Roar Out Loud

The emerging scandal over “Libor” (London Interbank Offered Rate”) is yet another Wall Street violation of public trust in which every investor is a victim of theirmisconduct, greed, and fraud.  Once again, the “humps” in banking are the driving force behind the misconduct infecting our financial system.

 

Unlike many four-letter descriptions or the internationally renowned middle digit wave, “Hump” is a four-letter word with a slow fuse.  It will normally take some passage of time before an individual realizes the depth of this vile insult.

 

A hump anywhere on your body is usually bad news, one on your back may mean you are changing into Quasimodo, (that’s not so good), a dog humps your leg, and a hump in the road can flatten a tire, bend a rim, and misalign your car’s front end.

                  

Some postulate that a “Hump” can be a small “Hump” contained within a larger number of “Humps” called a Tumor.  For example, Bernie Madoff was a “Hump” within a large Wall Street Tumor or President Bush was a “Hump” contained within a large Republican Party Tumor. 

 

LIBOR is equivalent to the federal funds rate, or the interest rate one bank charges another for a loan.  These loans can be for one month, three months, six months and one year.

 

It is the benchmark for trillions of dollars of loans worldwide for variable rate mortgage loans, small business loans, personal loans, and interest rate swaps. It’s compiled by averaging the rates at which the major banks say they borrow.

 

There are really two different Libor scandals.  One has to do with a period just before the financial crisis, around 2007, when Barclays and other banks submitted fake Libor rates lower than the banks’ actual borrowing costs in order to disguise how much trouble they were in.

 

The other part of the scandal involves a more general practice, starting around 2005 to rig the Libor in whatever way necessary to bolster traders’ profits and assure the banks’ bets on derivatives are profitable.

 

Currently, the scandal ropes in one bank (Barclays) and one country (England). Barclays has been fined $450m by American and British regulators for its attempts to manipulate LIBOR. Barclays is the first of more than 20 banks under investigation for manipulating the LIBOR.

 

The scandal also corrodes further what little remains of public trust in banks and the “Humps” who run them.

 

Investigations into the fixing of LIBOR and other rates are also under way in America, Canada, and the EU.  These probes cover many of the biggest names in finance: the likes of Citigroup, JPMorgan Chase, UBS, Deutsche Bank and HSBC.

 

The LIBOR, borrowing rate is set daily by a panel of banks for ten currencies and for 15 maturities.  The rate are calculated each day by taking estimates from a panel, currently comprising 18 banks, of what they think they would have to pay to borrow money.  (Area under investigation).

 

The top four and bottom four estimates is discarded, and LIBOR is the average of those left.

 

A high LIBOR rate indicates that banks don’t trust each other resulting in higher loan rates across the board.  This means tighter lending standards and a general unwillingness among banks to take on risk.

 

Banks are extremely wary about lending money to each other because they are worried about who will be the next to fail (Washington Mutual Inc. and Lehman Brothers).

 

As we witnessed in 2007-2008, as a credit crisis unfolds, investors take their money out of other assets, such as stocks, bonds, certificates of deposit (CDs) and money markets.

 

This money from asset sales goes into U.S. Treasuries, (considered one of the safest investments).  As the money continues to flow into this area, it forces the rate on short-term treasuries (also known as T-bills) down.

 

This lower T-bill rate is a sign of high anxiety in the market as a whole as investors search for safer places to put their money.

 

In the world of a financial Oz, the change between the three-month LIBOR rate and the three-month rate for U.S. Treasury bills are used to measure the amount of pressure on the credit markets.

 

Generally, the spread between the LIBOR and Treasury bills has stayed under 50 basis points (1/2%).  The greater the spread between the two the greater credit market anxiety.

 

Some economists will look at the elements noted above to determine how risk-averse banks and investors are.

 

No one knows yet how big this scandal is, or what the implications will be for the long term.

 

It could be difficult to determine how much financial damage somebody really suffered from LIBOR cheating or how much any individual bank is responsible.

 

Most banks are keeping quiet, but upcoming quarterly filings could be revealing. Barclays’ Q1 filing increased operating expenses by $115 million for legal provisions, although with no explanation of why.  Investors in American banks will want to keep an eye on these types of expenses.

 

ราตรีสวัสดิ์นางสาวน้ำเต้าได้ทุกที่ที่คุณมี

 

 

 

 

 

In modern economies, Deflation is a decrease in the”general price level” of all goods and services in the economy and is associated with recessions and long-term economic depressions.

 

The decrease in the price level of a “single good or service” in the economy is the ‘de-escalation’ of that good or service.

 

The most notable deflationary time-period for the U.S. is the Great Depression of the 1930’s.

 

Between 1929 and 1933, real gross domestic product per capita plummeted by nearly 30% and the unemployment rate soared from about 3% to over 25%.  The consumer price index (CPI) plunged by nearly 25%, with the rate of deflation exceeding 10% in 1932.

 

Economists debate the extent to which deflation is merely a symptom of a negative shock, such as a financial crisis, that reduces economic activity. Regardless, deflation can be harmful.

 

Deflation is a persistent fall in some generally followed aggregate indicator of price movements, such as the consumer price index or the GDP deflator. Generally, a one-time fall in the price level does not constitute a deflation.

 

However, sustained decreases in asset prices (deflation black-holes), such as for stock market shares or housing, can also pose economic growth problems since, other things equal, such outcomes imply lower wealth and, in turn, reduce consumption spending and economic growth.

 

In the IS/LM model (Investment and Saving equilibrium/ Liquidity Preference and Money Supply equilibrium model) (1), deflation is caused by a shift in the supply and demand curve for goods and services, particularly a fall in the aggregate level of demand.

 

Historical evidence indicates that a substantial increase in slack demand can lead to deflation, but the depth and duration of the deflation depends on how well anchored inflation expectations (2) are.

 

Some Economists view deflation or de-escalation negatively because it transfers wealth from borrowers and holders of illiquid assets, to the benefit of savers and of holders of liquid assets and currency

  

As inflation reduces the real value of money over time, conversely, deflation increases the real value of money in a national or regional economy.

 

While an increase in the purchasing power of one’s money sounds beneficial, it amplifies the sting of debt, since after some period of significant deflation the payments one is making in the service of a debt represent a larger amount of purchasing power than they did when the debt was first incurred’.

 

Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity (“U” or “L” Shape Economic Recovery Curve) (3).

 

Although a persistent fall in an aggregate indicator of total price movements, (Consumer Price Index or the GDP Deflator) has less than a 5% chance of occurring, the de-escalation of large isolated markets (real estate, stocks, and new autos) is almost a certainty in the short-run. 

 

This de-escalation of asset prices will serve as a damper to a rapid economic recovery (“V” Shape Recovery) (4).

 

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(1)  IS/LM Model:  A  macroeconomic tool that demonstrates the relationship between interest rates and real output in the goods and services market and the money market.

(2)  Anchored inflation expectations:  People expect the central bank to take policy actions that will restore a positive rate of inflation, and this expectation acts as a magnet pulling prices up.

 (3)  Economic Recovery Curve:  See “The Dark Side of Recovery Oct. 2010.

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La buonanotte Sig.ra Zucca, Dovunque lei è

With the stock market and economic indicators turning in opposite directions, by August of 2010 “Market Engineers”(1) began to wonder if the economy suffered from symptoms of the dreaded “FUBAR Virus”(2).

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The debate over the shape of the recovery curve is really a debate over the degree of structural change in the U.S. economy.

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If you believe that demand levels and production in the economy will rapidly return to those experienced before the recession a “V” shaped recovery curve is your likely choice (1981-1982 recession).

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If you believe the recent recession, coupled with changes in global economic equilibrium, created large structural changes in the U.S. economy a “fat U” or “L” shaped recovery curve is your most likely scenario.

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Currently, market risks are changing the expectations of consumers and investors.

