I watched "The Donald" perform in Mobile, Alabama last night. He was, well, "The Donald." Holding no punches he launched broadsides at all his favorite targets with Jeb Bush getting more than before and Hillary getting a bit less. Very engaging performance and another solid block in his campaign to be president. Perhaps the most lasting message was that as president he will be a great negotiator for the USA and through this make America great again.
However, in spite of being a businessman with worldwide interests he does not grasp the reality of the global economy. He is still on his campaign against US outsourcing of jobs, being beaten up by every trade agreement we have, being bought out by China, losing our industry to other countries and more. While this makes for good "Jingoism" it falls far short of any understanding of how the global economy functions. His demands would make sense 100 years ago, maybe 50, but they ring hollow today.
Perhaps what he tried to say can be encapsulated in his attack on the Ford Motor Company. He complains that Ford plans to build a multi-billion dollar new factory in Mexico. He said if he were president he would call in Ford and tell them that if they build a plant in Mexico he would slap a 35% tariff on all cars, parts and whatever the company brought into the USA from Mexico. Of course this violates the NAFTA Agreement so he would be in court immediately for merely threatening that action.
What Trump fails to understand is that Ford is no longer an "American" company. It is a worldwide operation that has a headquarters in the USA. But it operates on a worldwide plan that allocates location of factories according to several factors including transportation, availability and cost of skilled labor, markets, availability of suppliers, tax regimes, government supports, government regulations and more. Ford will locate its factories as it determines based on all these factors.
President Obama makes the same mistake when he talks about bringing lost manufacturing jobs back to the USA from abroad. First of all he fails to recognize that more jobs in US manufacturing have been lost to automation of industry than to sending then abroad. All one has to do to understand this is to take a tour of a modern auto factory where you see a forest of robots doing what workers used to do. Second, the jobs that were outsourced were done for sound business reasons and no company will commit industrial suicide by bringing the jobs back.
Before attacking US firms for building facilities abroad and "outsourcing" jobs perhaps Trump should answer why he builds casinos, hotels and golf courses abroad. By doing so he sends US tourist facilities abroad land thus deprives American workers of jobs. You have to have a generous dose of chutzpah to chastise another for doing what you are doing yourself.
Whatever Trump and Obama may say about American companies building facilities abroad or outsourcing jobs, it is not because American workers are more expensive. Consider the following, Toyota has seven factories in the USA, Honda five, Nissan three, Mercedes one, Volkswagen one and BMW one. In fact, BMW's factory has the largest number of employees of any auto factory in the USA. Obviously US workers are competitive with workers in other countries.
As the election heat up we will hear more about the USA and its relation to the global economy. I will continue to try to shed some light on the subject.
Friday, August 21, 2015
Thursday, August 20, 2015
I'm Back
After writing my blogs on a joint web site I am back to writing here. I hope my loyal readers will follow. We have a lot of good issues to address in the coming election year.
Wednesday, June 10, 2009
EUROPE TURNS RIGHT WHILE AMERICA TURNS LEFT
The results are in, Europeans demonstrated a clear turn to the conservative side of the political spectrum in electing the new European Parliament. The Conservative bloc will have a 100 seat margin over the Socialists. This was a real boost to the current conservative governments in Germany, France and Italy and a real blow to the socialists governments in Spain and the UK.
The elections also saw real gains for the "Green" parties and their bloc in the Parliament as well as the "ultra-nationalists" who are often called the "far right." Hard to see where they will wind up in the Parliament with most assuming that the "Greens" will align with the Socialists and the "Ultras" with the Conservatives.
One of the major reactions was to contrast this win for the "right" with the Democractic victory in the last US election. One Spanish journalist lamented that while the "US moves forward on a progressive path, Europe chooses to stagnate." Of course the writer's political bent is clear. But the contrast did receive much commentary.
So what to make of the outcome? Hard to say that the swing to the right was the result of the "Global Recession" since Sarkozy, Berlusconi and Merkel have been at the helm long enough to be blamed for the economic downturn. Never-the-less the UK and Spanish governing parties quickly blamed the bad economy for their losses.
The gains for the "Ultras" were probably spurred by the anti-immigrant mood in Europe. The recession is a two edged sword here since immigrants taking jobs while locals are losing them in major numbers has generated much of the anger. On the other hand, the recession has already caused the number of new immigrants to fall off dramatically.
The Conservative gain fairly assures that European Commission President Manuel Barroso of Portugal will be installed for a second term. The only glitch here is that his re-election will be held off until the Lisbon Treaty, which reorganizes the European Union government, is adopted. The Irish, who stopped the Treaty by voting against it in a referendum last year, now want to approve it.
All of this indicates that a new, more powerful central European government will start life with a conservative flavor.
Now when and where did we start using the terms "left" and "right" to define our political parties?
Leo Cecchini
June 2009
The elections also saw real gains for the "Green" parties and their bloc in the Parliament as well as the "ultra-nationalists" who are often called the "far right." Hard to see where they will wind up in the Parliament with most assuming that the "Greens" will align with the Socialists and the "Ultras" with the Conservatives.
One of the major reactions was to contrast this win for the "right" with the Democractic victory in the last US election. One Spanish journalist lamented that while the "US moves forward on a progressive path, Europe chooses to stagnate." Of course the writer's political bent is clear. But the contrast did receive much commentary.
So what to make of the outcome? Hard to say that the swing to the right was the result of the "Global Recession" since Sarkozy, Berlusconi and Merkel have been at the helm long enough to be blamed for the economic downturn. Never-the-less the UK and Spanish governing parties quickly blamed the bad economy for their losses.
The gains for the "Ultras" were probably spurred by the anti-immigrant mood in Europe. The recession is a two edged sword here since immigrants taking jobs while locals are losing them in major numbers has generated much of the anger. On the other hand, the recession has already caused the number of new immigrants to fall off dramatically.
The Conservative gain fairly assures that European Commission President Manuel Barroso of Portugal will be installed for a second term. The only glitch here is that his re-election will be held off until the Lisbon Treaty, which reorganizes the European Union government, is adopted. The Irish, who stopped the Treaty by voting against it in a referendum last year, now want to approve it.
All of this indicates that a new, more powerful central European government will start life with a conservative flavor.
Now when and where did we start using the terms "left" and "right" to define our political parties?
Leo Cecchini
June 2009
Tuesday, June 9, 2009
AMERICAN WAKES UP TO THE "NEW ECONOMY"
GM stands for “Government Motors,” the US Government comes out with new guidelines for executive compensation for companies slopping at the public trough, Jon Stewart of the “Daily Show” rails against Uncle Sam buying up failed businesses. The public is finally waking up to the salient fact of the “Financial Meltdown of 2008″ and “The Great Recession of 2009,” the economic upheaval has led to Uncle Sam becoming the largest shareholder in US private business and thereby acquiring even more control over the economy.
But of course readers of my blogs already know about this seminal event since it has been the theme of my series on the “New Economy.” I started by reviewing other definitions of the “New Economy” which included a service dominated economy, a global economy and an information/communication dominated economy. To these definitions I added, the “New Economy” means one in which Uncle Sam, who was already the single largest consumer, owned the central bank, and set the rules, has become the largest owner of the economy.
Let’s review that ownership. Uncle Sam already owned, or held the major share of, the traditional government parts of the economy - the military, cutting edge technology (NASA, NIH, CDC, etc), the road network, national lands, and, with his siblings the state and local governments, education, ports, public safety, and the lion’s share of health care. I realize I may have overlooked other parts, but you get the drift. To these he has now added the largest auto maker, the largest insurance company, parts of the major banks, and the mortgage industry. With President Obama’s health plan he will soon own most of the rest of the health care industry.
Wow! This should make every Libertarian and Republican froth at the mouth. And they do. Wait a minute, is Jon Stewart a Libertarian, or worse, is he a Republican?
While my political leanings are well known, usually compared to Attila the Hun, which is a great injustice, since he was a real socialist, if you doubt me, just check his administration, I am not concerned. In fact I applaud Uncle Sam expanding his investment portfolio. If the sovereign funds of such oil powers as Saudi Arabia, Kuwait and the United Arab Emirates are buying up the private sector, why not Uncle Sam? And the beauty of this is that, while sovereign funds must pay money for their purchases, Uncle Sam does it by giving a chit.
I was once a stockbroker and thus am very impressed by Uncle Sam’s portfolio - manufacturing industry, transportation, energy, finance, health care, education, security, communications, and, of course, Treasury bills. While others lament the debt he has incurred in acquiring this stake in the economy, I point to the reality that income from these investments could replace taxes to a large extent, and thus lighten, not increase, the burden on my purse.
