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Global Economy Bursting?

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One of the unintended consequences of crony capitalism is reckless abandonment of risk management knowing that government has to bail you out. It is the government's policy of too big to fail, meaning, the government will collapse along with the economic system if it does not bail out those individual institutions that, knowingly, took on huge risks for huge gains. As long as the risk play returns high gains, no problem. But as soon as risk consequences return big losses, rather than let those institutions fail, government steps in with taxpayer guarantees and taxpayer money to save the day.

Looking at what happened, for example, BofA buys Countrywide. That surely concentrated risk, not diffusing it, however, the government sanctioned it. BofA buys Merrill Lynch. Again, that surely concentrated risk, not diffusing it, however, the government sanctioned it. BofA grows exponentially larger in risk with huge impairments in the value of the assets acquired.

That same scenario played out with the top 20 institutions. In order not to have the concentrated risks explode, again, the government through the federal reserve steps in with zero percent cost of money to the banking system and quantitate easing. The government suspends FASB accounting rules for banks. The government instructs the regulators to not enforce the rules for impaired assets.

And, the big payoff is no one goes to jail. Works for me, how about you? woohoo woohoo
 
He has it right: Zero percent interest rates are destroying the economy and job formation.

He spoke some truth, but it was way too one sided to be TRUE. It is the old top down rhetoric, which you would expect from a CEO or owner of a large corporation. Would I seek an unbiased opinion regarding the economy from a CEO? The same statements come from that community day-in and day-out, the wording may change slightly, but it's always the same stuff.

Let's think about it carefully and from both sides - Here is a simple equation:

Is not the presence of jobs necessary for any economy to exist? If so, then where are the jobs coming from? Are they coming from the biggest corporations or from the small companies that hire less than 19 people? Where does the tax break to the wealthiest few percent go, to the small companies or the biggest companies?

"KansasCityFed.org affirms that small business accounted for 79.5 percent of new job creation between 1990 and 2003. The same website reports that large business is only accountable for 7.3 percent within the same period".


Why is this? Because feeding the top with tax breaks mostly results in jobs and investment overseas, not here - because overseas is where the growth is and there lies the economic incentive. Small companies are here in the US, they are the 'Bottom of the economy". The right and large corporations want the taxpayer to feed the top (themselves) by giving people the "trickle down" job growth "carrot". However, this formula, while it may seem logical, doesn't work anymore - The gates are open, the US is no longer largely a closed economic system that ends at our borders.


"The authors of the study, Andrew Sum, Ishwar Khatiwada, Joseph McLaughlin and Sheila Palma, tracked the nation's income since the official end of the recession in June 2009. They found that between the second quarter of 2009, when the recovery began, and the fourth quarter of 2010, national income rose by $528 billion, with $464 billion of that growth going to pretax corporate profits, while just $7 billion went to aggregate wages and salaries, after accounting for inflation".....

According to the study, "The only major beneficiaries of the recovery have been corporate profits and the stock market and its shareholders."



The large corporations are already stuffed with money, and there is no evidence of a trickle down and there won't be after stuffing their face with another mouthfull of cash flow.

The answer should be in a balanced approach and more targeted with respect to the "top".

.....such as:​

1) "Bottom up" economics in regard to stimulation and tax breaks and small business tax breaks that hire.

2) "Top down" in regard to allocating tax incentives to those companies (and only those companies) that locate their jobs primarily here in the US - they have to create the jobs to get the incentive! - not the other way around - In other words, our top-down policy should be "Show me the US jobs, in the US (not stationed oveseas) and I'll show you the money!"

3) Make trade less "free" [it's free because the bottom is paying for it in the long run]. Put trade tariffs (carefully) on those products that compete excessively with domestic manufacture. We don't want inefficient business, but we can't compete with foreign currency manipulation either.​
 
You are too wound up in the politics to see the macro condition that exits.

Bottom line, zero interest rates are now part of the problem, not the solution. Zero interest rates are a political response to a fiscal problem and it transfers wealth from savers to debtors so that they can resume spending.

It now been over 3 years of a failing economy. Where are the jobs?
 
You are too wound up in the politics to see the macro condition that exits.

Bottom line, zero interest rates are now part of the problem, not the solution. Zero interest rates are a political response to a fiscal problem and it transfer wealth from savers to debtors so that they can resume spending.

It now been over 3 years of a failing economy. Where are the jobs?


