Banks, Inflation, and Yuck!

The last few days, there has been a lot in the news about Cyprus and their banking system.  Seems their banks were in danger of failing, and the Eurozone was trying to work out a deal.  The Cypriots were balking at the deal, as it would nationalize a percentage of those accounts.  Even the Russians were involved, it seems a high percentage of the biggest accounts were owned by Russian businesses or other elites. 

The Russian President said that this plan was like stealing, and I agree.  Cyprus set themselves up to be Europe's version of the Caymans.  A place where you could park your money, and not have to worry about local taxes.  I believe that is one of the problems here, other governments were jealous that this little island in the Mediterranean was able to get 7 times their GDP in bank deposits.  They also knew that it was primarily Russian money.  Russia over the years has tried to bully Europe, both east and west.  Now they saw their chance.

The ones hurt the worst in this are those Russians that invested their money in Cypriot banks.  Although, the Cypriots are being hit as well.  Imagine how you would feel if the government just took 30% of your checking account (well besides that which the IRS already takes).  Would it move you to deposit more in your bank?  In my opinion this is just the start of the Cypriot crisis.  And as soft socialism seems to be the norm in the world today, I expect this to spiral to depths of possible economic crisis world wide.

Without condemnation to this action forced on the people of Cyprus, we can expect more actions just like this to occur across the world.  Spain, I'm sure is eyeing this, as are the Italians.  Both of those economies are in trouble.  What if the Russians retaliate by cutting off gas to Europe, or raising the price?  Great Britain is already having gas supply problems.  Their people are already paying inflated prices, because supply is not meeting demand.  When people get desperate, can you really predict with certainty what they will do?

What if President Obama sees this as a way to finance more government here?  What if the Federal Reserve prints too much money?  Can we handle inflation?  Remember, Germany prior to World War II experienced massive inflation, and the result was the rise of the Nazis.  Can we be assured that that can't happen here, or elsewhere?  Argentina in the 1980's experienced hyperinflation, it caused collapse of the government and the "dirty war" of the tyrants that replaced them.



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When our government is told, you have to go austere, will the poor who will get hit hardest rise up?  Or the rich, in fear of losing all their life's work to runaway government won't try to flee, or to hide their assets?  At some point that will happen.  See, government finances are not that different to your personal finances.  At some point, no one will lend you money, then you have to cut back.  What if holders of our debt internationally demand payment?  If nothing else, might they dip in to the Social Security Trust Fund, oh wait that was spent in the 1960s.  Will Grandma be eating cat food?  Will her children and grandchildren be there to help?  Or will our seniors just be allowed to die via socialized health care. 

Is our economic problems manageable now?  Who knows, but one thing that is certain is that the longer we wait to make economic changes that bring sanity to our Federal Budget, the more traumatic it will be.  But in our one party government, that is unlikely, and our children will inherit the mess, assuming that it doesn't collapse before then.  The optimist in me says we can work through this, but it is a political solution, more than an economic solution.

Spend Well!

Let's Be a Democrat

I love quotes, because I am not the most creative writer.  So quotes do two things for me.  First, they get me thinking.  And Second they usually say it better than I can.  Thomas Jefferson, one of our founding fathers, and perhaps the first leader of the Democratic Party was an amazing speaker.  I wish they had recording devices in those days so we could actually listen to him.  I digress.  I ran into a quote attributed to him that is the base for this edition.  "I believe that banking institutions are more dangerous to our liberties than standing armies.  If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and the corporations that will grow up around the banks will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered."

Wow!  I remember my Mom telling me that as she grew up in Southern Illinois, towns gaged their value by how many banks, churches, and taverns they had.  A town without a bank would always be small.  And that was pretty much true.  But I want to distinguish here between locally owned and operated banks and the large banks we have now.  Today we have many massive sized banks.  As I grew up in St. Louis, we had two large banks, Boatman's Bank and Mercantile Bank.  Both were gobbled up by larger out of town banks.  Both of those banks had good reason to care about their home town, and many of their shareholders were from the area.  When McDonnell Douglas needed a bank, they were there, it was good business.  When Anhueser Busch needed a bank, they were there.  When Monsanto needed a bank.. Well you get the picture.