Like it or not, we are into the “New Economy” in which Uncle Sam will have more control and say about what happens. Doubt me, just look at the new government guidelines for executive pay in such corporations as GM, Citibank, AIG, and more.
Leo Cecchini
June 2009
But of course readers of my blogs already know about this seminal event since it has been the theme of my series on the “New Economy.” I started by reviewing other definitions of the “New Economy” which included a service dominated economy, a global economy and an information/communication dominated economy. To these definitions I added, the “New Economy” means one in which Uncle Sam, who was already the single largest consumer, owned the central bank, and set the rules, has become the largest owner of the economy.
Let’s review that ownership. Uncle Sam already owned, or held the major share of, the traditional government parts of the economy - the military, cutting edge technology (NASA, NIH, CDC, etc), the road network, national lands, and, with his siblings the state and local governments, education, ports, public safety, and the lion’s share of health care. I realize I may have overlooked other parts, but you get the drift. To these he has now added the largest auto maker, the largest insurance company, parts of the major banks, and the mortgage industry. With President Obama’s health plan he will soon own most of the rest of the health care industry.
Wow! This should make every Libertarian and Republican froth at the mouth. And they do. Wait a minute, is Jon Stewart a Libertarian, or worse, is he a Republican?
While my political leanings are well known, usually compared to Attila the Hun, which is a great injustice, since he was a real socialist, if you doubt me, just check his administration, I am not concerned. In fact I applaud Uncle Sam expanding his investment portfolio. If the sovereign funds of such oil powers as Saudi Arabia, Kuwait and the United Arab Emirates are buying up the private sector, why not Uncle Sam? And the beauty of this is that, while sovereign funds must pay money for their purchases, Uncle Sam does it by giving a chit.
I was once a stockbroker and thus am very impressed by Uncle Sam’s portfolio - manufacturing industry, transportation, energy, finance, health care, education, security, communications, and, of course, Treasury bills. While others lament the debt he has incurred in acquiring this stake in the economy, I point to the reality that income from these investments could replace taxes to a large extent, and thus lighten, not increase, the burden on my purse.
Like it or not, we are into the “New Economy” in which Uncle Sam will have more control and say about what happens. Doubt me, just look at the new government guidelines for executive pay in such corporations as GM, Citibank, AIG, and more.
Leo Cecchini
June 2009
Sunday, June 7, 2009
AFRICA IN THE RECESSION
I read an article the other day about how Africa is fairing during the worldwide recession. The author pointed out that Africa is doing better than one would expect, because of its new position as a main supplier of basic materials to the major emerging economies of the world, with Brazil and China leading the pack.
It was almost 20 years ago that I left my last foreign service job in Mexico. In my parting review of Mexico I noted that Mexico, as well as most of the rest of Latin America, was well positioned on the development train and that I had no real concerns about Mexico and the rest of Latin America for the future.
At the same time I noted in other writings that most of Asia was also well along the road to economic success. However, I said that Africa was still the problem child. I had also spent time in the 1980s working in Mozambique, South Africa and Namibia so had some idea of what was going on. I urged that whatever foreign assistance was available, that it be directed to Africa.
Well foreign aid was not redirected to Africa. But something more important happened. China found that Africa offered the raw materials it needed for its rapidly growing industry. The Chinese then set about establishing companies, joint ventures in the main, in several African countries aimed largely at producing raw materials.
China’s effort to obtain raw materials from Africa was clearly evident in its development of petroleum supplies from Sudan. And no matter where you go in Africa today you will find the Chinese busily building similar businesses.
Brazil is a different partner for Africa. It enjoys plenty of its own raw materials. But it is short of petroleum. Enter Petrobras and its explorations in Africa.
I am pleased to report that the fledgling cooperation between African countries and major emerging economies promises to be the engine of Africa’s economic future. I no longer fear for Africa’s future and believe it has joined its fellow developing states in Asia and Latin America on the train to a better economy.
Leo Cecchini
May 2009
Categorized in Uncategorized
It was almost 20 years ago that I left my last foreign service job in Mexico. In my parting review of Mexico I noted that Mexico, as well as most of the rest of Latin America, was well positioned on the development train and that I had no real concerns about Mexico and the rest of Latin America for the future.
At the same time I noted in other writings that most of Asia was also well along the road to economic success. However, I said that Africa was still the problem child. I had also spent time in the 1980s working in Mozambique, South Africa and Namibia so had some idea of what was going on. I urged that whatever foreign assistance was available, that it be directed to Africa.
Well foreign aid was not redirected to Africa. But something more important happened. China found that Africa offered the raw materials it needed for its rapidly growing industry. The Chinese then set about establishing companies, joint ventures in the main, in several African countries aimed largely at producing raw materials.
China’s effort to obtain raw materials from Africa was clearly evident in its development of petroleum supplies from Sudan. And no matter where you go in Africa today you will find the Chinese busily building similar businesses.
Brazil is a different partner for Africa. It enjoys plenty of its own raw materials. But it is short of petroleum. Enter Petrobras and its explorations in Africa.
I am pleased to report that the fledgling cooperation between African countries and major emerging economies promises to be the engine of Africa’s economic future. I no longer fear for Africa’s future and believe it has joined its fellow developing states in Asia and Latin America on the train to a better economy.
Leo Cecchini
May 2009
Categorized in Uncategorized
KRUGMAN ON DEBT
I read an article by “Nobel Laureate” Paul Krugman in which he berates Americans for spending beyond their means by resorting to excessive borrowing and then chastizes the Chinese for not spending enough. I believe Mr. Krugman would have served us better if he had explored why this happens, rather than preach prudence to Americans and exuberant spending to the Chinese.
In my opinion the reason Americans have been happy to go into debt to buy is that they have confidence in their ability to earn more in the future and the underlying strength of the American economy. The Chinese spend less and save more because they do not have similar confidence. Of course the present state of the economy has gone a long way to undermining America’s confidence, but we are using record new debt to correct the situation in full confidence we will be able to meet future debt obligations.
More important it is important to understand the basic assumption of debt - you buy something on credit today that you will pay from future income, but you have the purchase today. The reverse would be to save today to buy tomorrow.
My parents used to say, “we don’t use credit, we pay cash for all we buy.” The net result is that our family missed out on some important items - no television, no automatic washing machine, no vacations. Of course my father conveniently forgot about having a mortgage on his home and a lien on his vehicle.
But let’s get real. The average new automobile costs $20,000. The median American household income is about $50,000. At a saving rate of 10% it would take four years to save enough to buy a new car, if the prices stay the same. The average home price is $200,000. Thus it would take 40 years to save to buy that house, and you can be sure the home price would be substantially more.
No, even the Chinese use debt to buy homes and cars. Buying on credit is a fact of life everywhere. The only question is the proper level of debt.
Krugman and most others blame the present recession on excessive debt. They keep crying that the credit house we built is collapsing around us. But hold the phone, we now know that 97% of bank loans are being paid on time. Hardly a cause for a major calamity. Moreover, the US Government is taking on unprecedented new debt to correct the slump.
No, the basic problem is that debt is part and parcel of our modern life but we are still uncomfortable with this fact.
Leo Cecchini
June 2009
In my opinion the reason Americans have been happy to go into debt to buy is that they have confidence in their ability to earn more in the future and the underlying strength of the American economy. The Chinese spend less and save more because they do not have similar confidence. Of course the present state of the economy has gone a long way to undermining America’s confidence, but we are using record new debt to correct the situation in full confidence we will be able to meet future debt obligations.
More important it is important to understand the basic assumption of debt - you buy something on credit today that you will pay from future income, but you have the purchase today. The reverse would be to save today to buy tomorrow.
My parents used to say, “we don’t use credit, we pay cash for all we buy.” The net result is that our family missed out on some important items - no television, no automatic washing machine, no vacations. Of course my father conveniently forgot about having a mortgage on his home and a lien on his vehicle.
But let’s get real. The average new automobile costs $20,000. The median American household income is about $50,000. At a saving rate of 10% it would take four years to save enough to buy a new car, if the prices stay the same. The average home price is $200,000. Thus it would take 40 years to save to buy that house, and you can be sure the home price would be substantially more.
No, even the Chinese use debt to buy homes and cars. Buying on credit is a fact of life everywhere. The only question is the proper level of debt.
Krugman and most others blame the present recession on excessive debt. They keep crying that the credit house we built is collapsing around us. But hold the phone, we now know that 97% of bank loans are being paid on time. Hardly a cause for a major calamity. Moreover, the US Government is taking on unprecedented new debt to correct the slump.
