Category Archives: Economics

Public Pensions

San Francisco Police Union endorses Angela Alioto for Mayor

In the heyday of the “New Deal”, FDR’s program to address the crisis of the Great Depression of the 1930’s, a lot was done to shepherd workers into unions.  But one group was not encouraged, or even given the opportunity to unionize, government workers.  This is because unions were supposed to get workers a percentage of the profits they were generating for the “fat cats”.  And it was obvious to everyone that government workers didn’t’ create profits.  Even FDR himself explicitly stated that unions were NOT a good idea for government employees.

Today we know why.  The laws and regulations were changed in the early 1960’s, under President Kennedy.  He probably thought he was just giving a simple “right” to those that had not been allowed to unionize.  Neither he, nor those that took similar action at the state and local level, evidently did not foresee what the consequences would be.

Unionization led to massive increases in pay rates and pensions for government employees.  These range from teachers in local schools, to the police and fire departments, to bureaucrats doing government work at every level in a myriad of byzantine organizations that collectively are paid for with tax dollars.

It used to be that being a policeman or a fireman was a decidedly blue collar job.  No one went into these fields to get rich.  Now, they are among the best paid professions in the country.  They frequently make more in salary than many engineers do.  And their pensions are astronomical.  A policeman in California (OK, probably the worst example, but it’s to make the point) can retire at 50.  If he works for thirty years, his pension will be 90% of the average of his last couple of years on salary.  And this “average” is typically inflated by overtime, selling back vacation days, and other “tricks”.  Nobody, not even military, get a pension like this.

The reason for this mess is that politician all think short term.  They only care about their election or re-election.  They will not be around when the pay raise or pension bump they gave the police union in return for their political endorsement (Mayor X is “tough on crime”) has to be paid.

These salaries and pensions have by now wrecked havoc on local, state and federal budgets.  Many municipalities and quite a few states are now literally bankrupt.  Services will have to be severely curtailed.  This could mean lack of the very police and fire protection that we all rely on.  Detroit today is the case in point.  It is where every major city is headed.

The funny thing is that in the end, by bankrupting the cities and states they work for, the government employees will end up getting almost nothing.  They will have literally killed the goose that laid the golden egg.

What to Do

Government worker pay, especially executive level compensation, needs to brought back to reasonable levels, in line with other workers in the private sector.  Government pensions should be reduced to long term sustainable levels.

If needed, caps need to placed on public pensions to prevent excess and to give local and state governments some latitude regarding their financial future.  In fact, these caps could ensure that people who have government pensions will at least get something when the system craters.

Corporate Welfare

President Obama and Elon Musk (Businessman)

Currently, one of the greatest economic problems we face is Corporate Welfare.  This is where the government literally gives money to businesses.  The most egregious example is outright grants.  That is why the picture is of Elon Musk with President Obama.  Mr. Musk is an expert at getting grants from the government.  His electric car (Tesla) and space businesses (Space X) are utterly dependent on them.

One of the longest programs going is agricultural subsidies.  Originally this money was intended to tide over poor farmers during the Dust Bowl and the Great Depression.  Now, the vast majority of this money goes to corporations who own and operate the vast majority of farmland in the country.  Other industries also receive various levels of subsidies, most notably Energy and Housing

The government does more than just “give” money to businesses.  Most of the financial support is actually through tax reductions.  These are usually called “tax incentives” to mask the reality of what is going on.  The government makes it so that businesses don’t have to pay taxes on certain activities or property.  For example, when Donald Trump built the Trump Tower in New York, he was given a 40 year “tax abatement” for the property.  This meant he paid no property tax or other city taxes on the tower for 40 years.  This tax break was worth more than what the Tower cost to build!  And this is just a small case in point.

The government also erects barriers to prevent new competitors from “disturbing” the activities of those it wishes to so protect.  Corporate lobbyists regularly influence governments at all levels to pass laws that are beneficial for their firms, while detrimental to the competition.

During the last financial crisis, the Government went all out to provide money to banks and corporations it deemed “too big to fail”.  A lot of this was done to protect the investments of Goldman Sachs, the investment bank formerly headed by the Treasury Secretary of the time, Henry Paulson.  Other massive government investments were made in General Motors, which is arguably the worst run company in the country.

What has happened is that Free Markets and true Capitalism have been grossly distorted.  One of the core principles of Capitalism is that businesses that consistently lose money should fail.  That means that they go bankrupt, and the owners and investors lose what they had put into the business.  The government has now intervened, and has protected those that should have lost, at the expense of the common taxpayer!

What to Do

Corporate subsidies need to end.  Businesses should succeed or fail based on their own merit and profitability.  Taxpayer money has no business being given to business.

We need to let things fail.  Propping up failed businesses only prolongs and increases the economic pain.

Tax codes should be as simple as possible, eliminating “incentives” and “abatements”.  Taxes should be a percentage of a person’s or a corporation’s gain.  This is how a lot of government favoritism could be eliminated.

We need to insist that our representatives in government adopt these principles.  Unfortunately, too many want to keep their own “tax breaks” while taking away those going to others.  We all need to be willing to do what in the end will benefit us all.

