Officials in the administration this week stated that they were declaring war for the economy. If this is indeed a war, we must define who the enemy is so that individuals can determine which side of the war they are on. However, the administration in its declaration failed to clearly define who the enemy was. This leaves us to look at the evidence provided by the administration’s current strategy in fighting this war as our only means of determining who the enemy is. Exploration of this evidence provides clues as to industries and individuals the war strategy is going to target. Of course all wars also have collateral damage. The administration’s strategy must assess any potential collateral damage and devise a strategy to minimize it.
The recent economic strategy seems to target healthcare and environmental issues. If you happen to be involved in industries affected by these issues, you may find yourself the target of the administrations war for the economy. You can either surrender by getting out of the industry or develop a defensive strategy to fight the administration.
The administration seems to believe that people are filing bankruptcy, losing their homes and losing their jobs due to the lack of affordable healthcare. Their solution is to have government provided healthcare that will be provided “free of charge”. I placed this in quotes because I believe everything has a price. The administration has stated that it does not intend to suspend the current private healthcare system however, if given a choice; consumers will opt for the free product. This means that consumers of the current system will leave to take advantage of the free system and the companies currently involved in our private healthcare industry will go out of business through attrition.
The administration also seems to believe that continued economic security depends on a healthy environment. This may be true but we must ask the question is our environment truly on the verge of disaster? We have been told for years that temperatures worldwide are increasing and that if the trend of global warming is not reversed our planet is doomed. Environmentalists target industries such as big oil, big coal, and the automakers as enemies of the environment. However, this has been one of the coldest winters in recent history causing many once proponents of the theory of global warming to begin to question the theory. The bottom line is that predictions of a global catastrophe may have been premature.
As a defensive strategy individuals and businesses involved in the healthcare, energy, and auto making industries need to band together to fight the proposed onslaught by the administration. This means they should not take any more proposed bailout money or loans from the government as these may actually be Trojan horses with many strings attached. As an example, many states are planning on turning down portions of the money offered in the recent stimulus plan because is requires that they change their unemployment laws in order to comply with the new federal guidelines. After the bailout money runs out, they will still have to pay additional costs to comply with the new federal standards.
Targeted industries also need to lobby their legislators about their concerns. Lobbying the congress has taken on many negative connotations in recent years but in reality lobbying is actually a right provided by the constitution. Every citizen, and businesses are actually legal citizens, has the right to petition the government regarding their concerns. When restrictions are placed on lobbying, the government is actually placing restrictions on this constitutional right.
As for individuals that are potential targets in this war, we must first consider individuals engaged in the previously mentioned targeted industries. Corporations may legally be considered individuals but corporations are comprised of individuals who earn their livelihood by working for the corporation. These individuals become collateral damage in this war if the administration insists on targeting their employers. The administration must devise a plan to minimize the collateral damage their attacks will cause or better yet, not engage in the attacks at all.
The administration is also planning on increasing taxes as well as reducing and eliminating deductions for individuals earning more than $250,000 per year. They sell this proposal by spinning it as a tax increase on the rich. However, many small businesses today are structured on the form of a limited liability corporation (LLC). Many of these corporations make more then $250,000 per year. The administration rightly can claim that these corporations pay no taxes but the individual members of these LLC’s pay the taxes. These members will need to pay the additional taxes and most likely will do this by either laying off some of their employees or not expanding in order to keep their incomes below the $250,000 level. The collateral damage this will cause is increased unemployment and stifling the creation of new jobs, which are desperately needed to reduce unemployment.
In my opinion the administrations declaration of a war for the economy comes with unacceptable collateral damage. The current economic recession has been difficult but declaring war on it will do nothing to solve the problem. As we have seen from our exploration of the problem, fighting this recession as a war will carry unacceptable collateral damage and prolong the recession or turn it into a depression.
Recessions are common and are not wars to be fought. Recessions are when the economy takes a break to correct its wrongs so it can emerge stronger. When the government gets involved and hinders or stops the correction process, it makes the problem worse and lengthens its duration. I urge each one reading this posting to lobby their senators and congressional representatives, urging them to stop the insanity of continued bailouts and stimulus packages and instead allow the economy to correct through the free market. The government’s involvement in the process should be limited to providing temporary assistance to those adversely affected as the economy corrects itself. I believe this is the best strategy since it minimizes the government’s role to mitigating collateral damage while preserving the free market system that has been the foundation of our economy throughout our nation’s history.