No, the basic problem is that debt is part and parcel of our modern life but we are still uncomfortable with this fact.
Leo Cecchini
June 2009
Monday, May 25, 2009
The Economy and the Environment
President Obama has linked the environment to economic recovery. He is concurrently taking action to correct the economy and address environmental concerns.
I am writing this blog while sitting in my home in Mallorca, Spain with the tallest mountain on the east end of the island rising directly behind me and the Mediterranean 50 meters in front of me. The house is surrounded by a "Nature Park" or nature preserve. The setting and the views are spectacular in all directions.
I recall about 20 years ago the Spanish government being worried by pollution in the Mediterranean ruining their tourism industry, you see Spain's coasts are the main seaside resorts for Europeans. I am giving to calling it the "Florida" of Europe. Spain's concern was echoed by other Mediterranean countries and the concern led to joint action to clean up the Mediterranean.
My initial reaction to an attempt to clean up a whole sea was total skepticism, how can you clean up thousands of square miles of sea? Well the effort was not to clean up the whole sea, but to clean up the coastal waters. I am happy to report that the effort worked. Twenty years ago I would find lots of flotsom and jetsom when walking along the water's edge. At times the sea itself was clogged with sea nettles who are a sure sign of sewer tainted water. Now the water's edge is clear of all trash and the sea nettles are a rare sight.
My thoughts about the environment also brought to mind another instance in which I was a direct participant. While running a public relations company in Turkey two of my people, an American expert in public relations provided by the US side of the joint venture and a young Turkish woman recently graduated from Ankara's Middle East Technical Institute, came to me to present a proposal for clients. They explained that a group of Turkish companies was worried by threatned new government plans to impose high taxes on plastic bottles that were causing a "solid waste problem."
My immediate reply was to say that Turkey was too poor to have enough such bottles to be of major concern and that there were plenty of sink holes throughout the country where they could be disposed.
I then looked at the details of the situation. I found that the problem was specific to one town in Turkey, Bodrum, a seaside town known in ancient times as Halicarnassus, the home of Herodotus, the universally acclaimed "Father of History." The town was also the site of one of the Seven Wonders of the Ancient World, the tomb of King Mausolus which gave the world the word, Mausoleum. The Mausoleum is long gone but you can see a full scale reproduction in New York City, General Grant's Tomb looking over the Hudson River. It is also the largest tomb in the USA.
But I digress. By 1990 Bodrum had become a popular seaside resort for foreign visitors and Turks with the foreigners staying in the newly built hotels and the Turks spending the summers at their phalanxes of new cookie cutter "villas." In season the town was chock a block with tourists.
Bodrum has a climate like that of Southern California, it never rains but when it does, "it pours, man it pours." These periodic floods served to sweep the town clean of all debris and trash carrying it out to the Mediterranean Sea. This should have been the end of the story but a popular treat for visitors to Bodrum was to take trips in glass bottom boats from which they could see the remains of sunken ancient Greek ships that were the backbone of Greece's commerce based economy.
Imagine looking through a boat bottom to see 2500 year old wrecks resting on the sea floor. And see those ancient amphoras that held wine and olive oil. And see those plastic bottles emblazoned with Hassan's Bleach, Hikmet's Detergent and Coca Cola. What, how did these modern bottles wind up among the amphoras of the sunken wrecked ships? Well the rains washed the bottles out to sea where they filled with water and sunk to the bottom with many falling among the wrecks.
Eureka I said, we are not dealing with trash pollution but "visual pollution." All that had to be done was to keep the bottles from being washed out to sea and spoiling the sight of ancient ships on the sea floor. We devised a PR campaign featuring bottle collection centers where people could bring their plastic bottles to be properly disposed of. The centers also took in glass bottles and other refuse since all was subsequently dumped into the sink holes. It worked.
These personal experiences with enviornmental concern led me to a clear realization, action to save the environment comes when problems threaten your pocketbook. I fear that President Obama will not have much luck with his environmental plans until he can show clear damage being done to our economy. It is no accident that he has linked the two. But he must make the link clear and urgent.
Leo Cecchini
May 2009
I am writing this blog while sitting in my home in Mallorca, Spain with the tallest mountain on the east end of the island rising directly behind me and the Mediterranean 50 meters in front of me. The house is surrounded by a "Nature Park" or nature preserve. The setting and the views are spectacular in all directions.
I recall about 20 years ago the Spanish government being worried by pollution in the Mediterranean ruining their tourism industry, you see Spain's coasts are the main seaside resorts for Europeans. I am giving to calling it the "Florida" of Europe. Spain's concern was echoed by other Mediterranean countries and the concern led to joint action to clean up the Mediterranean.
My initial reaction to an attempt to clean up a whole sea was total skepticism, how can you clean up thousands of square miles of sea? Well the effort was not to clean up the whole sea, but to clean up the coastal waters. I am happy to report that the effort worked. Twenty years ago I would find lots of flotsom and jetsom when walking along the water's edge. At times the sea itself was clogged with sea nettles who are a sure sign of sewer tainted water. Now the water's edge is clear of all trash and the sea nettles are a rare sight.
My thoughts about the environment also brought to mind another instance in which I was a direct participant. While running a public relations company in Turkey two of my people, an American expert in public relations provided by the US side of the joint venture and a young Turkish woman recently graduated from Ankara's Middle East Technical Institute, came to me to present a proposal for clients. They explained that a group of Turkish companies was worried by threatned new government plans to impose high taxes on plastic bottles that were causing a "solid waste problem."
My immediate reply was to say that Turkey was too poor to have enough such bottles to be of major concern and that there were plenty of sink holes throughout the country where they could be disposed.
I then looked at the details of the situation. I found that the problem was specific to one town in Turkey, Bodrum, a seaside town known in ancient times as Halicarnassus, the home of Herodotus, the universally acclaimed "Father of History." The town was also the site of one of the Seven Wonders of the Ancient World, the tomb of King Mausolus which gave the world the word, Mausoleum. The Mausoleum is long gone but you can see a full scale reproduction in New York City, General Grant's Tomb looking over the Hudson River. It is also the largest tomb in the USA.
But I digress. By 1990 Bodrum had become a popular seaside resort for foreign visitors and Turks with the foreigners staying in the newly built hotels and the Turks spending the summers at their phalanxes of new cookie cutter "villas." In season the town was chock a block with tourists.
Bodrum has a climate like that of Southern California, it never rains but when it does, "it pours, man it pours." These periodic floods served to sweep the town clean of all debris and trash carrying it out to the Mediterranean Sea. This should have been the end of the story but a popular treat for visitors to Bodrum was to take trips in glass bottom boats from which they could see the remains of sunken ancient Greek ships that were the backbone of Greece's commerce based economy.
Imagine looking through a boat bottom to see 2500 year old wrecks resting on the sea floor. And see those ancient amphoras that held wine and olive oil. And see those plastic bottles emblazoned with Hassan's Bleach, Hikmet's Detergent and Coca Cola. What, how did these modern bottles wind up among the amphoras of the sunken wrecked ships? Well the rains washed the bottles out to sea where they filled with water and sunk to the bottom with many falling among the wrecks.
Eureka I said, we are not dealing with trash pollution but "visual pollution." All that had to be done was to keep the bottles from being washed out to sea and spoiling the sight of ancient ships on the sea floor. We devised a PR campaign featuring bottle collection centers where people could bring their plastic bottles to be properly disposed of. The centers also took in glass bottles and other refuse since all was subsequently dumped into the sink holes. It worked.
These personal experiences with enviornmental concern led me to a clear realization, action to save the environment comes when problems threaten your pocketbook. I fear that President Obama will not have much luck with his environmental plans until he can show clear damage being done to our economy. It is no accident that he has linked the two. But he must make the link clear and urgent.
Leo Cecchini
May 2009
Sunday, May 17, 2009
BULLASHEET
Yes, the title is what I say is Italian for that famliar expletive for false information. Of course it is only this Italian-American's invention.
In his last item one of my colleagues writing in another blog site lays bare the truth of the "Financial Crisis of 2008" and "Great Recession of 2009." He writes that the largest US banks are not undercapitalized. More importantly, he notes that 97% of their loans are fully performing and thus only a small percentage of their securitized assets are "toxic," which is contrary to the conventional wisdom.
I have repeatedly stated for the last eight months that there was no real reason for the meltdown. The error came about when the "Wunderkinder," who created the securitized asset boom, got nervous about stagnant property sales. They translated the slump in the property market into destruction of the securitized assets built on mortgages and other loans. I kept saying that this was an error, foreclosures were never above 3% of the mortgages and that the assets built on these were being grossly undervalued. I should have used my colleagues number and stated that the glass was 97% full instead of 3% short.