Now that they are gone, Boeing was able to buy McDonnell Douglas, InBev was able to buy Anhueser Busch, and Monsanto while still independent, is not as big as it used to be.  Other great St. Louis Companies included Malinkrodt Chemical, Ralston Purina, Brown Shoe Company, International Shoe, Famous Barr, Stix Baer and Fuller, Venture Stores, May Department stores, Payless Shoe Source, Energizer on the larger side, and many small to medium size businesses.  But those were the good old days.

Let's look briefly at two of the companies mentioned above, Stix, Baer, and Fuller, and Anhueser Busch.  Stix as they were known was a full line department store, and number 2 in town to Famous Barr.  Look at what they did for their home town:  In the 1930s they sponsored a soccer team that won the national championship.  In 1955 they contributed funds to build the first public television studio in the country, and the station named the building after them.  The Boy Scouts of Saint Louis area still visit S-F Scout ranch, S-F stands for Stix, Baer, and Fuller on property the Stix family helped buy in the 1960s.  In 1984, they were bought by Dillard's Department stores of Arkansas.  Funny, but no other moves by Dillard's, except to sell product to St. Louisans.

Anhueser Busch was pretty much a family business that went public.  They did many charitable works, shipping water to natural disasters, helping local organizations stay afloat, they had a budget for managers that the managers could use for charity, merchandise for a local auction etc. It was the largest brewery in the world at one point, and still the largest in the US at the time of the InBev takeover.  There was a brief attempt to stop the purchase, and one way is to turn the tables and buy the buyer.  Gussie would have done that.  He would have made a call to Mercantile or Boatman's or both and InBev would be a division of a US company.  But at the time of the takeover, there was no Boatman's or Mercantile...  And the charitable budgets have been eliminated for the most part, I wonder if they help out in Belgium...  They still want to sell you beer.

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Some of our economic troubles, perhaps many, are related to big banks.  Congress has passed legislation to control bank fees, because of lack of competition in that market.  Government regulation is interference in the market, but these banks are so large, the market has to pay homage to them, they no longer compete with as many institutions.  Lack of competition breeds government regulation, and restricts the economic liberty of the country.  So, several years ago we were told these banks were too big to fail.

But maybe failure of the big banks would readjust banking economics to a more local venue.  Perhaps they should have failed because they screwed up.  Maybe had they failed, our economy would be in better shape today. 

So I want to be a Jeffersonian Democrat.  Unfortunately, there is no Jeffersonian Democratic party in the United States.  In fact, neither of the two major parties seem to care one way or the other about localities, only their national power, and the ability to get rich.  They are to use an OWS phrase the 1%.  Jefferson would have been an advocate for local control.  Our founders distrusted large national government which is why they reserved the powers not enumerated in the Constitution to the states, or to the people.  If there were more George's (It's a Wonderful Life) and less corporate executroids, maybe we would be better off? 

Spend Wisely!

Why Are We Still Down?

In 2008 things seemed to turn down in the economy.  I was thinking today that it has been a very long time since we have had such a long term downturn.  Maybe it would be helpful to explore why this may be so.

The business cycle, as economists call it, is a series of booms and busts that have happened since the first transaction of trading a part of the meat killed for fire to cook it on.  In my lifetime this cycle has turned continuously.  The two worst times I can remember is now and back in the late 1970s.  I remember well those times, because that is when I was coming out of school and in dire need of a job. 

What significance do these cycles have?  During boom times, it is almost impossible to not make money.  Companies pop up selling their goods to an attentive populace.  Established companies see their sales grow exponentially.  As sales rise more people are put to work.

