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March 31, 2012

This Week in Economics: Jobless Claims and Q4 2011 GDP Revision

Q4 GDP was unchanged in the final revision as jobless claims slightly rose.

March 30, 2012

Paul Ryan Discusses the Proposed GOP Budget

I know this is old news by now, but last week, the GOP proposed an alternate budget to what the Obama administration is proposing. Paul Ryan discusses the proposal in the video below. We have not had time to analyze, because we think the Administration is going to put little effort into considering it. We are, however, considering putting forth our own budget.

March 29, 2012

How to Create another Financial Crisis featuring Bernanke and Geithner

Last week, Ben Bernanke and Tim Geithner testified before Congress about the European Debt Crisis. Additionally, we've heard a great deal of opining from Tim Geithner about austerity being bad for the Europeans. I'm not so sure we should be taking advice from the people who got us into this problem with easy money on how to find our way out. A better title for this hearing would have been "How to Create Another Financial Crisis."

Wickard v. Filburn, the Supreme Court Case That Gave Unlimited Economic Power to the Federal Government

Roscoe Filburn is one of the most important names in American history that you've never heard of. Filburn, an Ohio farmer, took on the federal government over his rights as a farmer.

In 1938, the government passed the Agriculture Adjustment Act. This law was designed to bring price stability to the agriculture markets. As a part of that law, farmers were told to limit their production of crops. In the Filburn case, he was to keep his wheat production at a certain level.

Mr. Filburn violated the act by growing more than the allotted amount. He did so for private consumption on his farm. The federal government sued Mr. Filburn and the case made its way to the Supreme Court. In a unanimous decision the court found in favor of the federal government, thus paving the way for any economic activity to be regulated.

The entire decision from the case can be found here.

Some quotes from the decision that I found interesting:

Appellee (Filburn) says that this is a regulation of production and consumption of wheat. Such activities are, he urges, beyond the reach of Congressional power under the Commerce Clause, since they are local in character, and their effects upon interstate commerce are, at most, "indirect." In answer, the Government argues that the statute regulates neither production nor consumption, but only marketing, and, in the alternative, that, if the Act does go beyond the regulation of marketing, it is sustainable as a "necessary and proper" [Footnote 15] implementation of the power of Congress over interstate commerce.

"The maintenance by government regulation of a price for wheat undoubtedly can be accomplished as effectively by sustaining or increasing the demand as by limiting the supply. The effect of the statute before us is to restrict the amount which may be produced for market and the extent, as well, to which one may forestall resort to the market by producing to meet his own needs. That appellee's own contribution to the demand for wheat may be trivial by itself is not enough to remove him from the scope of federal regulation where, as here, his contribution, taken together with that of many others similarly situated, is far from trivial."

Therefore, any intrastate commerce that acts in mass volume, is now considered interstate commerce. Are there any economic actions you take that, if done in mass volume, wouldn't have a major impact or be considered interstate commerce?

"It is said, however, that this Act, forcing some farmers into the market to buy what they could provide for themselves, is an unfair promotion of the markets and prices of specializing wheat growers. It is of the essence of regulation that it lays a restraining hand on the self-interest of the regulated, and that advantages from the regulation commonly fall to others. The conflicts of economic interest between the regulated and those who advantage by it are wisely left under our system to resolution by the Congress under its more flexible and responsible legislative process. [Footnote 29] Such conflicts rarely lend themselves to judicial determination. And with the wisdom, workability, or fairness, of the plan of regulation, we have nothing to do."

Basically, the Supreme Court states that if you are disadvantaged as a result of regulation, it's your problem, not the courts. I wonder what happens when regulation means tortious interference?

There's enough justification in federal court precedence to side either way when it comes to Obamacare. We can only hope that there is some sensibility in the court to recognize that Americans have the right to conduct commerce without the federal government interfering or forcing a commercial transaction.

By the way, here's a link to the Filburn Farm.