Of course even a 3% default rate is cause for concern, but not sufficient to cause the massive panic that led to our current sorry state of affairs. To put it succinctly, we overreacted and in the process sunk our economy.
Fortunately some steady hands at the main tiller, Paulson, Bernanke, Geithner and others, steered the economy back to stability. We now see that our banks are sound and never did have the level of threat that was feared by many.
While the financial system is sound, the panic did ruin the economy in general. Securitized assets were erroneously marked to a non-existent market that resulted in massive devaluations that in turn ruined bank balance sheets and forced credit to dry up. Credit dried up, consumption went down. Consumption went down, unemployment went up.
While a sound financial system is necessary for economic recovery, it cannot do the job itself. We have to get people back to work and that is the aim of President Obama's stimulus package.
We were fed alot of "bullasheet" and it wrecked the economy.
Leo Cecchini
May 2009
In his last item one of my colleagues writing in another blog site lays bare the truth of the "Financial Crisis of 2008" and "Great Recession of 2009." He writes that the largest US banks are not undercapitalized. More importantly, he notes that 97% of their loans are fully performing and thus only a small percentage of their securitized assets are "toxic," which is contrary to the conventional wisdom.
I have repeatedly stated for the last eight months that there was no real reason for the meltdown. The error came about when the "Wunderkinder," who created the securitized asset boom, got nervous about stagnant property sales. They translated the slump in the property market into destruction of the securitized assets built on mortgages and other loans. I kept saying that this was an error, foreclosures were never above 3% of the mortgages and that the assets built on these were being grossly undervalued. I should have used my colleagues number and stated that the glass was 97% full instead of 3% short.
Of course even a 3% default rate is cause for concern, but not sufficient to cause the massive panic that led to our current sorry state of affairs. To put it succinctly, we overreacted and in the process sunk our economy.
Fortunately some steady hands at the main tiller, Paulson, Bernanke, Geithner and others, steered the economy back to stability. We now see that our banks are sound and never did have the level of threat that was feared by many.
While the financial system is sound, the panic did ruin the economy in general. Securitized assets were erroneously marked to a non-existent market that resulted in massive devaluations that in turn ruined bank balance sheets and forced credit to dry up. Credit dried up, consumption went down. Consumption went down, unemployment went up.
While a sound financial system is necessary for economic recovery, it cannot do the job itself. We have to get people back to work and that is the aim of President Obama's stimulus package.
We were fed alot of "bullasheet" and it wrecked the economy.
Leo Cecchini
May 2009
Saturday, May 16, 2009
RECESSION PROOF NORWAY
I read an interesting article about how Norway has survived the current recession by saving and not spending. I had the chance to observe and learn about all of the Nordic peoples while at our embassy in Finland. I came to some short descriptions of each: Swedes viewed themselves as the leaders and trendsetters of the group, Danes saw themselves as fun lovers, far removed from their status as the most savage and barbaric people 1000 years ago - the Vikings, Finns wanted nothing more than to top the Swedes, and the Norwegians lived the motto of Gold´s Gym, “No pain, no gain.”
To understand how Norwegians came to this state, one has to remember that the country became independent only at the start of the 20th Century and at that time was one of the poorest of the countries in Europe. This nation of fishermen, lumbermen and farmers expended much blood, sweat and toil in building one of the highest standards of living in the world.
But a funny thing came in the 1970s, Norway found great reserves of oil and gas in its territorial waters. By now the country had already achieved one of the highest income levels in the world. Finding petroleum was the icing on the cake.
Fearing that the easy money from oil and gas exports would undermine their carefully built stolid pursuit of the good life, Norway chose to husband much of its petroleum income. The practice paid off. While all the world is desperately going deeper into debt to overcome the recession, Norway is simply dipping into its reserve funds.
Perhaps the Norwegians will now be able to lighten up a bit and be more like their fun loving cousins the Danes, who also enjoy a high standard of living, but spend less time at Gold´s Gym.
Leo Cecchini
May 2009
To understand how Norwegians came to this state, one has to remember that the country became independent only at the start of the 20th Century and at that time was one of the poorest of the countries in Europe. This nation of fishermen, lumbermen and farmers expended much blood, sweat and toil in building one of the highest standards of living in the world.
But a funny thing came in the 1970s, Norway found great reserves of oil and gas in its territorial waters. By now the country had already achieved one of the highest income levels in the world. Finding petroleum was the icing on the cake.
Fearing that the easy money from oil and gas exports would undermine their carefully built stolid pursuit of the good life, Norway chose to husband much of its petroleum income. The practice paid off. While all the world is desperately going deeper into debt to overcome the recession, Norway is simply dipping into its reserve funds.
Perhaps the Norwegians will now be able to lighten up a bit and be more like their fun loving cousins the Danes, who also enjoy a high standard of living, but spend less time at Gold´s Gym.
Leo Cecchini
May 2009
Tuesday, May 12, 2009
STRESSLESS
Well the report is in, the 19 banks given a “stress” test by the Feds are all able to survive and continue as key financial institutions. Ten need to build up their asset bases and nine have adequate funds. The result was seen even before the report was released, financial shares on the stock exchanges rose like rockets at lift-off.
One thing not revealed in the public information about the tests was the role played by lifting the “mark-to’market” rules. While nothing was specifically said about this, clearly the banks would not have been able to perform so well if they had not been able to revise valuations of assets to “long-term” or “maturity” values, instead of marking them to notional markets.
Proof of how fast the banks have recovered enough to lend again, I am in Spain where its largest bank just issued a new Euro 1.5 billion securitized debt bond based on mortgages. Say what, aren’t these the “toxic assets” that caused the recession? Well yes, they are, but, as I have said all along, we now know that traditional sources of credit are not sufficient for our “New Economy.” We need securitized debt to regain where we were in 2007 and go beyond, even in Spain.
A major hurdle has been crossed. Now to the Obama stimulus plan.
Leo Cecchini
May 2009
One thing not revealed in the public information about the tests was the role played by lifting the “mark-to’market” rules. While nothing was specifically said about this, clearly the banks would not have been able to perform so well if they had not been able to revise valuations of assets to “long-term” or “maturity” values, instead of marking them to notional markets.
Proof of how fast the banks have recovered enough to lend again, I am in Spain where its largest bank just issued a new Euro 1.5 billion securitized debt bond based on mortgages. Say what, aren’t these the “toxic assets” that caused the recession? Well yes, they are, but, as I have said all along, we now know that traditional sources of credit are not sufficient for our “New Economy.” We need securitized debt to regain where we were in 2007 and go beyond, even in Spain.
A major hurdle has been crossed. Now to the Obama stimulus plan.
Leo Cecchini
May 2009
Wednesday, May 6, 2009
ON THE MONEY
Well no sooner did I write the last blog titled "Time to Invest" the mavens came out of the woodwork to confirm my notes. One guru on CNBC even pointed to my own portfolio as the best way to go, i.e. Bank of America, Citibank, Freddie Mac and such.
But none was as impressive as the coments from Jimmy Buffet's dad Warren at his annual meeting of his investment firm. He too spoke about investing in financial stocks. His most memorable line, however, was that, "if it takes a computer or calculator to determine how good a stock is, then I don't buy it."
For all of this last year I have been constantly hammering at the "wunderkind" with their electronic Ouija boards givine erroneous values to securitized debt and other derivatives, structured products and so on. People kept saying how could they be wrong, they are highly educated financial professionals. Well Buffet has called them out and they are now exposed as glib charlatans hiding behind the "smoke and mirors" of their trade.
By the way the stock market is rocking and rolling.
Leo Cecchini
May 2009
But none was as impressive as the coments from Jimmy Buffet's dad Warren at his annual meeting of his investment firm. He too spoke about investing in financial stocks. His most memorable line, however, was that, "if it takes a computer or calculator to determine how good a stock is, then I don't buy it."
For all of this last year I have been constantly hammering at the "wunderkind" with their electronic Ouija boards givine erroneous values to securitized debt and other derivatives, structured products and so on. People kept saying how could they be wrong, they are highly educated financial professionals. Well Buffet has called them out and they are now exposed as glib charlatans hiding behind the "smoke and mirors" of their trade.
By the way the stock market is rocking and rolling.
Leo Cecchini
May 2009
Monday, May 4, 2009
Time to Invest?
