months to produce an initial report, and then implement as much of that report as possible. Subsequent reports can be every six months for two years, then every two years after that, to keep regulation from running amok again. The final report should have something on the state of regulation in the US. The releasing of the US, (or any economy), from the onerous regulation that has built up over generations, would propel the economy into fast GDP growth, driven by the release of the US entrepreneurial spirit.

Tax law is another avenue of improving the lives of Americans, by helping the profitability of US businesses and therefore, their competitiveness in the World economy. Tax law can be pernicious, because when high wage earners are targeted, they tend to be business owners, and so it is business profitability that is effected. The rhetoric always presupposes some “rich” people will be punished but it is never the actual rich who are victimized. The victims are those trying to get rich, and the laborers who are denied work, when government tax policy extinguishes their jobs.

The schools have become an arm of the US government’s jobs program. They have lost their original mandate and have replaced it with a new one. That is, to provide high paying jobs to overly educated people, while insuring that the students are indoctrinated away from the morals of their family, and inculcate them into a blind worship of State power. To change the education system, back to one where students are educated in, math, reading, history and creative thinking, and also, interpersonal discourse, rhetoric and logical thinking, would require the hated repair be applied, one that has worked every time, everywhere and in every circumstance… competition.

The Societies of most “advanced” countries in the World, have made the conscious decision, to pay for education with government largess. The non excludable good argument has been made, and in my opinion, is the best grounds to justify such a system. Since we as a people have made this decision it is best to work within it as much as possible. The best means, within our criteria, to competition… is a voucher system. Under a voucher system, parents would be empowered, to be consumers in the education market. This education market would be geared so that children would be educated, in such a way as to be in the best position, when graduating, to participate effectively in the market system. The value for each school would be the achievement of the students that came from them. This would set up a whole series of positive feedback loops within the complex system of our society.

Crime is a result of, rendering risk takers hopeless, and giving them bad role models. This leads to a glamorization of crime, and the view that law-breaking is the only means to get ahead. (Notice this implies, onerous regulations are a cause of crime, if legal means are impossible)? The breakup of the nuclear family is largely due to government relegating the role of father irrelevant. The rampant drug use among our youth is a sign that there is a lack of opportunities for them. At least opportunities that they see as feasible.

We need to change the paradigm, from one that creates the problems, into one that erases them. To do that we need a competitive educational system, an entrepreneurial people, clean and fair tax code, and government officials who model good behavior… not bad. These are concrete policy points Romney should make to the American public, how he would improve their lives, and thereby, the lives of every human being on the Planet.

Sincerely,

John Pepin

CEO Salaries and Congressional Perks.

Thursday, December 29th, 2011

Dear Friends,

It seems to me that most people in business have no idea what business is about. They are utterly ignorant of how business works. Business is about getting the customer to love your product, good, or service. It is that simple. Not maximizing revenue or making a good IPO it is about the customer. This fundamental fact seems to be lost on most people in business today. Netflix anyone?

When a firm does a good job at a reasonable price that firm is profitable. It is when a firm seeks profit ahead of customer satisfaction that firms go wrong. When You or I, am satisfied with a product, I know I continue to use that product, you probably do too. In complexity theory it is called, explore or exploit. Once a satisfactory good has been found that fills a need or want then the most profitable choice is exploitation. It less profitable to explore as more satisfactory products come into our understanding. In this context, when a firm provides that satisfactory product, then that firm gets the business.

Making a product that works, for the use it is sold for, is so important that you would think it wouldn’t need to be mentioned… But, alas, it must be. How many times have you bought a tool or item that broke immediately? Not only did it break but any one you bought would break in the same way? I bought a garden weasel once. The handle was made of luan. Seriously, it was made of luan, the wood from the Philippines they make the sheet board from. It broke immediately into a very sharp stake. I then tried to use the dangerously sharp, and much shortened handle, and it broke again! The ultra low quality handle made the rest of the product useless. No matter the quality.

A product that is ill suited by design or material usage does not build brand loyalty. It does however generate revenue. If an unsuitable handle for an implement can be purchased for 10% of the cost of a suitable one, the 90% that I save, can go into management’s pocket, as a bonus, for the short term profit. The long term consequences will be born by the stock holders of the company, who, by the way, didn’t get a dividend payment for the short term revenue enhancement, (or have any say in the decision about the handle).

What we have here is the principle agent dilemma. The principles being stockholders of the various companies and the agents being the managers of those companies. Corporate America has become the poster child for the principle agent dilemma… in action. The giant salaries of idolized CEOs are only one small example that is plainly obvious. More pernicious examples are when, Americans eschew American products, because of a perceived quality deficiency. Defects often totally due to engineering or not meeting jobbing specs.