March 28, 2012

Federal Reserve Has Credibility Problem, Too Much Easing: CNBC Fed Survey

As the video points out, opinions of monetary policy have shifted drastically in the past couple of months.

March 27, 2012

Inside the Liberal Ideology of Medicare

I love how this liberal Congressman said "Medicare is not going broke" and then stated it needed "reform." And what was his reform idea?

Greece to Default Again, Regulation Biggest Threat to Recovery:CNBC Fed Survey

The market has very little confidence in Greece or the government's ability to regulate without disrupting economic growth.

March 26, 2012

Jon Corzine Directly Decided to Move Client Funds: Internal Memo

The evidence against Jon Corzine's direct involvement in the MF Global collapse and fraud is becoming more evident.

Spain Becoming the Bigger Euro Zone Threat

Back in January, we released an article discussing the debt problems in Spain and Italy and how the rates at the time were going to reverse.

Well, they have reversed, with Spain's rates going higher than Italy.

Over the past year, Spanish and Italian rates moved together, then Italian rates jumped over Spain's during the height of the euro crisis.

The above chart shows the relationship between the Spanish (purple) and the Italian (blue) interest rates in the past month. This officially means that Spain is clearly becoming the bigger concern in Europe. With the amount of outstanding debt much higher than that of Greece, Portugal, or Ireland, a bailout is not an option for Spain.

We believe that Spanish and Italian rates from this point on will continue to move in par with each other, with the Spanish 10 year keeping a 40 to 60 basis point premium on the Italian 10 year bond. We'll continue to keep an eye on Europe as Spain appears to be the next focal point in the Eurozone Debt Crisis.

March 24, 2012

This Week in Economics: Jobless Claims

Jobless claims fall below 350,000.

March 23, 2012

Chart of the Day: Labor Participation Rate for Spain, Greece, Ireland, and Spain

Last weekend, I posted an article regarding an international comparison of labor participation rates. A reader asked for information on Spain, Greece, Ireland, and Portugal. I found that stats through the World Bank website.

March 22, 2012

The Gap Between Public Pay and Private Sector Pay, Illustrated

Each quarter, the BLS releases the Employer Costs for Employee Compensation report. This reports details the average cost, per hour, of employees across various demographics of American employment. Two numbers that I've decided to focus on are total compensation for private employees and total compensation for public employees.

As shown from the above chart going back ten years, there is a massive disparity between the pay of public and private employees. More interestingly, the pay gap in percentage, has changed over the past 10 years.

It is evident that the state and local governments participated in the gluttony of the housing bubble and the pop of that bubble brought government pay closer to parity with the private sector. It's clear from the behavior of these two variables that state and local government officials are overpaid.

The solution to this problem isn't for the private sector to "catch up," it's about making the cuts necessary to bring government pay to more reasonable levels. This is clearly another example of legislators abusing other people's money. Remember, this is a problem we are all paying for!

March 21, 2012

Chart of the Day: Unemployment by State- January 2011

How does your state measure up to others in the employment market?

March 20, 2012

I Actually Have Some Respect for Hank Paulson!

I just wanted to take a brief moment to say that I have tremendous respect for Hank Paulson. I understand that many people with the same economic and political views as I criticize Paulson for the bailouts or for the fact that he came from Goldman Sachs. I respect him because he was an individual, in a leadership position, thrown into a crisis, and expected to react.

While he did not react in a way I necessarily agree with, he came to forefront during a crisis and did everything he could to try to solve a massive problem. He really wanted to improve the situation. I know many people may not agree with me regarding this, but it takes exceptional courage to act with conviction (and quickly) when a crisis is underway. That's why I have some respect for him.

March 19, 2012

The Double Tax of Regulation

While there are countless regulations created and enforced by the federal government, they seem to exist under one consistent theme. The federal government creates regulations to "protect" citizens from essentially themselves. Practically any consumer protect has some layer of federal regulations in order to ensure that it is used "safely" by the consumer.

But, has anyone actually thought about the cost of such measures?

