Well, Christmas is coming, Operation Twist is coming to an end, oil is crashing, the Senate is flipping...an interesting time for the economy. Predictions? Pretty early to tell, but "all things being equal"--a dangerous thing to say in economics--I look for a return of the Travel and Entertainment industries at the minimum. Look for slowly falling food prices. Long term national debt remains a big problem, a stronger dollar could possibly help with that; however, congress would have to hold the line on spending, and that is a big if...especially when considering the spending on the new healthcare system, overseas military conflicts, and with a much needed modernization of the infrastructure coming into view. The first and the last issues could possibly strengthen our posture for doing business in the long run, if done right--another big if, while the middle issue...well, not so much. With an expanding global population, food, health and technology look to hold continued opportunities for investment. Energy is a big question mark at present. Stay current, stay real, stay true.
DT
Saturday, December 13, 2014
Saturday, October 1, 2011
Pause/Reflect Before 'Twist'ing
As the Fed prepares to implement Operation Twist next week there is a moment for pause and reflection. Operation Twist is designed to push down long term interest rates and conversely put upward pressure on the price of long term bonds and debt instruments by trading its short term debt instruments for long term debt instruments--thus bidding up the long term instrument's price, and due to the inverse relationship between price and yield, driving down the interest yield. By thus pushing down long term interest rates, things such as mortgages should become more affordable and help stimulate the housing industry out of its slump. On the flip side, what I expect to happen is that by dumping short term instruments onto the market, the Fed in effect will drive down the price of those instruments, resulting in the inverse effect of a bidding up of their interest yields on the part of the sellers, thus inducing holders of long term debt into trading their positions for more lucrative returns in the short term market. With short term notes carrying higher interest tags, short term borrowers will be slammed, and such credit will become less affordable to consumers and small businesses, thus putting downward pressure on many 'core' purchases made on credit and creating a drag effect on sales, expansion, and employment in the retail industry--here-to-fore one of the few bright lights in the faltering recovery. Artificial growth, at first in in the equities market, and now in the long term debt (mortgage and housing) market, resulting from the Feds monetary maneuvers, in this author's opinion, only stimulates temporarily, then passes through the system, leaving investors and consumers dry, disillusioned and desperate.
The lack of demand due to shrinking incomes and joblessness is the real reason for the stubborn downward pressure on the economy. The Fed can temporarily increase demand, but they can only indirectly and slowly influence unemployment and underemployment, which in the long run, are essential to get the economy back to growing at an admirable rate on its own. The real focus of the government should be on 1) increasing exports, to employ domestically and to bring wealth back into the country, along with 2) a lowering of corporate taxes and regulatory disincentives which drove U.S. companies overseas and discouraged foreign companies from moving into the United States and employing American citizens in the first place. Exporting and the repatriation of U.S. corporate investment and jobs should be the real emphasis of the Federal government. These type of changes cannot be made by the Fed, only by the elected government. The elected government holds the keys to restructuring the economy in such a way that provides the right environment for domestic investment and job creation. Until the elected government steps up and shoulders its constitutional mandate to "promote the general welfare"--in this case the necessary environment for businesses to invest, expand, and employ domestically--there is no cure for the flagging economy.
D.T. Johnson
The lack of demand due to shrinking incomes and joblessness is the real reason for the stubborn downward pressure on the economy. The Fed can temporarily increase demand, but they can only indirectly and slowly influence unemployment and underemployment, which in the long run, are essential to get the economy back to growing at an admirable rate on its own. The real focus of the government should be on 1) increasing exports, to employ domestically and to bring wealth back into the country, along with 2) a lowering of corporate taxes and regulatory disincentives which drove U.S. companies overseas and discouraged foreign companies from moving into the United States and employing American citizens in the first place. Exporting and the repatriation of U.S. corporate investment and jobs should be the real emphasis of the Federal government. These type of changes cannot be made by the Fed, only by the elected government. The elected government holds the keys to restructuring the economy in such a way that provides the right environment for domestic investment and job creation. Until the elected government steps up and shoulders its constitutional mandate to "promote the general welfare"--in this case the necessary environment for businesses to invest, expand, and employ domestically--there is no cure for the flagging economy.
D.T. Johnson
Friday, September 23, 2011
A Windfall from Twist?
Are we inadvertently reaping a windfall as consumers from the Fed's Operation Twist that originally brought such negative reactions and sell offs on Wall Street? Commodity prices, including oil, are crashing. Gas prices at the pump are falling, and perhaps food prices will follow. While generally deflation is not considered a positive thing, perhaps this will give consumers some relief from the artificially high prices at the pump and in other 'non-core ' inflationary items such as food--which grew out of the Fed's QE2 program earlier this year. Lower energy prices might help jump-start sputtering industries and lower transportation costs for goods in general--putting downward pressure on prices of competitive manufactures, while money saved at the pump and in the grocery store might encourage consumers to go back to consuming, and hence set merchandisers and manufactures back to supplying and the economy back to growing. On the cautious side, the Fed's maneuvers have complex implications for the markets that may not be fully understood, and in this climate it's hard to look very far into the future. Is this an unforeseen windfall from the Fed's pronouncements this week, or a fleeting phenomenon? At this point any relief, no matter how minor seems good.
D.T. Johnson
D.T. Johnson
Economic Warning and Explanation for Americans/QE2, the U.S. and China
China's has started an ongoing process of jacking up their interest rates in order to slow down their economy and to keep the value of the yuan strong while stopping inflation. The U.S. on the other hand is doing approximately the opposite. Through the Fed's policy of Quantitative Easing (QE2) it is printing money to buy up government debt, driving bond yields lower and forcing people into the more risky stock equities, all in an effort to keep corporations growing, and in theory stimulating new hiring, while at the same time making borrowed investment capital cheap, which in theory helps people with mortgages and other loans along with putting small businesses in positions of favorable liquidity levels.
