We saw an article (first published 18th November 2009) featured on MSN which got us thinking; the title is "How long can Social Security last?" Reading the article, the answer seems to be "not long at all." It's very interesting that this article was apparently dredged up from the archives and floated once again on MSN, unless it's just that popular.
The article perpetuates the myth of an SS trust fund, stating that the fund will go in the red "in a few years," and be empty by 2037. Oh darn, that sounds unfortunate. But what actually caught our attention was when the article talked about how to fill the 'short-coming' in the 'fund.' The list was as follows:
-Benefit cuts
-Tax increases
-Riskier investments
The first two options are obvious: more money coming in, less money going out, just like our wallet and bank account. The irony of cutting benefits is that inflation is constantly decreasing the value of the SS payouts, but that is beside the matter. We want to dissect the third option: investing the 'trust fund' in riskier ventures.
Given the present, heady atmosphere in the United States Government, we can think of a few exciting places wherein the SS Administration can dump the excess cash it has just sitting around at the office. Now, we have to point out here, that the SS 'trust fund' is actually just money which flows in and out of the U.S. Government's General Fund. In spite of all the accounting shenanigans, in reality the SS cheques are drawn from the general operating budget, as simply any other expenditure.
If the SS 'trust fund' is authorised to be 'invested' in riskier ventures, it will allow the U.S. Government to treat those monies as, effectively, another slush fund. Or, to put it another way, the SS 'trust fund' becomes the SS 'bank, automaker, and whatever-else-Congress-feels-necessary bailout fund.' This can, of course, be dressed up as a good thing: banks and automakers are 'turning the corner,' and will make massive profits to investors; mortgage-backed securities will recoup their value, and then some; credit cards will become profitable again; car loans will be great as the economy turns around; et cetera, et cetera. All these would seem, on paper, to help the SS 'trust fund' close its fiscal gap.
"Surely they won't do that!" you exclaim, dear Reader; "the Government wouldn't put the retirement of millions of Americans on the line to bail out banks and other corporate interests?"
Well, what can we say to that? Frankly, the U.S. Government seems to be constantly doing exactly the worst thing possible during this Depression. From bailing out banks and automakers, to planning on raising taxes via health care 'reform' and other such nefarious plots, we can't see any good moves having been made at all! So, if the SS 'trust fund' were to be allowed to invest in riskier sectors of the economy, where would that investment go but to the arenas which the Government has already been furiously bailing out for two years? We'd be overjoyed to hear other likelihoods, but such corruption as we lay out herein seems inevitable to us. That is, of course, contingent on the SS 'trust fund' being loosened in its restraints.
If the SS 'trust fund' is successfully retooled as a slush fund for banks and automakers, we fully expect to see all other Federal 'trust funds' to be similarly revised. Since all such 'funds' are facing budget shortfalls, brought on by whatever cause(s), such changes can be presented as both necessary, and intelligent. Perhaps even shrewd. Those manoeuvres will be, of course, none of the kind, but rather hopelessly wasteful and economically destructive.
Showing posts with label investment. Show all posts
Showing posts with label investment. Show all posts
Thursday, January 14, 2010
Thursday, July 9, 2009
The Great Fall of China
We have always felt that China's strengths are greatly overstated. It always seemed to us that glowing reviews of the PRC were editing out many inconvenient details about the nature of China, thereby making investment in China - financial or otherwise - seem like a good, though risky, venture. As the leading industrialising power in the world, the PRC garnered quite a bit of clout, especially as its economy grew at a pace which seemed to defy all natural limits. The nation produced more cheap plastic crap than the biggest spendthrifts in the world - Americans - could possibly absorb.
In the past we came up with a short list of reason why we felt China was doomed to collapse somewhere along the line: a severe disproportion of male to female citizens; no strong tradition of common law; and a totalitarian Communist government. These three things, we felt, are any one of them sufficiently problematic to deal a serious blow to the PRC.
And then the 2007 Depression happened, and the game changed completely. Communism is, in practice, a cannibalistic system: it requires constant inputs of new resources - both raw and financial - in order to keep the State-run enterprises from going belly up. This wasn't such a concern in a growing world economy, because there was always more resources to throw at bloated and inefficient industries. But now, the world economy is shrinking thanks to the Depression; the pain of which will be vastly increased by Peak Just-About-Everything.