In order for the government to enforce these regulations, they must hire thousands of employees and create an infrastructure to support such massive governance. This costs hundreds of billions of dollars per year. This is financed through each individual's tax contributions.

In addition to this, the rules and regulations created by the government have to be carefully followed by businesses. Manufacturers must spend money in order to produce products that meet federal regulations. Service providers spend time and money (outside consultants) filling out a variety of forms required by the government for all types of information.

These private costs of regulation were estimated at $1.1 trillion in 2004. This was far before Dodd-Frank, Obamacaid, and a consumer protection bureau. The study also found that the cost for small businesses equated to around $7,600 per employee. These costs must be passed on to the consumer in order for the company to make a profit. Therefore, the private cost of regulation is baked into what the consumer pays for the product.

People are so consumed with the government protecting them that they do not realize the economic costs of such protection. The government is extremely inefficient in its application of most of what it does. As long as people don't be informed and hold the government accountable, these costs will continue to rise.

March 18, 2012

Chart of the Day: International Comparison of Labor Participation Rate

A comparison of eight major countries labor participation rates with ours shows some interesting discoveries.

First, the whole 'aging population' rationale in the United States (for the sudden drop) may be discredited because other countries are having aging populations as well, yet the United States had one of the most precipitous drops.

Second, despite the drop, we look better than many of our developed nation counterparts. It should be no surprise that the three lowest countries on the list are European. Additionally, Italy's below 50% rating may explain some of the growth problems the country is having and subsequently debt problems.

Third, if we take an average of these countries, we find that while the participation rate is falling, it's still well within the tight trend set over the past forty years.

March 16, 2012

Big Government Strikes Again: Cameras Required on Cars

About two weeks ago, regulators announced that starting in 2014, automakers will be required to install rear view cameras in all new vehicles. The report cited that this would cost the industry around $2.7 billion. Will this help the industry create jobs? The government cited 228 deaths and 17,000 injuries caused each year from a vehicle backing up. A lobbyist in the article described this as something we should do to protect pedestrians. Unfortunately, someone needs to tell him that stupidity cannot be regulated.

March 15, 2012

The Commonality of Financial Crises

1997 Asian Financial Crisis

From Wikipedia:

"Foreign debt-to-GDP ratios rose from 100% to 167% in the four large Association of Southeast Asian Nations (ASEAN) economies in 1993–96, then shot up beyond 180% during the worst of the crisis. In South Korea, the ratios rose from 13 to 21% and then as high as 40%, while the other northern newly industrialized countries fared much better. Only in Thailand and South Korea did debt service-to-exports ratios rise."

Panic of 1837

Listed as possible reasons for the financial crisis:

"Others take a different view, blaming a combination of the Second Bank of the United States, Mexican bimetallism (which drove Mexican silver out of Mexican circulation according to Gresham's Law, and into America where it was legal tender), legal tender law, fractional reserve banking, and state government deficit spending, which dramatically increased the money and credit supply, decreased interest rates, and led to erroneous investment decisions before and up to 1837, according to the Austrian Theory of the Business Cycle."

The Great Depression

Interest Rate Policy from 1920 to 1929:

"In 1920–1921 there was an acute recession, followed by the sustained recovery throughout the 1920s. The Federal Reserve expanded credit, by setting below market interest rates and low reserve requirements that favored big banks, and the money supply actually increased by about 60% during the time following the recession. By the latter part of the decade "buying on margin" entered the American vocabulary as more and more Americans over-extended themselves to speculate on the soaring stock market and expanding credit. Very few expected the crash that began in 1929, and none suspected it would be so drastic or so prolonged."

Add all this to the obvious low interest policy that caused the latest financial crisis, and ask yourself, what are we doing differently to get away from this problem?

March 14, 2012

Romneycare and Obamacare

This is why I cannot support Mitt Romney. You can't criticize big government and then turn around and use big government to propel your agenda.