The Sinking Ship

RMS Titanic

Shortly after the Titanic struck the iceberg, the overwhelming majority of the passengers and crew felt that while there had been a big bump, that everything was basically fine.  After all, the ship was still afloat.  When told that the ship was fatally compromised, and that they needed to get into the life boats, the vast majority thought this was an absurd over-reaction to the situation.

The economic situation today is like that of the Titanic.  It isn’t a perfect analogy, as the economic situation hasn’t been caused by one sudden and unexpected event, but its close enough.  The economy is fatally damaged.  It WILL sink.  The fact that it hasn’t sunk yet is not proof that it isn’t sinking and won’t shortly capsize.

Most people, like the Titanic’s passengers, and most of the crew, believe the current economic situation will just continue on similar to the way it is today.  There might be some minor problems, but they believe that everything is fundamentally sound.  Some even think that the situation is improving.  The dot-com bubble of 2000 is seen as ancient history, and the crisis of 2008, in their minds, has been completely handled.

The fact is that the world is sinking in debt.  Individuals are deep in debt.  Governments are deep in debt.  Both groups so much so that it can never be repaid.  And it is the weight of this cumulative debt that will eventually cause the economy to “sink beneath the waves”.

The iceberg in this “Titanic” analogy has been the world’s central banks.  They have moved the world away from true free market economics by their interventions and interference.  They have enabled governments to accumulate crushing debt.  They have intervened in financial markets to the point that stock prices bear little if any resemblance to actual worth, turning them into casinos of speculation.  They have taken control of the rate of interest charges by loans, and thereby have enabled individuals to also take on far too much debt, while at the same time completely destroying any incentive to save or to actually invest.

People are kidding themselves into thinking that everything is just fine.  After all, that’s what we want.  We want everything to be ok, and for the future to just be an extension of the calm lives most of us have led since World War Two.  But the facts point to the ship sinking.  And if you and your family don’t take action now, while everything still appears to be calm, you will be caught up in the panic and the calamity that is about to take place.

What to Do

Start preparing, financially and physically, for what is about to happen.  Don’t be like the masses, living life one minute to the next without much care for the future.

Start by putting your financial house in order.  Live within your means.  And don’t count the value of your house or your stock portfolio to remain the same or to grow.  In fact, both can radically move to the downside in literally the blink of an eye.

Prepare for at least some short period of extreme duress.  Be able to take care of yourself and your family with what you have in your house for a period of time.

Don’t expect the future to be like the past because that is all that you have personally experienced in your own lifetime so far.



The Trump Business

A Trump Branded Hotel

Donald Trump professes to be one of the best businessmen in existence.  A large part of his presidential campaign and appeal to voters was that Trump, by becoming financially successful, learned how to successfully operate a large business, and that this would translate to successful political leadership.  So what is Trump’s business?  How did he run it?  And what are the implications for all of us now that he has moved from business to political leadership?

Trump started out in New York City refurbishing old hotels and building new ones.  Before he did so, he got “tax abatements” from the city for what he was to build.  This meant that the properties would not be taxed for forty years.  So, he got $400 Million from the city (over the 40 years no tax was collected) for a hotel it cost him $120 Million to build.

This is how Trump constructed and profited from his initial Manhattan property empire. He was guided and aided by none other than Roy Cohn, the infamous Senator McCArthy attorney, who was later represented most of the heads of New York’s mafia families.

He then became a big player in Atlantic City, building Trump Plaza and then Trump Castle.  He then went too far, borrowing and bonding heavily to build the Taj Mahal.  This last casino was so big, and required so much debt to build, that Trump couldn’t afford the interest payments (let alone payments to construction contractors).  At this point, banks stopped lending him additional funds.  So he went public.  He sold stock in “Trump Hotels & Casino Resorts”.  Around the same time, he moved all of the personal and company debt he could into the already over-leveraged Taj Mahal.

Years ago, I played a computer game called “Railroad Tycoon”.  After some experience, I found that there was a foolproof way to win the game every time.  You started off the game owning one of many different rail lines, let’s call it “MyRR”.  To win, the best strategy was to take control of a faltering competitor, call it “SadRR”.  Once you controlled SadRR, you would have them borrow all the money that banks would lend them.  You then transferred the borrowed funds from SadRR to MyRR.  Then you had SadRR declare bankruptcy.  The banks could only go after SadRR, as that is who borrowed the money.  MyRR pocketed a windfall.

Trump developed a similar business model, using the Taj Mahal as “SadRR”.  Money was transferred from the public company to other Trump owned entities, by paying for goods and services.  A company or a hotel doesn’t have to prove that it has hired the best supplier or the best management firm, and it pays those it chooses what they ask.  This way Trump was able to get out from under mountains of debt, yet leaving his investors and contractors in ruin.

In the end, the banks stopped lending to Trump properties and projects.  They had been burned too many times.  But Trump had been doing something else during the 1980’s and 90’s.  He had been making himself famous.  He became known for wealth and opulence, among other things.

So when he could borrow no more, he changed his business model.  Instead of building a project himself, he leased his NAME to others.  This way he did not have to borrow, or even build the project.  While those doing so branded it a “Trump Property” by paying him for the use of his name.

Evidently, many of the people paying for his name are doing so for nefarious purposes.  In the old days, mobsters would launder their money from illegal operations (gambling, prostitution) through restaurants.  It was impossible to tell how much a restaurant was really bring in, as it used to be a cash business.  Mobsters could then say that their money came from their “restaurant business”.

