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Ross Perot on the Economy, Auto Bailout, and More
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Former presidential candidate and businessman Ross Perot is answering questions over at the Freakonomics blog.
Check out some of the interesting points:
Do you consider all deficit spending misguided? Surely there are some times when it is called for.
Classical economic theory calls for deficit spending by government when faced with prospects of recession and depression. The challenge, of course, is to spend money in a manner that will create the most benefit for the economy. This will prove to be an incredibly complex assignment and the subject of much debate.
Of course, wartime often requires deficit spending. World War II required huge amounts of deficit spending, for example. The difference between then and now, however, is that we ran budget surpluses after the war and paid off the debt.
I remember when you were running for president, they showed you driving around in your old Volvo. What are you driving now? And what would you do about the U.S. automakers’ woes?
Actually, I was driving a 1986 Oldsmobile. I have always driven American-made automobiles, and I currently drive a Ford product.
Clearly, General Motors meets the definition of too big to fail, as do Ford and Chrysler. General Motors happens to be closer to running out of cash at this moment. The question is whether domestic automaker sales are slumping as a result of the short-term liquidity credit crunch or more basic reasons such as their business models. I suspect both are to blame, but the proportions are difficult to determine. An analytical approach would favor a prepackaged bankruptcy, but the situation is well beyond that stage. It’s now in the hands of the politicians who are almost certain to craft some type of bailout or bridge-financing feature to keep G.M. out of liquidation.
Check out the full Q&A here.
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Are Lower Prices Encouraging People to Spend?
It is time for savers to pay more attention to prices. That assumes savers are still interested in saving, but frustrated with ever lower interest rates.
In a depressed economy like we have in the United States, low interest rates should increase borrowing, spending and then jobs.
It should, but it may not. For example, low interest rates may encourage existing home owners to refinance at lower interest rates rather than encouraging those who are renting to buy a new house. In the case of refinancing, there will be few jobs created; in the case of a new house there will be construction jobs.
Those who refinance and save with lower monthly payments have more money to spend which might add to new spending. I say might because lower interest rates mean lower earnings for savers, which will cut their income and discourage spending as well as saving.
Right now, lower interest rates are not generating much spending, just lots of talking and proposing.
Low interest rates need to finance borrowing where something actually happens like building a new factory or a new house. Lending transactions that generates more schemes to buy low and sell high will not generate jobs.
Low interest rates are only one potential change that can help revive spending. Lower prices on goods and services can do that as well.
Just as lower interest rates can put people to work, lower prices get people to buy more, which means more work, more production of goods and services, followed by more jobs and more income.
Lower prices also translate into personal savings. Low gas prices help us save as individuals, but also generate mass savings that supports spending in other sectors.
There is other regular and discretionary buying that has potential for savings. Try the grocery store where savings on week-in and week-out buying can easily translate into four figure savings over a year. I never buy cereal, chips, crackers, or most prepared food unless it's on sale.
Yesterday, the local grocery had an end of aisle display announcing chips at 2 for $7. Chips on sale are supposed to be 2 for $5, but worse I took a bag down to check the size and found 10.5 ounces instead of 11.5.
I walked away, which we all realize is a tiny gesture in a mass market, but I still have my $7 bucks. In a computer age, the wholesalers back at the warehouse know exactly what the larger market thinks of their new price.
If others pay more attention to pricing and show more resistance, it will translate into price cuts and personal savings. We can also realistically hope it will work to revive our declining economy.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Deploying Consumer Credit Isn't the Answer
A recent headline from the Washington Post reads "U.S. Moves to Revive Consumer Lending."
The first line of the article tells readers "The government said yesterday that it will deploy up to $800 billion to make it cheaper for Americans to get a home mortgage, take out a car loan or borrow money through a credit card…"
The word "deploy" has never been a financial term in my memory. Troops get deployed, but money is typically saved or spent. Dollars need to be spent rather than deployed to revive the economy.
The article's use of the word deploy tells us the government knows Americans are short of more solid sources of money to spend: wages, salaries and savings. Instead they apparently hope consumers will return to their usual excess and borrow.
Spending our way to prosperity was the policy of Franklin Roosevelt in the 1930's and every president since, but a policy that deploys dollars for consumer loans differs from previous expansionary policies.
