Warren Buffett: An Economic Indicator?

Marketplace.org Senior Editor, Paddy Hirsch, explains Warren Buffett as an economic indicator.

Rick Perry Calls Ben Bernanke 'Treasonous'

Perry stands by 'treasonous' comment on Bernanke | CNN Money

Bernanke 'treasonous'? I don't think so. Bernanke has a PhD in Economics from MIT. Quantitative Easing was done to combat massive shrinking of the economy (aka 'Deflation'). Bernanke wrote about the effects of deflation in the Bernanke Doctrine.

What I do know is 'treasonous' is a pretty strong word to be used by someone [Perry] with a 2.23 GPA, and who earned a bachelor's degree in animal science.

Bernanke: 1, Perry: dumb

UPDATE: Perry's GPA is actually 2.23 (correction made) using the standard weights for grades (A=4, B=3, C=2, etc). You can read an article regarding his transcript at Texas A&M at the Huffington Post. Better yet, just view his transcript here.

Here's some items that stand out:
Phys Ed 102: B - Really, Perry? You couldn't get an 'A' in this class?
Phys Ed 202: B - For realz?
History of the U.S. (105): C
History of the U.S. (106): C

and most importantly...

Principles of Economics (Econ 203): D

WTF!

And he wants to throw insults at Bernanke?!

GTFOH.

US Debt: Why We Don't Compare Household Finances To Government Finances

I understand the attraction to liken your household finances to government finances. Comparing your income to what you're spending works for households; It's clean, it's neat and it's simple. But comparing Government finances to Household finances is not accurate. The simplicity of our spending (utilities, debt, living expenses) and our income does not apply to the government. Flexo at Consumerism Commentary describes why it’s not at all akin to a family spending more than it earns:

• The government can at any time, at its discretion, increase revenue. It’s not popular, but raising taxes is an option. Households cannot similarly decree that their income increase. People can take certain actions to increase their income, like obtaining more education or training, but these often require even more expenditures. Income-earners can get second or third jobs to help make ends meet, and the farther that goes, it will be emotionally, mentally and emotionally straining on a family. Fact of the matter is, most of us work for money. It's a sad face but it's the hard truth; households aren't as flexible on the revenue side as the government.



• The government can at any time, at its discretion, devalue its debt. Monetary policy comes into play. The Federal Reserve, working alongside the government, purchases government securities, increasing the money supply for banks and consumers. With more money available in the economy, people (but mostly businesses) can afford to pay more, and prices increase, effectively decreasing the purchasing power of a dollar. This is a great position for people who owe money to be in, because the real value of what they owe decreases.
  
  Households, on the other hand, have no control over the money supply and therefore cannot manipulate the real value of their debt.



• Deficit spending helps spur the economy. Throughout the twentieth century, the government was more frequently in a budget deficit than in a budget surplus. The ability for the government to spend freely helped this country become the rich economic powerhouse it is today. With the federal government taking up the slack by investing in the economy during periods in which businesses were gun-shy, the country continued prospering — particularly the middle class. Periods of deficit spending were followed by periods of surplus, but for the most part, deficit spending is linked to this country’s growth.

Is there a risk to printing money? Sure, hyperinflation (very high, rapid monetary inflation) comes to mind. But we are no where near hyperinflation. The U.S. hasn't experienced hyperinflation since the Revolutionary War (when we were 13 colonies) and the Civil War (a divided nation). In fact, we are currently experiencing deflation (more on this in a later post).

The national debt will always be a point of contention but we have to separate the narrative from the facts. My narrative is that I don't believe (based on the bullet points above) that the U.S. Government has a debt problem. I do believe, however, we have inefficiencies in government leadership that leads to ineffective government spending (more government spending to create jobs please, kthanksbai). The fact remains -- we can always print money. And if you continue to compare your household finances to government finances, then ask yourself this:

If you have a machine at your home that can print you money, would you have a debt problem?

Truth bomb go "boom".

Why S.&P.’s Ratings Are Substandard and Porous

Nate Silver had a FANTASTIC piece on Why S.&P.’s Ratings Are Substandard and Porous (many thanks to my buddy, Brad, for finding this). It's a long article, but if you can work your way through it, he has some excellent content.

Boom.

US Downgraded: Americans Demand Leadership

America doesn't have a debt problem.

America has a leadership problem. America's leaders have failed to spend productively albeit with cash and/or with debt and then play a dangerous economic game by arguing about it rather than solving the problem.