Real Estate is a much better way to launder money.  A lot more money is involved in the construction, sale, and re-sale of real estate than in the operation of an eatery.  Trump may or may not be involved in such dealings.  If he was, that would have been a crime.  We will all have to see what the Mueller investigation finds out.

I don’t believe that Trump is any kind of super successful businessman.  I think that he figured out how to game the system, nothing more.  He has produced little of anything of lasting value.  He is, however, a master showman.  He showed very early on that he knows how to get his name in the media and keep it there.  He knows how to work a crowd.  And he knows how to tell people things they want to hear.  So he’s a very good politician.


What to Do

It is difficult to get past all of the current bluster concerning Trump.  Many of the accusations against him (like the use of Russian Influence, see the post “Red Russian Herring”) are incorrect.  Many of the attacks against him, like making fun of his hair or his hands, are insulting and mean spirited to the extreme.

On the other hand, he has proven himself to be a quite amoral person, and has said things about women that are extremely demeaning.  However, there are no laws against this, and it was well known before the election.  And he was elected anyway.

However, should evidence be uncovered that he engaged in unlawful activity, such as fraud, money laundering, or illegal campaign practices, Trump should be held legally accountable.

And if no unlawful activity is uncovered, voters should at least hold him accountable for his actions and results as President in the next election.

Trade Wars

International Conflict by Economic Means

We have become accustomed to hearing that the world is a better place due to “Free Trade”.  “Free Trade” being the idea that anyone, anywhere in the world, can sell their goods or services anywhere else without a government imposing import or export taxes on those goods or services.  The main word here is “idea” because, in fact, there are many important “exceptions” to Free Trade.

For example, the US started importing massive numbers of cars from Japan in the 1970’s, when the price of fuel went through the roof, and US manufacturers were way behind the Japanese in producing fuel efficient cars.  The Japanese sold their cars in the US after paying very low import taxes.  On the other hand, the Japanese still levied extremely high taxes on US agricultural products sold in Japan.  The Japanese import taxes were so high that they imported almost no US agricultural products.  They did this to protect the livelihood of Japanese farmers.

The point is that the United States has allowed itself to be victimized by one sided trade agreements for decades.  It is not all bad news though.  The winner is certainly the American consumer.  Goods in the US are cheaper as a result of low or non-existent import taxes.  My daughter, for example, regularly buys dresses direct from China, paying maybe $10 for a dress that would cost at least $100 in a store.  American “quality of life” has improved due to low cost goods from overseas.  Yet it is also true that American industries have suffered as the US is stymied in its attempts to similarly sell cheap products (mostly agricultural products) in overseas markets.

China has become America’s largest trading partner.  The trade is mostly one way, with China being the source of a vast quantity of manufactured goods for Americans.  The US does sell a significant amount of stuff in China, but it is not exactly a level playing field.  A good portion of what the Chinese sell in the US is “subsidized” by the Chinese government, the case in point being steel.  That means that they sell it here for LESS than it costs them to produce.

The Chinese are producing too much steel.  This is because their own demand for it has tanked as the Chinese construction boom has ended.  But they don’t want to lay off their steel workers.  So they “subsidize” it by giving grants and loans to producers that they will never repay.  This is the reason they are selling it for LESS than it costs to produce.

President Trump’s slapping tariffs and import taxes on steel and other Chinese goods is in response to so called “Free Trade” being a mostly one sided deal.  The problem is that it will hurt American consumers, and, in the short term, those who are exporting successfully to China.  That is because the Chinese will retaliate against Trump’s tariffs with those of their own, starting a Trade War.

A trade war caused by American tariffs (the Smoot-Hawley Act) in the early stages of the Great Depression caused serious harm to the world’s economy.  It was a major factor in the depth and length of that economic catastrophe.  Trade wars harm everyone involved, as it just makes a bad situation (the lack of true “Free Trade”), worse.

What to Do

The best way to handle one sided “Free Trade” is to deal with poorly negotiated trade treaties.  If you can’t sell your stuff in another country at the same rates they can sell their stuff in your country, it’s a bad deal.  And you shouldn’t make bad deals.  We enter into these things because those that will profit from the bad deals are the ones supporting politicians who sign them.

The bad deals need to be renegotiated.  That takes time.  Hitting out with tariffs and import taxes only has the result of hurting the consumer and hurting export industries.  And it does this VERY quickly.  American consumers and exporters will suffer almost immediately.

The Trump tariffs will also give the Chinese significant propaganda ammunition.  The Chinese leaders can say that China’s economic troubles are caused by America not living up to its signed agreements.  And when things get really rough economically, they will say that America, not the poor planning and policies of the Chinese Communist party, is the cause.  And this will be one of the triggers for outright conflict between China and the USA.

Who’s Buying?

The stock market just went up and up in 2017.  Too many people, this is proof that the economy is doing better and that everyone is better off.  We are all conditioned to believe that things are going along well if the stock market is going up.

Stock prices go up when more money is put into the stock market than is taken out.  Most of the money moving in is from investors doing normal things, like saving for retirement.  At the same time, most of the outgoing funds being taken out by those who made their profits and now want to actually pay for their retirement.  But these normal inflows and outflows are modified by the other money moving in or out of the markets, and this right now is what makes the market either go up or down.