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Market risks and expectations are pushing the economic recovery into conversations of double dip recessions and a slow, “U” or “L” shaped economic recovery.

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The market risks and variables discussed in the next few issues put downward torque on the right tail of a rapid (“V”) recovery curve bending it flat toward a slower less desirable “U” or “L” slow recovery are:

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• Consumer Expenditures

• Deflation.

• State & Local Budget Deficits.

• Market Uncertainty.

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CONSUMERS:

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The eight year political dominance of the Bush Republican Guard from 2000-2008 was very disruptive for U.S. household balance sheets. 

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The “hands-off” of business policy during the realm of the “Republican Guard” accomplished through the underfunding or cutting regulator budgets (i.e., Security Exchange Commission) in a rapidly expanding global financial market essentially silently decontrolled financial markets.  

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This act eventually accelerated and aided our financial collapse and resulted in a sharp decline in consumer institutional confidence (Large banks, Treasury Department, Federal Reserve). 

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Household real net worth declined approximately $8 Trillion from its peak (-26%) in 2006 to the first quarter of 2010.

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In their quest to replenish balance sheets consumers will most likely reduce debt, reduce consumption, and substitute costly consumption items with less expensive products.

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If history is a guide, many years of debt reduction will occur in specific sectors of some of the world’s largest economies, and this process will exert a significant drag on GDP growth (3).

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Empirically, a long period of deleveraging (debt reduction) nearly always follows a major financial crisis.

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In historic episodes, private investment was often quite low for the duration of debt reduction.  Today, the household sectors of several countries have a high likelihood of reducing debt.  Consumption growth will be slower than the pre-crisis trend and spending patterns will shift.

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Consumer expectations about future income affects spending/saving today.  If we anticipate lower future income, we will lower our current spending to match the newly perceived future income level.

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LOWER INCOME = LESS CONSUMPTION = LOWER GDP GROWTH =”U” or “L” CURVE.

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Consumers obtained massive debt levels by 2006.  Home refinancing, credit cards, and personal loans offered numerous opportunities to finance their massive conspicuous consumption.

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As the consumer reduces debt, deflation [3] is a certainty.  As the combined impact of declining asset values and associated deleveraging flows through the economy, it will further depress prices of some goods and services.

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Depressed prices should not dictate that we run out and purchase more motor homes, iPods, bigger houses, and fantasy vacations to boost the economy.

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As noted in earlier publication (“The Stress Of Moving To Global Economic Balance”) [4] this will only further exasperate the problem of disequilibrium between producing nations (Asia) and debtor consuming nations (U.S.).

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Global manufacturing of goods is not exactly competing on level ground. 

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China subsidizes its state run manufacturing which offers it the opportunity to offer manufactured goods prices 10%-30% below their competition.  Until this situation is resolved, buying more crap from stores only transfers wealth from the U.S. to China.

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Although the Bush Republican guard fosters a lot of responsibility for our economic situation, consumers can also step up to their contribution.  Large amounts of consumer debt have exasperated the economic downturn.

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Too much debt will sink any business or household during an economic downturn.  With Christmas rapidly approaching, I can only hope we will not go into another large increase in consumer debt.

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I am not certain at what point in our history we lost the significance of providing our family with the basics of food, shelter, clothing, and safety.

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Providing our families with eight different shoe styles, sixteen milk types, fifty different shirts, and IPODS has taken precedence over these four basic elements, even if the debt incurred for these items ends up in the loss of these four basic, but important elements.

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Something sure has changed.  I can remember Christmas during the 1950’s recession.  My father lost his job just before the holiday.  In order to provide the four basic elements noted above, Santa’s gifts shifted downward.  My family did not increase debt to a point where it threatened our food, shelter, clothing, or safety.

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Figure -1 below indicates the historical consumer deleveraging and increase in savings may follow our latest financial crisis.

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[1]  Market Engineers:  Economists, Regulators, and Investment banks.

[2]  F.U.B.A.R.:  Fouled Up Beyond All Recognition.

[3]  Deflation:  A decrease in the general price level of goods and services.  Because the price of goods is falling, consumers have an incentive to delay purchases and consumption until prices fall further, which in turn reduces overall economic activity.

[4]  April 2009.

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DEFLATION:———–NEXT

….Goodnight Ms. Calabash ~~~

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Politics is just one of a seemingly endless number of variables that affect the U.S. economy.

 

Analyzing outcomes of key economic variables during a presidential term is non-scientific, but often entertaining exercise that can display long-term political party trends in our economic history.

 

For example, isolating economic variables that serve as critical political performance measures, yields some interesting political party trends (Table-1).

 

 

 

 

  

 

 

Before you start screaming foul, I realize that previous fiscal policies may lag into a current presidential term, house and senate policies, and that Federal Reserve Board monetary policies may affect some of this data.

 

 

Nevertheless, it is mildly entertaining and helpful to examine presidential economic results.  Examining [Figure -1] suggests that republican administrations showed poor results for employment and household net worth indicators.

 

 

 

On average, employment declined by approximately 2.8 million under republican administrations and household net wealth (household assets less liabilities) increased by a mere 1.6%.          

 

It is interesting noting that the Bush father and son team logged in the lowest growth rates in household net worth and may have won an honorable mention for massive job losses.     

 

Historically Ronald Regan was the only republican administration that demonstrated any job growth in over 64 years.

 

Regardless of the results for my performance matrix, try building your own matrix to assist in focusing on election issues.  It works even better for local elections if your key performance data is available.

 

INVESTMENT BANKS  - S.E.C. STRESS TEST:           

 

 

 

Investment banks like Goldman Sachs can easily devour a career in the quest to understand their structure, organization, and function in the market.  Therefore, since this article is finite in nature the following discussion only briefly summarizes the current concerns surrounding investment banking.

 

 

Investment banks are financial institutions that assist corporations and governments in raising funds by underwriting and acting as an agent for issuing securities (banknotes, bonds, debentures, stocks, futures, options, and swaps). Investment banks by nature secrete huge conflicts of interest from their basic organizational structures. 

 

Investment banks also assist in mergers, acquisitions, and divestitures.  It also provides ancillary services such as trading of derivatives, fixed income instruments, commodities, and foreign exchange.  Investment banks do not take deposits like commercial and retail banks.

 

A conflict of interest is “a conflict between the private interests of the firm [seller] and their responsibilities to [buyers] of their services [in a position of trust]“.  Conflict of interest thus arises when a person has to play one set of interests against another.  For example;

                     

Assume that investment bank “DP” (seller) sells a plan of action to finance offshore deep well oil production in the Gulf of Mexico to oil company “BQ” (buyer).

 

 

The “DP” plan calls for selling “BQ” corporate bonds.  Bondholder disclosure statements require that firm “BQ” supply information/studies specific to the offshore production project.  Firm “BQ” complies and sends the relevant information to investment bank “DP”.

 

 

 Investment bank “DP” front office forwards disclosure information to the banks equities (stock) research department to analyze the possibility of proprietary long purchases of “BQ” stocks.

               

 

The investment bank “DP” sells the “BQ” bonds to their proprietary customers and the investing public [position of trust].

  

 

A petroleum engineer in the “DP” equities research department notes a possible technical offshore well problem and passes along his analysis and the disclosure study to the risk analysis group in the equities research department.

             

 

Risk analysis recommends that “DP” go short [borrow BQ stocks from a third party with the intention of buying identical assets back later, at a lower price to return to the lender].

 

    

 

 

 ”DP” fails to notify its customers and the investing public of its latest risk assessment of the “BQ” offshore well [Senate complaint; “DP” demonstrated a conflict of interest between its proprietary company investments and that of its customer or public investors.  (e.g., DP company investments took precedence over public investors].

                     

 

“DP” bets on the failure of the well through its purchase of insurance through derivatives [a contract written on a stock between two parties, which bind the parties to the terms of the agreement based on the outcome of the stock].  If the offshore deep well fails, the insurance will pay a set amount of money to “DP”.