Let me use an example.  In 1987 a company formed that had a novel idea on sleep.  They designed an air chambered bed, that the public seemed to like.  During the 90 and early 2000s, this company had average growth per year of 20% or more.  From a small concern to large company in a decade, not bad.  As they grew they opened stores, hired people to mind these stores, hired managers to manage the stores, executives to watch over the stores, marketers to promote the stores, trainers to train the new personnel, assistants, secretaries, personal assistants, event planners, delivery crews, and many more.  In early 2000s, they decided they needed a nice headquarters to house all these functions, and they spent and borrowed to build a building.

In 2008 the market crashed.  Oops, see they mismanaged to a degree, they assumed that there would be 20% growth for all of eternity.  As people stopped spending, their product was hit pretty hard, since most either considered it a gimmick, or a luxury.  Soon they were laying off people.  They tried to maintain a good forward face, but behind the scenes people were being laid off.  Most of the training staff, including the training executive were gone.  Most of the loss prevention staff were gone.  Times were bad.  At one point they considered selling the company at a discount to a corporate raider, they actually had a deal in hand.  Their shareholders said no.

As the economy improved slightly, they of course improved as well.  Thing is they learned their lesson.  They spent a lot of time saving money, hoping never to have times like that again.  They got out of debt, and maintained their current state.  They managed to improve their business.  This January, they had enough reserves that they purchased their largest competitor in a cash deal.

Bad times, or recessions help the economy.  What??? How can that be?  it is simple, the economy likes productivity.  The more productive we are the better we can do.  Recessions are like forest fires, at first they appear catastrophic, but they also foster life.  With capital tied up, new things cannot grow.  Companies that use capital, but do little in return are not productive.  So why is this recession seemingly endless?

I would contend that this recession is longer because of the way government has tried to deal with it.  It is the Keynesian economic theory that says government can level the cycles, but it is my contention the opposite is true, with one exception.  Let's look at what happened.  The government bailed out the auto industry and banking.  A lot of people think that that is a good thing.  What if GM were allowed to go out of business?  I know there is a lot of nostalgia for Chevy, but there was a lot for Desoto too, and what about Willys Jeep?  Remember Studebaker?  The point is, if GM had gone out of business, there would have been a hole, a market ready to be tapped.  Sure maybe some of that market would have been filled by imports, but cars these days are made of foreign and domestic parts, I had a Mustang with a West German clutch back in the 80s.  Other companies like Ford might have become stronger.  Why did GM come that close to failure?  They mismanaged.  They like the earlier example assumed that good times were here forever.  They were willing to settle labor issues to avoid downtime, overlooking what the consequences might be in bad times.  Labor and pensions is what almost downed them. 

The point of negotiations should be to further the company and protect the employee.  Some times strikes are necessary, as are lock outs.  It has to do with productivity.  GM became unproductive.  Had they failed, labor would have been in surplus, helping other companies be more productive.  Look what saving GM has done to Detroit...

And when productivity rises, two things happen.  First, sales will start trending up. And, second, Labor will move to equilibrium.  There are not many blacksmiths out there today, they moved to other, productive ventures.  At one time getting a job with Pullman was considered a very stable job, quick question, anyone know who Pullman is?  When I first went to work, I found a job with the #4 retailer nationally (#1 Sears, #2 KMART, #3 JC Penney, and #4 FW Woolworth) There are no Woolworth stores anywhere any more.  Notice in the list there is no mention of either Target or Walmart, interesting huh.  Three of those four are still there, but they are no longer top, Sears and Kmart merged, and if you read the news Penney's is hurting big time.  Walmart and Target are surviving because they are productive.

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What is "Natural Awakenings"?

Can you imagine no Dime Store Fountain?  Ray Crock did.  So we bailed out autos.  Instead of a productive company, we get a company, that because of government intervention, brought us the Volt.  How many Volts have you seen this week on the road?  Is that productivity?  The corporate undergrowth was not purged, and as a result low productivity is causing our recession to linger.