March 12, 2012

Chart of the Day: Euro Zone Reserves Continue to Rise

Data released last week by the Federal Reserve shows that Germany, France, Spain, and Italy continue to hoard reserves away. The second chart shows that the reserve balances for these four countries together is at a euro-era all time high.

Chevy Volt Failing, Why We're Not Surprised!

Last week, I discovered that General Motors had idled production of the Chevy Volt due to slow sales. The company had forecast 60,000 unit sales in 2012, however, through the end of February, the company had not sold 2,000. General Motors is on pace to sell 1/6th of its forecasted Volt sales this year.

The reason that the Volt appears to be failing is because we have a situation where the federal government is trying to move against what the public demands. The Chevy Volt is currently priced around $35,000 in an economy where consumers do not have that kind of money to spend. The government, on the other hand, pumped taxpayer dollars into General Motors (through subsidies and TARP) in an effort to generate Volt sales as the outcome.

In a previous article I wrote regarding TARP and General Motors, I noted (point #4), "At the bottom of page 11 (marked pg 7), the TREASURY identified the keys of viability for General Motors and Chrysler. One such characteristic for both companies was “improving product mix and moving towards fuel efficient vehicles.” The government attempted to write GM's strategic plan and maneuver its outcome.

Michael Sykuta at Truth on the Market, wrote a good article last week about the Chevy Volt subsidies. Milton Friedman also had a good description of subsidies in the video below. Is this what the government is going to turn to in order to bring the price of Volts down?

March 11, 2012

Chart of the Day: Personal Savings Rate in the United States since 1982

The trend line shows the perversion away from savings in the past 30 years. The Federal Reserve wants us to spend and borrow (hence the low interest rates). What if that leveraging made our last recession more complicated (a la foreclosures)?

It's Official: Greece Has Defaulted!

The ISDA has ruled that a 'credit event' has occurred, paving the way for bondholders to cash in on their credit default insurance. The big fear in a Greek default has been unexpected events. We will find out in due time if any of these occur.

March 10, 2012

This Week in Economics: Jobless Claims and the February 2012 Employment Report

Jobless claims moved slightly up, while the economy created over 200K jobs in February and the unemployment rate remained at 8.3%.

March 9, 2012

Excessive Bureaucracy And Economic Growth

I ran into a great article over at Carpe Diem that I would like to share. The article gives great examples about individuals who want to create economic growth, being stymied by the government.

March 8, 2012

Grading the Government's Ability to Forecast Revenues and Expenses

In my studies of the past four Obama budgets, I found a glaring and growing error in the administration's ability to forecast government revenue.

I decided to take a look at the FY1996, 2000, 2004, and 2008 budgets to see how the government matched up in its ability to forecast revenue and spending.

On government spending...

The government has pretty much overspent its projections for the past 12 fiscal years. It's interesting that the Bush Administration seems to have prepared for the increased entitlement spending, and yet the government still outspent those projections.

On government revenue...

The government is more dependent on economic cycles for revenue than it ever has been. We still have yet to reach the peak revenue years of 2007 and 2008. This is scary because the government needs higher revenues to feed its bloated bureaucracy. The more the government needs the revenue, the more likely they are to loosely spend money in a recession to "chase" recovery. How much will the government spend in the next recession?

March 7, 2012

Ireland's Austerity Progress

A great site on the status of the Irish Economy has linked the latest report on Ireland's austerity program. The chart in the article shows simply how tough of a road these European countries need to take in order to restore fiscal competence.

March 6, 2012

Imagine if This Were the Federal Government....

Last week, I read a great article on the 'Truth on the Market' website. It was regarding a beer garden that faced problems with local regulations. What if this were your business? What if it were federal regulations blocking you? How much power or freedom would you have?

March 5, 2012

Why Greece Should Learn from Iceland, Leave the Euro Zone

Greece should leave the Euro, print its own currency, and solve its economic problems independently. The bailout package carries too many risks to the country, euro zone, and the global financial community. In the event of an escrow account cutoff, a disorderly default would occur, and due to the unexpected nature of the default, the financial markets would be rattled.