There are signs that the economic recovery plans are kicking in. Credit is once more available for housing and other purchases. The Obama stimulus plan is coming on stream. Banks seem to be back on the hale and hearty list. For many now seems to be the time to strike and get in early on rebounding investments. So what do I advise?
PROPERTY. I have been flogging "short sale" and foreclosure low priced rental units. "Short sale" is a term invented to describe properties sold for less than the value of their mortgage balance with the bank taking the loss. I can sell you one of these for as little as $40,000 for a unit that has a gross monthly income of $800. That means $9600 for the year less taxes and insurance of maybe $3500 or a net of $6100 or 15%.
SECURITIZED DEBT. The bad boys of the recession are back and selling very well. The easiest way to get in on the action here is to buy Fannie Mae and Freddie Mac. You should also look for products from the TAFL program of the Federal Reserve Bank.
SILVER. Funny, lots of people like to hold gold in their investment portfolio. And commodities should do well over the balance of the year. I prefer silver. While gold doubled in value over the last five years, silver trebled in value.
STOCKS. Put your money in financial shares - banks, lenders, investment groups. They took the biggest hit during the recession and promise the biggest gains in the come back.
ANYTHING GREEN. The corporate world has glommed onto the environmental movement and sees "green" to be made in being "green." Check energy technologies, no matter how far fetched, since all will get development funds. Recycling companies loom large. Another good choice is transportation that provides more efficient use of fuel, e.g. railways.
BIOTECHNOLOGY. With stem cell research now open for Federal funding and waiting cloning in the wings any group engaged in this research should see a renewal of interest.
EDUCATION. Private education led by online universities is booming. Start your own school or put your money into one.
Maybe a bit early for the faint of heart but definitely the time for the steely nerved investor.
Leo Cecchini
May 2009
PROPERTY. I have been flogging "short sale" and foreclosure low priced rental units. "Short sale" is a term invented to describe properties sold for less than the value of their mortgage balance with the bank taking the loss. I can sell you one of these for as little as $40,000 for a unit that has a gross monthly income of $800. That means $9600 for the year less taxes and insurance of maybe $3500 or a net of $6100 or 15%.
SECURITIZED DEBT. The bad boys of the recession are back and selling very well. The easiest way to get in on the action here is to buy Fannie Mae and Freddie Mac. You should also look for products from the TAFL program of the Federal Reserve Bank.
SILVER. Funny, lots of people like to hold gold in their investment portfolio. And commodities should do well over the balance of the year. I prefer silver. While gold doubled in value over the last five years, silver trebled in value.
STOCKS. Put your money in financial shares - banks, lenders, investment groups. They took the biggest hit during the recession and promise the biggest gains in the come back.
ANYTHING GREEN. The corporate world has glommed onto the environmental movement and sees "green" to be made in being "green." Check energy technologies, no matter how far fetched, since all will get development funds. Recycling companies loom large. Another good choice is transportation that provides more efficient use of fuel, e.g. railways.
BIOTECHNOLOGY. With stem cell research now open for Federal funding and waiting cloning in the wings any group engaged in this research should see a renewal of interest.
EDUCATION. Private education led by online universities is booming. Start your own school or put your money into one.
Maybe a bit early for the faint of heart but definitely the time for the steely nerved investor.
Leo Cecchini
May 2009
Tuesday, April 28, 2009
PRIVATE SECTOR FUNDS PUBLIC TAKOVER
Over the last week while visiting friends and family in California I have come to more clearly see the exquisite humor in what has happened over these last several months due to our faltering economy.
I have repeatedly commented on how the Federal Government has taken on an even larger role in the economy. Already the largest consumer, it will be even more so with the new budget that will increase Uncle Sam's take from 20% to over 25% of output. Already the central banker, the Federal Reserve System, Uncle Sam now owns a substantial share of the private banking sector. Already the rules maker for the economy, Uncle Sam will now engage in a round of enacting even wider controls over the financial sector. And of course the new role for Uncle Sam, the single largest stock holder in corporate America.
I have reduced this event to a terse comment, "What it took the Bolsheviks a sea of blood to do in Russia, Uncle Sam has done for peanuts." What I mean is that the Bolsheviks seized the means of production by force, while Uncle Sam is doing it for a rather small price.
I say small price because Uncle Sam is doing all this with money borrowed at small cost, in the main for less than 1% interest. And his capacity to borrow is not yet exhausted. I calculate that he can double the national debt without causing serious harm.
So what do we have. Uncle Sam is borrowing funds from the private sector at ridiculously low cost and he is using the funds to buy up the private sector. In other words the private sector is funding the Federal Government to buy it out. As I said, I find this to be exquisite humor.
Leo Cecchini
April 2009
I have repeatedly commented on how the Federal Government has taken on an even larger role in the economy. Already the largest consumer, it will be even more so with the new budget that will increase Uncle Sam's take from 20% to over 25% of output. Already the central banker, the Federal Reserve System, Uncle Sam now owns a substantial share of the private banking sector. Already the rules maker for the economy, Uncle Sam will now engage in a round of enacting even wider controls over the financial sector. And of course the new role for Uncle Sam, the single largest stock holder in corporate America.
I have reduced this event to a terse comment, "What it took the Bolsheviks a sea of blood to do in Russia, Uncle Sam has done for peanuts." What I mean is that the Bolsheviks seized the means of production by force, while Uncle Sam is doing it for a rather small price.
I say small price because Uncle Sam is doing all this with money borrowed at small cost, in the main for less than 1% interest. And his capacity to borrow is not yet exhausted. I calculate that he can double the national debt without causing serious harm.
So what do we have. Uncle Sam is borrowing funds from the private sector at ridiculously low cost and he is using the funds to buy up the private sector. In other words the private sector is funding the Federal Government to buy it out. As I said, I find this to be exquisite humor.
Leo Cecchini
April 2009
Monday, April 20, 2009
WE ARE ALL NOW GREEN
President Obama has stated that economic recovery and future progress must be addressed at the same time as our energy supply and environmental concern, especially global warming. In fact he has linked the three as integral parts of the same problem.
I have no problem with global warming, the earth has been on a warming trend for the last 10,000 years. Now I say this as someone who lives at 18 inches above sea level on an island and has a second home so close to the sea that it is caked in salt residue after strong storms. I know hurricanes, having lost parts of both homes to hurricanes. The island I live on was actually the product of a hurricane in the early 20Th Century. I live my talk and I repeat I am not afraid of global warming, in fact I welcome it since the earth is basically a cold place.
I find that my friends are about evenly split between those who state unequivocally that global warming is a problem and we better do something about it immediately and those who deny that global warming is even occurring. Both sides have plenty of ammunition and supporters. Neither one has won the battle for public opinion. The average Joe is worried by cries that the sky is falling but is equally concerned that stemming global warming will cost him an arm and a leg.
As far as I am concerned the debate is over. The corporate world has now embraced global warming and is using it as the best marketing tool since the American dream of owning a home and a car. We are now constantly barraged by ads urging us to be "green." WalMart proudly announced that it intends selling millions of new light bulbs that use much less energy. Auto makers are flogging ad nauseum their "hybrid, electric, and new fuel" cars. We are urged to eat food grown without chemicals. In fact we are urged to eat less, period.
I wonder how the avid environmentalists view their cause being usurped by the very corporations that they held up as the villains causing all the ecological disasters. How will they deal with a march to global purity led by such bad guys as Exxon, DuPont, Dow, and so on? Talk about unintended results.
Leo Cecchini
April 2009
I have no problem with global warming, the earth has been on a warming trend for the last 10,000 years. Now I say this as someone who lives at 18 inches above sea level on an island and has a second home so close to the sea that it is caked in salt residue after strong storms. I know hurricanes, having lost parts of both homes to hurricanes. The island I live on was actually the product of a hurricane in the early 20Th Century. I live my talk and I repeat I am not afraid of global warming, in fact I welcome it since the earth is basically a cold place.
I find that my friends are about evenly split between those who state unequivocally that global warming is a problem and we better do something about it immediately and those who deny that global warming is even occurring. Both sides have plenty of ammunition and supporters. Neither one has won the battle for public opinion. The average Joe is worried by cries that the sky is falling but is equally concerned that stemming global warming will cost him an arm and a leg.
As far as I am concerned the debate is over. The corporate world has now embraced global warming and is using it as the best marketing tool since the American dream of owning a home and a car. We are now constantly barraged by ads urging us to be "green." WalMart proudly announced that it intends selling millions of new light bulbs that use much less energy. Auto makers are flogging ad nauseum their "hybrid, electric, and new fuel" cars. We are urged to eat food grown without chemicals. In fact we are urged to eat less, period.