 

 

As time passes the offshore well fails, millions of gallons of oil pollute the gulf coast, and “BQ” share prices fall by 50%.  

 

 

SUMMARY:

 

 

INVESTMENT BANK “DP”

1.       Collects a fee for the offshore deep well funding plan.

2.       Collects on sale of BQ stocks, less purchase of shorted BQ stocks.

3.       Collects from insurance derivative contract.

 

INDIVIDUAL “DP” AND PUBLIC INVESTORS:

 

   1.       Caught picking up the soap; a 50% loss for those still holding “DQ” stocks.

 2.       Risk profile for bondholders changes and the bonds should be re-rated.

 

Authorities that regulate investment banking (the FSA in the United Kingdom and the SEC in the U.S.) require that banks impose a Chinese wall that prohibits communication between investment banks on one side and equity research and trading on the other

 

 

 

 

A Chinese wall or firewall is an information barrier implemented within a firm to separate and isolate persons who make investment decisions from persons who are privy to undisclosed information that may influence those decisions.

 

Investment banks have told and sold a good story of how they have designed and implemented procedures, firewalls, employee training classes, and in many cases isolated people in key areas of possible conflicts of interest.

 

Does a Chinese wall or firewall succeed in isolating persons who make investment decisions from persons privy to undisclosed market information?  Probably not, a company bonus systems that promotes the use of inside information, a friendly game of golf, cocktails at a conference, or employee personal BBQ’s can undermine the strongest firewalls.

 

In my experience the only industry that has implemented successful firewalls within its organizations is in the sections of aerospace industry that design and manufacture military weapons. 

T

 

Although not 100% successful, I suspect that Aerospace military firewall systems are very close to perfection.  

 

     

he Aerospace military complex has spent a tremendous amount of resources to train employees on information security, instituted departmental firewalls, and have severe sanctions in place for those that breach the security of information.

 

 

 

 

 

 

 

You are traveling through another economic dimension—- a dimension not only of mixed financial indicators and reporting but also of mind.  Your journey is into an economy with indefinite boundaries and limitless economic conundrums”.

Look, that’s a signpost up ahead Senator: Your next stop:

***The Twilight Zone Economy***

Media and regulator reports on the economy are at best, confusing and directionally scattered.

 

As I waited for Federal Reserve Chairman Ben S. Bernanke to give his U.S. economic outlook, I contemplated him delivering the presentation with an off- hand impersonation of Rod Serling.

He would stroll up to his seat at that long table decked out in a cheap thrift store black suit, white shirt and tie, and a cigarette dangling from his mouth.  He would open his notes and begin his economic outlook with a statement about the Economic Twilight Zone.

 

Examining dozens of economic indicators going in different directions causes great confusion and ambiguity about the status of the economies fuel tank.

 

It becomes uncertain whether we need to add more fuel (stimulus) or if the fuel we already added is enough to fill the tank.

The many economic indicators used by the Feds and others demonstrate mixed results.  Some are showing signs of improvement while others remain depressed.

The best we can say when looking at conflicting indices is that we may be getting worse at a slower pace (we think the tank is off empty but we don’t know by how much).

Magically the business cycle leading committee (National Bureau of Economic Research) will waive its magic wand in early 2010 and decide the recession ended in the summer of 2009. 

 

 

 

THE  ROAR-OUT-LOUD***SEPTEMBER –2009:

Regulatory economists, or perhaps all economics, have a problem with terminology, we usually say either the economy has an empty tank (recession), a full tank (full recovery), or it has (recovered). 

         

 

However, there is no barometer to indicate how far we are from the bottom or top of the economies tank.

 

A Roar and a “middle finger salute” go out to all the ambiguous regulatory economists this month. 

 

Until we have a barometer to measure exactly where the economy is at relative to the top or bottom, all of us are failing to advance the field as a science.

 

Until we resolve this dilemma, regulators are destined to answer questions about the economy with mundane idiotic answers such as; the economy is getting worse at a slower pace, it’s almost certain that GDP is growing; it is for certain we will still lose jobs, and the recession appears to be hitting the bottom.

Unfortunately, this is just one of many ambiguous tools and definitions we as economist, use in the field of economics.  For example, in economics full employment has more than one meaning.

To many economists, it means the lowest level of unemployment that is sustainable given the structure of the economy (So What?).

For modern macroeconomics (The study of the entire economy), full employment means that there is no unemployment above the level of the “natural rate of unemployment “, [i.e., there is no cyclical or deficient-demand unemployment].  (Yippee, is that informative?).  

Yet others state that full employment is obtained when Inflation does not rise or fall when the unemployment equals the “natural” rate.  This is why many economists most often call the latter the (N)on-(A)ccelerating (I)nflation (R)ate of (U)nemployment, or [NAIRU].  This definition also reflects the fact that there is nothing “natural” about an economy or perhaps, even concretely definitive.

In macroeconomics, when unemployment equals the [NAIRU] the real Gross Domestic Product [GDP]  { The market value of all final goods and services produced  in the U.S. in a year} equals potential output of the economy given its labor and capital structure (wow, that’s easy to apply a measureable barometer on).

Then again, maybe this is one of the reasons I always thought the main tools of macroeconomists are somewhere between divine rods, darts, and magic charms. 

Macro-Econ Dudes and Dudettes let’ s get off the couch and concretely and clearly define those tools so we can lose some of the mundane idiotic statements we make regarding the economy.

 

 

EMPLOYMENT RECESSIONS:

Labor market recessions are long lingering painful events.  They can generate a great number of social and individual negative externalities. Long-term unemployment burdens social services, diminishes spending levels in the economy, and drains overall savings.

Employment is often referred to as a “lagging indicator,” meaning that when an economy begins to pull out of a recession you can expect employment to grow some time after [GDP] begins growing.

 

Employment profiles have varied widely across recessions.  In many recessions, employment declined only slightly (depth of employment curve) and bounced back quite quickly (breadth of employment curve).  In others the depth and breadth of unemployment has been quite extensive.

 

Figure -1 below shows the gap between the labor-market peak (defined as the low point of the national unemployment rate) and the labor-market trough (defined as the high point of the national unemployment rate) for historical U.S. recessions. 

 

The current recession has demonstrated by far the largest increase in the number of unemployed (excludes great depression) and as of August 2009, has not reached a labor market trough.

 

 

 

 

 

In its entirety, the 2001 employment recession exhibited a rather large breadth of over 47 months from peak-peak employment (30 months peak-trough and 17 months recovery of trough-peak). 

 

The most interesting point in the 1990 employment recession is the period of employment stagnation from the trough in May of 1991 through March 1992.

 

For comparative purposes, in the 1990 recession it took approximately 11 months to arrive at the trough in employment compared to 30 months in the 2001 recession.  The current recession is in the 21^st month and still searching for a trough in employment.  

 

Another interesting point to note about the 1990 recession is the fact that the recession (as noted by the NBER) lasted for only 10 months (July 1990-March 1991) but the employment recession lasted for approximately 32 months from peak to full recovery (June 1990-January 1993). 

 

The employment recession of 2001 (as noted by the NBER) lasted for only 9 months (March 2001- November 2001) but the employment recession lasted for approximately 47 months from peak to full recovery.

 

Of course, the future direction of the unprecedented 2007 employment recession curve is subject to great speculation at this point.  

 

Will employment retrace prior paths only gradually, leading to subpar net hiring reminiscent of the recoveries from the 1990 and 2001 recessions?  The most likely path will be one with no historical precedence.  

 

I hope that the shock of the past year’s financial crisis has not driven the U.S. into a period of permanently high unemployment similar to what Europe has suffered for decades.

 

Those that occasionally wander by this website know that since the beginning of 2008 I have continually stated that my estimate pushed the recovery of the 2007 recession into the year 2012.  In the next section, we will visit an example of how my unemployment estimate fits into this outlook for the economy.