As in the case of the garden weasel the casting and assembly was done in America but the handle was made in, I’m guessing, the Philippines. The quality of the American made part was perfectly acceptable, (from how it appears unused), but the dangerously unsafe foreign part gave the perception of low quality. Here we have a problem with management that let this go out the door. The workers who made the metal parts did a fine job. But are probably now out of work because of the dangerously unsafe handles.

Structural economic malfeasance is what the principle agent dilemma in American boardrooms, as well as some European ones, have become. Structural in that it is endemic and unpunished, it is a form of malfeasance in that it is utterly cupidity and it effects the economies of the various countries that have this as a problem, by lowering GDP growth… Which magnifies the negative economic effects over time.

What is the source of this corruption? I would argue the source is the corruption we see in government. Congressmen and women engaging in legal insider trading, with no consequences, a vice president admitting he broke the law but without an “overriding legal authority” he was in the clear, Cold cash, banking scandal, House post office scandal, Nancy Pelosi’s jumbo jet while she was Speaker, the list is endless. Confucius said, leaders lead and the people follow. If the leaders want a more human hearted people the leaders must be more human hearted themselves and the people will follow… Pretty sage advice from a sage… Too bad it’s not followed.

Sincerely,

John

Economists and Weathermen

Sunday, January 17th, 2010

Dear Friends,

It seems to me there are only a few jobs where you can always be wrong and never have to defend it. One is weather man and the other is economist. Although, of the two, weathermen are far more accurate in their predictions.

Economists are always astounded that they are wrong. No matter what the numbers come out. Like the latest unemployment figures. The “consensus” among economists was that the American economy would add around 4,000 jobs. In fact the economy shed over 80,000 jobs.

More to the point, during the Bush years and after the attacks on America on 911, economists under estimated the real economic numbers over and over. In hindsight we can see that real economic output as measured in GDP never actually declined during the Bush years. The US only saw real GDP growth go down in the year 2009. The year Obama took office and three years after the democrats took control of the House of Representatives. Since the new administration took office economists have over expected economic growth, over and over.

In this chart compiled from Bea.gov data we can see that even in the “recession” of 2001 real GDP grew.

chart 2

Note; 2010 figures are projected by economists.

We also have the ability to go back and see what economists were saying in the 2001 to 2008 period. Some stories can be read here  and here  and here.

Everyone wants to make a difference. Economists are no different. Under a command and control economy economists are gods. They have great say in people‘s lives, what we do for a living, where we live, how we live and even if we live (eugenics and population control). Economists have a vested interest in creating a command and control economy. This doesn’t necessarily mean they cannot be trusted… but it does mean that anything an economist says must be considered carefully.

The United States is well down the road to reestablishing a 1930’s style command and control economy. The progressive playbook rules the day as it did in the 1930’s. With such ideas as price controls the Roosevelt administration effectively castrated any economic growth before it could get started. The Obama administration seems to believe the same theories. They have nationalized the inefficient US car industry in all but name. They have effectively taken over CITI Corp. The government has nationalized (according to Barney Frank) Fanny Mae and Freddy Mac.

This trend is very concerning because it portends much lower annual GDP growth for years to come. Lower GDP growth lowers the standard of living of everyone. But that is the price the Elite are willing, for us, to pay. They couldn’t care less about the standard of living in the US. Only if it threatens their power. Then the Elite will care. But not until.

Command and control is on the ascendancy in the US. Read and listen to the words of prominent Obama appointees. Of course the Elite like the ideas of John Maynard Keynes. He told them government spending is good. One thing the Elite love to do is tax and spend. If revenues are low it is a matter of too low a tax rate. If a temporary surplus should appear, it would be irresponsible to cut taxes, instead we should spend the money on ongoing programs that have no future funding and will make people dependant on government… (programs that will still have to be funded when the surplus runs out). The Elite can out argue Gorgias (The Sophist) till he is blue in the face. (And ashamed of his legacy).

The Elite like to echo the new catch phrase “capitalism is dead.” More a wish than reality. That is like saying gravity is dead or fire has ceased burning. Capitalism is a force of nature. It can be harnessed for good or it can be toyed with at one’s peril. Fire has been harnessed to improve the lives of everyone on the planet. But fire is dangerous. We safely use fire because we know it’s nature and we work within the framework of it’s attributes. We don’t try to enclose fire in paper because we know paper is ineffective at stopping fire. We use wings when we want to fly because we know it is futile to jump from a cliff expecting to fly. But we still think we can control the economy like electrons in a IC. Economists can be empirically proven wrong at every turn, yet they still love the idea, of a command and control economy.

Before I start a fire in my home I make sure the fire will be contained in a device capable of it. My couch is not sufficient to contain a warming fire.

An economist might disagree however… Fire extinguishers can be used quite effectively to keep a fire under control and using extinguishers in this way creates a demand for them… and sofas.