I wonder how the avid environmentalists view their cause being usurped by the very corporations that they held up as the villains causing all the ecological disasters. How will they deal with a march to global purity led by such bad guys as Exxon, DuPont, Dow, and so on? Talk about unintended results.
Leo Cecchini
April 2009
DIAMONDS AND MORTGAGES
A reader raised an interesting point, while he finds my articles to give "lucid" explanations of the current economic drama he believes that most readers do not understand financial markets. In looking at how to better explain the way the financial markets work I struck on an idea, why not use the market for diamonds as a way to describe the mechanism?
Diamonds are valued by the familiar "4 Cs" - carat, clarity, cut and color. Let us consider carat or weight and clarity to determine the "intrinsic" value of a diamond while we can consider cut and color to determine the "subjective" value of a diamond.
The carat or weight of a diamond can be accurately determined by a scale. Turning to a mortgage we can call its carat or weight to be its balance due, times its interest rate, times the period for repayment of the loan. This can be readily and accurately calculated.
The clarity of a diamond means how clear it is of imperfections or flaws which can be readily seen with a microscope. Such flaws and imperfections determine the potential for the stone to break and can be accurately measured. Turning to mortgages we can consider "clarity" to be determined by defaults and foreclosures which can also be accurately measured.
The color of a diamond can range from white to blue to lemon to "root beer." The demand for certain colors changes over time and this the value goes up and down according to fashion. Likewise the cut of a diamond can be of several types with demand for a certain cut affecting the value. At present the most sought after cut is the "Leo" diamond (no, I had nothing to do with this, unfortunately). The point here is that cut and color constitute "subjective" valuation of a diamond that can change over a wide range.
Subjective valuation of mortgages has to do with perceptions of their reliability. Thus they are subject to variable measures, rather than constant measures. Last year sub prime mortgages were consider to be the weakest mortgages and their values were smartly reduced, no matter what the "intrinsic" value may have been. Now prime rate mortgages are causing concern and they are being devalued smartly.
Another subject valuation stems from the fact that no one knows the full scope and scale of "securitized debt" built on mortgages. At first we panicked and cut valuations to the bone. However, as we get a better handle on this pile of "toxic assets" we are able to better value them.
I have argued since last summer to drop the "subjective" values derived from "mark-to-market" rules and value mortgages and mortgage based assets to their "intrinsic" value. This was done on April 2 of this year. This change will lead to banks increasing the values of their mortgages and mortgage based assets and thus allowing them to lend again.
P.S. More notes on diamonds:
1. Diamonds are found throughout the world, from the frozen wastes of Canada and Siberia to the steamy jungles of the Congo to the deserts of Namibia to the gentle hills of Arkansas.
2. The main suppliers of diamonds are South Africa and Botswana where they are mined and Namibia where they are culled from the desert sands.
3. For the last 100 years the supply and thus value of diamonds was controlled by the De Beers organization owned by the Oppenheimer family of South Africa. De Beers has now changed to a market strategy of being the "supplier of choice" in the wake of intense competition from Russia and Australia.
4. I once met the late, legendary patriarch of the Oppenheimer family, Harry Oppenheimer on a visit to Washington DC. I caught his attention when in response to his direct question I said I was negotiating the entry of the first American mining company into Mozambique, his back yard.
5. The diamond market rests squarely on its symbiotic relationship with love and marriage. If the demand by women for a diamond as the visible symbol of their marriage should change to some other stone, the market for diamonds would, get ready, drop like a rock.
Leo Cecchini
April 2009
Diamonds are valued by the familiar "4 Cs" - carat, clarity, cut and color. Let us consider carat or weight and clarity to determine the "intrinsic" value of a diamond while we can consider cut and color to determine the "subjective" value of a diamond.
The carat or weight of a diamond can be accurately determined by a scale. Turning to a mortgage we can call its carat or weight to be its balance due, times its interest rate, times the period for repayment of the loan. This can be readily and accurately calculated.
The clarity of a diamond means how clear it is of imperfections or flaws which can be readily seen with a microscope. Such flaws and imperfections determine the potential for the stone to break and can be accurately measured. Turning to mortgages we can consider "clarity" to be determined by defaults and foreclosures which can also be accurately measured.
The color of a diamond can range from white to blue to lemon to "root beer." The demand for certain colors changes over time and this the value goes up and down according to fashion. Likewise the cut of a diamond can be of several types with demand for a certain cut affecting the value. At present the most sought after cut is the "Leo" diamond (no, I had nothing to do with this, unfortunately). The point here is that cut and color constitute "subjective" valuation of a diamond that can change over a wide range.
Subjective valuation of mortgages has to do with perceptions of their reliability. Thus they are subject to variable measures, rather than constant measures. Last year sub prime mortgages were consider to be the weakest mortgages and their values were smartly reduced, no matter what the "intrinsic" value may have been. Now prime rate mortgages are causing concern and they are being devalued smartly.
Another subject valuation stems from the fact that no one knows the full scope and scale of "securitized debt" built on mortgages. At first we panicked and cut valuations to the bone. However, as we get a better handle on this pile of "toxic assets" we are able to better value them.
I have argued since last summer to drop the "subjective" values derived from "mark-to-market" rules and value mortgages and mortgage based assets to their "intrinsic" value. This was done on April 2 of this year. This change will lead to banks increasing the values of their mortgages and mortgage based assets and thus allowing them to lend again.
P.S. More notes on diamonds:
1. Diamonds are found throughout the world, from the frozen wastes of Canada and Siberia to the steamy jungles of the Congo to the deserts of Namibia to the gentle hills of Arkansas.
2. The main suppliers of diamonds are South Africa and Botswana where they are mined and Namibia where they are culled from the desert sands.
3. For the last 100 years the supply and thus value of diamonds was controlled by the De Beers organization owned by the Oppenheimer family of South Africa. De Beers has now changed to a market strategy of being the "supplier of choice" in the wake of intense competition from Russia and Australia.
4. I once met the late, legendary patriarch of the Oppenheimer family, Harry Oppenheimer on a visit to Washington DC. I caught his attention when in response to his direct question I said I was negotiating the entry of the first American mining company into Mozambique, his back yard.
5. The diamond market rests squarely on its symbiotic relationship with love and marriage. If the demand by women for a diamond as the visible symbol of their marriage should change to some other stone, the market for diamonds would, get ready, drop like a rock.
Leo Cecchini
April 2009
Thursday, April 16, 2009
TAX DAY
I should have published this item yesterday but better late than never.
I find the subject of taxes fascinating. If I had not been a diplomat I would most likely have had a career in taxes. Not the most glamorous of professions, in fact an often reviled one. Jesus Christ was reproached for "consorting with prostitutes and tax collectors." But a career with as secure a future as a mortician.
And taxes are the talk of today. I even saw President Obama's tax return spread around on the internet. Most likely you have just sent your return in.
My first thought is what my old tax teacher, who was one of those venerable professors who literally wrote the book on the subject, at least the one we used in his course, who said one warm afternoon, "There are two elements of a good tax, first they collect sufficient revenue and second they are easy to collect." Notice, he did not mention equity, fairness, income distribution and such. Just raise enough to pay the bills and don't waste time collecting them.
Well we know that taxes in the USA today do not raise sufficient funds, we pay allot of public expenses with borrowed funds. We also know that taxes in the USA are not easy to collect, just ask the current head of the IRS, Treasury Secretary Geithner. This has led to endless debate about improving our tax system, indeed it was a core feature of President Obama's election campaign.
I am partial to "taxes" raised by government monopolies. At different times governments have raised funds through government monopolies that sold goods, such as salt, matches, and tobacco to the public. This allows the government to raise taxes whenever it wants and it is easy to collect. However, it is difficult to control, since smugglers have always managed to steal some of the income.
A similar process was that of the Soviet Union. It owned the "means of production" or most of the industry in the country. It took its "taxes" from the sale of the products made. These "taxes" would have been profits in a capitalist system.
In general, however, taxes is a complex subject. I hear many Americans complain about the complex US tax code, they want a simpler formula. I reply that a thick tax code is the tax payer's friend, while a simple tax code favors the collector.
This complexity is made even more so when taken to the international arena. As a diplomat, I had to examine tax systems in other countries and at times help negotiate tax agreements between the USA and other countries. Let me assure you that there are more angles on taxes throughout the world than there stars in the sky.
So what to do? I personally go for the so-called "flat tax" that Steve Forbes used as his banner for his campaign for president a few years ago. As with all income taxes, it is a "direct" tax, rather than an "indirect" tax such as sales taxes. As income goes up, your tax payment increases, as opposed to a consumption tax.