Since the market has gone up consistently over the last year, the question is what is the source?  The problem for everyone is that it is not what we would call “normal” investors, people who have saved some money and are investing it for the long term.  Instead it is coming from dangerous sources, by people who will imperil everyone else.

One dangerous source is individuals who are borrowing money to buy stocks.  This will backfire the instant that their loan payments are more than they are making from stock gains.  But there are even more dangerous market players involved here.

One such group is corporate executives.  They are having their businesses borrow money to buy their own stock.  This is a great short term play for them, as most CEOs and senior corporate executives get more in stock options than salary.  So if the stock price goes up, they make a windfall.  The basic problem is that their corporation’s stock is not going up because the company is more profitable than it was a year or even a quarter ago.  Instead, the stock price is going up because the company is borrowing money to buy its own stock.  And in the end, this will bankrupt otherwise sound and profitable companies, throwing their employees out of work during a market crash.

But the most dangerous players are Central Banks.  They are buying up stocks with the money that they “create” out of thin air.  As a result, the worth of the currencies of major nations is now strongly dependent on the stock market.  This is a new and highly volatile development.  And is yet another way that the markets are now leveraged to dizzyingly new levels.

What to Do

Too many people think that they may be “missing out” by not participating in the stock market run up.  The opportunity seems to be there, and if you don’t get in, you will miss out.

This is true ONLY if you are lucky enough to get out before the inevitable crash.  If you get in, and then it crashes, you will lose everything you put in.  It takes time for everyone to get in.  Everyone will want OUT at the same time, and that is when you will lose.

We need to get our national banks out of the Stock Market.  Tell your representatives so.

We also need better rules for corporate governance.  But this must come from shareholders.  Unfortunately, too many are wrapped up in the very schemes I’ve just discussed.

The Biggest Bubble of All

Ordos City, China – SCMP, Simon Song

I have often written about what gambling casinos world financial markets have become, as speculation becomes more and more rampant.  The stock market in the USA is certainly such a case.  But the biggest problem out there in not in the USA or Europe.  The biggest bubble of all is in China.  More money is at risk of evaporating overnight in China than anywhere else.  So here is what is going on that will impact each and every one of us here.

China has grown economically by leaps and bounds since the 1980’s.  The country moved from being desperately poor and backward to having a booming economy as the West collectively outsourced its manufacturing to Chinese factories.  China built more and more factories, and housing and other infrastructure with this income.  But in recent years, they have built past the demand.  They have built more housing and more stores and more of everything than people currently want to buy.  For years now, there are reports of ghost cities and ghost shopping malls in China.

What is going on is that their companies only know how to operate in an environment of rapid expansion.  So now they continue to build things they cannot sell.  And they have burned through their available credit to do so.  But they don’t want to stop being as “profitable” as they had been in the past.  So they continue to borrow money.

The root of the problem is how these overleveraged Chinese companies are borrowing the money.  They can no longer get funds directly from banks, as they are no longer credit worthy.  Plus, the banks don’t want to admit that what they have loaned them in the past is now a bad loan.  So the banks want to enable these companies to get money, as they can use part of the new funds to pay back something on the prior loans, so the bank loans will look like they are still good.

So the banks set up a system of selling an “investment” to common people who are unhappy with the paltry returns they can get from regular savings accounts.  These “investments” are called Wealth Management Products or WMPs for short.  The Chinese banks are telling people putting money into WMPs that they are guaranteed returns of 10-20% per year.  They don’t tell them where the money is actually going.  Not that the investors care.  They think that both the bank and the Chinese government are backing the WMPs, and therefore they are Risk Free.

The reality is that WMPs are a new fangled version of the Ponzi scheme.  The money is going to companies that have no way of paying it back.  The few people taking money out of WMPs is covered by the amount of money coming in.  And once more people want their money back than can be covered by new investors, the whole thing collapses.  The big problem is that currently there is nearly $20 TRILLION invested in Chinese WMPs.  And very soon, more people are going to want their money back than anyone can cover.

I recently alluded to the fact that when things go wrong, the Chinese Communist government will blame everyone but themselves.  This is when an Economic disaster will change into a World Wide Military disaster, as the world goes to war over who is to blame.

What to Do

There is nothing that we can do to fix the Chinese banking and investment systems.  Our own governments can do nothing to fix it.  The Chinese have created this problem on their own.  The West’s sole responsibility in all of this is that we probably showed them how to do it.

The point is that an Economic and then a Military disaster ARE going to happen.  We don’t know exactly when, but like the Titanic after it hit the iceberg, the ship IS going to go down.

So again, the time to prepare is now.  Get your life jackets, make a plan for the ship sinking, and how you and your family are going to survive.  If you don’t, you’ll be jumping into the ice water like just about everyone else.

Where We Store Our Wealth

Most of us know that we need to save money for the future.  Many know this, but do nothing about it.  More than 75% of Americans admit that they live “paycheck to paycheck”.  More than 10% of those who make more than $100,000 per year cannot make ends meet, and almost 60% of these people are not making enough to pay their bills and debts (CNBC – Jessica Dickler, 10:15 AM ET Thu, 24 Aug 2017).  This lack of savings and “live in the moment” attitude is truly frightening.

