San Juan Mountains

San Juan Mountains
San Juan Mountains: Grenadier Range

Saturday, February 7, 2015

Dave Ramsey Gets Mortgages Wrong

For the record, as if such a mythical thing actually exists, let me state that I am a Dave Ramsey fan.  Dave Ramsey, for those of you who might not be aware, is a Christian financial adviser who does a good job of teaching biblical principles of finance, economics and investment.  Unlike most of the people I skewer in this blog I actually think Ramsey is a good guy with a sharp mind.  I have known people who have followed his financial advice and they have done very well for themselves as a result of it.  In fact, I find myself in agreement with everything I have ever read from Dave except his position on home mortgages. Let me tell you why.
I was poking around the website last week when I came across a link to one of Dave's articles.  Here is the link if you want to go there yourself.  The website asks the financial question, "Is the 30 year mortgage really a bad option?" and then answers it by quoting Dave Ramsey.  Here is what Dave had to say, "[T]he 30 year mortgage robs your future. […] It simply enabled borrowers to buy more house than they could afford by spreading the payments out over a longer term. On top of that, those homeowners paid tens—even hundreds of thousands of dollars more in interest."  The article then goes on to describe Dave's teachings on the matter of the 30 year mortgage.  It says, "Instead of a 30 year mortgage, Dave recommends getting a 15 year mortgage with 'at least a 10% down payment and monthly payments that are no more than 25% of your take-home pay.'  Following this advice is a great first step to ensure you build wealth quickly and avoid paying a mortgage into your retirement."  The article also makes an argument that I hear all the time from those who oppose 30 year mortgages when it says, " Paying off your mortgage completely will free up income later for other investments and allow you to live more comfortably in your older age."  Let's consider this argument for a moment, shall we?
It is true that the longer the term of the mortgage the higher the total amount of interest that will be paid but, so what?  Interest paid is just another opportunity cost of owning the mortgage and unlike other costs associated with home ownership, it is tax deductible.  There is a better way to look at a long term mortgage.  Consider these facts about a hypothetical $200k home with a $1000/mo 30 year fixed rate mortgage:
  • The home does not know and does not care how much of it you own prior to realizing capital gains.  In other words, you can own the home with 1% down or 99% down and the rate of capital appreciation on the home will be exactly the same.  
  • Your rate of return on the home is determined by how much you put down on it.  If the home appreciates at 5%/year and you bought it for cash, your rate of return on investment is 5%/year.  On the other hand, if you put down just $10,000 your rate of return on investment is 100%/year.  That is a very strong argument for putting the minimum amount down.
  • Unless your tax adjusted rate of interest on the mortgage is higher than your expected rate of total return in an alternative investment, you should put your money into the alternative investment.  If your interest rate is 5% and your tax bracket (combined state and federal) is 20%, your effective rate of interest on the loan is 4%.  If you can invest money into any other investment and realize more than 4%/year, also after tax adjustments, then you should never put a penny more into your mortgage than you are required to do so.  Given the fact that any quality stock mutual fund should realize in excess of 10%/year over the length of your loan, why would you ever put an extra penny into the mortgage?
  • The belief that you can pay off a mortgage in 15 years and then invest the mortgage payment for the next fifteen years in order to get a higher net worth thirty years from now is a myth for two reasons.  First, human nature being what it is, people simply don't do it.  Once the mortgage is paid off people find something other than investments to spend that freed up money on.  Second, and you can run the numbers as many times as you would like on this one and the results will always come out the same, it is impossible to catch up for the lost 15 years of the mortgage when you were not investing.  Compare the mortgage payment of a 15 year loan with a 30 year loan and plan on investing the difference between the two for thirty years versus investing the entire 15 year amount fifteen years later.  The 30 year mortgage always wins.  Your net worth will always be higher with the 30 year mortgage.  There is no substitute for long periods of time when compounding can work for you.  Shortening that term with a 15 year mortgage actually decreases your net worth at the end of the thirty year period.
  • With a 4% annual rate of inflation the real cost of your 30 year mortgage will be half of what it was at the start in just eighteen years.  By the end of the 30 year term you will be paying with dollars worth about 30% of their original value.  As long as banks are willing to assume the risk of loss associated with inflation why should you ever try to shorten the term of your loan?  That $1000 monthly payment is only a $300 monthly payment by the end of mortgage term.  Let the bank suffer all the losses associated with inflation by taking a loan for the maximum possible term. 
Unless the interest rate of the mortgage is greater than the expected rate of return in an alternative investment you should never seek to shorten or pay off a long term mortgage.  Just the opposite is the case.  When purchasing a mortgage get the lowest rate of interest for the longest period of time possible.  That principle will maximize your net worth at the end of the period.
Why, given the financial realities I have described, do advisers continue to recommend shortening or paying off your mortgage?  The answer to that question is found in Dave's comment about how the 30 year mortgage robs your future because it allows a person to buy a more expensive home.  Now that is a different issue entirely.  Buying a home that is more expensive than you can afford is just plain stupid.  Using a 30 year mortgage to get the monthly payment down so you can buy a larger house is dumb.  But that is not the fault of the 30 year mortgage.  The blame lies entirely with the sinful materialism of the house buyer.  I am not responsible for the sinful materialism of others.  As a result I will not recommend against a 30 year mortgage just because someone may use it incorrectly.  The 30 year mortgage is a great deal for those who use it responsibly.