Other factors are lining up to suggest a serious blow to China. For instance, the World Bank has predicted that Foreign Direct Investment in China is going to drop by 20% this year. Although that will not create a concurrent 20% drop in China's economy, it will help to bring down 'growth' to some degree. If 'growth' is too low, the PRC will not be able to give jobs to its vast population, and they will be very angry about that.
Additionally, we read that vicious riots have broken out in the capital city of Xinjiang, apparently brought on by ethnic tensions. This, we posit, is going to become evermore common in China in the months and years ahead. Simply put, the PRC has ravaged China in the hope of generating those stellar economic growth numbers, and now they will no longer be able to make good on their promises. The one-billion-plus Chinese are not going to be happy, especially as they find the nation's export sector is in shambles.
We also learn that the GDP of China has been overstated by about 40%; it is only a $6 trillion dollar economy. That's a serious bite out of the PRC's ability to keep its population in check via jobs and pay cheques. Even the Indian Defence Review is making noises about China's impending difficulties.
In conclusion, we have to wonder how not only China's own population expects the PRC to make good on its promises of growth and prosperity, but why much of the rest of the world is hoping that China will haul them out of recession. China has, at least by our reading, become a cornerstone to 'recovery,' a cornerstone which we think is both faulty and due to fail in less time than one might think. When China does fall, as we believe it will, all talk of recovery will end, and the world will be forced to realise that the situation in the 2007 Depression is very dire indeed.
In the past we came up with a short list of reason why we felt China was doomed to collapse somewhere along the line: a severe disproportion of male to female citizens; no strong tradition of common law; and a totalitarian Communist government. These three things, we felt, are any one of them sufficiently problematic to deal a serious blow to the PRC.
And then the 2007 Depression happened, and the game changed completely. Communism is, in practice, a cannibalistic system: it requires constant inputs of new resources - both raw and financial - in order to keep the State-run enterprises from going belly up. This wasn't such a concern in a growing world economy, because there was always more resources to throw at bloated and inefficient industries. But now, the world economy is shrinking thanks to the Depression; the pain of which will be vastly increased by Peak Just-About-Everything.
Other factors are lining up to suggest a serious blow to China. For instance, the World Bank has predicted that Foreign Direct Investment in China is going to drop by 20% this year. Although that will not create a concurrent 20% drop in China's economy, it will help to bring down 'growth' to some degree. If 'growth' is too low, the PRC will not be able to give jobs to its vast population, and they will be very angry about that.
Additionally, we read that vicious riots have broken out in the capital city of Xinjiang, apparently brought on by ethnic tensions. This, we posit, is going to become evermore common in China in the months and years ahead. Simply put, the PRC has ravaged China in the hope of generating those stellar economic growth numbers, and now they will no longer be able to make good on their promises. The one-billion-plus Chinese are not going to be happy, especially as they find the nation's export sector is in shambles.
We also learn that the GDP of China has been overstated by about 40%; it is only a $6 trillion dollar economy. That's a serious bite out of the PRC's ability to keep its population in check via jobs and pay cheques. Even the Indian Defence Review is making noises about China's impending difficulties.
In conclusion, we have to wonder how not only China's own population expects the PRC to make good on its promises of growth and prosperity, but why much of the rest of the world is hoping that China will haul them out of recession. China has, at least by our reading, become a cornerstone to 'recovery,' a cornerstone which we think is both faulty and due to fail in less time than one might think. When China does fall, as we believe it will, all talk of recovery will end, and the world will be forced to realise that the situation in the 2007 Depression is very dire indeed.
Monday, April 13, 2009
Too Many Obligations, Too Few Resources
Within the OECD nations, at all levels of society - from the household, to business, to government - obligations have been piling up for years: debts, pensions, social programmes - to name a few. Clearly, these obligations can only be met with continual economic growth. But what happens when anticipated growth fails to materialise?
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
This question is hardly academic. Virtually everyone and every institution is struggling with the fact of a less than expected actual income slamming into financial obligations. The general consensus is that this is a crisis, a mere interruption of the norm of perpetual growth. Once the crisis is passed, like a fever, economic health (a.k.a. growth) will return.