 

UNEMPLOYMENT SCENARIO

 

To put forth two possible employment frontiers for the 2007 recession I will be employing the use of data from the 1990 and 2001 recessions.Figure -2 below, provides a perspective on employment recession variations and just how deep non-farm employment has fallen in the current recession when compared to others.

Figure-3 and Figure-4 below, display a graphical depiction of these two employment recessions.  I will be extracting characteristics from both of these recessions to develop employment scenarios for the 2007 employment recession.           

First and perhaps foremost, the employment recession estimate shown below is for illustrative purposes.

Since the current recession is, for the most part, an economic phenomenon without a historical perspective, the estimates of the depth and breadth of the employment recession will most likely be in error.

Nevertheless, it does serve as an illustrative example of how we can pull together a non-econometric profile of the current employment recession pieced together from separate historical recession occurrences’.

Following an employment profile of the current recession, we can extend this estimate into the secondary impacts it has on other economic variables such as GDP, retail sales, and personal income.

(2007) —PEAK TO TROUGH: 

In the examination of previous recessions, I noted that excluding the depression, the longest peak- to- trough period of 30 months occurred in the 2001 recession.      

We develop the estimate of the 2007 unemployment trough point by overlaying the slope of the line for the last nine months of the 2001 employment recession onto the last recorded data of 2009 (August).

 

Overlaying the 2001 peak-to-trough period of 30 months onto the current recession brings the trough of the current employment recession out to May of 2010 (FIGURE-5).

In stage-2 of our scenario for the 2007 employment recession, we overlay the 11-month employment stagnation of the 1990 recession and the slope of the 17-month recovery curve in the 2001 recession.

The resulting curve (FIGURE-6)demonstrates the entire employment profile estimate for the 2007 recession.

Of course, a great many economists speculate that unemployment will stagnate at a new equilibrium level of approximately 8 million for a decade.  

The stock panhandlers believe the recession is nearing its end.  A generally improving trend in the economic data has panhandler forecasters saying the downturn will turn into an upturn sometime late this winter.

In our next issue, we will measure the impact that this employment recession scenario has on other economic variables (e.g., consumption expenditures, GDP, personal income, debt, etc.)

  

 

Jó éjt ‘BETTY G. “: ha valaha a pompás lábakat  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

       

Although the economic climate is not as gruesome as it was a few months ago, relevant economic indicators still resemble a soggy wet dough-ball trying to bounce off the floor.

Recessions have far-reaching impacts on a wide range of economic and social outcomes.  Although the number of economic and social impacts of the current recession is numerous, our patience/tolerance for reading about them and the time we allocate to deal with the changes is limited.

Therefore, we will focus on the economic/social issues of the recession that are having the largest impact in our economy.

THE OUT-LOUD ROAR OF THE MONTH:

A Roar-Out-Loud and a wrinkled “middle finger salute” to the slime ball-management at the American Association of Retired Persons (AARP, Inc.). 

AARP, one of DC’s most powerful lobbying groups, has worked inside the beltway for years to defeat real health care reform and lobby against the best interests of its membership (senior citizens).

               

These slithering mollusks earned a cool $770 million in 2008 in royalties from insurance companies that sold products referred by AARP Services Inc.

         

About a quarter of its revenue comes from selling insurance through its affiliate, United Healthcare Group, the nation’s largest for-profit insurance company.

 

Do you think we may have a conflict of interests here?  These connections will always assure that the status quo insurance infrastructure wins lobby dollars with AARP.

         

As an FYI (for your information) and historical reference, AARP was the driving force behind the passage of President Bush’s 2006 senior nightmare “Medicare Prescription Drug, Improvement, and Modernization Act” (MPDIMA).

           

This confusing legislation turned the clock back to the pre-1965 private insurance/drug industry high margins and prices in Medicare.

           

 

For mild entertainment, watch AARP representatives reject listening to their constituents’ on the website listed below.  (Texas August 4, 2009 town hall health care meeting).

   

http://www.youtube.com/watch?v=AoMNDdQ1_h0

 

MEDICAL CARE & POLITICAL BEDLAM:

The U.S. medical care system is a swollen tick gorged with blood and borrowed deep into the neck of the U.S. economy.  The current medical care system has had over 200 years to mutate into what it is today, and with our political system, it may take half that long to remove the gorged tick and institute any real significant change.

Even a corpse is aware of the fact that the percentage of Gross National Product (GNP) ‘[GNP= the market value of all final goods and services made within the borders of a nation in a year]’ devoted to health care has been rising for several decades.  However, the increasing share of GNP devoted to health care, by itself, is not evidence that the health care market is in need of repair.

There are many products, such as recreational activities, whose share of GNP rises as our wealth increases, yet there is no concomitant clamor to reduce our expenditure on them, as there is on health care.

Unfortunately, it is impossible to develop a proper public policy for medical care do to the continual demonizing of certain components of the medical industry, unclear federal policies, and third party money interests.

At least everybody seems to agree that our health care system has many inefficiencies, excessive administrative expenses, inflated prices, poor management, and inappropriate care, waste, and fraud.

These problems significantly increase the cost of medical care and health insurance for employers and workers and affect the security of families.

For the most part, total spending for health care in the United States, private and public spending combined, has risen steadily over the past several decades (   See Figure-1).

 

 

 

       

 

Most analysts agree that the most important factor contributing to the growth of spending for health care in recent decades has been the emergence, adoption, and widespread diffusion of new medical technologies and services.

 

 

 

In 2008, the annual premium for an employer health plan covering a family of four averaged nearly $12,700 workers contributed nearly $3,400.  The annual premiums for family coverage significantly eclipsed the gross earnings for a full-time, minimum-wage worker ($10,712).  The annual premium for single coverage averaged over $4,700.  

 

 

Although nearly 46 million Americans are uninsured, the United States spends more on health care than other industrialized nations, and those countries provide health insurance to all their citizens (not adjusted for technology differences).

There is a fundamental philosophical difference between health care policies in countries like Switzerland, Canada, France, Germany, and the U.S.  These European countries and Canada have adopted health care into their basic federal charters along with fire, police, and military protection while the U.S. has not. 

 

Historically, health care in the U.S. was not and still is not, considered part of the federal protection for its citizens.  With the formation of America, the implicit social contract was to surrender some freedoms so that government could protect people from other people through the formation of armies and police, but not protection from ill health, disability, and disease.

 

Until the early 1920’s inequities of health in America were primarily a matter of inequities of wealth.  Wealthy people lived longer because of better nutrition, less stressful lives, better sanitation, and so on.  

 

As of the 1920s, expensive advances in medical technology began to give greater advantages to those who could afford to take advantage of them. 

 

The creation of the health insurance industry between 1929 and the late 1940s was to close the gap for health care wealth inequities.  The idea was to spread the risk, and costs of expensive care (Damn, sounds similar to packaged real estate bank mortgages).  

 

With illness and disease excluded from the charter of federal protection for over 200 years it is not surprising why any mention of adding it to the federal charter of responsibilities along with fire, police, disaster, and military protection sends violent shock waves through many U.S. citizens (Generation programming).

 

The problem for progressive politicians like President Obama is that they have not been getting this perspective or their view of health care as another basic government protection out in public effectively.

 

In the end, we will see health care legislation from liberals and conservatives negotiated into roughly in the same framing ballpark — maximizing material interests of some group—with the political progressives left in the bleachers.

          

Other factors that have contributed to the growth of health care spending include increases in personal income and the growth of health insurance coverage.  Demand for medical care tends to increase as real (inflation-adjusted) family income increases.

 

The expansion of insurance coverage in recent decades, as evidenced by the substantial reduction in the percentage of health care spending that people pay out of pocket, has also increased demand, because insurance coverage reduces the visual cost of medical care for consumers.