1) The jobs are overseas.

2) 0 Interest rates does as you say, transfer wealth from savers (the bottom), but not to debtors. It transfers it to Wall Street investments, since you can't make any money in a CD or insured money market at a local bank. It's a great way to extract money from retirees and those remaining few in the "bottom" that have cash to invest. Ultimately, the people at the bottom with money are becoming debtors.

3) Quantitative easing transfers money from our Treasury (our Children's money, small business's money and our future money) to the big corporations.

There has been alot of transfers to the big corporations, including the "bail-out" funds, but no trickle down.

When the stock market goes down and the rating agencies, Wall Street and large corporations are Poo Pooing some new legislation, you know it is good for the "bottom up". You should be happy - you are at the bottom with the rest of us and those that don't have 100's of millions in the bank.

If there is no bipartisan agreement from the new commission to reduce an additional 1.5 tirllion, the president can veto the extension of the Bush tax cuts (sounds like something a CEO from fortune 100 would want to Poo Poo) and/or extract it from military spending.

http://www.washingtonpost.com/wp-dyn/content/article/2010/07/30/AR2010073002671.html
 
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1) The jobs are overseas.

I helped move National Semiconductor production overseas back in the 1990s. It has been going on for a long time. I was laid off in December 2001; my job went to China. I changed occupations to a self-employed appraiser in 2002.

What is your reasoning back then?


2) 0 Interest rates does as you say, transfer wealth from savers (the bottom), but not to debtors. It transfers it to Wall Street investments, since you can't make any money in a CD or insured money market at a local bank. It's a great way to extract money from retirees and those remaining few in the "bottom" that have cash to invest. Ultimately, the people at the bottom with money are becoming debtors.

If you recall the last recession in 2001, what was Greenspan's response (then chairman of the federal reserve)? He cut intrest rates to 1%. What happened? Huge debt increase to buy houses and to refinance houses. Where did the money come from, tax reduction for the rich?

3) Quantitative easing transfers money from our Treasury (our Children's money, small business's money and our future money) to the big corporations.

QE is electronic printing of money. The FED buys debt in the open market with money they create. They don't get it from the U.S. Treasury. Banks and GSEs get it as they are sellers of what the FED bought.

There has been alot of transfers to the big corporations, including the "bail-out" funds, but no trickle down.

Big corporations = banks and investment banks and GM & Chrysler and AIG and Harford (all sorts of financial institutions).

Why would you expect a trickle down? Those financial institutions are insolvent holding defaulted debt. Keeping rates at zero is the cost of borrowing from the FED. These institution loan it out to who? Big corporations who have trillions of dollars on their balance sheet?

No, they loan it to consumers and they don't pay depositors but 1% for multi-year commitment.



When the stock market goes down and the rating agencies, Wall Street and large corporations are Poo Pooing some new legislation, you know it is good for the "bottom up". You should be happy - you are at the bottom with the rest of us and those that don't have 100's of millions in the bank.

Actually, I have non-productive investments in California tax exempt bonds, guaranteed by the state. I also have a chunk in an international bond fund, a bet against the U.S. dollar.

The whole debt ceiling political food fight was a charade. Look at the markets.

Keep your eye simple and you will see the obvious. If your eye is out of focus, you can't see reality but you will experience it.

Taxes are going to increase on everyone, except the rich. I won't be paying income taxes to California or the federal government and I haven't since tax year 2007.

And, less you forget, the economy is 70% consumer spending. Consumers don't have the money to spend. And they will have less money to spend with inflation. Who benefits from inflation? Would that be debtors? Who is the biggest debtor in the world? Would that be the country that has over $14 trillion issued as U.S. Treasury obligations, not to mention the trillions of dollars of guaranteed mortgages? Get a clue.
 
Jobs are much reduced in large measure that there is tax incentive to buy new automation and equipment and thus reduce staff. The quality of the employee must be higher and because of that, the least skilled in computing etc. are the last to get hired. This is creating a new underclass. Further, with so many older people forced to delay retirement, the younger ones are bumping a ceiling of geezers hanging on for dear life...hanging on because they know if they lose their job, they have no future. It is age class warfare at its worst. The employer has both over the barrel and need not pay a premium for labor. There is a huge surplus thereof.