Our opinion departs from the general consensus. We expect growth to become the interruption in the general economic routine. It will become even more difficult for individuals or enterprises to amass wealth. The present uncertainty of employment and profit will continue and be normal.
In such an environment the notion of taking on any obligations is questionable. There will be an enormous cultural lag for the realisation of this however. Expect to see a lot of bad decisions to be made over the coming years: investments made with the expectation of a return to a prosperity that never comes.
Economic actors - everyone, that is - need to learn the new rules of economic life in a world turned upside down. We don't know them - no one does - but we could hazard a few guesses: you must live on half (or less) of your income; much of what comes in is not true income but a windfall and must be treated as such; never borrow money; investments must be recovered from cash flow in a very short time frame - perhaps three or four years for low-risk endeavours, perhaps one or two years for risky ones; all investments are riskier than they used to be.
At present, society is following a set of economic rules completely at variance with our guesses of the new rules. The transition to new rules will nevertheless be made, no matter how impossible it seems at the moment.
Monday, March 30, 2009
Bring Back Bank Branch Laws
In the present popular discourse, a great deal is said about how to clean up the financial mess, but not much about how to prevent a future financial catastrophe. Vague calls of "more regulation" fill the air, but not many concrete proposals can be found.
Our very concrete proposal is to return banking to a fragmented industry where the preponderance of financial assets are held by tens of thousands of institutions instead of a few global behemoths.
In the past, fragmentation was enforced not by heavy-handed regulation, but by a simple principle of law: a bank could have only a few branches, or even in the most restrictive jurisdictions, just one.
For example, from 1870 to 1967 in the State of Illinois, banks were not allowed to have even one branch in addition to its home office. In 1967, banks were allowed to open a separate drive-through building, so long as it was withing 1500 feet of the main office! Gradually the law was liberalised, and by 1993 Illinois banks could open an unlimited number of in-state branches.
In 1994, the US allowed interstate branch banking for the first time, and since then banks have expanded and consolidated across state lines. As a result of this 'reform', there has been an enormous concentration of banking assets in the hands of the nations largest institutions.
Interestingly most of the problem assets currently involved in 'rescue' schemes are held by these largest institutions. In other words, these super-huge banks that have grown up over the past few decades have made terrible investment decisions, blown their capital, and are now giant purse-sucks on the US taxpayer.
The whole housing bubble fiasco and consequent Depression might have been avoided if the Branch Banking Laws had not been 'liberalised'. It is true that a fragmented banking industry is more expensive in theory, but in practice the de-fragmented industry has turned out to be vastly more expensive.
Our very concrete proposal is to return banking to a fragmented industry where the preponderance of financial assets are held by tens of thousands of institutions instead of a few global behemoths.
In the past, fragmentation was enforced not by heavy-handed regulation, but by a simple principle of law: a bank could have only a few branches, or even in the most restrictive jurisdictions, just one.
For example, from 1870 to 1967 in the State of Illinois, banks were not allowed to have even one branch in addition to its home office. In 1967, banks were allowed to open a separate drive-through building, so long as it was withing 1500 feet of the main office! Gradually the law was liberalised, and by 1993 Illinois banks could open an unlimited number of in-state branches.
In 1994, the US allowed interstate branch banking for the first time, and since then banks have expanded and consolidated across state lines. As a result of this 'reform', there has been an enormous concentration of banking assets in the hands of the nations largest institutions.
Interestingly most of the problem assets currently involved in 'rescue' schemes are held by these largest institutions. In other words, these super-huge banks that have grown up over the past few decades have made terrible investment decisions, blown their capital, and are now giant purse-sucks on the US taxpayer.
The whole housing bubble fiasco and consequent Depression might have been avoided if the Branch Banking Laws had not been 'liberalised'. It is true that a fragmented banking industry is more expensive in theory, but in practice the de-fragmented industry has turned out to be vastly more expensive.