 

However, according to the best available evidence, increasing income and insurance coverage cannot explain much of the growth in health care spending in recent decades.

 

EXCESS COST GROWTH:

 

 

Factors that affect spending for health care include general inflation; growth in the size of the population; and, to a lesser extent, changes in the population’s age composition.

 

 

Removing the effects of those factors reveals the amount of spending growth attributable to factors beyond inflation and demographics.

 

The most useful way to measure the growth of spending over the long term is to gauge the increase in health care spending for an average individual relative to the growth of GDP per capita (person), which is commonly referred to as “excess cost growth”.

         

This phrase does not imply that growth in per capita spending for health care is necessarily excessive or undesirable.  It simply measures the extent to which the growth in such spending exceeds the growth in per capita GDP, after adjustments for changes in the age composition of the population.

 

Table-1 below shows the excess cost growth for spending in health care during that period.  (That is, spending by the private sector and by federal, state, and local governments for health care programs other than Medicare and Medicaid).

        

    

In computing historical rates of overall cost growth, CBO (Congressional Budget Office) removes the effects of changes in the age composition and size of the relevant population.  Thus, for Medicare and Medicaid, CBO excludes the effect of increases in the number of beneficiaries in the programs. 

 

For Medicare and for the overall growth of health care spending, it also removes the effect of changes in the age composition of the population.

 

For Medicaid, CBO removes the effect of changes in the composition of the program’s caseload— that is, changes in the portions of beneficiaries who are children, disabled people, elderly people, and other adults.

     

So what is it all about Jethro? 

 

Other than the entertainment value gained from watching insane political fighting over medical care issues, watching people pull guns on one another, or beating the hell out of each other at town hall meetings what does all of this mean?

 

Under current rules and regulations, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run.

 

Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario.

 

Unless revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt.  

Keeping deficits and debt from reaching levels that would cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two.

     

Projections of Health Care Spending

   

Over the past 30 years, total spending for health care has more than doubled as a share of GDP.  According to CBO’s (Congressional Budget Office) projections, under the extended-baseline scenario, that share will double again by 2035, to 31 percent of GDP.

 

Thereafter, health care costs will continue to account for a steadily growing share of the economy, reaching 37 percent of GDP by 2050 and 46 percent by 2080.

 

In 2009, total consumption per person is expected to average about $26,000, of which about $7,000 will be spent on health care. Under CBO’s projections, spending per person by 2035 would have grown by more than $14,000 (in 2009 dollars), but more than 80 percent of that extra money would be spent on health care.

 

Although spending for other goods and services would grow by just 14 percent, spending for health care would nearly triple.

DEBT:

 

 

Unlike the deficit, which drives the amount of money the government has to borrow in any single year, the national debt is the cumulative amount of money the government has had to borrow throughout our nation’s history. 

   

Each time the government runs a deficit, it increases the national debt; each time the government runs a surplus, it shrinks the debt.

 

NET DEBT:

Also called debt held by the public, measures the government is borrowing from the private sector (including banks and investors) and foreign governments. 

Net debt is the best measure of the effect of debt on the economy because it reflects the interaction between the government as a whole and the private sector. 

  

When the net debt is particularly large that is, when the government is borrowing large amounts of money from the private sector, less capital is available for private firms to borrow, which can lead to less investment and slower economic growth over the long term.

  

Every dollar the government spends on debt interest payments is a dollar that is unavailable for programs that currently benefit taxpayers. 

   

Interest is what we pay now for benefits received in the past.  Adding to the national debt by running up deficits essentially shifts the costs of current programs on to future generations, who will have to pay the debt interest costs.

       

EFFECT OF RISING DEBT OVER TIME:

 

Debt held by the public can grow faster than gross domestic product (GDP) for a limited time, but it cannot do so indefinitely.

 

If the ratio of debt to GDP continues to rise, lenders may become concerned about the financial solvency of the government and demand higher interest rates to compensate for the increasing riskiness of holding government debt.

 

Eventually, if the debt-to-GDP ratio keeps increasing and the budget outlook does not improve, both foreign and domestic lenders may not provide enough funds for the government to meet its obligations. 

 

By then, whether the government resolves the fiscal crisis by printing money, raising taxes, cutting spending, or going into default, causes disruptions in economic growth.

 

Congressional Budget Office (CBO) budget projections carried out into the future, show whether current commitments imply that spending will consistently exceed revenues and produce debt that grows faster than the economy.

    

Projections of the debt-to-GDP ratio indicate that changes in current policies (medical care) will be necessary at some point to bring the federal budget back to a sustainable path.  Hence, the game on health care reform is born.

                  

 

 

LA BONNE NUIT BETTY « G » OU JAMAIS CES JAMBES ETRE MAGNIFIQUES

 

 

 

 

Part `1—‘Navigating a Pandemic Economy’

Global economies begin to pull out of the seemingly bottomless recession of 2008. However, U.S. economic growth (Gross Domestic Product’ (GDP) (1), is still very anemic and refusing to leave its familiar partnership with slow growth.

 

THE ECONOMIC THEATER:  

NATIONAL ECONOMY- – MAY 2009

Despite optimism from Fed Chairman Bernanke and Wall Street, the U.S. continued to regurgitate economic nastiness for the sixteenth straight month.  We are now surpassing the 16-month recessions of both the 1973-75 and 1981-82 economic downturns.

Even if the Bernanke optimism that GDP (Gross Domestic Product) turns out of its current negative realm in late 2009:  

·         Economic growth, although positive, will remain anemic as consumers shed debt.

·         Unemployment rates will remain high.

·         Unemployment foreclosures will continue.

·         State and local tax increases will dampen Federal economic stimulus payments.       

 

U.S. GROSS DOMESTIC PRODUCT (GDP)

Gross Domestic Product (GDP) is the total value of all final goods and services produced in the economy.  Although (GDP) is not the only tool used to measure economic activity, it is a good general gauge of the goods and services produced in the economy.

One of the problems with using {GDP} is that the economic information is always in hindsight since it has a lag time of at least one quarter.

As shown in (Figure-1) below, {GDP} is very sensitive to changes in personal consumptions expenditures.

 

The collapse in housing and stock values took its toll on household asset values and net worth (the difference between assets and liabilities) in 2008 (see Figure-2).  Household net worth fell by $11.2 trillion in 2008.

Scrambling to repair their balance sheets households have begun to reduce debt (-3.5%), spending (-2%), and increased savings.  These are healthy changes from the perspective of long-term economic growth; however, less personal consumption is painful in the short term because it will result in a slower pace of {GDP} recovery.  (Figure-1)

 

By definition a depression is any economic downturn where real (same years dollars) {GDP} declines by more than 10 percent.  A recession is an economic downturn that is less severe.

 

By this yardstick, the last depression in the United States was from May 1937 to June 1938, where real (same years dollars) {GDP} declined by (-18.2%).

 

If we use this method then the Great Depression of the 1930s can be seen as two separate events: an incredibly severe depression lasting from August 1929 to March 1933 where real {GDP} declined by almost (-33%), a period of recovery, then another less severe depression of 1937-38.

 

The United States has not had anything even close to a depression in the post-war period.  To date, real {GDP} has declined by (-0.5%) and (-6.3%) for the third and fourth quarters of 2008.

 

It seems likely that the current recession is not only the longest in the postwar period but is an economic adjustment that will set in place a new long-term equilibrium for the U.S. economy and carry us well past 2011.

It is my premise that the current downturn is unlike the postwar recessions of [1973-75] or [1981-82].  These previous postwar recessions were the result of a short-term restrictive monetary/fiscal policy that merely caused a stutter in U.S. [GDP] growth.

For example, the Federal Reserve policy of a temporary spike in interest rates in the [1973-75] recession demonstrated a very short-term bottom in {GDP}, shown as a “V” shape graph below.  

