Things Are Looking Up

I see more jobs than any time in my career. Fully half of all my business clients are hiring or have hired in the last few months. Tax Prep & Accounting Services hired three bookkeepers this summer, more tax preparers for tax season, and one or two more will be added this week to handle the phones and front desk duties. Either the national statistics are wrong, will soon reflect the growing economy, or my clients are the only ones experiencing economic expansion.

The only real explanation is the economy is finally gaining traction. Once the wheels start turning, the rust can get ground off, and America can be back in the saddle again.

It has been a long economic pullback. Even though the government says we are in a mild expansion for a few years now, it never felt like it was. Certain statistics tell me we are due for better days ahead. The average car on the road in nearly 10 years old, the oldest fleet on record. Households have reduced debt for several years. With lower debt and an old auto fleet, vehicle sales should continue to grow with all the jobs it requires. As old, worn out things need updating, either repair or remodeling is required or a new purchase.

I feel good for my clients. I feel good for their new employees. As people get jobs they can update old cars, furniture, or buy a home. The economy always works best when people feel good about themselves. We took a serious body blow in 2007 and 2008. When sentiment is crushed that hard it takes time to get back up and running again.

I hope we are all running again real soon.

Stealth Tax Increases

Just like 2008, the Republicans are getting everything they want, and asset values (stock market and housing) are dropping fast. The Democrats do not have clean hands either. Neither party focused on jobs and as a result, we have no job growth. Go figure.

But this blog post is not about jobs or spending; it is about taxes: should they go up, down, or stay the same. Republicans in Congress say raising taxes kills jobs. Ahhh, dummies... so does cutting spending. Less demand, no matter where it comes from, will not create jobs.

The GOP has worked very hard to raise your tax burden and you never knew they were in your pocket. When the policies of Congress destroy the value of your 401(k), IRA, and home value, this is a real and hidden tax. The brinkmanship with the debt ceiling was a colossal waste of time and created no jobs. Zero. Yet, the stock market dropped 15% in two weeks and housing prices look like they may start down again as economic activity stalls because there is no demand (government cutbacks) and hence, no jobs.

I don't know about you, but I would take a higher tax rate if I didn't have to watch my saving earn .1% in the bank, my retirement funds shrivel in the stock market (the Dow closed on December 31, 1999 at 11497.69), my home drop 40% in value, and felt secure in my job. Maybe I am nuts, but all this adds to a real tax increase. The only difference is who gets the money. If the government taxed a small amount more at least it would help lower the deficit. Instead, we just get to bleed more with no doctor in sight.

Can someone please lead? Real leadership. Please.

The Not So Big Problem of the U.S. Budget Deficit

One and a half trillion dollars in added debt per year seems like an insurmountable problem, but is it? The red ink pouring out of Washington has so many people up in arms that our economy may falter or sink into a double-dip recession. Our leaders should review the 1930s before embarking on such austerity.

After World War II, the United States had a national debt of around 120% of GDP. The United States never paid any of that debt down... ever. Okay, there were two years with a small budget surplus, but that was so small it was only a fraction of a percent and the next year it was spent. So what gives? The national debt was huge in 1945, never paid down, and became a small, manageable debt in subsequent years. Why? And more important, how?

We need to fast forward to the 1990s and the largest budget surpluses our federal government ever had. (On percentage terms President Andrew Jackson paid off 100% of the national debt. It did not last long.) How did President Clinton run so many and so much surplus? It was simple really. President Clinton understood that the budget deficit can be eliminated by increasing spending slower than economic growth. It takes a few years, but it always works and keeps the economy humming.

Let me illustrate. If your national economy is $1,000 and the government takes in $90 in taxes and spends $100, you have a budget deficit of $10. If the economy grows 5% the next year to $1,050 and tax revenue collected remains the same in percentage terms, you collect $94.50. If spending increases 2%, your government spends a total of $102. The budget deficit for the year is $7.50, a decline of 25% in your budget deficit.

When using really big numbers, like the size of our real economy and government finances, the numbers are compelling. The federal government can spend more and actually be financially in a better fiscal position as the debt is a smaller percentage of the economy. Running a budget surplus can injure a national economy, especially in weak economic times. The real trick is to increase the total national debt less than the economy grows.