Saturday, March 21, 2009
Your Single Best Investment
The notion that housing is an investment certainly has a lot of egg on its face these days. But behind every bubble, is a grain of truth. The truth behind the housing bubble is that affordable, paid-for, owner-occupied housing in reasonable repair is an excellent investment for many reasons.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
What was lost sight of in the recent bubble was the affordable part, and the paid-for part. The system's idea of making housing affordable was to wildly dole out loans no matter how large, and uncovered by income.
The simplest rule-of-thumb for defining what is affordable is the house value should be no more than twice the household income. This is a figure that doesn't get much air time. More typical multipliers are higher. They are propogated by bankers (who want people to borrow money) and real estate agents (who want higher commissions).
People often buy houses to live in at an affordable multiple, but then hang on when market-based appreciation takes the multiple higher. This seems innocent enough, but is actually a mistake. The primary reason is the cost of property taxes which, in most places, is proportional to market value. The cost of both insurance and repairs typically rise to some extent with market value as well.
If you live in an area where you can't find a decent house in a decent neighbourhood for twice your income (or less), move to an area where such houses abound or accept that you will be a renter. It is as simple as that. Don't compromise the quality of the house or the neighbourhood to find a house to buy in an expensive area.
The paid-for part is very important. It is not an easy thing for renters to save up two years of income to buy a house. Mortgages are indeed a great convenience when used wisely; but absolute poison if abused. Once taken out, the mortgage should be paid as quickly as possible. The indebted owner should consider a severe austerity until the mortgage is extinguished - perhaps applying as much as half the household income towards it. This will pay off a mortgage on an affordable house in just a few years.
And now to the reasonable-repair part. There are two ways of turning your house into a money-pit. One is buying a house with excessive deferred maintenance, such as the "fixer-upper" that should have been torn down or the house that "just needs a new roof." A professional inspection before purchase may save a world of hurt after the purchase. Never buy serious problems, unless you are a skilled construction worker, or the price is low enough that you can perform the repairs within the overall purchase budget.
The second way to turn your house into a money pit is to over-maintain it. Your house is not a piece of precision military machinery, so it does not need to always be in tip-top shape. A little shabby is not a bad condition for a house to be in. Let the municipality tell you when you need to re-side.
The chief advantage of owning the house you live in is that you have avoided paying for two significant costs: the bank and landlord's profit on renting to you; and the taxes on the money you would need to earn to cover said profit. As an investment, the owner-occupied house has the benefit of a guaranteed customer and a return more certain than every other investment.
The affordable, paid-for, owner-occupied house in reasonable repair is a great benefit to households, and ultimately to society as a whole. This latter benefit is perhaps at the core of the good intention behind the out-of-control promotion of 'home ownership' at all costs - the paver that led the world to a bit of economic Hell.
Tuesday, February 24, 2009
Slow Versus Fast Collapse
In the information economy, knowledge is valuable. If one can fine tune one's production to match market demands, one's operation will be more efficient and profitable. But now, across the world, management information systems are flashing "negative growth, liquidate, liquidate!" and managers are responding appropriately. This, in brief, explains the crash-like environment the world's economy is experiencing. One might call it "panic at light speed."
In the coming years as economic decline is compounded with various stresses (such as peak oil, overpopulation, pollution) piling up, does the world risk a fast crash back to the Stone Age? We think not.
All the crashing going on is also opening up opportunities. Necessary investments are being deferred, and at some point in time not too distant, it will become glaringly obvious to make them - at least to some. New technologies, and just plain changes of taste will also open up all sorts of new opportunities. Investment goes on, and economies will hobble along.
We are not saying that the economy as a whole will necessarily be able to grow. Just that enough opportunities for profit will exist to keep the civilisation more or less intact.
In the coming years as economic decline is compounded with various stresses (such as peak oil, overpopulation, pollution) piling up, does the world risk a fast crash back to the Stone Age? We think not.
All the crashing going on is also opening up opportunities. Necessary investments are being deferred, and at some point in time not too distant, it will become glaringly obvious to make them - at least to some. New technologies, and just plain changes of taste will also open up all sorts of new opportunities. Investment goes on, and economies will hobble along.
We are not saying that the economy as a whole will necessarily be able to grow. Just that enough opportunities for profit will exist to keep the civilisation more or less intact.
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