Sunday, July 13, 2014
Advanced Economics 666 for your course load.
More Insurmountable Mysteries of Economics Most People Get Their Economics Wrong. the Proof is How Few People Actually Thrive and Prosper in Their Financial Lives. the Great Economic Bell Curve Tells Us Something. Lex Loeb Contributor Network . Predicting the stock market is not something that most economists are good at. It is true that most trained economist are richer than the average person in society but what percentage of multi-billionaires are economists? In real life economics proof of understanding economics is at least a billion dollars in personal wealth creation. What is the study of economics about if it is not about a science of understanding the dynamics of wealth creation? Most casual observers of the economy find the whole subject of economics as insurmountable to the mind as going to the moon and back. They know it can be done but they don't know how to do it or they have already reached permanent false conclusions about what economic data at hand really means. Having a billion dollars isn't! Having financial assets does not mean you can necessarily spend them. Suppose you own a corporation worth ten billion dollars owning 80 percent of the shares. The market sets the valuation for the 20% of the share you don't still own but you can sell a lot more shares and depress the market price with your 80% holdings. If you decided to sell any percentage of your holding you can immediately depress the value of your remaining stock if the are few or no buyers in the public market. The reported billion dollars in assets is based on market value and not on annual earnings for holding the shares. Markets that set the price don't mean you have to sell any more of your shares but the markets can down grade your billionaire status very quickly. A billion dollars is just an arbitrary amount of money. Any stock portfolio is going to be market valued and not necessarily earnings valued. Portfolios can be over and under valued according to real underlying productive assets. It is really amazing how stupid the average financial news commentator is declaring that people have lost 30 or 40 percent of their wealth or their retirement plan wealth after the crash! There is no evidence that just because stocks are down that anyone still holding them has lost any wealth. They did loose market valuation and sometimes permanently. It is more likely that their underlying portfolio wealth is unchanged unless they had purchased more stocks shares at crash level fire sale prices. Stock market action is all about supply and demand which makes it a mystery that financial news reporters are almost universally cheer leading bull markets and then surprised when those markets come crashing down . It is an insurmountable mystery to them then when the market turns bad even when they seem to be partly responsible causing the panic in feeding market fears by sensationalizing the doom and gloom. China's success is great for America. That is true of Mexican success too. We want our trading partners to succeed and we succeed more when they succeed more. This is one of the more insurmountable economic mysteries for most people. Growing the economy in china, Canada, Mexico, the world is great for America not just good. As their economies expand so does ours. Foreign economic success is not at our expense. China's ownership of US debt, just like Japans before it and Europe's before Japan's is not bad for America But great. Holding US debt did not make Japan or Europe America's banker it actually drove investment to the US and away from the countries holding the debt. The Chinese holding of US debt seems more foolish and Ill advised for them than just spending their US dollars of trade goods. The Chinese don't get it and are taking rather bad advice in keeping high US dollar reserves. China is the developing country and it should be the debtor nation not the US. Old discredited mercantilism policy of holding gold reserves or US dollar reserves seems a bit like economic suicide. Japan fell into a pit holding huge dollar reserves like China is now with negative interest rates and the Japanese people are still being punished by having a restricted over protected consumer economy. The US citizen has the advantage of lower prices on most consumer goods, even those made in japan as a result of having the freer market here. The Japanese have suffered needlessly as a result not the Americans. This could be shaping up to be the same prospects for China's mercantile tendencies. The Obama administration is clueless and could do considerable damage to our own economy with their buy American nonsense policy should it tilt more toward protectionism. It is yet another popular insurmountable economic mystery that China can do well and we do well because China does well. Unfortunately for the Chinese it seems an even bigger mystery to their policy makers than ours. Energy is not free and necessarily has to cost money. The cost of finding, producing, distributing energy has a cost in energy. It is practically a law of physics. Say you have an oil well in Texas and you someone who wants to buy 1000 gallons of it in New York to heat a home for the winter. Then you need to put the oil on a truck to transport it to New York, after you pump it out of the ground. It costs energy to do the pumping and then if the truck runs on the oil from the same tank you will need to have a tank big enough to fill with oil so as to deliver the 1000 gallons plus maybe 175 gallons to get the truck caring it to New York. So who pays for the 175 extra gallons of fuel? The buyer does. The price for 1000 gallons of oil fuel is the actually the price of pumping it and transporting it plus earlier unseen costs of finding it and drilling for it. The buyer is actually paying for around 1200 gallons of oil and only getting 1000 gallons delivered? No they pay for more than that because the cost of hiring a driver and people to run the oil drilling and pumping operations have to be paid for too and there is the issue of showing an actual profit. Why bother to drill and pump oil and then pay to transport it to New York from Texas if you are going to loose money doing it or if you are going to go though the effort of doing it just as an act of kindness. Why waste your time. Why not let the New Yorkers who need the oil come down to Texas with their own trucks, find the oil , pump their own and drive it back to New York for the winter? By the time the Texans do it for a profit it probably costs the New Yorkers less to have the Texans find , drill and deliver