Failing public schools (at all levels), overcrowded prisons, medicare/medicaid, social security, roads, and inept politicians have hemorrhaged financial resources. This means that the Government Spending equation of GDP isn't as effective as it needs to be:

GDP = Consumer Spending + Investment Spending + Government Spending + (EXports - Imports)

Government spending can be financed by seigniorage, taxes, or government borrowing. It is important to realize that "G spending" happens at all levels: federal, state, and local.

John Maynard Keynes was one of the first economists to advocate government deficit spending as part of the fiscal policy response to an economic contraction. In Keynesian economics, increased government spending is thought to raise aggregate demand and increase consumption, which in turn leads to increased production. Keynesian economists argue that the Great Depression was ended by government spending programs such as the New Deal and military spending during World War II. According to the Keynesian view, a severe recession or depression may never end if the government does not intervene.

Reducing government spending, in general, doesn't solve the problem in the long-run. It just puts a band-aid on a bullet wound. We need effective government spending; the kind that adds value to America: public schools and infrastructure.

America has been hemorrhaging spending for decades without improving the infrastructure. And with low growth and sloooooow job creation, we may not see pre-recession GDP output and unemployment until 2018. Nate Silver wrote:

Not only is the worst not yet over — the situation is still deteriorating. Every quarter that the economy grows at a rate below 3.5 percent, it loses ground relative to the long-term trend. Although the economy grew at a 3.8 annual percent rate from fall 2009 through summer 2010, over the past year growth has averaged just 1.6 percent, putting us farther behind.

What we need, instead, is above-average growth — in fact, quite a lot of it. Even if the economy were to begin growing at a 5 percent annual rate, it would take until 2018 for it to catch up to the long-term trend.

We need leadership. We need to be galvanized about one idea that will make America competitive. Although I don't agree with each of FDR's policies passed in the New Deal, he had some fantastic ideas: Works Progress Administration, Civil Works Administration, Civilian Conservation Corps. The common theme among these programs is that it was effective government spending while putting Americans to work. Where are those ideas today?

Why we no have speed rail? :-(
or wind power? :-(

Epic. Fail.

Understanding the Ratings Agencies
In early of 2010, Paddy Hirsch of Marketplace.org had one of his whitebaord sessions regarding the credit rating agencies. Although it's dated, there's some good content in there regarding the conflict and possible collusion of these agencies:



Why The Downgrade Happened
At first, I didn't understand Standard & Poor's motivation behind the downgrade. But their job is to inform us if we're going to get our money back if we invest in a certain asset like US Treasuries (hence, the ratings). Although there was an error that inflated U.S. deficits by $2 trillion, John Chambers, head of soveirgn ratings for S&P said:

[the error] "doesn't make a material difference -- it doesn't change the fact that your debt-to-GDP ratio will continue to rise over the next decade," he told "AC360."

So the downgrade happened because the S&P thinks that America will not be able to pay its debtors because of the high debt-to-GDP ratio. Because of this, maybe the downgrade needs to happen.

What The Downgrade Really Means
Besides meaning that our leadership is absolutely atrocious in Washington, the downgrade also means a rise in interest rates across the board. The rising of these rates will vary. CNN Money had a good article on how it affects your money -- everything from your cash to bonds to borrowing. Please do check it out.

Failed Leadership
The downgrade does mean something for all of us. It means that America has failed leadership. As a Veteran, I am angered by their lack of basic leadership skills: working as a team, implementing ideas, compromising, making effective decisions, disseminating information, and most importantly, accomplishing the objective. In my opinion, we need leaders that know the following:

• basic economics


• allocate (cash & debt) spending effectively


• leadership

The image of our nation is damaged internally and externally. Retired General Russel L. Honoré said:

It's time to get draconian. But not with the helpless elderly who need their Social Security payments, not with the powerless Army private supporting a family. I mean it's time to load our elected officials on troop planes and send them to Camp Shelby, Mississippi. Put them in tents with no air conditioning, have Army drill sergeants teach them teamwork and physical sacrifice. When they recognize their responsibility to the people of America, they can return to D.C., their upscale restaurants, and military plane trips, as though they were royalty.

I couldn't agree more. We need a better way to assess the strong from the weak in our leadership. To accomplish an objective, you don't wait on the weak. And unfortunately, the weak are in Washington.