During a recession the economy shrinks so the debt burden grows fast and scares politicians and guys on the street. It shouldn't and here is why. Economic performance is measured in inflation adjusted terms. If the government reports 3% economic growth and inflation is 2%, the economy grew 5%. The government adjusts the numbers to reflect real growth. However, the economy grew 5% in dollar terms. If the national debt grew less than 5%, not he 3% reported, the deficit is easier to manage than the year before.

With all this said, $1.5 trillion deficits are not something we want to repeat each year. However, the sky is not falling. The national debt of the United States is well below all-time highs compared to GDP and is currently under 100% of GDP. The concern is how fast we are increasing the debt burden.

Congress does not need to irritate the President into lowering spending. Just increase spending slower than the economy grows and in a few years we are back in the black.

Now you can smile and enjoy the day.

Inflation, Deflation, Double-Dip Recession...Ahhhhhhh

I scared myself.

Current media outlets are suffering a schizoid embulism when it comes to the economy. Half the commentators say we are in for massive inflation with all the government spending; the other half say we are in for crippling deflation, where prices decline for an extended period of time.

There is a call for a double-dip recession similar to 1980-82. Another group says we will have prolonged subpar growth with a few radicals calling for a rapidly overheating economy in the near future.

Everyone is wrong and I'll tell you why.

This is not 1980. In 1980 the economy suffered from high unemployment, high inflation, and not enough supply. President Reagan gave us "supply-side" economics. The term has been run through the mud over the decades, but Reagan was right. Lower taxes and less regulation were the exact ticket the economy needed to increase production, hire more labor, and reduce inflation. The problems of today are different.

Government spending does not cause inflation, the imbalance of supply and demand does. The opposite imbalance causes deflation.

Prices will remain stable with inflation starting a few years down the road. Not high inflation, some inflation. Demand is present, but fear is high. Banks are not lending to allow pent-up demand to push prices higher. At the same time, additional supply is waiting for work. Idle factories can fill demand when demand is able and willing to purchase. All these factors will keep prices bouncing around breakeven. There will be months of price declines followed by months of price increases. Mixed together, prices will go nowhere for the next several years.

Energy is the exception. If you review the oil bell curve you will notice a disturbing future event rapidly approaching: declining supply. I have no confidence in the American people to conserve oil until it really hurts; like 20% unemployment with $20 a gallon gas. When the world passes the United States as a low-cost, high efficiency producer, then Americans will get serious. That means Americans might as well get used to a declining paycheck and standard of living. And I'm an optimist. But there is hope.

Oil prices will rise as oil production begins to decline and then accelerates even lower. Oil prices will rise, but energy costs will not. At least not as much as oil, and eventually, energy costs will decline. Countries that cling to oil as an energy source will suffer the consequences.

China and Europe have decided on a different course. Wind and solar production  soar faster than demand, lowering their need for carbon based fuels. In less than 10 years, China wants 15% of all their energy needs filled by renewable production. Wind and solar will fill nearly all this need. To date, China is ahead of schedule.

The United States has chosen a carbon course. Policy in Washington is for energy independence from domestic natural gas and coal with a little help from solar and wind. China spends double what the U.S. does on renewable energy production each year. This is why in under five years the U.S. gave up its leadership possition in wind and solar to China, where over 50% of worldwide production now resides. Just think all those high paying jobs, and the U.S. exported them to China. Good move.

China understands that wind and solar have long-term benefits that pay back for extended periods of time. Solar panels and solar water heaters continue producing for decades at a very low cost once installed. China, and any nation that invests with the same wisdom, will enjoy an economic advantage that could last generations. China produces over 90% of worldwide production of evacuated tubes used in solar water heaters. Buy China or burn coal.

But all is not bad for the U.S. China will be the world leader and we can follow wherever they lead. China will want to cash in all those U.S. bonds they have been buying. As I write, China has nearly $1 trillion is U.S. Treasury securities. Just think of all the jobs Americans will have filling Chinese orders. We work, they consume, so we can pay our debts. All work and no play folks. American work ethic at its finest.

So you see, there will be no real deflation; there is too much money in the system ready to go to work propping up prices. Inflation has little chance because a large tract of North America will consume less than they produce for 30 years to pay for the sins of the father. No double-dip recession either. China stands ready to put us to work... at a lower pay rate.