For those that do save, most put their money into the Stock Market.  Due to the near zero interest rates paid by banks for deposits (thanks to the monetary policies of our Central Bank, the Federal Reserve), the stock market seems to be the only place to get decent returns on your money.  The problem is that the stock market is seriously overvalued.  Currently stocks are priced at about 25 times their earnings.  This ratio, called the P/E ratio, has a historical average of 14.  Whenever it is above 20, the risk of a sudden drop in prices is significant.  When a panic occurs, the ratio can easily drop down to about 5.  This today would mean an 80% drop in stock prices.

The retirement of almost all Americans (those who save, and those few who still have pensions) is dependent on the stock market.  Most companies stopped pensions years ago, and only “aide” their employee’s retirement by subsidizing their savings into 401(k) plans.  These are almost entirely invested in stocks.  For those with pension plans, the company is investing the pension funds into stocks, as even they cannot get decent returns on their funds outside of the stock market.  Think about what the repercussions are if there is a serious downturn in the stock market.

Even public pensions (like those for teachers, government workers, the police and firemen) are not safe.  This is due to the sad condition of finances in most cities and states.  States like Illinois are on the verge of bankruptcy.  Many major cities are on the verge, and this is well before any kind of downturn in the markets.  When it happens, they won’t be able to pay their pensioned retirees.

For those with Federal Pensions, like military and federal retirees, along with Social Security recipients, will either see their pension paid in inflated currency, or see their payments slashed.  During the Great Depression, for example, military retirement payments were cut in HALF.

Some have invested in bonds instead of stocks.  The risk with bonds is that the issuer has to pay the debts.  Junk bonds are called that because the companies issuing them have a high likelihood of going bankrupt and you not only don’t get your return, you lose your principle.

Many government bonds are no different.  For years people and institutions put money into bonds from Puerto Rico, due to their high rates of return.  These investors didn’t seem to mind that the place is heavily in debt with little means to pay them back.  And that was before the huge Hurricane hit the island.

What to Do

Do your best not to speculate with your savings.  Try to find some instrument that will maintain its value when the inevitable stock downturn comes.  I know that this is hard to do with 401(k) funds, but try.  They may not currently have great rates of return, but they might allow you to protect your principle, something that won’t be possible once computer traders hit the trigger points to start selling off stocks.

Even better is to put your savings into some form that will retain value.

Best of all is to avoid debt.  Pay off what debts you have.  In the end, what everyone needs is shelter and food.  Make sure this is financially and physically secure.

Hyperinflation or Deflation

As deficits and stock market speculation reach all time high levels, we are inevitably headed towards a financial crisis.  This time the national banks will be unable to do much of anything, as they have already lowered interest rates to zero (or even below) and have printed as much money as the dared (through purposely confusingly named programs like “quantitative easing”).

When the inevitable crash comes, the financial crisis can develop in one of two ways, Hyperinflation or Deflation.  Hyperinflation is frequently seen.  The examples are Zimbabwe today and Wiemar Germany.  Hyperinflation results when the national bank or government just prints money and starts paying everyone with it.  Inflation goes sky high (as in something like 100% per MONTH), and pretty soon, people either need wheelbarrows full of cash or banknotes denominated in billions to buy a loaf of bread.  Deflation is when the value of money goes in the other direction.  Prices go down, but so too do salaries, which go down faster.  What goes up dramatically is unemployment, as people put off purchasing, and, more importantly, banks stop lending.  The best known example of deflation is the American Great Depression.

If Hyperinflation happens, you are best positioned if you have a LOT of debt.  In fact, the more you borrowed to buy things like land, equipment, and precious metals the better.  This is because you can pay off the debts with almost worthless money.  If I borrowed $10,000 from a bank and owe it back in a year, and hyperinflation of 100% per month happens, I can pay that loan back with the equivalent of $2.50 (because $2.50 inflated 100%, or doubled every month, ends up being a bit more than $10,000 in a year).  So Hyperinflation eliminates debts.  Of course it eliminates savings too, but few have those today.  Most individuals, just like governments, are deeply in debt.

If Deflation happens, you are best positioned if you have a lot of savings, especially cash or precious metals.  As deflation plays out, what costs a lot today becomes very cheap over time.  The ability to buy things is even more enhanced for people with available funds, as others will be desperate to convert their property (especially real estate) into currency, as banks will stop lending.

Personally I believe that Deflation is the most likely result of the upcoming financial crisis.  I believe this for two main reasons.  First is that the amount of debt dwarfs the amount of currency and credit in the financial system (see the video in the first post on the “Economic” page of this site).  Maybe even more importantly, Hyperinflation would destroy the banks, as people would pay off debts in worthless money.  The banks are much more powerful than individuals, and they are going to protect themselves through laws and regulations.  The best recent example of this is when lawmakers changed the rules so that people can no longer declare bankruptcy to clear student loans.