Globalization dumbed down the wages of the world's more educated and wealthy nations. Further, it tied everyone together. In the past century global contagion was not an issue. The US could go into a funk and it only rippled in France, Great Britan and Germany. When we became the big dog consumer, it was said, when we sneezed, the rest of the world got a cold. When our banks sold crap mortgage securities to Europe, we coughed and they got tuberculosis.

Now it's when Greece sneezes, all of Europe gets the flu and America has pnuemonia. We are all sick countries and todays' sell off is showing how perverse low interest rates are. There is no where to hide for investors. They are forced to park their money in the banks..and the banks have so much cash they are charging customers more fees because the Fed is charging them for insurance on the money...

And there is no way to crawl out of the hole. Increase interest rates will slow the economy and we can't decrease the rate to stimulate the economy....and what will tomorrow's numbers bring? If the gov's have reduced hiring (like all those FAA employees idled by the congressional wrangling going on..) and the private sector is just hoarding cash or investing in mechanization that reduces labor requirements....and the drought is reducing the number of farm work, food processing etc... well, ain't that the berries?
 
Keep your eye simple and you will see the obvious. If your eye is out of focus, you can't see reality but you will experience it.

Simple is what simple thinks and simple is not the world.

Taxes are going to increase on everyone, except the rich. I won't be paying income taxes to California or the federal government and I haven't since tax year 2007.

Can't argue with that. The increased income has to come from somewhere and the top few percent are often too powerful to get tax increases. But...really, you don't pay taxes - you must be a poster child for the tea party - 0 government = 0 taxes. Naaaaaa. You'll be paying protection money to drug lords if you get that wish (to protect you from terrorists and other's trying to steal what you have). Everyone pays to live, its a fact of life.

And, less you forget, the economy is 70% consumer spending. Consumers don't have the money to spend. And they will have less money to spend with inflation.

No argument there. Consumers (and small business) are the bottom of the economy and yes they will have less money to spend in an significantly inflationary environment without a concurrent increase in personal income and wealth.

Who benefits from inflation? Would that be debtors? Who is the biggest debtor in the world? Would that be the country that has over $14 trillion issued as U.S. Treasury obligations, not to mention the trillions of dollars of guaranteed mortgages?

To answer your question - the holder of the dept instrument, if held to maturity; however, with climbing rates, prices go down on dept instruments and so you wouldn't be long on dept for trading purposes during an increasing inflationary environment

Sometimes you argue with a point I haven't made, Randolph. Can you find the word "inflation" in anything I have written? A short-term benefit of low interest rates (yes, all clouds have a silver lining) is that it reduces the interest rate on our debt; however, that being said, upwardly spiraling dept above 90% of GDP will have the long-term effect of putting upward pressure on inflation, which will hurt everyone if it is excessive. The ideal situation for an economy is slow gradual inflation (about 2% to 4%/year).

It wasn't just low interest rates that caused the leveraging situtation, it was the concurrent loosening of credit rules, and lending practices; such as - even 115% loan to value loans!! Bad underwriting practices (good from a business standpoint, since it was deregulated - anythink goes! Just make the deal today! Come on down and cash-in your American Dream! "offer good until supplies last, operators are standing by, get your money now"

I helped move National Semiconductor production overseas back in the 1990s. It has been going on for a long time. I was laid off in December 2001; my job went to China. I changed occupations to a self-employed appraiser in 2002. What is your reasoning back then?

The gradual migration of business to China accelerated in the 90's and continued through to the present.

"To reassert his economic agenda, in the spring of 1992, Deng made his famous southern tour of China, visiting Guangzhou, Shenzhen, Zhuhai and spending the New Year in Shanghai, in reality using his travels as a method of reasserting his economic policy after his retirement from office. On his tour, Deng made various speeches and generated large local support for his reformist platform. He stressed the importance of economic reform in China, and criticized those who were against further economic and openness reforms. Although there was a debate on whether or not Deng actually said it,[41] his perceived catchphrase, "To get rich is glorious" (致富光荣), unleashed a wave of personal entrepreneurship that continues to drive China's economy today."

http://en.wikipedia.org/wiki/Deng_Xiaoping

QE is electronic printing of money. The FED buys debt in the open market with money they create. They don't get it from the U.S. Treasury. Banks and GSEs get it as they are sellers of what the FED bought.

The Treasury prints the money, but it comes from our current and future prosperity - there aint' no free lunch. However, how it is exactly implemented is the issue. When the economy is weak, you can give the economy gas, but our economy is running on fewer and fewer cyclinders (jobs). We need to target the root problem.