The other factor not being discussed in all of this is the micromanaging of the Greek economy by other Eurozone members. It's one bad idea for the home country to try to micromanage its own economy, but to do so to another country? The bailout-escrow relationship is a disaster waiting to happen.

By leaving the euro, Greece can get the default out of the way, and perpetuate the end of the slow moving train wreck that has been the past three years. Additionally, Greece can get back to managing its own currency and hopefully increase trade via the low value of its currency.

A good example of this is Iceland. Iceland's krona value to the dollar fell by 50 percent following its financial crisis 2008-09. The country's export industries helped the economy recover, and in Q3 2011, the economy grew by 5.1%, which is more than any other euro-based economy in that quarter.

Greece could print its own currency, force itself to a balanced budget (because it won't have outside financing), and encourage its exporting industries to conduct international business. The depreciated value of the currency can encourage trade. Miller-McCune wrote an excellent article on this topic.

While Greece struggles, Iceland recently received a credit upgrade. While Iceland's reaction hasn't been fully vented, it's certainly something to watch closely over the next few years.

March 4, 2012

Greek 'Credit Event' Drama

Not many people realize that there is still plenty of drama surrounding Greece after the country and the EuroZone agreed to terms of a bailout. On one hand, Greece is rushing to implement its austerity measures. On the other hand, the international community is struggling with defining whether or not a default or a 'credit event' has occurred.

Instead of explaining further, I've attached three videos. The first explains how a credit event is determined, the second gives an update on what was decided on Greece (prematurely), and the third is Rick Santelli's opinion of all this.

March 3, 2012

This Week in Economics: Jobless Claims and Q4 2011 GDP Revision

Q4 GDP was bumped up to 3% while jobless claims logged their third straight week at 351,000.

March 2, 2012

Are Oil Prices About to Drive the Market?

Before the recession, oil prices really drove the market. Are we heading back to that dynamic, Rick Santelli discusses.

March 1, 2012

Greece Could Still Be A Problem

Everyone has been cheering the bailout of Greece as if all of their problems have been solved. The truth, however, is that Greece is facing several high risk short term and long term problems.

For more on the Greek bailout, the Business Insider put together a good summary.

Short Term

Between now and the time that the escrow bailout account is set up the Greeks need to meet a series of austerity conditions. This is not just agreeing to the austerity terms, but having the various programs implemented. To illustrate the ambitiousness of this, many of the Obama Health Care programs were scheduled to be put in place three or four years in the future. Imagine having to put those programs together in three weeks, at most.

Additionally, the 130 billion euro account could be cut off at any time if Greece does not hold up to the agreed upon austerity terms. This could occur simply by the country not cutting enough, but it could also happen if a new political party comes into power with no intention of following the terms of the bailout.

Long Term

The goal of this bailout is to get Greece's debt to GDP ratio down from 150% now to 120% by 2020. While 120% is considered 'manageable,' there are several unknown variables surrounding this. First and foremost, Greece's economy needs to grow in order to get that ratio down. This is something that isn't looking like it's going to happen through 2013.

The next layer is the debt. If Greece is to re-enter the debt markets and attain new financing, it is going to need to attract lenders willing to give Greece funds at a reasonable rate. That could prove to be difficult through everything we are seeing in the headlines today. Would you ever lend money to Greece?

And even if Greece reaches the 120% debt to GDP threshold, a recession could easily send them down the same road that started this slow moving train wreck in 2009. It's very unreasonable to assume there will not be a recession between now and 2020.

If any of these factors becomes a problem, an unexpected default could occur versus one that the markets have seen coming for months, if not years. An unexpected default could roil the markets and send disruptions throughout the financial world, pushing some economies into recession, other economies deeper into recession, and devaluing the euro. Despite the agreements reached in Greece, the world still needs to continue to watch.

The Guardian UK put together a great video describing the Greek's new dilemmas.

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