Inflation paranoia (13.5%) in 1980 led to a tight monetary policy that resulted in historically high interest rates in the U.S. for three years.  This tight monetary policy caused large declines in investment and consumer purchases of durable goods and the resulted in the 1981-82 fat “U” shape recession.  [Figure-4]

Unlike other postwar recessions, the 2007-2008 recession is a transitional global downturn complete with asset re-pricing (deflation), a credit crunch, and liquidity traps.  (See “The Stress of Moving to Global Economic Balance)

Asset re-pricing in deflationary periods like that transpiring in current real estate market create a vicious spiral of negatives such as loan defaults, lack of confidence, and unwillingness to loan money.

With declining assets, irrespective of interest rates, consumers sit on the sideline believing that goods and services will be cheaper tomorrow so they wait to consume.  Investors believe they can earn a better return or minimize losses by not investing and hoarding their money.  (Liquidity Trap)

The consequence of such a complex transitional recession is a much longer recovery time as noted by the “L” curve in [Figure-5].

STATE & LOCAL GOVERNMENTS:

For anybody not residing in California my apologies for taking you on a sidebar to this state.  However, it is hard to ignore the high level of economic illiteracy of our legislators or the states insane political process.  

Tax increases are problematic policies during an economic downturn because they reduce overall demand and can make the downturn deeper.

Unlike the federal government, states cannot print money when the economy turns down; they must cut expenditures/costs, raise taxes, or borrow funds to balance their budgets. 

Excessive taxation by state and local governments has the ability to offset federal monetary and fiscal policies and delay the recovery of the U.S. economy.

Most Californians are aware of the special election on May 19, 2009.  The “special election” contains six (6) ballot initiatives. 

Legislators (The Economic Cretin Association) tout Propositions [1A] and [1B] as being an end to the current budget deficit and they will change the states approach to budgeting.

Ironically one of these special elections cost this self-proclaimed poor state approximately $50 million each.

The reality is that Propositions [1A] and [1B]; maintain or freeze current state cost inefficiencies, overspending, and guarantee that California will maintain its position as the second highest taxed state in the U.S. (includes state and local taxes).

Currently state and local compensation in California commands a 30% premium above that of private industry.

Ballot propositions [1A] or [1B] contain NO benchmarking vehicle to adjust state and local labor compensation (wages plus benefits) at competitive levels with that of private industry.

Proposition [1B] maintains the status quo budget for California teachers.  Currently California teachers are the 2^nd highest paid in the U.S. and their students rank 45^th in the nation academically.

Nevertheless, legislators failed to include a benchmarking vehicle that ties teacher salaries and performance with other states (with adjustments for cost of living differences). 

 

I estimate that if approved, proposition [1A] tax changes will rank California with the second highest state and local tax burden in the nation, an estimated 11.75% of income.

Ironically, I was able to catch California’s terminator Governor coming out of an automobile show where he was interviewed by CNBC.  In the interview, the terminating governor stated that a strong auto industry is imperative for the United States.

It is politically more palatable to take your chance with a “status quo” proposition than develop and negotiate performance cost measures with labor unions.

 

Propositions [1A] and [1B] are just another demonstration of freezing or maintaining excessive state budgets and adding taxes to exasperate California’s recession woes.

The argument that adequate public schools and health care are impossible to maintain without such high rates is hard to accept when nearby states are able to do so with such dramatically lower tax rates.

Nationally, only eight states have a higher top corporate tax rate than California. In 2007, state-level corporate tax collections (excluding local taxes) in California were $307 per capita, which ranked 6th highest nationally.

California politicians lack the intestinal fortitude to solve the state problem of exorbitantly high levels of spending, excessive costs, taxation, and inferior services.  Propositions [1A] and [1B] both get a big NO vote from my corner.

MORE ECONOMIC NASTY’S —LABOR AND BUSINESS:

 

Labor:

The economy continued to shed jobs with unprecedented speed as nonfarm payrolls fell by over 663 thousand in March 2009.  The number of unemployed now stands at 13.1 million (8.5%), the largest number of unemployed in over 60 years (see Figure 6).

If we add the displaced workers in the market, workers which are no longer drawing unemployment or actively seeking employment, the number of unemployed jumps to 15.1 million (9.8%). 

Another depressing thought is that the unemployment is often a lagging economic indicator and often continues to increase even after the recession ends.

 

Job losses were broad-based across industries, with goods producing industries and services taking the biggest hits.  The shining stars was the cost troubled education, health services, and dreaded government sector, which saw an increase of over 100,000 jobs from the 4th quarter 2008 to the 1st quarter of 2009.

 

As an interesting side note total government employment as a percent of total non-farm employment increased approximately 3% from 1955 to 1999.  Even more interesting is the shift in employment away from federal employment in 1955(33%) to a rather large increase in local and state employment by 2009 (see pie chart below).  

 

 

 

 

 

As I remember the majority of my economics professors in college thought this was a great move, local and state is government is close to home and more readily visible.  I disagree with this premise, and as we saw in my discussion on California, economic illiteracy, and corruption often increases at an exponential rate as economic policy changes away from federal levels to local governments.

Non-farm employment fell by over 4.3 million from the 1^st quarter of 2008 to the 1^st quarter of 2009.  As displayed in (Figure-7), most of the decline is in the goods producing industries.

BUSINESS:

The recession continued to shake the manufacturing sector in February, with industrial production sliding 1.4% and factory output falling 0.8%.

As consumers scrambled to repair their balance sheets through household spending reductions and greater discretionary purchases it took a toll on business profits.  Year- end 2008 before tax profits declined for the six straight months. (Figure-8)

In response to declining demand, many businesses have instituted hiring and wage freezes, restricted work schedules, eliminated incentive pay and reduced benefit costs, such as through the elimination of 401(k) matching programs.

 

 

 

La bonne nuit Betty G—Where jamais ces jambes magnifiques sont.

 

 

 

 

 

 

 

 

 

 

The close of Act IV in the recent California budget circus should result in a state voting principal cast in Kryptonite—– “VOTE AGAINST ALL INCUMBENT CANDIDATES”.   

In summary, California legislators repeatedly display they are economic idiots as they waltz around the main issues of the California budget.  That is, state expenditures are excessive, state/county service costs are uncompetitive, and taxpayer returns per tax dollar spent is negative.

Their most recent budget actions are in direct opposition to the recession fighting plan the federal government has enacted (H.R.1).  The real tragedy is that while the federal government seeks to give more tax money back to households to stimulate the economy, our legislators views it as an opportunity to seize even more money through higher sales and income taxes.

 

CALIFORNIA SALES TAX INCREASE:

For most products, California’s sales tax increase of 1-cent-on-the-dollar will increase product prices and adhere to the most famous principal in Economics, “The Law of Demand”.  That is, the higher the price of a good, the fewer consumers will purchase.  However, this principal reveals nothing about the size of the buyer’s response to a price increase.                

In economics, the price elasticity of demand measures how responsive the quantity demanded is to a change in price.  For all you math fans that is simply:

Price Elasticity of Demand = Change in Quantity [divided by] Change in Price

The Elasticity of Demand will differ across products.  In general the greater the proportion of household income spent on the product, the more responsive buyers will be to a price increase or the more elastic the demand.  Most durable goods such as houses, cars, appliances, etc., fall into this category.

In the short run, buyers tend to be very responsive to an increase in the price of a new car.  Therefore, the California increase in sales tax coupled with the doubling of vehicle license fees will decrease new car sales and add more than one nail to the coffin of new car manufacturers. 

Yes, including the domestic manufacturers we just provided with taxpayer funds in an attempt to prolong their survival.  The tragic irony is that if several states enact similar tax increases, it may solidify the death of domestic automakers, loose taxpayer funds already in place, or spur more automaker loan requests.

Without the aid of an econometric model, my simple math estimates that the sales tax and license fee increases will decrease new car sales an additional 2% in California.