Sunday, March 15, 2009
Monday, March 9, 2009
What is the stock market?
Markets are where goods and services are traded. In ancient times, goods and services were traded through bartering. Imagine if when you went to the grocery store to buy milk and bread you had to bring in a cow. This is explains why cash was invented. Now we would sell the cow, take the cash from the sale, go to the grocery store, and buy our bread and milk.
The stock market is not much different from the markets where we buy groceries. The only difference is that instead of selling groceries, they sell stock. Stock represents part ownership in a corporation. In theory, if a company is profitable its stock price should increase in proportion to the earnings but this is not always the case.
In the 1990’s everyone was investing in the latest dotcom stock. Even though most of these companies failed to show a profit, their stock prices continued to increase because of the law of supply and demand. Since the demand for these stocks was unusually high, the prices went up. However, when investors realized that these companies were not profitable, they began selling off their stock and prices went down. These unprofitable dotcom businesses went out of business leaving only those that were profitable. This caused the market to stabilize causing stock prices to bottom out and begin increasing again.
We are seeing a similar situation today. Banks were issuing sub-prime mortgages and showing high profits. These high profits led a high demand for the stocks of the banks and financial institutions issuing these loans. However, when borrowers began to default on the loans, investors became skittish and began selling off their shares, leading to the current market decline. If the banks and financial institutions who issued these toxic loans were allowed to fail, only the profitable companies would remain. This would bring stabilization to the markets, allowing the markets to bottom out and begin to grow once again.
President Obama recently mentioned that he paid little attention to the stock market, claiming it was nothing more than a tracking poll. As we learned in last weeks posting, many individuals today have their 401K’s and pensions invested in the stock market. These hard working individuals are witnessing the disappearance of their retirement nest egg and the money they were saving for their children’s education. I urge President Obama to make restoring the stock market a priority since it represents the wealth of hard working Americans.
We must allow the current market correction to happen. Bailing out unprofitable companies does nothing but prolong the correction. After the correction has run its course and the unprofitable companies have gone away we need to offer incentives to those companies that are left so they can become profitable. This is what tax cuts accomplish. They worked when JFK did them in the 1960”s. They worked when President Reagan did them in the 1980’s. They even helped lessen the impact of the terrorist attacks of 9/11. There is no reason to doubt they would help us get out of this current recession.
The main tax that should be cut is the capital gains tax. This will encourage investors to put their money back into the stock market where their taxes will be lower. We should also cut the corporate income tax rate. This will result in a two-fold benefit. First, it will encourage companies to remain in the United States instead of going to other countries where their taxes would be lower. It would also increase the after tax earnings of these companies, attracting new investors and creating new jobs. The question I have is why this is so difficult for President Obama and his so-called highly educated economic team to figure out. If you have an answer to that question, feel free to leave your comment.
The stock market is not much different from the markets where we buy groceries. The only difference is that instead of selling groceries, they sell stock. Stock represents part ownership in a corporation. In theory, if a company is profitable its stock price should increase in proportion to the earnings but this is not always the case.
In the 1990’s everyone was investing in the latest dotcom stock. Even though most of these companies failed to show a profit, their stock prices continued to increase because of the law of supply and demand. Since the demand for these stocks was unusually high, the prices went up. However, when investors realized that these companies were not profitable, they began selling off their stock and prices went down. These unprofitable dotcom businesses went out of business leaving only those that were profitable. This caused the market to stabilize causing stock prices to bottom out and begin increasing again.
We are seeing a similar situation today. Banks were issuing sub-prime mortgages and showing high profits. These high profits led a high demand for the stocks of the banks and financial institutions issuing these loans. However, when borrowers began to default on the loans, investors became skittish and began selling off their shares, leading to the current market decline. If the banks and financial institutions who issued these toxic loans were allowed to fail, only the profitable companies would remain. This would bring stabilization to the markets, allowing the markets to bottom out and begin to grow once again.