It is generally calculated that for a flat tax to raise sufficient funds in the USA it would be about 15-17% of income. Interesting to note, Vice President Biden's joint tax return for 2008 showed that he paid about 17% of his adjusted income in federal tax. President Obama and his wife paid about 30% of their $2.5 million income in taxes.
Of course the complaint about the flat tax is that it is "regressive" which means it places a higher burden on low incomes than it does on high incomes, i.e taking 15% from an income of $20,000 means more hardship on the payer than taking 15% from an income of $1 million. But remember under our current tax system something less than 50% of income earners pay no tax. So the flat tax need only be applied to the wealthier half of the population.
Now I am sure some will also consider my comments here to be facile and I will admit that they only touch the subject. But when we do go about reorganizing our tax system let us keep in mind the words of my old tax teacher, "Make sure it collects sufficient revenue and that it is easy to collect."
Leo Cecchini
April 2009
I find the subject of taxes fascinating. If I had not been a diplomat I would most likely have had a career in taxes. Not the most glamorous of professions, in fact an often reviled one. Jesus Christ was reproached for "consorting with prostitutes and tax collectors." But a career with as secure a future as a mortician.
And taxes are the talk of today. I even saw President Obama's tax return spread around on the internet. Most likely you have just sent your return in.
My first thought is what my old tax teacher, who was one of those venerable professors who literally wrote the book on the subject, at least the one we used in his course, who said one warm afternoon, "There are two elements of a good tax, first they collect sufficient revenue and second they are easy to collect." Notice, he did not mention equity, fairness, income distribution and such. Just raise enough to pay the bills and don't waste time collecting them.
Well we know that taxes in the USA today do not raise sufficient funds, we pay allot of public expenses with borrowed funds. We also know that taxes in the USA are not easy to collect, just ask the current head of the IRS, Treasury Secretary Geithner. This has led to endless debate about improving our tax system, indeed it was a core feature of President Obama's election campaign.
I am partial to "taxes" raised by government monopolies. At different times governments have raised funds through government monopolies that sold goods, such as salt, matches, and tobacco to the public. This allows the government to raise taxes whenever it wants and it is easy to collect. However, it is difficult to control, since smugglers have always managed to steal some of the income.
A similar process was that of the Soviet Union. It owned the "means of production" or most of the industry in the country. It took its "taxes" from the sale of the products made. These "taxes" would have been profits in a capitalist system.
In general, however, taxes is a complex subject. I hear many Americans complain about the complex US tax code, they want a simpler formula. I reply that a thick tax code is the tax payer's friend, while a simple tax code favors the collector.
This complexity is made even more so when taken to the international arena. As a diplomat, I had to examine tax systems in other countries and at times help negotiate tax agreements between the USA and other countries. Let me assure you that there are more angles on taxes throughout the world than there stars in the sky.
So what to do? I personally go for the so-called "flat tax" that Steve Forbes used as his banner for his campaign for president a few years ago. As with all income taxes, it is a "direct" tax, rather than an "indirect" tax such as sales taxes. As income goes up, your tax payment increases, as opposed to a consumption tax.
It is generally calculated that for a flat tax to raise sufficient funds in the USA it would be about 15-17% of income. Interesting to note, Vice President Biden's joint tax return for 2008 showed that he paid about 17% of his adjusted income in federal tax. President Obama and his wife paid about 30% of their $2.5 million income in taxes.
Of course the complaint about the flat tax is that it is "regressive" which means it places a higher burden on low incomes than it does on high incomes, i.e taking 15% from an income of $20,000 means more hardship on the payer than taking 15% from an income of $1 million. But remember under our current tax system something less than 50% of income earners pay no tax. So the flat tax need only be applied to the wealthier half of the population.
Now I am sure some will also consider my comments here to be facile and I will admit that they only touch the subject. But when we do go about reorganizing our tax system let us keep in mind the words of my old tax teacher, "Make sure it collects sufficient revenue and that it is easy to collect."
Leo Cecchini
April 2009
Wednesday, April 15, 2009
JUST WHO ARE THE OBAMA SUPPORTERS?
I have received comments from two readers who disagree with my take on the economy. One says he doesn't agree with anything I say another finds my comments on consumption to be "facile."
I am amused when fans of President Obama dump on his policies. In case I did not make myself crystal clear I support the president's policies except for a couple of technical problems. The president in his address on the economy yesterday noted the initial success of the Feds several programs to revive the credit market, which I have carefully explained in my columns, and fully support. He also emphasized the need to get his stimulus program up and running as soon as possible, which I have also described and support.
President Obama made it clear in his speech that we need to crank up consumption in order to put people back to work. Now I know that the Republicans are calling the stimulus plan "excessive" government spending that will really not put anyone back to work. The also drag out the bugaboo about future indebtedness burdening our progeny. I see the Republican strategy as simply one of shoring up their position for the next election. If the president's plans work they will say they worked because Republican amendments and additions made them better. If they fail the Republicans will be able to say to the voters, "We told you so."
I mentioned in a previous article that I was surprised by the many Obama supporters who oppose his "excessive" spending. I also mentioned that while the president enjoys strong support from the public his programs do not.
So I say to those who commented on my economic views that mine are exactly the same as held by the Obama team and I did not vote for them. And while I am certainly in no position to implement my suggestions, the president and his people can, and will.
Leo Cecchini
April 2009
I am amused when fans of President Obama dump on his policies. In case I did not make myself crystal clear I support the president's policies except for a couple of technical problems. The president in his address on the economy yesterday noted the initial success of the Feds several programs to revive the credit market, which I have carefully explained in my columns, and fully support. He also emphasized the need to get his stimulus program up and running as soon as possible, which I have also described and support.
President Obama made it clear in his speech that we need to crank up consumption in order to put people back to work. Now I know that the Republicans are calling the stimulus plan "excessive" government spending that will really not put anyone back to work. The also drag out the bugaboo about future indebtedness burdening our progeny. I see the Republican strategy as simply one of shoring up their position for the next election. If the president's plans work they will say they worked because Republican amendments and additions made them better. If they fail the Republicans will be able to say to the voters, "We told you so."
I mentioned in a previous article that I was surprised by the many Obama supporters who oppose his "excessive" spending. I also mentioned that while the president enjoys strong support from the public his programs do not.
So I say to those who commented on my economic views that mine are exactly the same as held by the Obama team and I did not vote for them. And while I am certainly in no position to implement my suggestions, the president and his people can, and will.
Leo Cecchini
April 2009
Tuesday, April 14, 2009
SAVING MEDICARE
One of the major initiatives of President Obama's plan to correct the economy is his overhaul of Medicare and Medicaid. All agree that the nation's health care is too expensive. We get the same level of health care as is received in Western Europe but at about 2.4 times the cost in Europe.
President Obama wants to get better return on the government's dollar from its expenditures on Medicare. He then points the finger at everyone's favorite whipping boy, the health care insurance companies, e.g. Blue Cross. He believes we can get more for our Medicare dollar by curbing the insurance companies.
Well his plan is what I call "penny wise, pound foolish." As a cost saving measure the president wants to do away with what are called, "Medicare Advantage" plans. Essentially for a fixed payment from Medicare, usually so much per participant per month, the health insurance company agrees to pay for all medical care for the participant. Obama sees a problem here, Medicare pays a fee for the participant, but the participant may not use any health care, or much less than the fee paid. Thus Medicare is paying for a service that is not used.
The problem is that the Obama administration does not understand basic insurance. What it is actually paying is an insurance premium to the health care insurer who then agrees to cover all "losses" which in this case means health care expenses.
What the Obama team also does not understand is that by paying the insurance premium they limit Medicare's exposure for that participant to the premium. If there were no such plan Medicare would have to pay the participant's medical costs, up to very high limits. Thus not paying the premium would in effect set Medicare up for unlimited losses, the very reason we use insurance.
Moreover, the health care insurer provides a limit on the cost of medical care. Those medical services that agree to its fee structure only receive what the insurer will pay. And this is a great savings. My latest medical service procedure was billed by the physician and his group for $5110. Blue Cross paid $2320 and I had to pay $120 in co-payment. In short Blue Cross saved Medicare $1768 and me about $1200.
Clearly the real culprit in sky-high medical costs are the health care providers, not the insurers. In fact the insurers are the only reason that health care costs have not gone even higher. Doing away with the very effective "Medicare Advantage" plan will simply insure that health care costs rise even faster, instead of bringing them under control.