Consumers and businesses will have a few options available at their disposal to respond to the sales tax increase.  They can:

 

1.       Suck up the tax increase by maintaining the same quantities of goods consumed and reduce savings, or reduce quantities of goods consumed.  With the wealth losses incurred over the last few years in conjunction with the sword of unemployment, reduced savings with equivalent consumption is a bad bet.

2.       Increase Internet purchases out of state to avoid California sales taxes– as long as they continue to escape the wrath of the taxman.

3.       Substitute product consumption with services that do not incur sales taxes.

4.       Fire up the intestinal fortitude, look the devil straight in the eye, and issue 17 million challenges to the DMV regarding vehicle values used in the calculation of our vehicle license fee.

 

In general, retail sales to consumers and business alike will decline.  The tax-induced price increase and result in reduced orders placed with manufacturers and do little for solving state budget problems.  In the short-term a manufacturers profit will fall, and those with the greatest losses will be in products that decline the most (durables).

 

There are some very focused and specific federal tax breaks and infrastructure funding provided.  However, for now in the interest of time I will stay focused on the California mess.         

 

CALIFORNIA INCOME TAX SURCHARGE:

         

In an effort to further crater the California economy, legislators approved a 0.25% surcharge on personal income.  They have stated that if the state receives federal stimulus funding more than expected the surcharge reduces to 0.125%.

 

Of course, no mention of what that magic dollar amount is.  If you fall for this bull-shirt you also believe pigs can fly and real estate on the moon is for sale.  The income tax surcharge is here for the duration of state deficits.

 

The effect of the income tax surcharge will start when it takes a bite out of our take home pay.  State legislators are betting that taxpayers will:

 

 

A.       View the surcharge as temporary.

B.       Not miss the minimal amount of money reduced from their pay,

C.      Not alter consumption expenditures,

D.      Provide enough cash to get past the recessionary revenue downturn. 

 

Their wager on horse numbers A-C may come to fruition but, as we shall see later on in this discussion, horse #D is a sure loser without bringing the state out of its current— high cost, inefficient, underperforming mode.

 

 

MISCELLANEOUS BUDGET ITEMS:

 

 

The California Legislature reduced elementary and secondary funding by $8.4 billion.  The federal American Recovery and Reinvestment Act (H.R.1) allocated California $4.6 billion for all educational institutions.  State allocations of the H.R.1 educational funding will determine the net effect of the educational reductions for elementary/secondary and college funding reductions. (Right Hand-Left Hand) 

 

Education expenses account for over 40% of California budget requirements.  The state’s educational system is one of the most inefficient and costly institutions in California in desperate need of re-organization.

 

Six propositions that require approval by voters are in a special election in May 2009.  One of the more important measures/propositions purposes a spending cap mechanism on state expenditures.  This mechanism employs the use of a formula that links state spending to inflation and population growth not to exceed a rate greater than a 5 percent increase each year.

 

 

That probably sounds great but it’s really HORRIBLE. What it does is lock in or freezes all the inefficiencies that are currently in the state institutions.  This is similar to freezing your motor gasoline annual bill at 2008 expenditures regardless of how much gasoline you actually consumed.  

 

For example, the current compensation differences between state/local employees and private industry remain at their current differentials.  In 2008, total compensation (vacation, sick time, pension, benefits, and holidays) in private industry cost $27per hour worked compared to $39 for state and local employees (U.S. Bureau of Labor Statistics).  2008 private industry vs. state/local compensation differential frozen for perpetuity = ($27-$39) = - ($12.00)  

 

Examining the pieces of this [$12/hour] differential yields the fact that state/local employees direct wages (no benefits) are on average, [$7/hour] higher while benefit costs are [$5/hour] higher than that recorded in private industry in California.                 

 

I would like to know what justifies this large compensation differential between state/local employees and private industry before I agree to freeze it in perpetuity.

 

Once again, the question remains, are legislators disingenuous with their budget cap proposal or just economic idiots.  In reality, it appears like just another easy out that skirts the real issues surrounding the state budget.

 

 

La bonne nuit Betty G où que vous êtes

 

 

  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

A myriad of bleak economic reports ended 2008 and became darker as they transcended into 2009. 

Numerous negative externalities (spillover effects) began to gain momentum in the economy mimicking previous historical economic downturns.

         

U.S. ECONOMY:

 

Our daily confidence validation test for free market economies has transcended through a media barrage on the credit crunch and wealth vaporization.  The bleak economic reports serve as a daily stress test to one’s own economic viability.

 

                                              

Since there is a literal blitzkrieg of economic information in the media today, I will only hit some of the high spots on the U.S. economy and use this time/print to concentrate on the secondary spillover (negative externalities) effects of the recession.

 

Our daily confidence validation test for free market economies has transcended through a media barrage on the credit crunch and wealth vaporization.  The bleak economic reports serve as a daily stress test to one’s own economic viability.

 

As shown in Figure-1 below, the only bright spot in the depressing economic information published is that the [4^th] quarter 2008 downturn (-3.8%) in Real Gross Domestic Product (GDP)(1)  is currently less than the [6-8%] hammering (GDP) experienced in the early 1980’s.

   

 

 

 

                 

However, the grey encapsulating [GDP] growth is the length of time the recession will continue to work its way through the economy in comparison to the 1980’s downturn.  I am guessing we will be into [2012] before our economy begins to grow in earnest once again.

Belt tightening by American consumers is evident in both the savings rate and retail sales data for yearend 2008.  As shown in Figure-2 below, the personal savings rate, a measure of the amount of disposable personal income that is not spent, increased to almost 3% of disposable income by yearend 2008.

This follows more than three years of savings rates below 1% of disposable income during the 2005-2007 massive consumption and debt binge by consumers.

   

 

This follows more than three years of savings rates below 1% of disposable income during the 2005-2007 massive consumption and debt binge by consumers.

         

In the long run more savings in the economy is good because it creates a pool of money that are loaned to companies to invest in productive resources for new plants and equipment.  It can also supply funding for reducing the budget deficit and thereby bypass the need to borrow from foreign creditors (see; “The Stress of Moving to Global Economic Balance”).  

 

It is unfortunate but the current consumer thriftiness will have negative impacts on the economy in the short term.  Saving more, generally translates into further declines in retail sales and other consumer-driven businesses (See; Table-1, “Fraud Street-Main Street-The Economy”).

               

Additional declines in sales in these consumer driven businesses may also add additional short-term surge to the cresting tsunami of U.S. unemployed.

 

                               

The $700 billion fiscal infrastructure-program anticipates stimulating approximately 3 million new jobs in the economy.  A quick drive-by of the cresting wave of over 12 million U.S. unemployed [[Figure-3A]] points to another bummer.

 

Although it sounds like a valiant effort in the right direction, it will not clip much height off the tsunami of U.S. unemployed.  In addition at this point, it is unclear how many of the 3 million jobs will be filled by non-U.S. workers.     

 

Consumer thriftiness dug into retail sales for the sixth consecutive month in 2008.  Sales plummeted again in December by approximately 3%.  As shown in [Table –1] below, the declines experienced in retail sales have not been equal across all retail sectors.

 

 

As discussed later in the section on state government, this is putting downward pressure on state sales tax revenues and contributing to the headaches of balancing state budgets.

 

 

The one surprise offered by [[Table-1]] is that food services and drinking place sales displayed an increase of approximately 3% above 2007.  I would have guessed that this would be the first to cutback in difficult times.  However, this data says nothing about substituting a sit down restaurant for the local McDonalds.

 

 

It is worth noting that two-thirds of the U.S. Gross Domestic Product(1) results from consumer expenditures.

 

 

 

 

Consumer thrift will have the effect of weakening the impact of the massive interventions the government has made to stimulate the economy. 