Don't get me wrong, I do not delight in people's pain.  But sometimes a little pain makes the joys ahead more profound.  Is it not better to end the worry of the auto worker, and allow them to get on with their life?  A life in which they can succeed and grow, and gain for themselves and their families.

Next Post:  What booms mean...

Spend Wisely!

Revenue Increases

I really love an article that puts the Liberal mindset out for all to see.  And such was the article I read today!  Tax bills for rich families approach 30-year high.  It seems the government has been tracking actual taxes paid in the income demographics.  And those rates according to the article are at near all time highs.  The top 1% are paying more than a third of their income in taxes.  Intesestingly I read another article about people renouncing their citizenship, primarily because of tax reasons.

So we have a political royalaty intent on punishing the "rich"  without defining what rich is.  The rich, and they know who they are, are getting fed up with the attack.  And when most of their assets are outside the country, just renounce citizenship to avoid taxation they deem as excessive.  So we are loping off the mega international rich, meaning that you and I are much closer to the top... The New rich!  So my middle class friends, start reserving up to a third of your income, you will need it.  Why?  because without definition, the term rich is a moving target.

At the same time in the first story, they recount how "The average family in the bottom 20 percent of households won't pay any federal taxes. Instead, many families in this group will get payments from the federal government by claiming more in credits than they owe in taxes, including payroll taxes. That will give them a negative tax rate."  So not only are the poor not paying a dime in taxes now, but you could increase their rates and they still would not be paying a dime in taxes.  This may be our salvation!  Raise taxes on the poor!  They still won't be paying anything, so why would it matter?  Perhaps the aimless Republicans should take up this mantra, after all, it accomplishes what our President says he wants.  Does he not want revenue to be part of the deal?  And it would close some loopholes.  Win Win Mr. President!

Is it any more crazy to propose fixing our troubles on the back of the poor than on the back of the rich?  Or maybe, just maybe we should look more deeply at spending.  The infamous Obama phone is rife with fraud, there are a lot of people that really don't qualify that receive this benefit.  The Sequester is just 7% of total expenditures this year, and they are squealing.  The Scooter Store was raided for Medicare fraud.  Maybe we could find 10% in the budget that are like these 2 examples, maybe even more. 

However, government does not like to spend less.  Consider these examples:  A school board puts a bond issue on a ballot.  The voters reject that issue, what will the board do?  Why cut teachers or extracurriculars of course.  They are going to punish the kids for what their parents did.  No way do they look for waste, or ask that office supplies are more closely tracked, or doing without one assistant superintendent.  So to the Sequester.  TSA is furloughing much more than 7%, so there will be lines, punishing us for being so unreasonable.  The release ileagal aliens, to teach us that we cannot say no.  No way would they remove one servant from Air Force 1.  No way would they remove the liquor from the speaker's plane.  No way would the Vice President, whose job it is to wait in case the President dies, to stay home.  No way will the Secretarty of State be told to use the phone or video conferencing instead of burning expensive jet fuel to globe trot.

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So let's settle on a definition of "rich" and "fair share".  Is 35% fair?  Is 50% fair?  Is 95% fair?  Is a million dollars rich?  A half million?  A quarter million?  Let's look everywhere.  Let's bring sanity back to the budget.  We are a nation of equals, we should equally work to make it thrive, whether through labor or treasure.  Until there is sanity in our royals, I just have one thing to say....

Spend Wisely!

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Health Care Economics

Let's start with the premise that our health care system in the United States is somewhat flawed.  But the flaws mostly come from economics.  I was reading a story in today's St. Louis Post Dispatch about the up coming changes in our health care system because of the Affordable Care Act (ACA).  I would encourage you to read their story.  It is a good starting point for today's post.