President Obama recently mentioned that he paid little attention to the stock market, claiming it was nothing more than a tracking poll. As we learned in last weeks posting, many individuals today have their 401K’s and pensions invested in the stock market. These hard working individuals are witnessing the disappearance of their retirement nest egg and the money they were saving for their children’s education. I urge President Obama to make restoring the stock market a priority since it represents the wealth of hard working Americans.
We must allow the current market correction to happen. Bailing out unprofitable companies does nothing but prolong the correction. After the correction has run its course and the unprofitable companies have gone away we need to offer incentives to those companies that are left so they can become profitable. This is what tax cuts accomplish. They worked when JFK did them in the 1960”s. They worked when President Reagan did them in the 1980’s. They even helped lessen the impact of the terrorist attacks of 9/11. There is no reason to doubt they would help us get out of this current recession.
The main tax that should be cut is the capital gains tax. This will encourage investors to put their money back into the stock market where their taxes will be lower. We should also cut the corporate income tax rate. This will result in a two-fold benefit. First, it will encourage companies to remain in the United States instead of going to other countries where their taxes would be lower. It would also increase the after tax earnings of these companies, attracting new investors and creating new jobs. The question I have is why this is so difficult for President Obama and his so-called highly educated economic team to figure out. If you have an answer to that question, feel free to leave your comment.
Sunday, March 1, 2009
Why the Stock Market Rises and Falls
We have just witnessed another week of falling prices in the stock market. It seems that in spite of all the attempts to prop up the economy through bailouts and stimulus packages, the economy continues to fall. Perhaps a better understanding of what makes markets rise and fall will provide some answers for us.
First, who invests in the stock market? Many think that only the super rich invest in the stock market and there may well have been a time when this was true. However, with many people having pension plans and 401K plans through their employers, there are may more investors. This means that many more individuals have a vested interest in the performance of the markets today than ever before. This explains why there is more attention to this market drop than in the past. This increase in individuals investing in the markets also means there are more investors participating in the market today who do not regularly follow the markets.
This new breed of investor also lacks the knowledge needed to analyze market trends. This means they are not making investment decisions based on sound analytical analysis but instead are reacting to reports given to them through the media and politicians. Therefore, we must ask the next logical question, are these reports based on sound analytical data or is there some other motive involved? Let us take a moment to analyze what motives may be involved.
Media outlets are motivated by ratings. Their interest is in providing a product to which people will want to tune in. If the product they produce were a continuous stream of analytical data, most viewers would turn it off. However, if the media presents a report showing people who have lost their jobs or homes in the current recession, many will tune in and be moved emotionally. If this is what they continually see, it is easy for them to form an opinion that things are extremely bad and that there is little hope. This may lead them to pull their investments out of the market which if done in mass will cause the markets to drop.
Politicians are motivated by getting enough votes to win election to office. If the politician provides a litany of analytical data to the voter, most voters will be turned off and most likely vote for someone else or not vote at all. If, however, the politician promises to provide help to those individuals who have lost their jobs or homes, voters may be emotionally moved in mass to vote for this person. In fact, these voters may be so motivated to vote for this individual, they fail to take the time to check out their credentials or qualifications. When these inexperienced and unqualified individuals win election to office, they will make wrong decisions and the markets will continue to fall.
So what should we do to become educated investors and voters? First, turn off the media. It is important to keep informed but are the sensationalized reports provided in the media actually keeping us informed. Instead I urge everyone to seek out an expert or mentor to analyze their individual financial situation and through proper analysis, help them make sound investment decisions. I know this will come with a price but if the investments prove to be profitable the additional cost involved will be worth it. I also urge everyone to learn more about how economics and markets work. On this blog I recommend the book Basic Economics by Thomas Sowell. Mr. Sowell does an excellent job of explaining economics in a way that ordinary people can understand.
Voters should take the extra time to check out the credentials and qualifications of people seeking elected office. Just because a person is able to get on the ballot and raise sufficient cash to run for office does not mean they are qualified to hold that office. In our country we have the privilege of electing our leaders. However, along with this privilege comes the responsibility of doing our due diligence to check the qualifications and credentials of those seeking office. I urge voters to tune out the emotional pleas for your vote that comes through campaign ads from candidates and instead take time to analyze the candidate. The good news is that with the internet, cable news networks, and talk radio we have more information available today than ever before. However, this information is useless if we do not use it.