You and I will face financial ruin long before the banks do.  They will see to this under almost any scenario.  Even if Hyperinflation happens, the banks will change the rules so that you can no longer pay them back in currency.  Instead, your loans and debts will be pegged to some non-inflating asset, like gold.  So they will say, you borrowed the equivalent of so many ounces of gold way back when, and that is all that they will accept in payment.  So no paying off your mortgage years later with what’s in your wallet.  Instead, people will become “debt slaves” once a financial crisis hits.  They will be unable to pay back their debts, and like a lot of students, they won’t be able to get rid of them through bankruptcy, as this won’t be allowed.

A financial crisis is going to happen, and when it does, it will happen faster than you or I can respond.  This is because of computer trading.  You will not be able to get your money out of stocks.  You won’t be able to sell your real estate because almost everyone will be trying to do the same thing.  And the banks will make sure that YOU will have to pay your debts.

What to Do

First off, you must get out of debt.  Get out of the worst of it (like credit card debt) as fast as you can.  STOP spending on credit.  Stop borrowing for things that you want but don’t fundamentally need.

Save what you can.  Precious metals are one of the few assets that will retain their value through a financial crisis.  But even here you have to be careful.  During the Great Depression, the American Government made it illegal to own gold.  They made people turn it over to them.  The same thing can happen again, as the legal precedent has already been established.


Saving Health Care

The biggest drag on our economy is health care.  We are paying WAY too much for it, both as individuals and as countries.  Attempts to provide health care to everyone through government programs have bankrupted entire nations.  We need to radically reform how we deal with health care.  And neither Obamacare nor government run health care is the answer.

Most of what I have learned about health care comes from the exceptional book “Catastrophic Care” by David Goldhill (Vintage Books, 2013).  In this book, Mr. Goldhill, a New York Democrat, clearly describes both what is wrong with the health care system in the United States, and what could be done to fundamentally fix it.

Insurance is the basis of the American health care system.  The problem is that “insurance” works when a large number of people pay for a risk that few suffer.  Think of having a house fire.  We all insure for this, as losing hundreds of thousands of dollars suddenly would be a catastrophe, but how many people do you know who actually had a house fire.  Now think about health care.  How many people are going to get sick?  The answer is EVERYONE.

Most think that health insurance is a way to pay for health care with someone else’s money (the government’s, our employer’s, or others).  But it isn’t.  Because we all use it, we are all paying.  And paying a LOT.  In “Catastrophic Care”, Mr. Goldhill shows that an employee of his, who he expects will earn $3.85 Million over her working life, will spend $1.9 Million on health care.  That’s HALF of her earnings.  That’s what each of us is paying right now.  It is deductibles, plus insurance premiums, plus what the employer pays, and taxes (income and health taxes).  And just so you understand, what the employer pays would be our SALARY if they didn’t have to pay it – so make no mistake, it ALL comes out of our pockets.  We don’t get anything for “free”.

We pay so much because we are no longer the “customers” in health care.  We don’t pay the doctors or the hospitals, the insurance companies do.  And because of this, the system is set up to benefit not us, but the health care industry and the insurance companies.  Obamacare was written by Health Industry and Insurance lobbyists.  So that law benefits hospitals and insurance companies, while each of us pay more and more.

We have to take back both control and responsibility for our own Health Care spending.  Mr. Goldhill recommends a four part system:

1 – Mandatory Health Savings Accounts.  You are required to put so much into this every year.  You can only use it for health expenses.

2 – Catastrophic Health Insurance.  You must buy insurance (with a high deductible) for the health equivalent of house fires.  This covers the scary things that could happen, but rarely actually do.

3 – Health Loans that allow you to borrow against anticipated future deposits of your Health Savings Account.  This way if you (or your family) had health issues while younger, you can still access what you will eventually put into your account.

4 – Funding the Health Savings Accounts and Catastrophic Health Insurance for those without the necessary income.  We are doing more than this right now, as those at the bottom of the economy use expensive services like emergency rooms for their medical care.  So this would actually save over the current ways we subsidize healthcare for the poor.

“Catastrophic Care” even includes the road-map for a transition plan.  The outlined plan would move us from our current broken system, to one where individuals again have control (and responsibility) for their health care spending and choices.  An added bonus is that since it is our own money, if we don’t use it, we and our families get to keep what’s left over!

What to Do

The first meaningful step to taking action is getting educated on the problem.  So, I would highly recommend getting a copy of “Catastrophic Care” and reading it.

Next is to put pressure on elected representatives.  They need to do things for those they represent rather than the lobbyists and special interest groups that give them so much money.  We CANNOT have the rules about any industry written by the lobbyists from those industries.

Lastly, we need to recognize that we don’t get anything for free.  We all have to pay for our health care, in one way or another.  We need to take back this responsibility.  When we do, the health care system will become more responsive, improve the quality of its care, and become a LOT CHEAPER.


Lack of Interest

One of the major reasons our economy is so messed up is lack of interest.  Not lack of individual interest.  Near zero of interest rates at banks.

The reason banks now offer almost nothing in terms of interest is that the rates are not set by market conditions.  Instead, interest rates are set by the Federal Open Market Committee (FOMC) which is part of the Federal Reserve Bank.

In a free market, banks, investment houses, and others would compete to have you deposit your savings with them.  The more demand for deposits, the higher the interest rates.  On the other side of the coin, demand for loans would also either increase or decrease interest rates.  This way, interest rates were regulated by the supply and demand of the entire economy.