Thursday, February 5, 2015

There Is No Free Market In The SDA

People who know nothing about economics like to talk about how the Socialist Democracy of Amerika is a capitalist country.  Capitalism is equated with the idea of the free market and it is brought up in discussions between various groups with different political agendas.  By far the biggest group of people are those who love to talk about how capitalism exploits the poor.  This group believes that income inequality and the wealth gap are direct results of a functional capitalist marketplace.  This group also believes in aggressive socialistic activity on the part of the federal government to correct the excesses of the free market.  There are others who like to speak of crony-capitalism.  Crony-capitalism is not really capitalism at all since it involves a direct connection between business and career politicians.  Under the terms of crony capitalism a business will donate large sums of money to a career politician in exchange for future legislation that will give his company monopolistic powers.  In a free market it is impossible for a monopoly to develop but under the operation of a crony-capitalistic society monopolistic business practices become the norm.
Today I am going to introduce you to a form of crony-capitalism.  By the end of today's post I believe you will be forced to conclude with me that there is no such thing as a free market in the SDA.  The economic system that we have in this country is actually a form of mercantilism.  Mercantilism is defined as, " economic theory and practice, dominant in Europe from the 16th to the 18th century, that promoted governmental regulation of a nation's economy for the purpose of augmenting state power at the expense of rival national powers.  It is the economic counterpart of political absolutism.   Mercantilism includes a national economic policy aimed at accumulating monetary reserves through a positive balance of trade, especially of finished goods . Historically, such policies frequently led to war and also motivated colonial expansion. The Mercantilism theory varies in sophistication from one writer to another and has evolved over time. High tariffs, especially on manufactured goods, are an almost universal feature of mercantilism policy."  That is a lot of economic mumbo-jumbo to digest.  For my purposes today I am going to focus exclusively upon the matter of tariffs.
A tariff is a tax levied by the government on imported goods.  There are many reasons given by career politicians for why they place tariffs on imported goods.  Almost all of the given reasons are lies designed to cover up the truth.  The most common reason given by career politicians for the enforcement of tariffs is to "level the playing field" in order to keep foreign producers from "dumping goods" and engaging in "cutthroat competition."  We are repeatedly informed that foreign producers are able to produce goods, that are also produced by domestic producers, at a lower price.  The reason those stinking foreigners are able to produce goods for a lower price is because they enslave their laborers in sweat shops, frequently torturing and killing those who do not produce the daily quota.  For the most part the accusations about foreign producers are untrue.  But even if they were true it would be none of our business.  That does not keep the government from enacting tariffs however.
The real reason tariffs are placed on imported goods is to protect inefficient and bloated domestic producers.  Foreigners can't vote for career politicians whereas SDA citizens can.  Guess who wins?  Career politicians promise to add a tax to an imported good in exchange for campaign contributions and votes.  It is a classic example of you scratch my back and I will scratch yours.  Who loses in this little game?  The consumers of course.  The higher prices that are paid for domestic goods as a result of the federal protections are charged to the consumers.  As is almost always the case in this immoral land, the career politicians and their lackeys make off like bandits while we end up holding the bag.