There are two types of investors and voters today. Those who are motivated by emotion and those who take time to do their analysis. Emotional investors and voters are susceptible to emotional pleas and promises provided by media and politicians. These have little to do with actual stock values but can create mass panic and dramatic drops in stock values due to massive sell offs as well as the election of unqualified office holders. Logical investors and voters make decisions based on sound analytical data. What we need today are investors and voters that are more informed.
First, who invests in the stock market? Many think that only the super rich invest in the stock market and there may well have been a time when this was true. However, with many people having pension plans and 401K plans through their employers, there are may more investors. This means that many more individuals have a vested interest in the performance of the markets today than ever before. This explains why there is more attention to this market drop than in the past. This increase in individuals investing in the markets also means there are more investors participating in the market today who do not regularly follow the markets.
This new breed of investor also lacks the knowledge needed to analyze market trends. This means they are not making investment decisions based on sound analytical analysis but instead are reacting to reports given to them through the media and politicians. Therefore, we must ask the next logical question, are these reports based on sound analytical data or is there some other motive involved? Let us take a moment to analyze what motives may be involved.
Media outlets are motivated by ratings. Their interest is in providing a product to which people will want to tune in. If the product they produce were a continuous stream of analytical data, most viewers would turn it off. However, if the media presents a report showing people who have lost their jobs or homes in the current recession, many will tune in and be moved emotionally. If this is what they continually see, it is easy for them to form an opinion that things are extremely bad and that there is little hope. This may lead them to pull their investments out of the market which if done in mass will cause the markets to drop.
Politicians are motivated by getting enough votes to win election to office. If the politician provides a litany of analytical data to the voter, most voters will be turned off and most likely vote for someone else or not vote at all. If, however, the politician promises to provide help to those individuals who have lost their jobs or homes, voters may be emotionally moved in mass to vote for this person. In fact, these voters may be so motivated to vote for this individual, they fail to take the time to check out their credentials or qualifications. When these inexperienced and unqualified individuals win election to office, they will make wrong decisions and the markets will continue to fall.
So what should we do to become educated investors and voters? First, turn off the media. It is important to keep informed but are the sensationalized reports provided in the media actually keeping us informed. Instead I urge everyone to seek out an expert or mentor to analyze their individual financial situation and through proper analysis, help them make sound investment decisions. I know this will come with a price but if the investments prove to be profitable the additional cost involved will be worth it. I also urge everyone to learn more about how economics and markets work. On this blog I recommend the book Basic Economics by Thomas Sowell. Mr. Sowell does an excellent job of explaining economics in a way that ordinary people can understand.
Voters should take the extra time to check out the credentials and qualifications of people seeking elected office. Just because a person is able to get on the ballot and raise sufficient cash to run for office does not mean they are qualified to hold that office. In our country we have the privilege of electing our leaders. However, along with this privilege comes the responsibility of doing our due diligence to check the qualifications and credentials of those seeking office. I urge voters to tune out the emotional pleas for your vote that comes through campaign ads from candidates and instead take time to analyze the candidate. The good news is that with the internet, cable news networks, and talk radio we have more information available today than ever before. However, this information is useless if we do not use it.
There are two types of investors and voters today. Those who are motivated by emotion and those who take time to do their analysis. Emotional investors and voters are susceptible to emotional pleas and promises provided by media and politicians. These have little to do with actual stock values but can create mass panic and dramatic drops in stock values due to massive sell offs as well as the election of unqualified office holders. Logical investors and voters make decisions based on sound analytical data. What we need today are investors and voters that are more informed.
Monday, February 23, 2009
Spend, Spend, Spend
When my wife and I first got married we hardly had two nickels to rub together. I had just graduated from college and was just beginning my accounting career so; of course, my income was at an entry level. We had just purchased our first home, or what you might call a home since it was a mobile home.
I remember when a pre-approved credit card for Woolco came in the mail. It had a $500 credit limit which at the time seemed like a million dollars. Thinking we had just won the lottery, we went out and bought all the things we had to put off because we lacked money.
We had so much fun buying small appliances for our new home, things for our new baby, clothes, records and cassettes (the CD had not been invented yet). The fun lasted for about three to four weeks but ended when we received something in the mail. What we received was our bill meaning we now had to pay for our fun. Since we did not have the funds to pay the entire balance, our fun came at a price. That price was interest since we could only afford the minimum payments. Such is the reality of spending money on credit; the money eventually has to be repaid, usually with interest, to the person from whom it was borrowed.