Interest rates in this country have not been determined this way in a VERY long time.  Really not since before World War One and the creation of the Federal Reserve Bank in the United States.  Since that time, the Government, not the free market, have determined interest rates.  Decisions about where to set the interest rate are one of the main ways the Government attempts to manipulate the economy.

The FOMC uses interest rates mainly to either battle inflation or try to increase economic activity.  In the early 1980’s, when inflation was viewed as “out of control”, they raised interest rates to previously unheard of levels, well over 10% per year.  Since about 2006 they have put interest rates at or near Zero in attempts to increase economic activity.

With interest rates set at almost nothing, there is little to no incentive to save money.  People are generally risk averse.  You save money not just because you want it to be there in the future, but you also want that money to work for you by gaining interest.  If there is no way to make a gain safely, people start to look for riskier and riskier investments.  Today almost all of this money has been put into the Stock Market, as people think it is the only way nowadays to make their savings grow.

Low interest rates mean that money is moved from Investment to Speculation.  This is the root cause of almost every single financial crisis in history.

Low interest rates also mean that people and institutions borrow more and more money.  They view the cost of borrowed money as almost nothing.  Trouble is that most of them borrow the money on variable interest rates, meaning that the cost of the loan is not “locked in”.  So as interest rates go up, they find themselves owing a LOT more money than they ever planned to pay back.  And this is how people and even Governments find themselves bankrupt when interest rates rise.

Today the FOMC knows that it has painted itself into a corner.  So much money is owed by both the Government and individuals that it can’t raise interest rates without risking severe bankruptcies.  So it can’t raise interest rates to reduce speculation and move people back into investments.

So increasing speculation will eventually end the way that it almost always does, with a financial crisis, one that the FOMC will not be able to do anything about.

What to Do

Government control of interest rates did not start recently.  It’s been in place for more than a hundred years.  Drastic change from the current situation is warranted, but it has to be done carefully and slowly.  We should return to predominantly free market conditions, but we should try to do so in an orderly fashion.

Unfortunately, I have absolutely no faith that this is going to happen.  Almost everyone, individuals as well as Government, wants interest rates to stay low.  So they will remain low until there is a crash.

Again, recognize that the world is currently engaging in a speculative mania of epic proportions.  It involves Government, banks, corporations and individuals.  The best way to protect yourself is to stay out of it.

True Victims of Theft

We frequently hear the cry that the rich are stealing the rest of us blind.  This accusation is particularly pointed towards those receiving vast compensation as the CEOs of companies.  Their compensation is so high, that their annual earnings are multiples of what the rest of us will make in our entire lifetimes.  Fortune magazine reported that for 2016, the average CEO of a Fortune 500 company received $16.6 Million (up from $13.8M in 2014 and $10.5M in 2012).

The youth are particularly loud in their claims that the CEOs are stealing from them, and in their demands that they get some of this money.  Well, the youth are correct that these corporate chiefs are stealing; it’s just not from them.  The CEOs, it turns out, are stealing from people that own the companies they operate.

Before I went into management consulting, I used to think that only a small group of individuals possessed the knowledge, skill, talents and expertise required to successfully run a large company.  This is the rationale that executives would have you believe exists to justify their almost inconceivable compensation.  Then I started working with such people.  Got to know them, found out what they were doing and how they were doing it.  I then came to realize, firsthand, that these people are no different from the rest of us.  They are mostly intelligent, focused, and hard working.  But any large company has a host of such people that could competently run it.  The person at the top was no more successful or talented than these other business professionals; they just were in the right place at the right time, and with the right connections, when the advancement opportunity presented itself.

The CEO thieves run publicly held companies.  They don’t own the company, the shareholders collectively do.  If a company has issued a million shares of stock, each share represents a one millionth ownership of that company.  The shareholders actually own the entire company, all of its buildings, all of its assets.  The shareholders also have a right to the company’s profits.  If they so desire, shareholders can collectively demand distributions of the company’s profits.  Salaries and other compensation directly reduce a company’s profits.  So the CEO’s salary is a direct reduction on the profits the shareholders legally own.

There are two reasons CEOs get the compensation they do.  The first is because the board of the company approves it.  A company’s board is supposed to represent the interests of the shareholders.  Unfortunately for most shareholders, the board is usually made up of CEO cronies.  They get something like $50K a year to attend a paltry number of meetings, where they usually vote for things the CEO recommends, one of them being the CEO compensation package.  Shareholders get to vote for people nominated to join the board, but they are nominated by other people already on the board.  And since they like the pay and perks of being on the board, they usually aren’t going to make waves.

The second reason is that few shareholders care about getting their share of a company’s profits.  The vast majority of shareholders didn’t “invest” in the company for the long term.  Instead they buy the stock for a short period (months or weeks, or even minutes), and are interested only in the movement of the stock price while they hold the shares.  This is an aberration enabled by the speculative economic system we currently live in.

What to Do

CEO compensation needs to be brought back to reality.  Historically, people running public companies have made about fifty times as much as the average worker.  Company boards need to truly represent the interests of shareholders.  To do so, they need to be truly independent of the executive team.  Corporate regulations need to be adjusted to eliminate crony boards.  These regulations should make the selection process much more open to shareholder input and do more to improve shareholder board selection.  We need to ask those that write such regulations, our political representatives, to do so.