All this as well, in theory, resuls in more refinancing, spending and expansion/hiring. This also makes for a larger supply of dollars in our economy, which, in turn, drives down the value of each dollar--which means dollars aren't worth as much anymore and the places at which we are buying things start to want more of them. In other words, our prices on things like food and gasoline go up (I'm sure you've noticed). How does Congress keep buying things the government needs at these high prices? Answer, they try to borrow money from China. Problem...since U.S. prices have gone up, so has the price of buying a US Treasury Bond--the thing that Treasury Secretary, Timothy Geithner wants to sell to China for money to finance our government's operations (that's how we borrow money from China--by selling US Treasury Securities--which are kind of like I.O.U.s with payouts (to the Chinese) along the way till the due date--we get a lot of cash up front from China in return). Look, the price of our bonds have gone up. China will have to use more of the dollars she's got stashed in her bank to pay the higher price (she got those dollars originally when we bought her stuff at Walmart (and other Chinese marketing channels), who, in turn, sent a sizable portion of their dollar revenues back to China after they taking their cut). The question now is, will China want to drain her dollar account in her bank to pay for the more expensive I.O.U.+/U.S. bonds at the new higher price? Not so much.
All this as well, in theory, resuls in more refinancing, spending and expansion/hiring. This also makes for a larger supply of dollars in our economy, which, in turn, drives down the value of each dollar--which means dollars aren't worth as much anymore and the places at which we are buying things start to want more of them. In other words, our prices on things like food and gasoline go up (I'm sure you've noticed). How does Congress keep buying things the government needs at these high prices? Answer, they try to borrow money from China. Problem...since U.S. prices have gone up, so has the price of buying a US Treasury Bond--the thing that Treasury Secretary, Timothy Geithner wants to sell to China for money to finance our government's operations (that's how we borrow money from China--by selling US Treasury Securities--which are kind of like I.O.U.s with payouts (to the Chinese) along the way till the due date--we get a lot of cash up front from China in return). Look, the price of our bonds have gone up. China will have to use more of the dollars she's got stashed in her bank to pay the higher price (she got those dollars originally when we bought her stuff at Walmart (and other Chinese marketing channels), who, in turn, sent a sizable portion of their dollar revenues back to China after they taking their cut). The question now is, will China want to drain her dollar account in her bank to pay for the more expensive I.O.U.+/U.S. bonds at the new higher price? Not so much.
What's Congress going to do if China won't buy their bonds/lend them the money they need so that they can keep spending money on stuff that they and President Obama want? Answer, you're not going to like it but...they're going to have to stop spending so much money on us, also they're probably going to raise our taxes to get more money. They're probably also going to keep purchasing the Treasury's securities, trying to stimulate the economy, while at the same time driving up inflation and making the dollar worth less, until our money won't buy us the things we need and our standard of living is gone, all the while the government sinks under its accumating debt. Why is bankruptcy a possibility?-- because our country is over $14,000,000,000,000 (that's $14 trillion--with a 't'--in debt (that's about the same amount of money value that everyone in the entire country (U.S.A.) produces together in one year (GDP). The country that is the single largest holder of that debt is China.
What's all this mean to U.S. citizens? 1) We're going to have to get ready for the government to not spend so much money on us; 2) we're going to have to stop spending so much money on things we don't need, be smarter shoppers, negotiate better deals, make sacrifices, and try to find new ways to make money; and, 3) prices on food and gasoline and other things are probably going to keep going up, until the Fed stops the type of activity described above..
Now is the time to fix this and prove we're Americans.
Gingrich Forsaken by Fellow Republican Staffers for His Positions on Issues
Gingrich Forsaken by Fellow Republican Staffers for His Positions on Issues
I read in The Wall Street Journal that Newt's campaign staffers have left him (Neil King Jr. at neil.king@wsj.com, June 9, 2011). This is primarily due, no doubt, to his opposition to the Ryan Plan--transforming Medicare into a private voucher system. Newt knew that the vast majority of Americans, including many Republicans opposed the Ryan Plan. Trump knows this as well. Newt and Trump are the only Republicans to admit it. Ryan's Plan, whether you agree with it or not, is a political non-starter. For one thing, who in the 50-55 age range is going to support it? We've paid into Medicare our whole adult life and now the arbitrary 55 year old cut-off line says to us, "Too bad you didn't quite make the cut-off line...now look, here's some vouchers instead". And whether or not one finds Newt's comments about a 'radical' plan offensive, the plan is 'radical' by definition. The word 'radical' comes from the Latin word for root. A radical change therefore involves pulling up a plant, or program--Medicare--by it's 'roots'. Medicare is a well established 'plant' with deep 'roots'. Polls show the Ryan Plan would be opposed by as many or more Americans than opposed Obamacare. Shall we punish Newt and Donald because they dare tell the truth? A better way to solve the budget problem would be to downsize the federal government by combining/integrating government departments/agencies. Fold the Department of Education into the old model of Health, Education, and Welfare. Fold the EPA into the Department of the Interior. Fold the IRS into the Department of the Treasury. We forget that Reagan sought to reduce/sunset the Dept. of Education (which has existed only since Jimmy Carter), while most Republicans agree that the EPA is way too big, powerful and growing, and while Huckabee has called for the elimination of the IRS. We do not have enough money anymore to maintain so many departments, separate staffs, facilities and materiel. Any well run business would do such things in such a situation.
D. T. Johnson, June 2011
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