Since the present economic downturn began in September, we have witnessed one government bailout after another. The recent stimulus plan was nothing more than additional government spending. The government is not spending money it currently has since it has experienced budget deficits for several years. The money being spent is just like the money my wife and I spent when we used our credit card.
The money currently being spent is coming from two sources. The first is being borrowed from foreign investors through the sale of treasury bills. However, the government has reduced the interest being paid on these investments so they are less attractive to foreign investors. Since this source of funding is drying up the government has created a second funding source. The second source of funding for this spending is being created out of thin air through monetary policy.
The bill is eventually going to come in and someone will have to pay. The treasury bills have terms ranging from one to 30 years. This means that when they mature, the government will have to pay back the lenders with interest. The good news is we can predict when these payments will become due and budget accordingly. However, the money being created out of thin air also has to be repaid. This repayment will occur as the increased supply of money in the system causes the value of the dollar to decline. This will cause inflation, which means consumers will pay this money back through higher prices for the goods and services they consume.
Senator John McCain during debate on the stimulus bill called it the generational theft act. His reason for this was that future generations will be the ones paying back the money through higher taxes that will be required to pay back the debt when it matures and higher prices brought on by current liberal monetary policies. The question we need to ask ourselves is this. Is this the legacy we want to leave our children and grand children? Personally, my answer to this question is no that is why I urge everyone to write the president, their senators, and their congressperson telling them to quit this spending spree and restore some sanity to our government and its monetary policy. If they refuse to listen, inform them that there will be an election in 2010 and 2012 and they can be replaced.
We have not maxed out our nation’s credit card yet so it is not too late to stop the insanity. I invite you to comment or contact me at dalewsr34@gmail.com.
I remember when a pre-approved credit card for Woolco came in the mail. It had a $500 credit limit which at the time seemed like a million dollars. Thinking we had just won the lottery, we went out and bought all the things we had to put off because we lacked money.
We had so much fun buying small appliances for our new home, things for our new baby, clothes, records and cassettes (the CD had not been invented yet). The fun lasted for about three to four weeks but ended when we received something in the mail. What we received was our bill meaning we now had to pay for our fun. Since we did not have the funds to pay the entire balance, our fun came at a price. That price was interest since we could only afford the minimum payments. Such is the reality of spending money on credit; the money eventually has to be repaid, usually with interest, to the person from whom it was borrowed.
Since the present economic downturn began in September, we have witnessed one government bailout after another. The recent stimulus plan was nothing more than additional government spending. The government is not spending money it currently has since it has experienced budget deficits for several years. The money being spent is just like the money my wife and I spent when we used our credit card.
The money currently being spent is coming from two sources. The first is being borrowed from foreign investors through the sale of treasury bills. However, the government has reduced the interest being paid on these investments so they are less attractive to foreign investors. Since this source of funding is drying up the government has created a second funding source. The second source of funding for this spending is being created out of thin air through monetary policy.
The bill is eventually going to come in and someone will have to pay. The treasury bills have terms ranging from one to 30 years. This means that when they mature, the government will have to pay back the lenders with interest. The good news is we can predict when these payments will become due and budget accordingly. However, the money being created out of thin air also has to be repaid. This repayment will occur as the increased supply of money in the system causes the value of the dollar to decline. This will cause inflation, which means consumers will pay this money back through higher prices for the goods and services they consume.
Senator John McCain during debate on the stimulus bill called it the generational theft act. His reason for this was that future generations will be the ones paying back the money through higher taxes that will be required to pay back the debt when it matures and higher prices brought on by current liberal monetary policies. The question we need to ask ourselves is this. Is this the legacy we want to leave our children and grand children? Personally, my answer to this question is no that is why I urge everyone to write the president, their senators, and their congressperson telling them to quit this spending spree and restore some sanity to our government and its monetary policy. If they refuse to listen, inform them that there will be an election in 2010 and 2012 and they can be replaced.
We have not maxed out our nation’s credit card yet so it is not too late to stop the insanity. I invite you to comment or contact me at dalewsr34@gmail.com.
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