San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Friday, February 17, 2012

Three Tests Of Economic Truth In An Election Year

The political advertising is reaching a fevered pitch and is destined to only get worse.  In a year in which we have significant political elections, I offer up my three tests of economic truth for any candidate.  I would suggest that you apply these tests to all communication coming out of the mouths of the candidates.
  1. Any candidate who tells you that he will create new wealth is either a liar or economically ignorant.  It is economically impossible for any governmental activity to ever result in the creation of any new material wealth.   All new material wealth is created exclusively by individuals who make the decision to apply their labor to some capital asset.  The value added by that labor increases the value of the good (or service) and makes it available for trade and exchange among voluntary participants in a free market system.  It is through the exchange of these goods that wealth is created, as each participant values the good he purchases more than the media of exchange he gives up for it. It is true that government can create the appearance of creating new wealth but it is actually counterfeit wealth. The only way government can create wealth is by first extracting it from someone else.  There is no net new wealth created when government first extracts, via taxation and inflation, the supply of existing capital in order to transfer it to a politically preferred group.
  2. Any candidate who tells you he will create new jobs is either a liar or economically ignorant.  It is economically impossible for any governmental activity to ever produce any net new employment.  All jobs are created by profit seeking businesses operating in a free market.  As businesses expand and create more wealth it is usually the case that they go in search of additional labor to aid that venture.  The voluntary agreement of one person to sell his labor to a business in search of that labor is what creates new jobs.  It is true that government can create the appearance of creating new jobs but that appearance is a phantom.  Government can only create a job in one place by having previously extracted a job from another place.  Since government does not create any wealth it is impossible that it could ever create any employment.  Rather, government takes jobs from one location and, via regulation and taxation, assigns them to another location. That other location is always a politically preferred group.
  3. Any candidate who tells you that you have a right to anything other than your life, your freedom and your personal property is either a liar or economically ignorant. The framers of the US Constitution understood this principle.  They knew that government is incapable of conferring rights (other than the three listed above....and those are not conferred by government) upon its citizens and that any attempt to do so inevitably includes stealing from one group to give to another.  The notion that you have a right to have your doctor bill paid is economic nonsense.  The notion that you have a right to cash payments for not working is incredible.  The notion that you have a right to go to college and force your neighbor to pay the bill is ludicrous.  All of these alleged rights necessarily include the corresponding  activity of having the force of government levied against your neighbor to steal his property and give it to you.  That, of course, violates the real right that you have to keep and enjoy your property.  Candidates love to make up imaginary rights and include the enforcement of those rights in their speeches.  I believe we all are smart enough to see that talk of rights is nothing more than an attempt to buy votes.
After reading these three tests of truth for political candidates you may end up coming to the conclusion that all candidates for office are either liars or economically ignorant.  That does not mean you cannot vote for them.  The citizens of this country vote for lying ignoramuses all the time.  They fill our political arenas.  Just be aware of what you are doing.

