My Eeyore Moment

This just in:  Yesterday, the GDP was reported at 4% which is a very high number.  It reflects how strong our economy was last quarter.  I think it’s fine to celebrate, however, I’m thinking this is going to be short-lived.

Here is why…

First: Growth depends on productivity.  A major part of productivity is labor.  The United States is out of labor.  Once we dropped below 5% unemployment, everyone that wants a job has a job.  I work with companies that are outgrowing their current capacities.  For the last couple of years, the one thing that is holding them back is the lack of available labor.  This is a very real thing.

We have some solutions to this.  We can stop deporting so much labor.  We can allow more labor to immigrate.  We can invest in automation.  We are doing the exact opposite of the first two and the third one is a long term fix in that it won’t help us out in the near term.

Second:  Our deficit is out of control.  Yes, if we grow at 5% we may be able to slow this somewhat, however, this is extremely unlikely.  We are paying more and more interest as we borrow more and more money.  Why are we borrowing so much?  Did we increase spending?  No, we decreased income by cutting taxes.  We can feel like we have more money when we cut taxes but what we are really doing is borrowing more money so we feel richer.

Third: Inflation is starting to go up.  Interest rates are also going up as the FED tries to put a lid on inflation.  Inflation makes our dollars less valuable and higher interest makes products (like housing) more expensive.  In short,  we are becoming poorer without changing the amount of money we are holding.

Fourth:  Tariffs are creating a global trade war.  All you need to know about tariffs is that they raise the prices of things you buy.  If you want a Toyota and we put a 25% tariff on Toyotas, then that car will cost you 25% more.

Fifth:  Housing is unaffordable.  When this happens, no one is buying a house.  Hosing construction contributes to the GDP.  When people have a house, they buy big ticket items like sofas and ovens.  When they don’t buy houses, they don’t buy these other things as well.

Sixth:  Wages are oddly stagnant.  Typically, coming out of a recession, wages lag by a few months.  This means once the economy gets going again, wages eventually go up.  We came out of a recession 9 years ago and yet, wages are still stagnant.  Keep in mind, the middle class makes up 2/3 of our economy.  When they have less buying power, the economy slows down.

So there you have it.  I really, really hope that I’m wrong.  I want a chicken in every pot.

But I’m not.

Those that disagree with me simply because we just had a 4% GDP growth rate are the same people that look out the window and say, “There is no Global Warming because it’s cloudy outside right now.”

Time to save the world.

Up, up and away…

Jim

 

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I was wrong…imagine that!

This just in:  For basically forever, I have said that the president cannot be held responsible for the economy; at least in the short run (less than a year).

I remember Obama taking over in 2004 and a week later, the Republican Party blamed him for the millions of jobs lost during the Bush administration.  They blamed him if gas prices went up for a month.  They blamed him if the stock market took a 1-day dip.  They blamed him if unemployment went up.  All of this was blamed on him after about 20 minutes in office.

My response was to say, “Hey, Congress passes the laws.  Congress passes the budget.  Our economy is huge and cannot turn on a dime.  The president doesn’t have the power to change the economy very much and has zero ability to change anything economically in the short run.”

Turns out I was wrong…

Trump, all by himself (as the Republican Party acts as if they are busy elsewhere) has managed to tank our economy in about a year.  Yes, we are not in a recession…yet; however, the table has been set for us to begin a steep downward slide into insignificance.

He started with using his executive powers to drop us out the the Trans Pacific Partnership.  This effectively put billions of customers out of reach for our products.  He then started trying to renegotiate NAFTA; a partnership that involves our biggest trading partner, Canada.  Then he started exporting undocumented workers.  Yes, he broke up families but it also sent cheap labor out of the country.  This didn’t create high-paying jobs in the the tech industry.  What it did do was raise the price you pay for nearly everything you buy in a grocery store.

Now it’s tariffs.  It took about a week for a trade war with China to go nuclear.  A trade war with another country is like having a starvation diet competition with your neighbor.  You both suffer until one of you dies.  When that happens, the remaining person can say, “I won” as his body lays crippled on a hospital gurney.  Expect inflation; the inevitable result of a trade war.  Expect higher interest rates; the inevitable result of inflation.  Expect your home value to drop; the inevitable result of high interest rates.

The stock market is having its worst quarter since the Great Depression.  This is all the result of one man….Donald Trump.  A man fooling with our economy that was once called “the dumbest student I ever had” by his college economics professor.