Occasionally some idiotic politician will claim that tariffs are important as a revenue raising tool for the federal government.  It is historically accurate to assert that the lion's share of federal revenues in the early years of this country came from tariffs.  That does not make them right however.  It is also accurate to assert that tariffs account for less than 1% of total federal revenues today.  Anyone who advances the argument that tariffs are needed to fund the budget is a liar.  Tariffs exist for only two reasons:  1) to keep career politicians in office and 2) to allow crony-capitalists to gain monopoly income.  Under the terms of true capitalism and in a real free market there would be no tariffs of any sort.  All countries would be free to produce and sell their goods on an open and free market, without any interference from government agencies.  Only then would honest producers be rewarded for their efforts.  Only then would consumers get a fair price for the products they purchase.
Just how bad is the tariff system in the SDA?  Go here for a complete list of SDA tariffs.  I encourage you to go to the website and poke around it for a while.  I believe you will be astounded at how many tariffs exist in this sad land.  For example, do you know that mules that are imported for slaughter are tariff free but mules that are imported as breeding stock have a 4.5% tax?  You can import all the rabbits you want but a fox will come with a 4.8% tax.  In addition, if you are not importing your fox from one of 16 favored countries, you will pay another 15% tax in addition to the 4.85% tax.  Did you know that imported Styrene-butadiene rubber (SBR); carboxylated styrene-butadiene rubber latex has a 20% tax on it but Styrene-butadiene-styrene block copolymers produced by solution polymerization (SBS, thermoplastic elastomers), in granules, crumbs or powders is tax free?
Here is another tidbit you might enjoy...footwear that covers the ankle but not the knee and having soles and uppers of which over 90 percent of the external surface area (including any accessories or reinforce- ments such as those mentioned in note 4(a) to this chapter) is poly(vinyl chloride), whether or not supported or lined with polyvinyl chloride is subject to a 4.6% tax unless you are importing it from a country other than one the 17 countries listed in the tariff book, in which case you owe an additional 25% tax.  Of course all of this changes if the footwear you are importing is not precisely defined above.  For example, if your footwear has only an 89% poly vinyl chloride surface area the tariff jumps to 37.5%, with an additional 75% tariff (making the shoe now more than twice its original price) being imposed if the shoe is not imported from one of 12 particular countries.
I know I should stop but I can't help myself.  This is so fascinating. Did you know that there is a 45% tax on imported central heating system boilers?  I guess the boilermakers union is pretty strong.  Imagine how much cheaper your boiler would be if there were no tariffs.  There is also a 45% tax on imported boiler parts.  There is also a 27.5% tax in imported rotors that are finished and ready for assembly.  That is good.  I can't stand the idea of seeing a rotor maker standing in the bread line.  There is also a 45% tax on contact lenses unless you import them from one of 15 select countries.  Last but not least, there is a 45% tax on imported upholstered seats with metal frames.  I suspect the upholsterers union, the seat makers union and the metal workers union all got together to get that tariff enacted. 
My point is simple.  If you do not believe me go to the official government website describing the tariffs in this mercantilist land and explain to me how it is that we are a country operating with a free market.  Nothing is outside the reach of government regulators.  Everything that happens in the economy is regulated for the benefit of career politicians and those who finance them.  So if you ever want to write a critique of the free market or capitalism, do not critique what happens in this country because it is neither capitalistic nor free. 