Thursday, February 16, 2012

Bankers Are Middle-Men, Not Evil-Men

Although I have no statistical evidence to support this position, I believe it to be the case that businessmen are the most routinely villanized characters in the movies.  Among the general class of businessmen, I believe that bankers are the most villanized sub group.  Just think of Snidley Whiplash and you will get the picture.  If I am correct, there must be some reason why bankers are so often deemed evil.  Whatever the reason, there is no reasonable reason for it.  
Very few people understand the role of banking in the economy.  Bankers are middle-men.  The goal of all bankers is to put together those who want to lend money and those who want to borrow money.  It really is that simple.  It is also really that innocuous.  How could putting together lenders and borrows end up being deemed so vile by so many?  Did you borrow money for your car?  If so, that money came from investors who loaned their money to the bank.  Did you borrow money for your home?  If so, that money came from investors who loaned their money to the bank.  Do you have a credit card?  If so, that credit comes from money that investors loaned to a bank.  Did you borrow money to start or expand your business?  If so, that money came from savers who loaned their money to a bank.  All monies that you borrow are first deposited with banks by savers/investors.  Unlike the government, banks do not create money out of thin air.
What is evil about any of the activities I just described?  Why should bankers be subject to such intense hatred? I would suggest that the primary reason bankers are deemed to be evil men by so many in our country is directly related to envy and the immoral desire to obtain something for nothing.  When I take out a loan to buy my home I am initially thankful for the mortgage.  A year later, after I have been living in the home and am beginning to feel that I own it, I start to see the mortgage as a hindrance to my desired lifestyle. I am having a hard time keeping up with the purchases of my neighbor because this mortgage is too high.  A couple of years later, especially if I am having some financial difficulties, I begin to see the bank that loaned me the money as the source of my problems.  After all, this is my house!  What right do they have to threaten to take it away from me?  Of course, they have every right and, depending upon how much of the mortgage I have paid off, it is only partly my house.  But envy and self pity do not think rationally.  Somebody else must be responsible for my problems.  Eventually I decide to stop making payments.  It is not my fault.  The evil banker is taking away what is mine.  Help, somebody, please help!
Now the wheels have been set a rollin'.  The more I think about it the more angry I get.  It is the bank's fault I am in this situation.  They abused me.  They preyed upon me.  They are predatory lenders.  They forced this upon me.  I need help to protect me from this evil debt collector.  How dare the banker expect that I would give him his money back according to the terms we both originally, and voluntarily, agreed upon?  Who rides into the scene to help me (not Dudley Do Right)?  Government does, in the form of politicians.
What has been generally ignored in all the praise heaped upon the federal government and the Obama administration in light of the "mortgage settlement" is the fact that those people who saved up their dollars and loaned their money to the banks have been legally robbed.  Investors voluntarily entered into contracts to provide funds to banks in exchange for a stated interest rate.  Now, after the settlement, those agreements have been set aside and the government is going to determine how much lower the rates are going to be.  Could somebody please explain to me why this is not theft?  If I loaned my money to a bank expecting to receive 8% for 30 years on a mortgage investment, why is it not theft that I am now going to be forced against my will to accept only 4%?  I may have been counting on that 8% interest in order to pay my own mortgage.  Now, thanks to Obama, my income is drastically reduced.  But unlike those who were delinquent on their mortgages, I am an investor and I have no legal rights.  I am one of the upper 49% and what I have rightfully belongs to the lower 51%.  Those in the lower 51% believe they have a moral claim on my savings.  Those in the lower 51% believe that I am evil because I am in the upper 49%.  Those who borrowed money blame the bankers for their woes.  Those who loaned the money blame the bankers for the lower rate of return.  No matter what happens, the bankers lose.  Government loves it that way since it deflects the moral culpability away from them. Wonderful.