Will it work? As a saver, I believe there are many other savers like me who have matched percentage payments into defined contribution pension plans and 401(k) plans as well as other purchases of CD's, stocks and bonds. This fall's stock market and interest rate drops have caused a massive decline in purchasing power for this group.
As savers in a good economy, we were the least likely to use consumer loans or abuse consumer credit. In a bad economy, it is hard to think savers will be the ones most likely to resort to consumer borrowing. We are the group more able to postpone discretionary purchases like cars, clothes, electronics and vacations.
For the many others who defaulted on sub-prime loans and continue to struggle to pay credit card balances, it is hard to believe the government's plan will find them ready and able to borrow more and spend us out of recession.
When our government stops talking about consumer loans and starts discussing tax policy and the Federal Budget, there will be good reason for hope. If all they want to do is "deploy" consumer credit, expect another quarter of decline.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Money Saving Links: 11/30/08
Thanksgiving is over. Black Friday has past. Before you know it, we'll be in 2009.
Since we're at the end of the month and almost the end of the year, it's time to start looking forward to your financial status when the calendar flips.
This week, we participated in two carnivals again: the Carnival of Personal Finance hosted by Living Almost Large and the Money Hacks Carnival at Steadfast Finances.
Check out a few of the great stories from the two carnivals:
Online Bank Accounts and More Savings Options To Keep Your Money Safe - The Digerati Life
In light of the current financial turmoil, many are exploring alternatives to the traditional brick and mortar bank for saving and securing their assets. Here are some of the options.
Ask the Readers: What are Your Favorite Internet Sites for Discounts (Revisited)? - Uncommon Cents
We’ve discussed Internet coupon sites here in the past (and of course, we’ve had the fabulous Kyle of Rather-Be-Shopping.com do a bunch of guest posts!), so they’re not new to us. But there are other sites out there and other ways to spend less or get rebates, and I’m wondering which do you like?
Is Your Cash Flowing on a Daily Basis? - Debt Free Destiny
As more and more people are creating budgets to stay on track in a turbulent economy, it is important for those people to recognize their own cash flow situation and seal with it. Even if, on paper, your income meets your needs for paying bills, you still may not be off the hook.
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Are You Thankful For What You Have?
Look around you. What do you have in your life to be thankful for?
It's probably more than you think.
So much of our society places an unneeded desire on material possessions, wealth and status. But that's not as important as you might think.
Believe it or not, you've got it good.
There are so many people in the world who have way less than you do. A lot less.
Even if you think you're in a bad situation, look at yourself through the eyes of the less-fortunate.
Whether it's family, a home to live in, or food on your table … you could have it a lot worse. And many people do.
So on this day of Thanksgiving, remember to be thankful for what you have. It's not all about the Fortune 500 job, the fancy new car or even being debt free. It's about taking a moment and putting your life into context.
There's always someone who has it much worse than you.
Be thankful for what you have. Have a happy Thanksgiving.
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The Violent Demise of the U.S. Dollar
"Your premium brand had better be delivering something special, or it's not going to get the business." — Warren Buffett
The U.S. Dollar is the premium brand of currency in the world. It's the standard against which all other currencies are measured and it's where the money goes when people want rock-solid security.
This has been true for decades, but in the last 35 years, the U.S. has gone from the largest creditor nation to the largest debtor. Our twin deficits combined with artificially low interest rates have left us with a $10 trillion national debt — $50 trillion if entitlement programs are included, as they should be.
We haven't been spending the money on factories or production. Instead we've been buying houses, cars, HDTV's, playing world cop, and dramatically overpaying for health care.
To put it bluntly, we are broke, both as a nation and as a set of individuals. The dirty secret is that our lifestyle of the last 20 years is unsustainable.
Why Saving, Not Spending is the Key
To fix this mess we've made, we need to tighten our belts and start saving money rather than borrowing to spend. That goes both for individuals and the government. In addition, we need to focus on producing goods that can be exported to other nations so that we can get money flowing back into this country rather than out of it.
Unfortunately, the government is determined to sustain consumption epidemic. Certainly consumption brings short-term pain relief, but it just makes the long-term imbalance worse, similar to giving a crack addict more crack to avoid withdrawal.