What do I mean when I say our system is flawed because of economics?  If you go back to before World War II, very few had health insurance.  They would today be called the 1%.  Middle class and poor people did not have health insurance in general.  In 1941 a doctor might earn $300 per month.  It doesn't sound like a lot, but it was generous by the standards of the day.  $300 in 1941 would be just over $4500 today or $54,000 per year.  Doctors in 1941 would be considered middle class today.  So in fact Doctors today earn more than their counterparts from 1941.  Why is that?  It is because of economics.  In World War II the government froze wages, companies where not allowed to give monetary raises to employees.  So how do you lure a great employee into your company?  You would offer non monetary incentives, and one of the big incentives was paid health insurance.

When those employees went to the Doctor, the bill was paid by an insurance company.  Still there were not that many who had insurance, and Doctors would charge between $5 and $10 for an office visit.  However, those with insurance would not care what the visit cost, they were not paying for it.  As the years rolled by, more and more people had insurance and by the 1960s a substantial number of people were covered by health insurance.  This is when costs started escalating.  As more people stopped worrying about the cost of a visit, and visited more often for colds and minor ailments, doctors started earning more money.  Today less than 15% of the population is not covered by insurance.  And of those, a number are healthy young people who see no need for insurance, they are not sick, some are poor and can't afford the premiums.  And doctors earn at least $150,000 per year, many earn more, or at least 3 times what doctors earned in 1941.  This is because economics is no longer in the doctor patient relationship.  Since someone else is paying the bill, many people do not even ask the price of an office visit before setting an appointment.  Would you fill your gas tank if there was no price on the pump?  Doctors bill insurance companies.

At first, this was not a problem, but in the 1970s and 80s HMOs started popping up.  HMOs were the insurance companies way of attempting to control costs through negotiations.  Many people did not have HMOs so this was not as effective as insurance companies would like.  Over the years up to today, many companies have signed agreements with a network of doctors on payments, and if you go outside their networks, you pay a higher copay.  But doctors are bright people.  In a hospital, maybe the hospital is in network, your doctor may be in the network, but perhaps the lab is not, or the anesthesiologist. 

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Now we have the Affordable Care Act.  If you read the article, and the Post is not a conservative paper, the cost of insurance will be going up, and they don't know how much.  I along with others see it going up a lot.  Why?  Because it requires maximum participation.  And older less healthy people can not be turned away, or offered a very high premium.  As a result, costs will have to be shared over the entire population.  When healthy people see the higher premium, they will not pay it, opting instead to pay the fine imposed by the legislation, it will be cheaper.  And there will be no disincentive to do that, because if they get sick, they can't be turned down or have their condition excluded.  Why pay thousands, when you can pay hundreds?  So participation will not be what the government wants, and the group will share a larger burden per person, pushing premiums up.  As premiums rise, participation rates will fall, causing rate to go higher.

Insurance companies, just like you deserve to earn a profit on their labor.  With a near universal system like the ACA they will push costs directly through to the customer in higher premiums, preserving their profit margins.  And generally corporations earn a percentage of their sales, so they make more when costs go up.

So are we just screwed?  Maybe not.  When the system crashes, perhaps then some sanity will enter Washington, and they will deal with the true nature of the health care problem, lack of economics.  There may have to be regulation for a while, but putting the patient / consumer back in the drivers seat would seem to be the answer.  Require doctors to post their fees, before the patient makes an appointment.  Hold patients more accountable for what they spend, either through higher copays or other means to keep their costs down.  Set the system where doctors are once again in the business of competing for patients.  Which today you can see in some areas of health care like dentists or chiropractors.  Those branches of medicine still have relatively lower insured patients, so their fees are more reasonable.  But you are worth what someone will pay you, so the very best doctors will still command higher wages, which encourages all doctors to continue their education to see income increases.

This will also force health care manufacturers to find more productive ways of manufacturing machines and other doctor tools.  Today there is little such incentive.  After all, the person paying the fees (the insurance company) has little say in the purchase.  If hospitals or others compete for the dollars spent in say an MRI, the costs should come down, putting pressure on hospitals to find less expensive ways to accomplish the goal.  Lightened demand for high price equipment will bring those prices down.  It's all economics!

Spend well!