Wednesday, February 15, 2012

Good News Is Bad News

One of the most frustrating aspects about dealing with fellow human beings is the irrational nature of the beliefs of those who surround me.  Rather than being able to have logical discussions about the state of the economy and the stock market, I find myself being blitzed by a barrage of negativism that is based exclusively upon a backwards look at the past.  Yes, we have come through a difficult time in the economy although, as I have written elsewhere, it was not as bad as 1973-1974 or 1980-1982, and, of course, it was nowhere nearly as bad as 1929-1934.  Yes, we have had a difficult time in the stock market with ten year total returns that are barely positive.  But, business goes in cycles.  The stock market goes in cycles.  What happened in the past is not an indicator of what is going to happen in the future.  Simply because you feel bad about the past ten years is no reason to believe the next ten years will bring about the demise of the US as we know it.
An article on CNBC.com last Friday was entitled, "With Investors So Bullish, A Stock Pull Back Must Be Ahead."  Why?  Somebody give me a good economic or financial reason why a "correction" must be in our future.  The article presented no sound reasons for the belief that a stock market drop was ahead.  The entire article boiled down to the belief that we have been going up for three or four months now and we all know that the stock market cannot continue to go up, so it must be time for it to go down.  Ridiculous.  This is a perfect example of how the past clouds the perception of the present.  Because the stock market has gone down a fair bit in the past ten years, it must do so now that it has risen by twenty percent.
The entire notion of a stock market "correction" is an example of the negative bias.  Have you ever heard of a "correction" in which the stock market went up?  Why not?  Certainly it is possible for the stock market to be too low (as it is today).  In that case a rise in the stock market would be correcting that "too low" status.  Why must it always be the case that only stock market drops are corrections from a previous high?  Simply put, the answer is because human beings feel their stock market drops much more than they feel their stock market gains.  So we have come up with a title for the drops and we ignore the gains.
The stock market is still undervalued by 20%, when compared to historic price to earnings ratios.  Despite this fact, CNCB.com today reported that "Stocks close lower, with Dow Industrials finishing at lowest levels of the year."  Of course, the Dow Industrials are nowhere near the low point of the year.  That point was realized on the first trading day of the year.  The erroneous headline was later corrected.  Still, it is indicative of the mindset of those who believe we are doomed.
I was having a conversation with an investment professional the other day.  He informed me that I was crazy if I did not agree with him that the US is headed for hyperinflation and we should all pay off our homes and purchase guns and as much gold as we can find.  When I asked for his reasons behind his beliefs he had nothing for me.  When I presented our current economic conditions in light of historical reality he was in disbelief.  There was nothing I could do to persuade him we were not doomed.  I gave up.  Once a man is convinced the world is coming to an end, even good news becomes bad news. 
One last example, the Denver Post had this headline on the February 10th Business section, "Decrease in homes for sale".  The article went on to comment on how "a lack of inventory threatens to hurt the metro Denver market."  Now let me get this straight.  For the past five years we have been complaining bitterly about how many homes are on the market.  As a result of that glut of homes for sale, prices have dropped.  Now, buyers have stepped into the market and prices are beginning to rise.  As a result, the glut of inventory has dropped.  That is good news for homeowners.  Nevertheless, because of a persistent negative bias, the Post business writer is incapable of seeing this good news for what it is.  It is turned into bad news.  Amazing.

Tuesday, February 14, 2012

A Backwards View Of Political Leadership

The February 8th edition of the Denver Post had a front page headline that said, "Surplus calls into question leadership."  The story went on to describe how "last year, as the state budget was battered by the worst economy in generations, the Douglas County school district had to chop $36 million from its budget....It cut $2 million from administration, including several jobs....it eliminated 177 teaching positions."  Then, after bringing some necessary fiscal discipline to the budget, "imagine the public's surprise when, late last year, it learned that the district had a big chunk of unspent money left in the $390 million 2010-11 general fund budget:  $66 million to be exact."  The article concludes by saying that "many questioned district budgeting practices, and opponents of district policies saw an opportunity to galvanize public opinion."
Now let me get this straight.  During a time that was allegedly the "worst economy in generations", the budget planners in the Douglas County school system are being harshly criticized for running a budget surplus?!  How can it possibly be that folks would be upset with a school district that actually responded to economic reality and cut costs sufficiently so that, by the end of the year, a surplus remained in the coffers?  Why are these people not being praised for their efforts?  Why are these people not being sought out by every school district in the nation that ran a deficit in order to teach them how to operate within their budgetary restraints?  Why would the headline of the Denver Post assert that the leadership abilities of the Douglas County school district budget planners should be called into question when they responded to the worst economic conditions in years with a sound plan that kept the district under budget for the year?  This makes no sense.  Only in politics is it considered a bad thing to keep within a budget.  Only in politics is not spending more than you have considered to be an example of flawed leadership.
The Douglas County school district has 61,465 students in 80 schools.  There are 3,297 teachers and a total of 6,245 people employed as "full-time staff."  The teacher to student ratio prior to the layoffs was 18.6.  The teacher to student ratio after the layoffs was 19.7.  The 177 teachers who were laid off represented 5.4% of the total teaching staff and 2.8% of the total full-time staff.  The net result of laying off those 177 teachers was that each teacher had 1.1 more students to teach each year.  The average salary for a teaching in Colorado is $44,400.  The average salary for a teacher in Douglas County is $51,100.  It is difficult to see how the budget cuts imposed any serious hardship upon the students, the teachers, or the full-time staff. 
From January 1, 2008 through July 1, 2009, the total number of people employed in the private sector for the entire US declined by 6.2%.  For that same period of time the entire number of people employed by government (at all levels) increased by 1.9%.  Why should government be exempt from the economic cycles of recession and expansion?  Why should government employees not be subject to the economic downturns that are created by the money manipulative activities of the Federal Reserve?  There is nothing sacred about working for the government.
The total teacher layoffs in the Douglas County school district were less than the percent decline in private employment.  The budget planners in Douglas County should be applauded for their service to the district.  They were able to reduce the workforce at a lesser rate than the private marketplace and, at the same time, accrue a surplus in their budget.  That is the type of fiscally responsible behavior we would like to see from all branches of government.  To label those who were responsible for this brilliant monetary maneuver as bad "leaders" is the utmost of irresponsibility.   The Denver Post should be ashamed.