QE and current Fed Monitary policy is a rather complicated bag of market manipulations. The intended strategy is supposed to: A) buy assests from banks to give them more reserves so they can lend to consumers (with printed money) - but the big banks don't apparently need the consumer anymore B) Buy long term debt instruments to bring down interest rates on long term debt (such as mortgages) to stimulate the housing market - it helped for a while but without jobs, it is only delaying the inevitable C) Counter the current risks of deflation and keep inflation up in positive territory (deflation is not good, just as rapid inflation is not good). I think the best way to counter deflation is to increase job demand.

Big corporations = banks and investment banks and GM & Chrysler and AIG and Harford (all sorts of financial institutions)Why would you expect a trickle down? Those financial institutions are insolvent holding defaulted debt. Keeping rates at zero is the cost of borrowing from the FED. These institution loan it out to who? Big corporations who have trillions of dollars on their balance sheet?

* GM profit nearly doubles, slowdown risk ahead: DETROIT (Reuters) - General Motors Co's quarterly profit shot past Wall Street expectations, but its share price slipped as investors focused on the risks of a sputtering economy…

* Chrysler reports $183M second quarter operating profit, $172 ... The post-bankruptcy Chrysler Group is continuing its financial recovery even as the overall economy continues to sputter along...

* Biggest Insurance Basket Case: AIG - The Street Aug 03, 2011 - Analysts expect AIG to report a profit of 92 cents a share in the second quarter, compared with a profit of 14 cents in the year-earlier quarter.

* Hartford Profit Off on Disaster, Asbestos Charges ...
Insurer Hartford Financial Services Group Incposted a smaller second-quarter profit Wednesday after suffering large catastrophe losses and taking a charge to increase ...

Is GM insolvent, not profitable?; Chrysler insolvent, not profitable?; AIG insolvent, not profitable?; Hartford insolvent, not profitable? Seems they are all making and more more profit, less Harford due to disasters and litigation.

Get a clue.

Really, are we so far apart on this? - I don't think so.
 
Jobs are much reduced in large measure that there is tax incentive to buy new automation and equipment and thus reduce staff. The quality of the employee must be higher and because of that, the least skilled in computing etc. are the last to get hired. This is creating a new underclass. Further, with so many older people forced to delay retirement, the younger ones are bumping a ceiling of geezers hanging on for dear life...hanging on because they know if they lose their job, they have no future. It is age class warfare at its worst. The employer has both over the barrel and need not pay a premium for labor. There is a huge surplus thereof.

Globalization dumbed down the wages of the world's more educated and wealthy nations. Further, it tied everyone together. In the past century global contagion was not an issue. The US could go into a funk and it only rippled in France, Great Britan and Germany. When we became the big dog consumer, it was said, when we sneezed, the rest of the world got a cold. When our banks sold crap mortgage securities to Europe, we coughed and they got tuberculosis.

Now it's when Greece sneezes, all of Europe gets the flu and America has pnuemonia. We are all sick countries and todays' sell off is showing how perverse low interest rates are. There is no where to hide for investors. They are forced to park their money in the banks..and the banks have so much cash they are charging customers more fees because the Fed is charging them for insurance on the money...

And there is no way to crawl out of the hole. Increase interest rates will slow the economy and we can't decrease the rate to stimulate the economy....and what will tomorrow's numbers bring? If the gov's have reduced hiring (like all those FAA employees idled by the congressional wrangling going on..) and the private sector is just hoarding cash or investing in mechanization that reduces labor requirements....and the drought is reducing the number of farm work, food processing etc... well, ain't that the berries?

Yes, Indeed, Terrel! You bring up some other salient problems with our economy. 1)Demographic changes. 2)Reducing expenditures to reduce deficits may reduce jobs and send destimulating ripples through the economy 3) Too much global interdependence is not good for economic security and prosperity.

Aside: The problem with automation is really a big one that will be only getting worse into the future....perhaps every individual will, by right, need to own a robot for income:

"Yes, mommy, I want to own a doctor robot when I grow up so I can help people get well and earn a good living" "Well son, unfortunately, all the doctor robots go to the richest people first" "Oh daddy, can I own a space robot, so I can explore new planets and make discoveries that will help mankind" "I'm sorry son, all the space robots are owned by "space robotics consortium", which is a consortium of the largest global corporations".
 
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