Wednesday, February 4, 2015

I Live In A Monarchy, Under A King

Although it is hard for this old Welshman to believe, I now realize that I live in a monarchy, under the authority of a King.  My King's name is Obama.  Although he does not call himself a King I am smart enough to recognize the marks of kingship. When a man walks like a king and talks like a king, he is a King.  Obama has all of the monarchical trappings except the scepter and the throne so I am forced to conclude that the Socialist Democracy of Amerika is actually a functional kingdom, with Obama on the non-literal throne.  Let me explain my position to you.
Article II, Sections 2 and 3 of the Constitution of the United States (what the Socialist Democracy of Amerika was governed by when it was first established) describe the authority of a person it calls the "President."  Here, in part, is what it says about this mythical figure, "The President shall be Commander in Chief of the Army and Navy of the United States...he shall have the power to grant pardons for offenses against the United States...he shall have the power, by and with the consent of the Senate, to make treaties...he shall nominate, and by and with the consent of the Senate, appoint Ambassadors...Judges of the Supreme Court and all other Officers of the United States whose appointments are not herein provided for...He shall have the power to fill up all vacancies that may happen during the Recess of the Senate...he may convene both houses and, on extraordinary occasions, he may adjourn them until such a time as he think proper."  The above selections from Sections 2 and 3 of the Constitution delineate all of the powers delegated to the President of the United States.  Any president who attempts to do anything that goes beyond the powers specifically described above is in violation of his vow to uphold and defend the Constitution and should be impeached for doing so.
What I just wrote sounds quite quaint, doesn't it?  What an ignorant and silly little man I must be.  Don't I know that the Supreme Court has declared that the Constitution is a "living" document, free to be added to and subtracted from at will?  Am I totally unaware that the Constitution is a "living" document and, as such, contains hundreds of civil rights not specifically described therein?  How can I possibly be blind to the fact that the Constitution guarantees a woman the right to conspire with a government certified doctor to murder her baby?  I guess I am just not very good at hermeneutics.  When I read a document that is amazingly simple to understand I actually understand what it says.  When the Constitution declares that it exists for the purpose of granting powers from the states to the Federal government and that whatever power is not granted within the document is reserved to the states, I don't have a problem understanding that.  I guess I am just too simple minded to understand how the historical document known as the Constitution can be interpreted exactly the opposite of what it says and I somehow then end up being the crazy person in the room.
There is one more little thing that the President is permitted to do.  It is found in Section 3 and says, "He shall from time to time give to the Congress information of the State of the Union and recommend to their consideration such measures as he shall judge necessary and expedient."  Are you aware that that little phrase serves as justification for the mulit-million dollar process, paid for by the taxpayers, of creating and serving the President's Budget upon Congress?  Where in the Constitution is the President empowered to create a budget?  Nowhere.  In fact, the Constitution specifically states that all revenue bills must originate in the House.  The Senate may not propose a tax increase and the Executive Branch, including the President, has no authority whatsoever to propose a tax increase.  In fact, neither of them may have anything to do with tax bills at all.  Section 8 of Article I specifically states that Congress shall be responsible for all spending bills and, thereby, is exclusively responsible for the creation of the federal budget.  This being undoubtedly the intention of the original governing documents of this land, where does the President get the authority to propose a budget?  I conclude that the President does not have the authority to propose a budget.  I also propose that we do not have a President, we have a King.
An Associated Press article written by David Espo described the President's proposed budget for the upcoming year.  Here is some of what Mr. Espo wrote, "With higher taxes on the wealthy and billions in new spending, President Barack Obama's no-balance budget lays down an audacious challenge to Republicans who swept to full control of Congress last fall and now claim a mandate to elminate deficits in the next decade.  Make that the second audacious challenge in the past three weeks -- coming after a State of the Union address in which Obama threatened to veto Republican legislative priorities and demanded lawmakers enact his own....To do that he tars Republicans as apostles of 'mindless austerity' that has set back the economic recovery....the word 'austerity' appears seven times in a 17 page introduction, none of them favorable and usually attributed to Republicans and described as mindless or needless."  Does the President/King's budget make constitutional sense to anyone?  Please help me to understand.  Where in the Constitution, which the President swore an oath before God to uphold by the way, does it say that the President has the right to "demand that lawmakers enact his own" budget? Furthermore, the belief that the budget of the federal government of the United States, as it now approaches $4 trillion in spending as well as massive annual deficits, is somehow an example of austerity must make us question the sanity of our President/King.  
What I find most interesting in this entire matter is the fact that nobody is pointing out what I am pointing out in this blog post.  Republicans are screaming to high heaven about how the President's budget is dead on arrival in Congress but nobody that I have seen or heard is saying anything about the fact that the President has no right to propose a budget in the first place.  The role of the President, as clearly defined in the Constitution, is simple.  The Republicans are up in arms over the fact that he has said he will veto many of their proposed new laws but the right to veto is a right given to him by the Constitution.  That presidential right is found in Article I, Section 7, under the powers and authorities granted to Congress.  So I find myself in this strange new world where Congress is complaining about the constitutional things the president might do while, at the same time, accepting all of the unconstitutional things the president does.  Have they all gone mad?
I will answer my last question.  No, they have not all gone mad. They have all made the rational decision to ignore the limits imposed upon them by the Constitution.  Both Congress and the President do not want to be limited in their powers so they have struck a new deal in which they pay lip-service to the Constitution, even going to the point of mocking God by swearing a false oath to it, and then go about their business under the terms they have agree to among themselves.  Under the terms of the new agreement, which are written down nowhere and disclosed to no one but themselves, the office of President has been transformed into the office of King. Most important to all concerned, the new rules are designed to allow them, both Congress and the King, to promulgate their positions in perpetuity.  The new rules create a permanent ruling class of career politicians.  That, of course, is their goal.  Leading the country is just a ruse designed to fool the electorate and keep themselves in power.  It works quite well, does it not?  Long live the King!