People keep saying the the bailouts will be paid for by our children, but the truth is that we'll have to pay the price ourselves. If the government continues its spending spree, which is even more likely now that we'll have a unified government of Democrats, inflation risk is very real.
Standard & Poor has already stated that the U.S. is at risk of losing its AAA bond rating.
If the dollar devaluation prediction comes true, the new financial capital of the world will be Asia. Asian countries have been effectively taxing themselves to subsidize U.S. consumption by buying and holding our bonds and thereby keeping our currency valuable.
If the U.S. economy collapses, Asia will decouple and begin to flourish on its own. They will be in excellent position with industrialized production, steady growth, and plenty of reserve savings.
What Happens if the Dollar Falls Apart?
If the U.S. dollar declined to 1/2, 1/4 or even 1/10th of its current value, chaos would ensue and a great number of people would be in deep trouble, especially retirees.
Are you prepared for such a contingency? Any bonds you hold would decline in value significantly, as would any cash.
According to the government numbers, inflation was around 4% this year, which means that any cash you had in a high-interest savings account has actually been declining in value at 1% rather than increasing by 3%.
If we're headed for dollar deflation, as some say, then it's a good idea to keep your cash. If you believe the inflation scenario, then you should buy some commodities such as gold. Or of course you could hedge your position and buy some gold while also keeping some cash on hand.
If you do decide to buy gold, it's a good idea to avoid futures and stick with real, physical gold or a fund that holds physical gold to avoid counterparty risk of the futures not being delivered.
If you want to take more risk and attempt to profit off the possibility of a falling dollar rather than simply maintaining your wealth, buy mining companies rather than physical gold, but still don't buy futures.
As for equities, Asia is a solid long-term investment but it will suffer in the short term along with the rest of the world.
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How Many Funds Do You Have?
An open question to everyone to start off the week: how many funds do you have?
In funds, we're talking about savings, not mutual funds. Examples:
- car
- emergency
- college
- retirement
- house
- vacation
- PlayStation
I'll start off. In our savings onion, we currently have 5 funds:
- Emergency
- Housing
- Roth IRA (2)
- 401(k)
We used to have a car fund, but we got rid of that when we bought a car! (More on that soon.)
How many funds do you have? Tell us in a comment below.
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How Today's CEOs Are Like Yesterday's Karl Marx
There's a comment on my 1929 and 2008 post from Mickey Blue Eyes that deserves a reply.
The problem with promoting an even distribution of wealth is that it is a euphemism for Marxist "from everyone according to their ability, to everyone according to their need."
Doing a quick Google search, I could not find a global per capita income, but the per capita income for the U.S. in 2006 is $44,970. That's less than what I'm making now, and I'm not in evil top 2% of income earners.
Assuming everyone continues to be as productive (or unproductive, as the case may be) as they are now, everyone will receive a paycheck for $44K per year. That might be great to some high school dropout living off of welfare, but do we really expect productive people who studied in school and work hard for their >$44K/yr job to continue working that hard?
If the most you can earn is $44K/yr, are you going to work more than you absolutely have to to get your $44K paycheck?
Distribution of wealth, especially when forced by the government; e.g., USSR, N. Korea, Cuba, Maoist China, et al.; is a sure recipe for disaster.
It appears to argue that it is wrong to have social policies that reduce the inequality of income. It calls such a policy Marxian.
Marx was a 19th century guy who looked at the poverty and gross inequality of income he saw during the industrialization period in England. He could have said it is unfair, but instead he wrote a long boring book trying to convince people there is a natural and scientific reason that makes income inequality a bad thing.
Now we have free enterprisers that look at corporate CEOs who help themselves to millions of dollars of corporate funds. They could just say it is fair, but instead they write long boring books trying to convince people there is a natural and scientific reason that makes income inequality a good thing.
Truth is they are all posers and bluffers. Today’s free enterprisers are doing exactly what Marx did, only with the opposite conclusion.
If you think income inequality is a good thing you will have to convince people the current inequality is fair and should not be changed. Good luck, but my vote is no.
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Why Alan Greenspan is Wrong on Economic Regulation
The headline in the Washington Post reads "Greenspan Says He Was Wrong on Regulation."