it. The trucks delivering oil to New York are empty and have to be driven back at an additional energy expense. The same thing happens when electric utilities deliver electric to homes. It costs more to send it than production and transportation costs . It has to otherwise the electric consumer will have to find a way to generate their own for less money. That can be hard for the electric consumer to do. Prices for energy should be relatively high because the industry only exists because it is profitable beyond the expenses including energy costs consumed for production and delivery. Governments world wide see energy as a ripe industry for nationalization by demonizing the high costs of energy to the public. Once they take over they can subsidize prices at least for a while by taxing other people but later on it turns out that the government is interested in the same profit motive that private energy industry is interested in and it hardly trickles down to the public just because the government realizes the profit. Government can get the same outcome by just taxing production. There won't be any long term cost benefits to consumers unless the government nationalization actually results in more energy production after nationalization than before where market prices fall. What is the sense of nationalization if government does not hope to gain more from direct ownership than taxation. Even in Hugo Chavez Venezuela the nationalization of state oil shows insurmountable mystery confusion by the public about why that country can subsidize fuel prices. The subsidized prices in Venezuela are because of a surplus of production that has nothing to do with nationalization . There is a huge rift in Venezuela and other OPEC cartel countries between the world set price and the local price. Good economic times are not necessarily good times to get rich, fat maybe, but not necessarily rich. A billionaire has the financial capital of 1000 men who saved $25,000 a year working for 40 years without any compounding of interest. A Billionaire can go out on the market and buy precisely 1000 one million dollar homes or 2000 $500,000 dollar homes or 4000 $250,000 homes. If buying homes yields just 5 percent after upkeep expenses to rent them out than a billion dollars can yield a whopping 50,000,000 a year. Whopping? A fair amount of money but for some reason you won't find too many billionaires investing in homes as rentals and surely if they are self made billionaires they are not likely to be too satisfied compounding their money at 5 percent and paying a substantial amount of it to the government in income taxes. Simple math like this does not work for real self made billionaires. If the top federal and state taxes paid is around 50 percent than the actual yield is going to be less than 2.5 percent or just 25 million dollars. and thats just a bit more than 2 million dollars a month income. So what about the billionaire that needs to be hit with a variety of new taxes by politicians state, local and federal? Fifty million dollars income in a year is good money and even better for goverment if it does nothing more than pass a tax rule to take 25 million of that for themselves. The Billionaire may have 1000 million dollar homes but he is probably living in only a few of them and renting out the rest for income. Some billionaires are going to drain their own resources till they go completely broke chances are you meet very few who are not reinvesting their capital for maximum return. It means that the billionaire living on a mere 2 million dollars a month is running a small economy of his own if not an entire industry. Upkeep and rent collection from 1000 homes is going to take some employees or independent contractors to manage affairs. If the billionaire has to do it himself, service all 1000 homes he rents out to collect his monthly income than he definitely has a major job he has to do and is not one of the idle rich. Just because someone owns 1000 million dollars homes does not mean he will always own them or that he could not resell them and then go out and buy something else or put the money in a bank and let the bank put the money back into the economy on their terms. The popular idea that the rich need to be soaked or eaten goes badly wrong when the land lord is singled out to be punished by politicians who want a larger share of the billionaire's assets and income. Government can take the homes and spend the money that the billionaire used to get as income but it does nothing to expand the economy. Changing the owner with or without compensation does damage to the economy because it scares other investors away and causes them to re-evaluate where they should invest their money. They can invest it as far away as China if they feel that is safer than investing under a local kleptomaniac government. When investors flee the capital propping up real estate prices leaves the government holding properties that can rapidly devalue Ever notice how when government has a surplus sale it tends to sell at bargain prices. This is one reason why. If the government rents out the houses the billionaire once rented out at subsidized low income rate than it eats away at the commercial value of the houses. The government usually ultimately ends up with lower rent buildings that are in a state of depreciation instead of appreciating. Shrewed private interests know the government will likely be selling the properties later on for less than they originally paid. Government wasted what would be trillions of dollars in today's money if they were to rebuild the public housing projects most of which had to be torn down before expected life span of the buildings was over. Politicians who rail against planned obsolescence by General Motors were building huge state owned housing complexes and destroying them faster than ever. Sometimes government gets it right but does not realize that what they might see as adverse consequences are beneficial. This is the case with social control medicine where government decides that unborn babies can be aborted as is secretly planned in the Obama care medical plan. The welfare people are jumping up and down about how great socialized medicine will be for them what they don't realize is that when government bureaucrats have control over the medical services that are provided they can force single mothers to have abortions to prevent massive child support welfare transfer payments from the Social Security program outlays. The government would save billions and trillions over time and put an end to a lot of destructive child rearing paid for in