Tuesday, February 3, 2015

Has Real Income Really Gone Down?

I am sick and tired of hearing people who understand nothing about economics tell me that working class families have suffered through a ten year period in which their real wages have declined.  Politicians repeat that lie continuously.  I understand they have hidden motives for doing so.  Politicians who are not in power make the proclamation as a way to get people stirred up against those presently in power in order to get themselves installed as our next generation of rulers.  Politicians who are in power make the same argument in order to justify additional government spending programs which are also, not surprisingly, designed to keep them in political power.  Media lap-dogs repeat the words coming from the mouths of their chosen career politicians in order to increase their ratings by appealing to the political biases of their respective audiences.  The entire process is self-reinforcing and before long nobody has any idea what is true about income in the Socialist Democracy of America.  Until today.  Allow me to enlighten you about personal income.
Here is a graph of real personal income for the SDA over the past ten years.  Look at it carefully and tell me if real personal income has declined over the past decade.  It should not be hard to tell if it has:

"Real" income is income that has been adjusted to reflect the rate of inflation.  In other words, the income levels that you see are not the gross values but they have been adjusted downward to the "real" value of income after inflation has been accounted for.  The chart above shows me that real personal income in the SDA was ~11.1 billion dollars ten years ago and ~13.7 billion dollars today.  That represents a 23% real increase over the past ten years.  How can that be considered a drop?  Yes, there was a brief short term decline in real income during the Great Recession but that was quickly overcome by the economic growth that took place as the recession ended and the present economic expansion began.
Here is a graph showing the Real Disposable Personal Income.  Disposable income is lower than personal income because the folks who make the calculations subtract several expense items they consider to be fixed from the total income figure.  Look at this graph and tell me if real disposable income has declined over the past ten years:

As you can see, the graphs are almost identical with real disposable personal income rising by ~21% over the past ten years.   There are a handful of strange blips in the graph where real disposable income rose dramatically for a short period of time.  I have no idea why those blips are there and I am far too lazy to do the research required to find out why they are there.  It is sufficient for my purposes that the blips are upward rather than downward.  Clearly real disposable personal income continues to rise.
The next graph shows real personal income per capita.  Take a look at it and tell me if the average citizen of the SDA has experienced a real loss of income over the past ten years:

Do you see any evidence of a loss of per capital income over the past ten years?  All I see is a net gain of 9% over the past ten years.  Last time I checked a net gain of 9% was not a loss of income.  In fact, it was a gain.  Granted, it would be nice to have had a net gain of 109% in real disposable personal income over the past ten years but we did, after all, experience the worst recession since the Great Depression during that period.  I am happy to come out with a gain.
So where do the people who keep telling us income has gone down get their information?  The next graph answers that question.  Here is a graph of real median household income:

Ah....finally we have a graph showing a clear downward trend.  What would you think about my integrity if I took this graph and declared that it represents reality in the SDA and then I followed that up with an announcement that people are making less money today than they were ten years ago?  That is precisely what the media and career politicians have done.  Do you see the flaw in their argument?  Can you figure out how it can be that all statistical indicators of personal income have risen over the past ten years except real median household income?
If you have not figured it out yet, let me give you a hint.  What variable has changed from the previous three graphs?  The new variable in the calculation is that income is no longer being calculated for the entire country nor is it being calculated for each individual member of the country.  Income is now being calculated by the household.  The problem is that, unlike the entire country and unlike each individual citizen of the country, the number of people in a household is subject to change.   In fact, there are significant changes to the definition of a household that have taken place over the past ten years.
Over the past ten years the total number of single person households has risen.  A single person household has only one wage earner within it.  Does it not make sense if the number of households with only one wage earner increases it is possible or even likely that household income could go down?  The flip side of the coin is that over the past decade the total number of two earner households has declined.  These are households in which two or more people used to work but only one is working today.  Quite obviously if fewer members of a household are earning wages it is going to be the case that total household income will likely go down.  The reason the real median household income has declined over the past ten years is not due to a real decrease in personal income.  It is entirely due to a change in the number of earners in the households of this welfare-ridden land.
Over the past ten years the number of people receiving welfare payments has skyrocketed.  Current levels of welfare benefits are the highest in the history of the SDA.  Simply put, there are more people dependent on the federal government today than an other time in SDA history.  According to the Survey of Income and Program Participation taken by the SDA Census bureau, well over 100 million citizens are now enrolled in at least one welfare program run by the federal government.  That is roughly one in every three citizens.  Consider these tidbits:
  • In 2000 there were 17 million people on food stamps.  Today that number is 46 million.
  • The number of SDA citizens on Medicaid grew from 34 million in 2000 to 54 million in 2011.
  • The number of SDA citizens receiving federal housing assistance funds increased by 42% between 2006 and 2010.
These are just a few of the many grossly expanded federal welfare programs.  Now let me ask you a question.  If you were a member of a family that is living on the margin of a federal wealth transfer program would you choose to keep working or would you quit and get paid a little bit less to be on a permanent, government financed, vacation?  Millions of people have made the entirely rational decision to quit and let the federal government finance their permanent vacations.   Now let me ask you another question.  Do you think this behavior could be at least partially responsible for why fewer family members are working today?
I conclude that despite what we are being told, real personal income is rising.  I also conclude that median family income is going down but not because income is going down.  I conclude that median family income is going down because more people are getting divorced, more people are shacking up and more people are going on government welfare programs.