Liquidity problems in the economy coupled with declining sales has taken its toll on industrial production and employment.  Total industrial capacity utilization fell to [73.6] in December of 2008.  That is [2.7] percentage points above the 41-year historical low of [70.9] experienced during the 1982 recession.

The production of consumer goods declined [1.7] percent in December and contracted at an annual rate of [2.8] percent in the fourth quarter of 2008.

 

 

Unfortunately, politicians have seized on the politics of envy to shift the balance of power away from business and investors to regulators and Washington.  The main debate in Congress today continues to focus on re-inventing an old concept of class confrontation and igniting public perceptions of a ridiculous war between Wall Street and Main Street.  Yes indeed, politics at its finest. 

 

RECESSION EXTERNALITIES(2):  (Spillover Effects):

 

 

It is unclear what geopolitical and geo-economic effects a recession will bring.  It is unfortunate that the current recession is showing signs of bringing along the excess baggage of fear and scapegoats to ride shotgun over declining GDP, employment, and consumption.  (i.e. The world of protectionism, anti-immigration, and isolationism).

 

 

The government interventions are now showing signs of unleashing a new era of class fury and a political shift in power that may stimulate change but also can damage U.S. companies, business leaders, and investors alike.

 

 

The credit crunch and recession have proven that in the world of reality, Wall Street and Main Street are Siamese twins congenitally joined sharing vital organs, if one parishes so does the other.

 

Politics in its nastiest form always survives to reappear in another era; the political warfare involving the terms of Wall Street versus Main Street originates from an equally trying time in the late 1920’s during the great depression.

 

In this trite political theory, Main Street represents the interests of everyday working-class people and small business owners who share the values of hard work, community, and apple pie.  Wall Street symbolizes the dreaded corporate capitalists and financial economy.

 

At times throughout history, normally rocky times, a great deal of effort took place using this fuzzyheaded Wall Street/Main Street end-around attack to gain political power to manipulate the system towards one groups advantage.  This perceived war between Wall Street and Main Street is bogus regardless of the century it occurs.

               

Congressional leaders to gain greater powers in the market through regulation are using this “fuzzyheaded” ground attack.  The cold shoulder given to automakers, bad mouthing of Wall Street when being interviewed, and consistent butt kissing of bankers during hearings reeks of playing both sides of the fence to encourage political warfare and enhance their power base.  

 

Politicians choose to ignore how Wall Street and Main Street rely on each other in order to enhance their political power.  As shown in the primitive diagram below the interaction of Wall Street and Main Street form an economic gyrostabilizer that keeps an efficient fluid economy.  If the balance of power shifts significantly within this gyrostabilizer, the economy becomes destabilized and moves away from equilibrium.    

  

 

 

Main Street provides a transfusion of life into Wall Street through:

 

 

ü  The labor it supplies to resource markets for use in corporations and businesses.

ü  The savings it accumulates that provide loans to corporations or other consumers for expansion, production, and consumption.

ü  The company stock it purchases that provide funding for corporation productions and expansions.

 

Wall Street keeps markets flowing on Main Street by providing:

 

ü  A medium-of-exchange (cash, checking accounts, and credit cards) for market transactions.

ü  Loans to purchase cars, houses, and new factories.

ü  Perform centralized financial duties that receive, collect, transfer, pays, exchange, invest, and safeguard money for its customers.

                                       

 

Disequilibrium in credit markets (Wall Street) is at least partially responsible for igniting the recession in 2007.  However, the impact of the recession is painfully obvious in both Wall Street and Main Street.

 

If history is a leading indicator of the future, the deepening recession will stimulate economic globalization insecurities and build political momentum to enact protectionist and isolationist legislation.In addition, anti-immigration sentiments will once again raise its ugly head in search of scapegoats for job losses in the U.S. economy.       

 

 

STATE ECONOMIES:

    

 

It is unfortunate that the further down the query for economic information/data (i.e., Federal-State-Local) it either, does not exist, it is not current, or what is there is not relevant.

 

                                             

 

A decline in retail sales and income has resulted in a decline in state tax revenues.  Declining state revenues coupled with short-term contractually fixed costs is creating great budget duress among many states.  Shortfalls in state budgets are currently present in more than 40 states.

                       

 

As demonstrated in Figure-4 below, recessions can be very traumatic for state governments and take considerable time for them to claw their way out of the impacts.  During the recession of 2001, it took over 2 years before states began to demonstrate net budget savings once again (i.e., Revenues less Expenses).

 

     

 

 

California Dreaming (or Nightmare):

 

Short of having a terminating kindergarten cop for governor there is no other special reason for examining the recessionary impact on California.

 

 

The California economy decelerated in step with the national economy during 2007-early 2009.  Their main source of revenues, personal income, and sales taxes were or are currently under siege from the recession.  These two taxes account for over 72% of total state revenues.  Contractual cost increases has pushed expenses in the opposite direction of revenues adding to the frustration of maintaining a fluid balanced state budget.             

 

Political infighting over state budget reductions has added confusion, roadblocks, and speed bumps to an effect budget process (politics at its finest).

 

 

California taxable sales exhibited a sharp decline over the last 18 months.  Taxable sales declined by more than 13% since the 1^st quarter of 2007.  The steep line has continued to put extensive downward pressure on state revenues.

 

 

 

 

 

 

 

 

 

                      

Unemployment (Figure – 5) jumped to (1,731,760) or 9.3% of the total labor force (18,579,279) in California by the end of 2008.  December 2008 represented the largest number of unemployed in state history. 

After several legislative proposals to increase state taxes I became somewhat interested on just what state services all the tax revenues would provide.  Shown below in Figure-6 is the composition of the California taxpayer expenses for 2008-2009

                    

 

 

An examination of Figure-6 does not require a budgeting genius to notice that the majority of tax revenues expended are for education and health/human services (67 cents of each tax dollar collected).

 

The thought of the prospect of higher taxes increased my interest in peeking at possible reductions in state expenditures.

 

Being less than enthusiastic about examining any possible reductions in health/human services in an environment of massive foreclosures and unemployment (Figure-5), I briefly examined education in California.  Real basic stuff–what are taxpayers getting for this rather large bite out of tax dollars?

 

 

 

 

 

 

 

 

 

 

As demonstrated in Table – 2 below, California educational performance is in an abysmal state.  The highest ranking among states for California was 2nd, and that is for teacher salaries.  Academic testing of 4^th and 8^th grade students is consistently hovering around 45^th out of the 52 states in the nation.

 

 

 

The U.S. Chamber of Commerce state report card on educational effectiveness stated the following regarding education in California:

                              

Academic Achievement:Student performance in California is very poor—the state ranks among the lowest in the nation on academic achievement.  

 

 

 

Return on Investment:

California’s student achievement is low relative to state spending on education (after controlling for student poverty, the percentage of students with special needs, and cost of living). The state’s poor return on investment earns it a ‘D’ in their ranking.

 

 

FROM THE HEART OF MY BOTTOM:

 

 

 

 

 

 

 

 

 

 

ü  The raises and tax breaks given to California teachers are not working to enhance education and have not served as a rational investment of tax dollars (congress thinks that autoworkers have uncompetitive wages?).

 

ü  California consumers turned to foreign manufacturers for high quality automobiles.  Perhaps importing teachers will be next.  Even this may be a more rational economic choice for California Tax Payers.

 

ü  California teachers are actually contemplating a strike.  The United Auto Workers, C.E.O.’s, and bankers may be able to pick up a few tips on how to fleece American taxpayers from California teacher unions.        

    

ü  No federal fiscal stimulation money’s for education should go to a state with such poor educational results and low return on educational investment dollars.  These funds would be a better educational investment in another state.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Gross Domestic Product is the total market value of all the goods and services produced within the economy of the U.S. during a specified time- period.

     (2) An economic or political externality is a situation in which the private costs to the producers or purchasers of a good or service differs from the total social costs or benefits entailed in its production and consumption.

  

 

 

 

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