Trump does not know what is in the tax bill he signed.  Trump does not know what is in the Trans Pacific Partnership.  Trump does not know what is in NAFTA. Trump does not understand tariffs or international trade in general.  Trump even famously asked Flynn, his then National Security Advisor, “What’s the difference between a strong dollar and a weak dollar?”

And yet…he is in charge.

So…I was wrong.  The president can have a major impact on the economy.

Score one for the big Cheeto in the White House.

Time to save the world.

Up, up and away…

Jim

Note: I drop out of Facebook on 1 May.  If you want to still read these posts (for some reason), make sure you subscribe in the right sidebar.  Also, I will no longer be able to post these blogs on Facebook so if you think others might like the content, from time to time, please repost.

j

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La Ze Faire

This just in:  I thought I would explain the impact of Trump’s tariffs in an easily digestible way.

First of all, tariffs cause inflation.  Why?

Let’s suppose you by bagels at your local store for $1 per bagel.  Then, one day, the son of the grocer wants to start making and selling his own bagels.  Since the son is just starting out, he doesn’t have everything streamlined just yet so it costs him more to make a bagel than the original supplier.  He needs to sell his bagels for $2 each.  Now, the dad wants his son to succeed so he tells the original bagel supplier that for now on, he must pay a tax of $1.10 for each bagel sold at the store.  This means his son’s bagels are cheaper than the competition and his business begins to thrive.

Good for the grocer; helping out his son that way.

What does this mean for you?  Well, you used to pay $1 for a bagel and now you pay $2.  This is inflation.

Trump is seeing our steel industry in much the same way as the grocer saw his son’s bagel shop.  Good for Trump.

Except for the inflation part.  We put a tariff on steel so, in the future, everything made from imported steel becomes more expensive.

Yes, this could help our steel industry but that would take decades.  It’s not like a steel mill can be bought and unpackaged like something from Amazon Prime.

So, point #1:  Tariffs cause inflation.

What else happens?

Countries that feel tariffs are unfairly imposed will fight back by putting tariffs on products that they import.  Europe, China, Canada and Mexico are already preparing to do this.

Let’s go back to the Grocer example.

Suppose the grocer has a major customer for its vegetables.  That customer is the brother of the original bagel manufacturer.  The bagel guy tells his brother, “Hey, that grocer is charging me extra to sell my bagels, I think you should tell him that you will stop buying his vegetables unless he gives you a huge discount.  That will teach him a lesson.”

So, the grocer lowers the selling price for his vegetables.  Now, he can’t pay as much for his incoming vegetable supplies so he passes the loss to the farmer.  The farmer can’t make a living at the new prices so he cut back on how many vegetables he grows hoping that the smaller supply will drive up prices.  In the meantime, he has to lay off a bunch of workers.

In the end, bagels cost more; vegetables cost more and jobs disappear.

So, point #2: Unfair tariffs cause retaliation with side effects

What else happens?

The government/Central Bank has basically two ways to impact the economy: Fiscal and Monetary.

Fiscal policy is when the government increases or decreases spending to stimulate (or cool off) the economy.  For example, if they want there to be more money in the economy, they can lower tax rates.  Alternatively, they can increase employment.  People with jobs will spend more money.  This causes economic growth; at least in the short run.  The problem is that putting more money into the economy causes inflation.

This brings us to Monetary Policy.  The Federal Reserve (central bank) can raise and lower interest rates.  When interest rates are low, people spend money instead of saving it.  This causes inflation.  When interest rates are high, people save money (because saved money earns high interest).  This takes money out of the economy and lowers inflation.

The problem with raising the interest rate to control inflation is that is affects everything.  If you want to by a house and have $500K to spend, you can by a bigger house when interest rates are low.  When they are high, you can only buy a smaller house.  If you own a house and interest rates go up, the value of your house goes down because it is now more expensive for someone to borrow money to buy your house.

Higher interest rates also cause companies to save.  Instead of expanding they save.  They won’t spend $10 million on a new production line if the interest on the money borrowed to buy that line eats up all of the potential profit from that line.  No new line = no new jobs.

We recently lowered our taxes.  Today, we just imposed tariffs.

It should come as no surprise that the Federal Reserve just raised interest rates.

So, point #3:  We can control inflation but it comes at a price. 

From my perspective, we are trying to fix an economy that isn’t broken by pulling on both ends of a rope at the same time.  We cut taxes to to incentivize people to spend more which creates jobs.  We impose tariffs that cause inflation.  We raise interest rates to  control inflation which causes us to save instead of spend which results in job loss.

This is the type of economic policy we get when we don’t have knowledgeable economists working in the White House.

Time to save the world.

Up, up and away…

Jim

 

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