Leo Cecchini
April 2009
President Obama wants to get better return on the government's dollar from its expenditures on Medicare. He then points the finger at everyone's favorite whipping boy, the health care insurance companies, e.g. Blue Cross. He believes we can get more for our Medicare dollar by curbing the insurance companies.
Well his plan is what I call "penny wise, pound foolish." As a cost saving measure the president wants to do away with what are called, "Medicare Advantage" plans. Essentially for a fixed payment from Medicare, usually so much per participant per month, the health insurance company agrees to pay for all medical care for the participant. Obama sees a problem here, Medicare pays a fee for the participant, but the participant may not use any health care, or much less than the fee paid. Thus Medicare is paying for a service that is not used.
The problem is that the Obama administration does not understand basic insurance. What it is actually paying is an insurance premium to the health care insurer who then agrees to cover all "losses" which in this case means health care expenses.
What the Obama team also does not understand is that by paying the insurance premium they limit Medicare's exposure for that participant to the premium. If there were no such plan Medicare would have to pay the participant's medical costs, up to very high limits. Thus not paying the premium would in effect set Medicare up for unlimited losses, the very reason we use insurance.
Moreover, the health care insurer provides a limit on the cost of medical care. Those medical services that agree to its fee structure only receive what the insurer will pay. And this is a great savings. My latest medical service procedure was billed by the physician and his group for $5110. Blue Cross paid $2320 and I had to pay $120 in co-payment. In short Blue Cross saved Medicare $1768 and me about $1200.
Clearly the real culprit in sky-high medical costs are the health care providers, not the insurers. In fact the insurers are the only reason that health care costs have not gone even higher. Doing away with the very effective "Medicare Advantage" plan will simply insure that health care costs rise even faster, instead of bringing them under control.
Leo Cecchini
April 2009
"COOL IT" AND GLOBAL WARMING
A response to my last item about the philosophy of the economy causes me to reflect on the concern about the environment. I am constantly amazed at the hubris of many "environmentalists." They really believe that mere mortals can do more damage to the world than cosmic forces. I suggest they see the latest "end of the world" film, "Knowing," which has mankind destroyed on earth by a massive solar flare. Or perhaps they could reflect on the billions of years of earth's history and the many times it was totally altered by cosmic forces.
Yes, we all want to live in a comfortable, safe, sound environment. I doubt anyone would say no here. The real question is economics, what are the costs and trade offs to achieve a particular environment. It comes as no surprise to me that the best book I have seen on the subject is the one done by a Danish economist named Bjorn Lomborg and titled, "Cool It." Lomborg does not deny that the earth is getting warmer or that man's activities has added to the warming trend. Instead he focuses on the results of the warming and the appropriate response to these.
A central point Lomborg raises is the concern about rising temperatures causing more deaths due to heat. He says yes, this will occur. But that has to be compared to the many more that will not die because of reduced cold. He notes that in Europe about 200,000 die because of excess heat each year while some 1.5 million die from excess cold. For Britain he shows that a 3.6 degree F increase in temperature will mean 2000 more heat deaths but 20,000 fewer cold deaths.
Lomborg's main concern is that the funds and energy being demanded for stemming the rising temperatures could be better used for other major problems that cause more harm to mankind. In short, he views the situation that of an economist, does the end justify the cost?
I go a bit further. I say global warming cannot come too soon. The earth is a cold place. The average temperature of the earth is 60 degrees F or 15 degrees C. At this temperature the unprotected human corpus expires in a matter of minutes or a few hours. Indeed, the largest use of fossil fuels goes to keeping the body warm - building shelter, heating those shelters, manufacturing clothes, producing food and so on. Therefore, upping the average temperature will actually reduce our need for fossil fuels.
My problem with many "environmentalists" is a lack of perspective. Yes, the earth is getting warmer, where's the news, it has been doing this for the last 10,000 years. The issue is what changes will this bring and what is the best way to handle the changes. As Lomborg and I maintain, lowering the deaths from hypothermia is a change for the good and needs no response.
Leo Cecchini
April 2009
Yes, we all want to live in a comfortable, safe, sound environment. I doubt anyone would say no here. The real question is economics, what are the costs and trade offs to achieve a particular environment. It comes as no surprise to me that the best book I have seen on the subject is the one done by a Danish economist named Bjorn Lomborg and titled, "Cool It." Lomborg does not deny that the earth is getting warmer or that man's activities has added to the warming trend. Instead he focuses on the results of the warming and the appropriate response to these.
A central point Lomborg raises is the concern about rising temperatures causing more deaths due to heat. He says yes, this will occur. But that has to be compared to the many more that will not die because of reduced cold. He notes that in Europe about 200,000 die because of excess heat each year while some 1.5 million die from excess cold. For Britain he shows that a 3.6 degree F increase in temperature will mean 2000 more heat deaths but 20,000 fewer cold deaths.
Lomborg's main concern is that the funds and energy being demanded for stemming the rising temperatures could be better used for other major problems that cause more harm to mankind. In short, he views the situation that of an economist, does the end justify the cost?
I go a bit further. I say global warming cannot come too soon. The earth is a cold place. The average temperature of the earth is 60 degrees F or 15 degrees C. At this temperature the unprotected human corpus expires in a matter of minutes or a few hours. Indeed, the largest use of fossil fuels goes to keeping the body warm - building shelter, heating those shelters, manufacturing clothes, producing food and so on. Therefore, upping the average temperature will actually reduce our need for fossil fuels.
My problem with many "environmentalists" is a lack of perspective. Yes, the earth is getting warmer, where's the news, it has been doing this for the last 10,000 years. The issue is what changes will this bring and what is the best way to handle the changes. As Lomborg and I maintain, lowering the deaths from hypothermia is a change for the good and needs no response.
Leo Cecchini
April 2009
Monday, April 13, 2009
A PHILOSOPHICAL LOOK AT THE NEW ECONOMY
Well the economic story is moving past the technical debate about how to stop the downward spiral and start moving up again. We are now into a philosophical debate.
The cover story on the latest issue of TIME magazine was a piece by an author who has apparently made his mark as a latter day Savanarola, the 15th Century monk who tried to cleanse Florence, Italy of excess. Savanarola got rid of the Medicis but was soon burned at the stake for heresy. The TIME writer preaches against the excesses of our modern society and believes the current economic downturn will be the genesis of a more prudent society.
I fundamentally reject notions that we are engaged in excess consumption. In my book there is no excess demand, just short supply. What is wrong with all families owning their own home? What is wrong with wanting a modern home with the attendant conveniences? What is wrong with wanting quality education? What is wrong with wanting more leisure time to enjoy life? What is wrong with wanting to travel and explore the world? What is wrong with wanting good food? And on and on.
Again, my definition of economics is "the science of meeting the perceived needs of the people," with the operative word being "perceived." I eschew the endless debate about what constitutes the "proper level" of consumption. If the consumer wants it, how do we provide it? Of course I leave out demands for illegal items.
The salient feature of human history has been the desire to provide more for our heirs than we had for ourselves. We want a better world for our children. The difference between me and other economists is that they prefer that the parents determine what constitutes a better world, I leave it to the kids to determine what they want.
I expect to see more such talk about how to formulate our revived economy. But this is good, since it means that the bottom has been reached - "Been down so long, looks like up to me."
Leo Cecchini
April 2009
The cover story on the latest issue of TIME magazine was a piece by an author who has apparently made his mark as a latter day Savanarola, the 15th Century monk who tried to cleanse Florence, Italy of excess. Savanarola got rid of the Medicis but was soon burned at the stake for heresy. The TIME writer preaches against the excesses of our modern society and believes the current economic downturn will be the genesis of a more prudent society.
I fundamentally reject notions that we are engaged in excess consumption. In my book there is no excess demand, just short supply. What is wrong with all families owning their own home? What is wrong with wanting a modern home with the attendant conveniences? What is wrong with wanting quality education? What is wrong with wanting more leisure time to enjoy life? What is wrong with wanting to travel and explore the world? What is wrong with wanting good food? And on and on.
Again, my definition of economics is "the science of meeting the perceived needs of the people," with the operative word being "perceived." I eschew the endless debate about what constitutes the "proper level" of consumption. If the consumer wants it, how do we provide it? Of course I leave out demands for illegal items.
The salient feature of human history has been the desire to provide more for our heirs than we had for ourselves. We want a better world for our children. The difference between me and other economists is that they prefer that the parents determine what constitutes a better world, I leave it to the kids to determine what they want.
I expect to see more such talk about how to formulate our revived economy. But this is good, since it means that the bottom has been reached - "Been down so long, looks like up to me."
Leo Cecchini
April 2009
Subscribe to:
Posts (Atom)