China can even help us rewrite our Constitution. They can help us serve their values. Isn't that nice? And if we refuse, they dump $1 trillion of our debt on the market, pushing up our interest rates to 30%+ and we become a third-world nation.

Ahhhhhh. I'm scaring myself again.

I don't know about you, but I am hungry for Chinese. At least they want to speak English.

Economic Growth Rate, Development, and Indicators of the Next 50 Years

Politicians have had a singular mind when it comes to economic growth rates and development over the last 150 years. The common man has used these political indicators as a personal guide toward economic success.

Since the mid 18th Century, economic growth has been defined as a growing Gross Domestic Product (GDP). The common man understands this as having more and more stuff as each year passes by. All this growth has been carried on the back of cheap energy, and more to the point, cheap carbon based energy: oil, natural gas, and coal.

The Industrial Revolution gave us mass production and the resulting wild swings in economic performance. By the 1920s, production grew so rapidly that demand could never keep up. The economy faltered and then collapsed as the machines produced more than people could possibly buy. WWII sopped up the excess production and the economy started humming again.

Since WWII, worldwide debt has exploded. The excesses of production ramped up each year and debt and mild to moderate inflation, mixed with crude oil, fueled the near straight line advance of Western economies.

The end of the era of cheap oil will create a paradigm shift in economic growth thinking. Growth rates are unsustainable. Oil is getting harder and harder to find as we see by the deep ocean drilling around the world just to keep up with demand.

The concept of more disposable stuff every day to amuse us will turn out to be a blip on the historic map. When one car was not enough, we bought two, then three, then Hummers and SUVs. A one thousand square foot home gave way to fifteen hundred, then two thousand, then three thousand square feet of living space. Many of us live in museums or grand cathedrals today.

More flat screen TVs, computers in every room, cells phones, iPods, are now the must have lifestyle. There is no more time in our lives to enjoy what we already have and the Earth cannot tolerate the abuse any longer.

Economic growth in the future will look much different. Occupations of tomorrow do not even exist today, but soon. A stable GDP will be the new successful economic norm. Living within our, and the planet’s, means will be the only acceptable way to live.

Some future jobs are here today with alternative energy. But the real jobs will come from zero energy homes, homes that produce more energy than they consume, while providing all the comforts of life. We already know how to build homes like this, even in cold climates. We got so used to cheap energy that we built our homes any way we felt and forced the interior environment to our liking by burning more oil.

Transportation has been a solitary event. We drive in our cars, alone. We build more and more highways. The more roads we build, the more we drive. In 2007, in the U.S. alone, we consumed over 22,000,000 barrels of oil a day, just shy of 1 billion gallons every day, day after day. We have come off the 2007 peak consumption year numbers, but not by much, and only because of a recession.

Future good-paying jobs will produce products that consume less. Future jobs will include consulting with businesses and the common man to do more with less. It is certain we will drive less. Once we stop running the rat race of more and focus on better, our lives will become less cluttered and hectic.

Think of some of the real benefits to our society when we produce more of what we consume locally. Electricity transmitted long distances from coal power plants lose a third or more of the electricity produced from transmission, and coal fired power plants are less than 50% efficient.

Think of it: local food that requires less shipping; cars that run on electricity produced by your own home, your home producing more electricity than you personally use. We will do less and get more in the form of a less anxiety-driven, hectic lifestyle. The engines of production will allow the entire human race to live a comfortable life.

We don’t need to work 40 hours per week. We work so much so we can buy all the gadgets, extra TV’s, SUV’s, 5,000 square foot homes, and all the trinkets we are told we must have. We need to work longer hours to pay for the extra car we need to get to work. We dine at restaurants because we are too tired after a long day at work; we work to pay for the added expense of dining out. The cycle never ends… unless you step off the hamster wheel yourself.

And oil, no longer easy to find, will not bail us out. Now we will work smarter or suffer the consequences. The old answer to every problem, “just burn more oil”, will no longer work.

It is a better world we will become. The environment will get a rest, heal, and then nurture us. We can live better by burning less. It is the new economic growth and development paradigm. If we know what is good for us.