taxes. Most gang members come out of single mother homes and most kids who go nowhere in school and society are the product of the same disastrous system. Accidental the Obama administration is doing something that really saves money with a Cuban/ Chinese abortion style program and what may eventually turn into a one child policy with citizens being forced to be spayed and neutered. More savings will come from putting Grandma down at the humane society. I am not saying this is good economics but it would be "economical" for the government but probably would not reduce overall health expenses it would just reduce child care welfare payments and moves the welfare issues out of the old human services part of government in to the government medical program. Government necessary will take a cut to pay up to a million new bureaucrats to run the Obama health care program and will need to expand offices at hospitals across the country at considerable expense. It is an insurmountable economics concept for most people to understand a better solution to getting health care under control might be to have government work to prevent single motherhood rather than finance it in the first place. Right now it is reinforced as a positive incentive. We have all seen our public schools going out to our young girls and encouraging them to go out and get pregnant to emancipate themselves from their parents. The big union controlled public schools want to encourage everyone to go on welfare. It is part of what they call education. Young underage girls work hard to get pregnant because they often already know that welfare checks start arriving as soon as they become single mothers in their name and not in their mother's name. The other uneconomic benefit of an Obama abortion plan that prevents child support welfare of single mothers indirectly is they force up the minimum wage buy making less future entry level workers available. This is not necessarily positive because at some point the benefit of higher wages may end up going to guest foreign workers and illegal aliens. It is better not to have the gang and ruined welfare children later having to go though the absurd foster family system than it is to have government deciding who can and can't have children and what penalties they might suffer if they transgress the law. A low birth rate would also tip the USA into a position where it will be like Italy and some other European countries that are now unable to replace their populations with out importing foreigners who have a higher fertility rate. In Oregon we have an insurmountable economic mystery that is shared with the federal government. There is a belief that warehousing convicted prisoners in prisons protects society and has somehow now become with the expense that it costs between $30,000 and $40,000 per capita to keep them in prison per year. Yes Per Year. The public votes for harsher penalties and longer prison sentences and extensions on prison terms. The economics is unsustainable if the state can find something more positive to do with that same kind of money. The state could build whole new universities or just send a lot of kids to Ivy league colleges for free if not blowing the money on prisons. The union of prison guards wants even more prisons. Prisons definitely make sense for the worst of the criminals but the trade off is using the money on things that probably benefit society more or just by cutting taxes because the expense disappears. Prisoners spend much of their time lifting weights as if they are in a health club instead of doing hard labor. Other unions are happy to keep the labor out and object to prison programs that pay prisoners 50 cents an hour or less for making state license plates. One simple solution for non violent prisoners might be to have a program where they sign a form that they want to be released from prison to work at a below minimum wage job under probation with their wages garnished to pay back their victims not the state. The simple solution is unacceptable even with an instant thirty plus thousand dollars a years savings per prisoner and a signed promise that their penalties and prison time will increase if they re-offend. If our prisons are about "corrections, " why do we want to wait 5 , 10 years or more costing between $150,000 to $300,000 not including lost opportunity costs for the cash when we can wait a few months to see if the prisoner is "corrected." If not corrected why not let the prisoners go live in a wilderness where they can forage for themselves as best as they can and learn to live with each other on their own terms. That does not have to be an involuntary program. If inmates could choose between living in a wilderness camp with their signature and costing $30,000 plus dollars a year to have the horror of prison life which do you think they are going to choose? Once again the economic mystery is insurmountable. Oregon like the Federal government is living on borrowed time with the expenses of minimum sentence prisons and tougher sentence and strangely society seems happy that the dept gets paid back to special interests and government insiders and not to the actual victims of the prisoner's crimes. Strange economics. Another insurmountable economic mystery is the strange idea that people have that government should be in the business of making homes more expensive so that banks can lend them money to buy them. History shows that market crashes have silver linings of affordable housing and more efficiently redistribute homes to those who need them than any government program allowing non collateralized loans to buy homes. Some is misinformation. The rest is the public being forced to rent homes to buy them from banks just because market prices are going to be propped up artificially. Government never seems to learn--creating artificial scarcity or an artificial surplus is not necessarily a quality economic solution to achieve anything. The environmental movement absurdly believes in artificial scarcity ,rationing and punitive sanctions for use which is the exact formula necessary to give the country black and gray markets. Government could go on a housing building spree and cause home prices to fall. In a sense they did that during the last real estate boom by making easy credit available to stimulate the economy. The free markets come with automatic feedback reactions which generally self correct. Government programs are not designed to change when feed backs come into play. The inflexibility means eventual failure. Few laws are passed that automatically go away once they have proven their success. .