Monday, February 13, 2012

Another Example Of The Destructive Effects Of Envy

Last week (2/9) I wrote that the foreclosure settlement was an example of hypocrisy on the part of the government.  On Saturday, the Denver Post printed a letter to the editor from John W., of Conifer, in which he asserted the following:  "The settlement amounts to approximately $5 billion in assessments for each of the perpetrators.  During the same period of time, Citibank alone accrued $65 billion in revenues."
This assertion is in error.  Either John does not know the facts or he is lying.  By calling the banks "perpetrators" he has already biased the discussion in favor of his conclusion that the banks are evil and the mortgage holders are as pure as the driven snow.   A "perpetrator" is someone who is guilty of a crime.  None of the banks involved in the settlement are being charged with any crime.  John needs to change his terminology.
More egregious is his assertion that Citi earned $65 billion "during the same period of time".  I do not know what period of time he is speaking of  (he does not give a specific time frame), but I do know how much Citi earned in 2011.  It was 11.3 billion dollars on gross revenues of 102 billion dollars.  11.3 billion dollars is nowhere near the 65 billion dollars John says Citi earned.  So, I checked the total earnings for Citi from 2007 through 2011 (a reasonable thing to do since the "mortgage crisis" is considered to have started in 2007).  For the five year period ending 12-31-2011 Citi had a net loss of 3.7 billion dollars.  There is no way to manipulate the income statement from Citi to derive an income figure of 65 billion dollars for any recent time frame.  John seems to be lying.
John goes on to say that "those who have lost tens or hundreds of thousands on the wrongful sale of their properties...will find little comfort in a $2000 check."  His belief that the foreclosure proceedings instituted against delinquent homeowners constituted "wrongful sales" is in error.  The only allegation of wrong doing against the mortgage companies is that they used "robo-signers" to process the paperwork and that the foreclosure paperwork was not read in its entirety.  Other than the paperwork issues, there are no allegations from the federal government that any of the foreclosure sales were conducted under fraudulent pretenses.   Hence, there were no "wrongful sales".  The folks who lost their homes in foreclosure proceedings did so because they voluntarily signed a mortgage contract with one of those five banks that gave the banks the right to take back the property if they failed to make the mortgage payments.  There were no coercive activities on the part of mortgage holders or the bankers.  To describe the proper exercise of the voluntarily entered into terms of a contract as a "wrongful sale" is a gross misrepresentation of reality. 
John concludes by saying "Once again, the giants proceed with impunity."  Nothing could be further from the truth.  His assertion is little more than the tired old refrain of  "business-bad, government-good".  The giants (mortgage banks) did not proceed with "impunity".  They have had 25-37 billion dollars extorted from them by the Obama administration.  In the case of Citi, they had almost half of their 2011 profits taken from them, by force, to pay off the alleged "victims" of their services.  How anyone in their right mind could consider this an example of proceeding with impunity is beyond my imagination.
John serves as a good example of how the destructive effects of envy can radically alter the ability of a man to perceive reality accurately.  Once envy settles deeply into the soul, everything changes.  It becomes impossible for a person driven by envy to ever allow anyone else to make a profit.  It becomes impossible for a person driven by envy to rejoice in the success of his neighbor.  It becomes impossible for a person driven by envy to ever conceive of himself as anything other than a victim of some grand conspiracy centered upon him.  It becomes impossible for a person driven by envy to think of his neighbor's property as anything other than something he has a moral claim upon.  It becomes impossible for a person driven by envy to mind his own business.  It becomes impossible for a person driven by envy to tell the truth.  It is all very sad.