The former Federal Reserve Board Chairman told Congressional Committee members the "… crisis has shaken his very understanding of how markets work, and agreed that certain financial derivatives should be regulated – an idea he long resisted."
After his opening comments to the committee, Mr. Greenspan argues against regulation and warns Congress that regulation is a threat to economic growth, despite the collapse of derivatives markets this fall.
Greenspan worships free markets so much he forgets that free markets and regulation work together all the time. Take physicians. Physicians are regulated because they have to go to medical school and get a license before they practice medicine.
Across America, biology students dissect frogs, but without that licensing regulation any one of them could decide they know anatomy so well they can be surgeons, ready to do surgery on you and me.
Regulating doctors lets us be confident they are competent to be physicians; without regulation many would suffer before word got out and free markets acted to eliminate incompetent physicians.
Free markets need equal opportunity and they operate best when we know what we are getting. Regulations requiring equal opportunity, disclosure, honesty and integrity aide and promote the smooth operation of financial markets just as they do in physicians markets.
Remember, banks and all financial intermediaries operate with one purpose: to attract the funds of net savers so the savings can be returned to the spending stream by loans to net borrowers. For many years savings accounts, certificates of deposit, stocks, bonds and mutual funds have served the millions in America who save.
Unless Mr. Greenspan will explain what unregulated derivatives can do for America's economy, which are beyond the established and regulated methods of saving and investing, then we can feel justified that he is arguing against disclosure, honesty, and integrity essential in financial markets.
After the collapse of derivatives markets, and then financial markets, further opposition to regulatory standards gets close to defending secrecy and deception. We would like to think better of Mr. Greenspan, but given his testimony he is making it hard.
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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Guess What? The Bailout's a Bad Deal For You
I have talked with many people about last week's bailout and they are all angry.
Some that I have talked with were complete strangers who started ranting and raving at the newsstand and several at my neighborhood library. In my unscientific poll it is unanimous: everyone regards the bailout plan as a payoff to politically connected cronies who caused the defaults.
Many recognize there are better alternative plans.
Where Abuse is Likely…
For the federal government to buy the current defaulted mortgage-backed securities has enormous potential for abuse. Salomon Brothers got the idea to bundle home mortgages together and re-sell them as bonds back in the 1980's.
They call these bonds various things like collateralized debt obligations or mortgage backed securities, but they are not the same as bonds at all.
For example, if I buy a $10,000 municipal bond at 5 percent for a term of 10 years, I get $250 every six months and after 10 years I get my $10,000 back.
If I need money before the 10-year term is up, I can sell my bond. If the interest rate is up I will have to accept less than $10,000 because potential buyers know they can earn 6 percent instead of 5.
To sell my bond, I will have to discount the price so that $250 twice a year will earn a 6 percent yield. If I sell after 5 years with a 6 percent interest rate, then $250 twice a year and a $10,000 final payout will sell at $9,573.*
… Don't Be Surprised When It Happens
A home mortgage all by itself is like a bond because it has known payment and maturity dates, which make it possible to determine the yield at any time. Mortgage-backed securities are many mortgages all bundled together as a lump sum and then divided into smaller but different parts to be resold to investors.
Trouble is the underlying mortgage holders can prepay at anytime and for investors who have mortgage-backed securities that contain many mortgages there is no way to know when prepayments will come.
Mortgage-backed securities were marketed by selling them at a discount over the total of their final payout. It is just that the date of the final payout could not be specified. Without a known maturity date or a known number of payments, a yield cannot be determined, but only guessed at as a gamble.
Any transaction of these securities will be a negotiation between sellers who do not know for sure what they are selling and a government that does not know for sure what it is buying. It is a situation ripe for cronyism and abuse.
Congress has the authority to ban the use of securities without a known yield, instead they did nothing but decide to buy them. It looks like a bad deal for savers and taxpayers.
*[Computations are Excel functions YIELD("1/1/2004","1/1/2009",0.05,95.735,100,2,1) also FV(0.06/2,10,250,-9573.5,0)]
Fred Siegmund covers America's jobs as part of work doing labor market analysis and projections for a client base of recruiters, trainers and counselors. Visit him at www.americanjobmarket.blogspot.com
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