The Real Debate

October 16, 2012
After watching the debate last night, I had a bunch of questions I thought were important but that were never asked. Here are three of them:

1. Why has the economy (GDP) been trending down for the past two years and the stock market moving up?
The answer of course in that the government has been pumping money into the banks (TARP, QE1, QE2, Twist Program and now QE3 with no limit as to the amount of money they will print.) This money goes to the banks and then the banks use this money to invest in the market (stocks, bonds, foreign investments, etc.). This 65% increase in “green paper” or money has driven the stock market up about 71% from the bottom in February 2009. This is illusionary wealth also called a bubble and like all bubbles, it will pop.

And just to make sure this money will go into assets that raise the value of the market (or what government economist’s call the “wealth effect”) which is suppose to make us run out and spend money; the Federal Reserve has instituted a Zero Interest Rate Policy (ZIRP) to make sure no one saves and is forced to go into the market to earn any interest.

2. How can the government continue to keep spending and driving up debt when mandatory spending (Social Security, Medicare, Medicaid, Other Mandatory spending -like VA benefits, welfare, etc. – and the interest on the debt equal the entire revenue?

In 2012, the government spent $2.5 trillion on mandatory items and interest and received $2.5 trillion in revenues (taxes, tariffs etc.).

That leaves Zero money left for all other discretionary spending ($628t) and defense ($680t). This is more than a trillion dollars a year which means we will likely not even have enough revenues to pay for mandatory spending next year unless the economy picks up.

Follow up question:

So to get to a balanced budget, are you going to cut discretionary spending (education, homeland security, perks for your constituents, etc.) or Defense Spending (even though defense industries are scattered in every State to ensure Congressional votes)?

You know the answer. No and No.

3. Economic data has been very weak and deteriorating; yet this past month, two unbelievable things have happened to make me confused:

A. The Federal Reserve Chairman has been saying for some time that the economy has been slowly improving; and that based on the data, the Federal Reserve stands ready to assist (meaning QE3) if the data shows the economy is slowing further. Yet, two weeks after saying this for the umpteenth time, the Fed surprises the market with potentially the biggest injection of money ever! What about the data? I thought we were improving?

B. The data. This month the data, in contradiction to the Fed action, has been unbelievable: unemployment has dropped, retail sales have jumped significantly higher, housing starts have jumped significantly higher, etc.

We know you have “economic models” to predict the numbers, but the data does not fit the description of the economy provided by the Federal Reserve Chairman prior to injecting money into the banks (QE3). Does this mean the economy is getting worse and the models will reflect the real economy in a month or two or have the models just gone wacky?

Well, I know I’m over the time limit and it’s my opponents turn to talk so I’ll stop.

A Marginal Improvement in Employment? Maybe.

May 7, 20012 April’s Non-Farm Employment Report showed an increase of 115,000 jobs plus an additional 59,000 jobs in revisions for February and March. Unemployment rate dropped to 8.1% (due to reductions in labor force participation.) This is a marginal improvement because it exceeds the estimated number of new people entering the labor force each month. Also, long-term this number is very important; but this data point is a lagging indicator not a leading indicator. The two leading indicators in this report: (1) wages, which were unchanged (negative if inflation included) and (2) hours worked which was unchanged as well at 34.5 hours per week. The net result was a very weak report. This means both political parties will shout that something has to be done. The Keynesian-Left wants the government to borrow even more money for another round of stimulus to “fill the gap” in consumer spending; and then reduce spending sometime in the future. The Keynesian-Right wants the government to borrow even more money to reduce taxes and stimulate supply; and then reduce spending sometime in the future. Do you think the economists or the politicians really know what supply and demand means or how it works? If they did, they would attack the cause rather than the symptom. There are a couple of real concerns however in this jobs report. One is that the model used to seasonally adjust this data has not been adjusted for the warm winter whether. The seasonally adjusted model has now added about 4.9 million jobs (jobs the government expects will materialize in the future) which will be re-adjusted (removed) from the actual numbers later in the year. Hopefully that will happen. The other concern is that we are loosing full-time jobs (-812,000 in April) and replacing them with part-time jobs (+508,000 in April). What kinds of jobs are being created? This trend has been going on for some time now. This may also be a reason that wages are not moving higher. With 90,000 people entering the workforce each month, and an election only months away, this slow jobs growth problem will become very important. Can you say QE3?