Shareholders need to do more to demand that the board not allow these obscenely out-sized compensation packages for executives.  Shareholders need to take a vested interest in what is going on at the companies they are partial owners of.  They need to reject the re-election of board members that have created and continue to allow overpriced executive compensation packages.

Modern “Wealth”

By WMS Gaming 1998

I recently watched a movie on slavery (The Free State of Jones).  The basic argument against slavery was that everyone should get to keep what they produce.  The bad people were those that got rich off of what their slaves produced.

This is one form of the old idea of trying to get Something for Nothing.  In the distant past the only way to do this was by outright theft.  You held up a bank or robbed people, maybe you were a pirate on the high seas, or, as in the case above, a slave holder.  Unfortunately for us all, there are now a lot more ways, many of them subtle, to try and get Something for Nothing.  But in every case, you can only get Something for Nothing by taking it away from somebody else.

I once read that an old saying about Democracy was that it works great, right up until the majority figures out they can vote themselves a “free lunch”.  The “free lunch” being Something that they voted to get in return for nothing that they themselves have earned or produced.  We are almost all complicit in doing this.  If you vote, and I have to admit I have done it too, you have no doubt voted for someone who is committed to providing some sort of unearned benefit to those that voted for them.

But remember, to get the Something for Nothing, you have to take it from someone else.  This may mean taking money from others in taxes.  Or it could mean having the government borrow money to provide it, which takes the money from future generations.  The point is that all of the benefits that we get have to come from someone.  We may contribute part of what we get (through taxes or Social Security and Medicare deductions), but when we get more than a dollar (plus interest) for what we put in, we are indeed getting Something for Nothing.

It is not just the government.  Most people are deep in debt.  They are buying things they cannot afford.  Most can barely afford to pay the interest on their debts.  They have literally stolen from their future selves.  And if they have any unforeseen expenses, they cannot pay, and have to borrow even more.

We might rationalize what we are doing.  We could say that we had nothing to do with the creation of such programs, they were set up long ago, and there is nothing we can do about it.  We could say that we are just trying to get our “piece of the pie”.  We could say that we deserve it, for any number of reasons.  But the truth is that we are trying to justify doing something that we know is wrong, theft.

We are at the point now where the so-called “Entitlement” programs are about to bankrupted us as a society.  The government has borrowed so much money that it can never be repaid.  Many individuals are in the same boat.  The amount of debt, by governments and by individuals is staggering.  In the USA, government debt is about $20 Trillion, while private debt is about $30 Trillion.  These levels are only projected to increase, and at an increasingly rapid pace.  And eventually it will be too much.

When it becomes too much, the unimaginable will happen.  Unimaginable to us, because it is not part of our lifetime’s experience.  Or even our grandparents’.  At least during the Great Depression of the 1930’s, the government had the ability to borrow to try and provide assistance.  That won’t be the case this time, as the government will be as broke as anyone else.

What To Do

I fear that for our government, it may be too late.  Even if so, we can try to reduce the magnitude of the disaster.  We need to stop asking for Something for Nothing.  We need to enact reforms to try and to reduce the pain we are all going to suffer when the financial day of reckoning comes.

We need to drastically reduce the size and scale of our Something for Nothing programs.  We need to be willing to take back only what we have put in (plus maybe the interest).  If not, we will all get Nothing.  At the very time we most definitely will need at least Something.

Our Broken System

Speculation vs Investment

We almost instinctively know that a good economy is based on productivity.  In this ideal economy, we earn money based on our productivity. We spend some on what we need or want, and we save what we don’t spend.  The savings are loaned out as investments in enterprises that produce goods and services.  These investments produce additional income, enriching the investor and the economy as a whole.  The entire system is characterized by money, saving and investment.

Unfortunately, we don’t live in such an economic system. Instead we live in a world of speculation.  Speculation means guessing and gambling.  At its foundation is manipulation and fraud.  Our currency once represented real gold and silver.  Now it is backed by nothing but collective faith that it will still be worth something tomorrow.  Much of what we work at is not productive, but bureaucratic.  We don’t save because we are saddled with debts.  We don’t invest, we gamble in the markets, the greatest casinos of all time.  We gamble that someone else will pay more for something we bought without knowing or caring what it produces.  The central banks have manipulated interest rates so that saving actually costs you.  The government taxes us to pay for other’s benefits, which we will probably never see ourselves, while amassing unimaginable national debts that can never be paid down.

Deep down we all know this is wrong.  Most people just don’t’ want to deal with what this will eventually mean.  They wish to “sing and dance” until the party is over.  The rest of us look at what is going on and are terrified of how it will end.

The reason to be terrified is that speculation never ends because people “wise up” and start to take corrective action.  Speculation causes bubbles.  Bubbles burst with a lot of people, companies, and governments suddenly bankrupt.  And nobody wants to take the blame for this when it happens.  People and companies will want the government to fix their problems.  Governments will not accept the blame, especially those that won’t give up power voluntarily.  Instead they will blame other nations.  All of this has frequently happened before.

Too often the result is financial ruin, followed by the even greater calamity of war.

What to Do

Recognize the system we are operating under, but don’t get caught up in it.

Gain the skills to be productive, and do your best to create and produce.  Do your utmost to stay away from speculation and gambling.